China’s Video Revolution Resonates in California
The video CD is sweeping across China, and the low-tech consumer electronics revolution is having an impact on California’s two most dynamic industries, technology and entertainment.
The sudden emergence of the inexpensive video player here is undercutting the conventional wisdom in the consumer electronics industry that acceptance in U.S. and Japanese markets is the critical test for products ranging from the Walkman to the DVD, the digital alternative to videotape.
Apparently nobody told entrepreneurs like Hu Zhibiao about the higher quality, more expensive DVD offered in Western markets.
Employing lower-cost video technology largely ignored in the West, Hu has earned his firm, the Guangdong Idall Electronics Co., a commanding share of a market worth an estimated $2.4 billion in China last year while establishing the video CD as the standard format for China’s millions to watch movies at home.
The VCD is hardly on the cutting edge of technology. The player is basically an upgraded version of the audio CD, and even after compression it still takes two to three compact discs to hold most feature films. Resolution at best is only as good as a videotape.
In the past, Hu and China’s VCD mania might have been dismissed as an aberration. But some industry analysts believe that China’s VCD experience has big implications for the global economy.
The VCD phenomenon “is the first sign that the locus of consumer buying power is shifting toward emerging markets, particularly China and its growing middle class,” said Ted Pine, president of Vermont-based InfoTech Research, which analyzes the electronic publishing and multimedia entertainment industries.
“The emerging-market consumer has woken up, flexed his economic muscles and said, ‘This is what I want to buy.’ . . . He doesn’t want a lot of bells and whistles, he wants content and value,” said Pine, who expects that more consumer electronics products will be made for regional markets in the future.
The official Beijing Daily recently touted the VCD as “the pride of the Chinese people.” In his first news conference as China’s new premier, Zhu Rongji cited China’s upsurge in VCD production as an indicator of China’s growing economic might.
The Dark Side of the VCD Industry
But the dark side of the VCD industry is that it has opened up a troubling front in Hollywood’s ongoing battle against video piracy.
Cheaper to make and easier to conceal than videocassettes or large laser discs, pirated VCDs of recent Hollywood hits are fueling a huge, clandestine economy all over China.
Yet Hollywood film studios are optimistic that the increasing availability of legitimate VCDs, along with stricter enforcement of China’s copyright laws, will eventually win out over piracy.
“In every marketplace in the world, the legitimate market is always preceded by a piracy market,” said Tony Wells, senior vice president in charge of Asia-Pacific markets at Warner Bros. Home Video International.
So far, Warner Bros. is the only major Hollywood studio licensing its movies on VCDs in China, with about 60 titles available so far, but industry experts say Disney and Columbia TriStar are negotiating to begin licensing this year.
Meanwhile, several of California’s technology companies already have profited handsomely from China’s booming VCD market, including firms that supply the silicon chips used to encode and decode the VCD’s digitized video.
“In consumer electronics history, no product has ever been adopted as fast as the video CD in China,” said Silicon Valley entrepreneur Andre Balkanski, whose C-Cube Microsystems supplies silicon chips to Chinese VCD firms.
In the early 1990s, Balkanski and fellow entrepreneur Edmund Sun pioneered the first silicon chips for VCD players. Now C-Cube provides about 70% of the chips used in Chinese VCD players. Its logo is emblazoned on many Chinese VCD machines, much as chip-maker Intel’s is on computers.
C-Cube’s sales surged with the growth of VCDs, rocketing from $45 million in 1994 to $337 million in 1997. During that period, C-Cube’s stock, traded on the Nasdaq exchange, went from $10 to $74 before sinking to about $35.
C-Cube also is the leading supplier of chips for digital versatile disc drives in computers. DVDs are being offered in the United States as a higher quality, digital alternative to videotape. Because of sluggish DVD sales, only 3% of C-Cube’s sales last year were to worldwide DVD markets, while the China VCD market accounted for 45%.
Films on VCD Are Hard to Find in U.S.
In the U.S., feature films on VCD are hard to find outside Chinatown stores. While many new computers sold in the U.S. can read VCDs, Hollywood will not invest in VCD movie titles in the U.S. because the format cannot compete with other popular storage formats, such as videocassette tapes or DVDs.
The fact that the VCD was not an expensive new technology played into the hands of Chinese entrepreneurs like Hu, who looked at the VCD and saw a low-cost product uniquely suited to China’s economy.
In 1993, Hu examined the first VCD players to hit the Chinese market and discovered that they were essentially $70 audio CD players converted into video CD players for about $50. VCDs could be pressed for 80 cents apiece, compared with $2 to make a videocassette tape.
VCD players range in size from Sony Discman-like portable models to high-end machines that can hold multiple discs.
Aside from imported disc drives and silicon chips, most of the VCD player parts were made by electronics manufacturers around Zhongshan, Hu’s hometown in Guangdong province’s highly industrialized Pearl River delta.
Enterprises Were Sprouting Up
As Hu launched his first VCD player factory in 1995, other such enterprises were sprouting all over the delta. Most were peasant households that assembled VCD players on beds and kitchen tables. A whole family could turn out 10 machines a day, earning $125--more than half the average Chinese peasant’s annual income.
The peasants had no research or design costs and used smuggled parts to avoid paying taxes. Within a year, there were 600 VCD machine makers in China, mostly in the delta.
Hu also saw that the VCD was the perfect alternative to Chinese television’s sorry array of entertainment programming.
More than 90% of urban Chinese households have color TVs serving up old revolutionary war movies and serial dramas. Communist ideology and lack of money keep all but the worst foreign movies off the air. Satellite TV dishes are banned, and the depressed mainland filmmaking industry is turning out fewer movies.
As a result, China remains reliant on cheap, pirated movies for home entertainment, despite frequent raids by police. A survey by the independent polling firm Horizon found that pirated Hollywood movies account for at least 80% of the programs on Chinese VCDs, with Hong Kong and mainland movies and karaoke music videos accounting for most of the rest.
At the main electronics bazaar in downtown Shenzhen in Guangdong province, for example, pirated copies of “Face/Off,” “Men in Black,” “Con Air” and other recent hits sell for the equivalent of $1.50 each.
None of these films played in urban Chinese movie theaters, where tickets cost around $5.
Last year, Hu’s firm hired Hong Kong action superstar Jackie Chan to advertise its VCD players and spent $25.3 million in competitive bidding for prime time slots after China Central Television’s evening news, watched nightly by an estimated 800 million people.
Then, Hu slashed prices on his VCD players by 45%, below $150 and well within reach of Chinese urbanites. The cuts ended market domination by foreign firms including JVC, Samsung and Panasonic and eliminated about half of Hu’s 600 domestic rivals. Idall emerged with a 30% market share and a reputation as the top Chinese VCD maker.
While the marketing hype surrounding VCDs has produced a glut of machines this year, Idall’s economies of scale--the company expects to turn out 4 million VCD players this year--help Hu to maintain profit margins averaging around 25%, compared with less than 10% for the rest of the industry.
For much of East Asia, VCD is already the standard for home theater, and although DVD players are expected eventually to wrest the market from VCDs, the two formats are likely to coexist for a decade or longer, since VCDs can be played on DVD players.
Up to 15 Million Players Sold
While worldwide DVD sales were well below a million units last year, Chinese consumers bought between 10 million and 15 million VCD players in 1997, roughly double the total for 1996. About 90% of these machines were domestically made.
According to Horizon’s survey, more than a third of households in major Chinese cities have VCD players.
Makers of televisions, video games and stereo equipment are following Hu’s path, rushing to make VCD players to establish their names and position themselves to profit from sales of new electronics products.
Hu, however, stays a step ahead of the competition. He is now gearing up to manufacture DVD players.
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CD Comparison
The video CD is basically an upgraded version of the audio CD. Here is a comparison of VCD and the digital versatile disc, or DVD, which is the higher-cost, higher-quality technology rolling out of in the United States.
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VCD DVD Machine price $90 to $400 $650 to $1,000 Disc price (licensed) $5 to $8 $20 to $25 Easily pirated? Yes No Quality Same as Digital format with videotape much higher resolution Number of discs 2 or 3 1 per movie
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Sales of video CD players in China (In millions of units)
1997 estimate: 10 million to 15 million
1998 projection: 20 million to 30 million
Source: Times research
