The Piracy Price Wars

Last fall Time Warner Inc. quietly began selling cut-rate DVDs in China to better compete with cheap bootleg copies of its movies. But the bootleggers were already a step ahead.

Even before Warner Home Video got its low-priced movies on the market, merchants along Wenmiao Road -- a hot spot here for pirated goods -- started peddling DVDs that compress four or five movies onto a single disc.

Although their picture quality is far from perfect, they are watchable. And priced at 5 yuan -- or 60 cents -- a disc, they are helping steer buyers away from the cheapest legitimate alternatives on the market, including DVD movies from Warner, which start at $2.65.

“What would you rather have -- seven hours [of content] for 5 yuan or two hours for 22 yuan?” said one merchant, who gave his name as Yang.

On a recent weeknight, a steady flow of customers walked up to his video stand on Wenmiao, just down the street from Confucius’ Temple, rifling through a vast collection that included titles such as “Sideways” and “The Aviator” on the same DVD with other recent hits, as well as all 10 seasons of “Friends” on eight discs for less than $5.

The brisk business along Wenmiao and countless other streets in China illustrates what Warner is up against as it battles piracy in the world’s biggest bootleg market.

As the first foreign company to directly distribute and market DVDs in China, Warner faces a host of economic, cultural and social obstacles in trying to create a legitimate market in the Asian nation. Last year, Chinese consumers bought about 1 billion home video discs -- 95% of them pirated, according to industry estimates.

For years, Warner and other global purveyors of film and music fought piracy in China and other developing nations by trying to exert pressure on government officials and hoping that intellectual property laws and enforcement would take hold in those countries.

Only a small number of authentic Hollywood DVDs were distributed in China through local licensees, and generally at a retail price five or six times what pirated movies fetch.

Warner’s new strategy of offering DVDs at prices that are more competitive with fakes, which it formally announced in February after testing it for several months, is being closely watched by other entertainment companies. General Electric Co.’s NBC Universal in March began a similar program in Russia. The studios are betting that people will pay a slight premium for originals that offer consistent high quality and some frills, such as extra scenes and interviews with stars.

“As consumers in China gain economic power, it’s only natural for them to desire a quality of life that says, ‘I’m not going to waste my money on inferior goods,’ ” said Mark Horak, general manager of Asia Pacific and Latin America operations for Warner Home Video in Burbank.

At the moment, Warner and its Chinese joint-venture partner, CAV Warner Home Entertainment Co., are selling DVDs at about 1,500 retailers in China, including outlets of Wal-Mart Stores Inc., Carrefour of France and Xinhua, this country’s largest bookstore chain.

CAV Warner Home Entertainment said it sold more than 270,000 DVDs in December, including 95,000 of “Harry Potter and the Prisoner of Azkaban,” which Warner released in China that month. The next month, though, sales of the Harry Potter movie slipped to 18,000.

Many Chinese consumers had already seen bootleg versions of the film, which were widely available earlier in the summer.

Even as the studios hope to compete by touting the higher quality of the real thing, experts say the fidelity of pirated DVDs in China has improved significantly in recent years.

What’s more, intense competition has driven down prices of copycat discs. The bootleg DVDs sold on Wenmiao, for example, started out last fall at 85 cents a disc, but the price has since dropped to 60 cents.

Price is not the only factor working against the big media companies. Timing is crucial too, and cultural sensitivities and bureaucracy can block or delay the official release of DVDs in China, giving pirates an opening.

Many popular American films and television shows, such as “Sex and the City,” are censored in China, so they are available only from bootleggers. Government review procedures and red tape, meanwhile, can delay release times of approved movies.

On March 3, Warner filed an application for “Ocean’s Twelve” and received an oral approval from a government official on April 4. But as of early May, Warner’s office in Beijing still had not received the necessary signature from the Ministry of Culture just two blocks away.

The ministry, which has a staff of 50 who review foreign movies and music, would not comment on specific titles. But Chen Tong, director of the ministry’s audio-visual movie section, said it was “complete nonsense” that government censorship played a decisive role in hurting sellers of legitimate DVDs. The Internet gives bootleggers an advantage, Chen said, and studios sometimes are the ones responsible for delays.

Warner, for its part, says it has no problem working with the government on censorship.

At any rate, Zhu Wei, a Shanghai resident who works for a bank, isn’t one to wait around for the studios’ DVDs to hit the stores. Last month, the 24-year-old bought a copy of “Ocean’s Twelve” for 85 cents.

“Why should I go to nonpirated stores?” Zhu said while making a regular visit to his favorite bootleg dealer, a large electronics store in a fashionable district in downtown Shanghai. “Whenever there are some new movies shown in the U.S., I only need to wait for a month before I can find it in pirated stores.”

That’s not to say Zhu doesn’t buy originals. With a monthly salary exceeding $700, he can afford it. But Zhu said release time and variety were important to him.

“I might consider buying a real one if I really like the movie and want to keep it,” he said.

Yan Zhen, 29, who works for a professional information technology consulting company, said he would pay extra for DVDs that had special features. But mostly, he said, he will download movies first or visit Wenmiao Road, where he spends about $6 a month for DVDs.

At Warner’s Shanghai headquarters, on the sixth floor of a high-rise in the old French quarters, publicity manager Christine Hu is trying to change such prevailing attitudes. She is working on a campaign to inform consumers that there is a relatively cheap, legal alternative to pirated DVDs. She wouldn’t say what her budget was but acknowledged that it would be a tricky message to get out.

The natural thing to do, Hu said, would be to advertise features of a new release. But that would boost sales of fakes.

“Consumers will see the ad and go straight to the pirated stores,” she said. Hu has no illusions about the challenges ahead. “I’m sure it will take a long time.”

It doesn’t help that buyers of fake goods don’t face much legal risk, or even social stigma. Nor do sellers, judging by the abundance of pirated video and music shops throughout Shanghai, China’s most cosmopolitan city. The bulk of fake DVDs are produced in relatively well-to-do Guangdong province in southern China, and occasionally there are reports of authorities busting assembly lines and confiscating tens of thousands of illegal discs.

But government agents can’t close these factories fast enough before new ones sprout up. “It’s a cat-and-mouse game,” said Kevin Koo, a Shanghai lawyer who specializes in piracy cases.

Beijing’s leaders have put in place tougher intellectual property laws, but rules are hard to enforce at the local level.

“I haven’t seen any shops selling fake DVDs closed,” Koo said. That’s because strong financial incentives exist to leave things alone. Closing down an illegal shop means not just taking away the livelihood of one merchant. Often there’s a whole chain of folks who benefit.

Chris Torrens, director of Access Asia, a consumer research and consulting firm in Shanghai, has watched how one popular bootleg DVD retailer downtown has created incomes and jobs for many. Business is so brisk that the road leading to it has been resurfaced. The store has a parking lot with attendants who earn a share of the $2 that drivers pay to park there. A restaurant and other shops have formed around the video store, he said.

“The community has come to rely on it,” Torrens said. As for the local police, he added, “they turn the other way.”

Like most analysts, though, Torrens still believes that Warner’s strategy has a good shot of succeeding. The price of its DVDs isn’t out of reach for the growing middle class, and Warner is looking to piggyback on big-name retailers that draw a lot of consumers.

“I think they realize that just lobbying Beijing isn’t going to be enough,” Torrens said, referring to Warner and other foreign media giants. “You have to drop prices too.”

The catch, though, is that it’s going to take time, and lots of it, before cultural changes take hold for people to alter their buying habits about pirated goods, he said. “I think you’re talking years.”

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Cao Jun in The Times’ Shanghai Bureau contributed to this report.