Beating the Pirates to the Punch Bowl

The low marginal cost of reproducing DVD movies has made it difficult to stamp out the bootleg DVD business in China.

In June 2005, Warner Bros. released the low-budgeted film "The Sisterhood of the Traveling Pants" on DVD in China the same day that the movie premiered on screens in the U.S.

This is a departure of the usual practice of releasing U.S. DVDs only five months after the movie makes its debut in U.S. theaters. Since Warner Bros. does not plan to screen the movie in China, it does not have to worry about its legitimate Chinese DVD competing against the movie in China.

Another unusual departure was the low suggested retail price of the locally produced discs. At about $2.65 per disc, these discs are much more competitive to the bootleggers' wares, (about $1.80) than the regular DVDs (about $18).

Hoping to make unauthorized copies of "Pants" less appealing outside China, Warner included no extra features on the DVD. It also added Chinese subtitles that cannot be hidden.

Such a major departure in DVD release practice in a major U.S. studio reflects a desperate attempt to combat the serious DVD piracy problem in China. According to an April report by the U.S. trade representative, at least 90% of virtually every type of copyrighted work sold in China is counterfeit.

Piracy is a particularly serious problem in digital media because the marginal cost of reproducing the products is miniscule but the fixed cost of producing the original content is usually quite high. Most big-budgeted U.S. movies do not recoup their production cost by selling theater tickets alone. Ticket sales accounted for only 23% of U.S. revenue for feature films in 2004, while home video sales and rentals accounted for 60%. If the high movie production cost cannot be spread over DVD sales, there will be few or no big-budgeted movies.

Fine-tuning the DVD release date and format may not even be the ultimate solution to piracy given the low marginal cost of reproducing DVD. To really contain piracy and to counter competition from used DVD, movies may have to be streamed online after theater screening on a pay-per-view basis. Hacking a streaming server is a lot harder than simply copying a DVD master. Already, Electronic Arts is set to begin selling online games in China from its Chinese game studio instead of selling games on discs that play on computers or consoles.