By Robert Cain

November 30, 2011 (originally published in 2004)

Several requests have come in recently for information about video piracy in China. I wrote a piece on this topic back in 2004 when I was consulting to Shanghai Media Group, and since things haven’t changed much in the intervening years, I have reproduced the article below.

Arnold Schwarzenegger probably doesn’t realize it, but he has become a poster boy of sorts for DVD piracy in China.

It seems that during his visit to the People’s Republic a few years ago to support an event connected with the Special Olympics, Mr. Schwarzenegger took the opportunity to pick up some extra cash by endorsing the products of Bubugao, a prominent local consumer electronics manufacturer.  For a time his grinning photo adorned Chinese billboards and print ads that touted the company’s products, inextricably linking his image with that of the company in the minds of Chinese consumers.

He couldn’t have known it at the time, but Bubugao has since become a major supplier of DVD players known for their superior ability to play pirated DVDs.  With their error-correction features that enhance the sound and picture of “low quality” (i.e., pirated) disks, and their ability to circumvent the zone encoding meant to restrict unauthorized disk distribution, Bubugao’s DVD players have become popular fixtures in the millions of Chinese households that purchase illegally copied DVDs.

Of course, Mr. Schwarzenegger is hardly alone in having his images co-opted by China’s sprawling video piracy industry.  Pirated Hollywood movies and television programs are the lifeblood of a vast, sophisticated and highly profitable trade that has created fortunes for Chinese profiteers, yet returned little to the creators and distributors of those films.

Viewed up close from, say, the streets and cafes of Shanghai, China’s piracy machine is a marvel of distribution efficiency and entrepreneurial initiative. Hollywood’s home video executives can only dream about the levels of product exposure and promotion achieved in Shanghai—a DVD collector’s paradise—with an extraordinary variety of movies and television shows, old and new, offered for sale in cafes, pubs, restaurants, subways and buses, and even in workplaces like office buildings and factories.  DVD peddlers can be found everywhere, lugging tote bags full of DVDs and dropping stacks of the shiny disks on restaurant and coffee shop tables for patrons to peruse while they dine.  All the latest hit movies are available; catalog titles abound; and even American television shows are popular, with programs like Sex and the City and 24 eagerly anticipated each week.

The system operates with awe-inspiring speed: within a few days after (and often before) a film opens in the U.S., China’s pirate manufacturers will have secured a master copy, subtitled the film in Chinese, and distributed millions of illicit disks to every corner of the country.

China’s DVD buyers love the prices too: about one dollar for a quality video; three dollars for a complete disk with all the bonus features.  Those who wish to save space can buy  “double features” with different movies on each side of the disk for about two dollars.

The problem for the Hollywood home video executive—where the dream turns into a nightmare—is that virtually all of these transactions involve pirated disks, meaning that not a single cent, or yuan, as the case may be, has flowed back to the copyright owners’ coffers.

Despite intense pressure from Hollywood lobbyists and genuine efforts by China’s central government to stem the illegal DVD tide, the situation is unlikely to improve any time soon.  There are simply too many economic and structural impediments to positive change.

For one thing, there is a huge imbalance between China’s voracious demand for filmed entertainment and its constrained “legitimate” supply.  Ideology-driven government quotas severely limit legal import and distribution of films and television shows; the cash-poor domestic cable television industry offers only a sparse array of entertainment programming options; and modern cinema screens are in short supply, even in major cities.  The black market has emerged to meet a need that would otherwise go largely unfilled.

Secondly, there is too much money at stake.  With its 1.3 billion population, rapidly rising incomes, and strong household penetration of DVD players, China is probably the world’s second-largest DVD market behind the United States.  When illicit exports to other territories are included, China may well be the world’s largest producer of DVDs.  Even at modest retail prices of just a dollar a disk, huge volumes and their attendant scale economies have made piracy highly profitable.  And in a job-hungry economy, piracy creates hundreds of thousands of jobs that the government may be reluctant to threaten with more rigorous anti-piracy measures.

Although Hollywood has recently won a few symbolic victories—such as a Shanghai court’s verdicts ordering two Chinese companies to pay fines ranging from $4,000 to $12,000 to Fox, Disney and Universal—the pirates maintain the upper hand.  Jim Lambert, an American documentary producer based in Beijing, is skeptical about the legislative approach.  “ I don’t think Hollywood has a full appreciation for just how difficult it is to completely eradicate piracy here,” he says. “The studios want the Chinese to enjoy their movies, but they don’t present them with feasible options, the way the pirates do. An average movie ticket here costs six times as much as a DVD, so for most Chinese the choice between a high-priced movie and a cheap DVD becomes obvious.”

The studios can at least take some comfort in the knowledge that they are not alone in their fight: Chinese producers feel the ill effects of piracy even more than their Hollywood brethren.  As China’s domestic film industry has grown with the success of such films as Ang Lee’s “Crouching Tiger, Hidden Dragon” and Zhang Yimou’s “Hero” (which grossed an unprecedented US $30 million in Chinese theaters), Chinese producers and distributors have been increasingly affected by the problems that video piracy engender. One recent victim was the major motion picture “The Touch,” whose ticket sales plummeted when black market copies of the movie became ubiquitously available four days after its opening.

Philip Lee, a producer with credits on both “Crouching Tiger” and “Hero” and a professor at Hong Kong University’s School of Creative Media, says that “Piracy cuts deeply into the theatrical income of a film. It forces the legitimate video distributors to release DVDs as early as possible, sometimes when the film is still showing in theaters. Theatrical distributors try to pay less for the film by complaining that they have to compete not only with the pirates, but also with the legitimate video release. The producers get stuck in the middle of this kind of conflict and they suffer the most.”

Solving the problem will require a multi-pronged attack.  China’s accession to the World Trade Organization last year seems to have helped, by requiring China to revise its copyright, trademark and patent laws to bring them into line with international standards.  China is eager to be viewed as a legitimate equal with the world’s great economic powers, and so has recently become more responsive to lobbying pressure from Washington, making periodic crackdowns on pirate manufacturing operations, seizing duplication equipment and recorded disks.

Aggrieved studio distributors would also be wise to consider other approaches in addition to lobbying and diplomacy.  The pirate companies, several of which have grown into very large operations, are increasingly open to more legitimate business methods because they realize their pirating days may be numbered.  William Brent, an American partner in Shanghai production company Cinezoic, points out that the shift toward semi-legitimacy was given notable impetus with last year’s video rights sale for “Hero,” which was purchased at auction by a Chinese video distributor for the “previously unheard-of sum of 18 million Yuan” (US $2.12 million).

Jim Lambert suggest that co-option may be more effective than combat.  He asks, “Would it not be a wise move to join forces with the illegal producers of DVDs, working with them rather than against them? Their distribution network is unparalleled, as is their knowledge of what the public wants and doesn’t want. Why not strike a deal and work with them to nudge ever so slightly towards legitimacy?  In the meantime, you have access to what any foreign company would dream of: an incredibly profitable, widespread distribution network.”

If all else fails, perhaps Governor Schwarzenegger can be persuaded to return to China to try and clean up the mess.  If he can somehow figure out how to fix California’s complex fiscal problems, then dealing with video piracy might just be a walk in the park.

Note: According to a report in China’s state-run media, the country’s pirate DVD industry raked in $6 billion in 2010.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.