Movie, Music Giants Try New Weapon
Against Pirates: Price
By KATE KELLY, ETHAN SMITH and PETER WONACOTT
Staff Reporters of THE WALL STREET JOURNAL
March 7, 2005; Page B1
On a freezing February afternoon in Shanghai, street peddler Cheng Meiyuan watched two women comb through his movie-disc collection, which featured pirated copies of "The Aviator" and "The Incredibles." Mr. Cheng tucked his hands into a black down coat, his head pivoting left and right in search of police. A few minutes later his customers were gone, having paid 16 yuan, or roughly $2, for two DVDs.
The 30-year-old Mr. Cheng says he doesn't know where his goods come from; when he runs out, he calls a delivery boy to bring more. He earns just pennies per sale. Now, he wonders whether a new wave of legitimately produced discs, priced just slightly higher than the fakes, will threaten his ability to make a living. For many buyers in China, he says, "the price difference [between a $1 DVD and a $3 one] is still too big."
Entertainment companies think otherwise. Rampant piracy in places like China, Russia and Mexico has prevented Hollywood studios and major record labels from tapping the full growth potential of those tantalizing markets. Now, some media companies are trying to reverse the tide by cutting prices on legitimate DVDs and CDs low enough to challenge the pirates at their own game.
The idea is to give consumers in those markets a cheap, legal alternative to pirated material. Time Warner Inc.'s Warner Bros. hopes to get a foothold in the Chinese market by setting the price of its DVD movie releases there to between $2 and $4. General Electric Co.'s NBC Universal would like to tap into Warner's Chinese distribution system and is planning a similar program in Russia. Meanwhile, the four global music companies have just launched a similar strategy in Mexico, in conjunction with government authorities, aiming to replace the pirated CDs sold by street vendors with new lines of cut-rate, legitimate CDs.
The companies are betting that, just as Apple Computer Inc. helped the U.S. music industry reclaim turf lost to Internet piracy by pricing songs for the iPod at 99 cents apiece, the movie studios and record labels can woo back consumers abroad by slashing the price of legally manufactured DVDs and CDs. Their discs are of superior quality, they say, eliminating the risk of buying substandard goods and justifying the premium they want consumers to pay.
"There is a value in legitimacy," says Bob Wright, chairman and chief executive of NBC Universal, "and now we're going to try to find out what the appetite is of the customer" for genuine, higher-quality DVDs.
Entertainment companies are pushing for much tougher law enforcement overseas. But in the meantime, selling cheaper DVDs is a bid "to create a more compelling value proposition, so that the good behavior drives out the bad," says Time Warner's chairman and CEO, Richard Parsons.
Yet any merchandise that's priced higher than a dirt-cheap pirate copy could prove a tough sell. Even $2.65, the price at which Warner Bros. plans to sell DVDs, "is still a lot of money," said an advertising executive, surnamed Chen, shopping on a bustling street in western Shanghai on a recent weekend. Legitimate movies don't offer much better quality than their pirated counterparts, he argued. And the latest movies are typically available much sooner as counterfeits -- because they often are created by pirates who sneak video cameras into U.S. movie theaters.
[China DVD]
Residents viewed illegally made discs before the material was destroyed in Chengdu, China.
The studios have a plan of attack for that problem, too. Warner Bros. plans to release more than 125 movies this year in China, including hoped-for blockbusters like "Batman Begins," around the time of its U.S. theatrical release. They will sell at two price points: $2.65 for relatively basic discs, with English and Mandarin dialogue tracks, and $3.38 for fancier versions with extra footage and language enhancements.
The DVD sales are part of the company's broader strategy in China. Current plans include an ambitious project to build 25 new multiplex theaters by 2007 and partnerships with local directors and production companies to make Chinese-language films. Studio executives also say they have discussed a content distribution deal with the government-controlled China Central Television -- a deal that would put Warner Bros. programming on China's pay-TV stations.
"We look at it and see a market with an enormous amount of potential for a lot of the businesses we're in," says Barry Meyer, chairman and CEO of Warner Bros. Companies like NBC Universal, which is exploring a deal to distribute its own DVDs at cheaper prices through a partnership Warner Bros. recently developed with China Audio Video -- the government entity that oversees disc content and retail sales -- hope to follow suit.
But if the music industry's experience offers any guidance, the film studios are in for a long, hard slog.
Years of antipiracy efforts have done little to reduce the rate of music theft in many markets around the world. In two dozen countries, primarily in Latin America and Asia, at least half of all CDs sold are pirated, according to the International Federation of the Phonographic Industry, a trade organization.
In China, according to IFPI estimates, 90% of all CDs sold are pirated, while in Russia and Ukraine the rate is well over 70%. The music industry's problems are compounded by the relative simplicity of copying a CD as opposed to a DVD.
In Mexico, what was once the eighth-largest music market in the world has been decimated by a piracy rate that has climbed to more than 60%. A legitimate CD usually costs about 130 pesos, or $12, while pirated titles go for as little as 90 cents to $1.35. Now the four global music companies are hoping to turn at least some street-corner pirate vendors into legitimate merchants. The month-old experiment -- limited for now to the city of Guadalajara -- includes releases from Vivendi Universal SA's Universal Music Group, EMI Group PLC, Sony Corp. and Bertelsmann AG's Sony BMG Music Entertainment and Warner Music Group.
The CDs being released for the program, some of which carry labels identifying the discs as specially made for street markets, include compilations of hits from various decades, as well as collections of songs by popular artists such as Luis Miguel. The discs, which include minimal artwork and packaging, cost around $4.50. To find cheap ways to sell current hits, the music companies are working on budget-priced singles.
The program, which aims to augment, rather than supplant, older tactics such as raids against pirate manufacturers, is being coordinated by the IFPI. Raúl Vázquez, IFPI's regional director for Latin America, says that while it is too early to declare the program a success, it appears to be more successful than past antipiracy efforts in Mexico. "Most of the programs have been enforcement-driven," says Mr. Vázquez. "Go in with the police, try to clean up the markets, make sure you hit 'em again. That only gives you temporary relief."
The moves in Mexico follow similar strategies by global music companies in other troubled markets. Since 1998, Universal and others have offered low-priced versions of some music titles in Russia. Last year in Germany, BMG made albums by five local acts available in both cut-rate and higher-priced, "enhanced" configurations. BMG, now part of Sony BMG Music Entertainment, is said to be considering whether to continue the program. A Sony BMG spokesman declined to elaborate.
Some executives concede that a price war against pirates may be folly. Fabio Alvarez, managing director of Universal Music Mexico, says that no matter how deeply his company slashes prices, "it's never going to compete with the prices of the pirates."
That helps explain why some in the industry believe their best solution to piracy-ravaged markets, paradoxically, lies in pricier, enhanced editions of albums, with extras that pirates cannot duplicate. EMI, for instance, says it has done well with a deluxe package for the Mexican band Intocable. The band's most recent album, "X," was released as a double CD, with a photo album and a video. The company says the album has sold about 40,000 copies in its first three weeks in stores in the U.S. Sales figures from Mexico aren't yet available.
