Chinese Counterfeits Have Long Legs

A story in the Washington Post reports that the infamous Chinese counterfeits (clothing, accessories, watches) are now showing up in U.S. department stores and on the online auction site, eBay. One of China's great shopping attractions is now becoming one of China's notable exports.

Counterfeiting is endemic and becoming more entrenched. The entertainment business is pulling its collective hair out over counterfeit CDs and DVDs of popular music and film. In addition to current movies, legacy American films are counterfeited in abundance as well. We've seen DVD copies of Fort Apache, Citizen Kane, Rebel Without a Cause, and Gone With The Wind (an extremely popular movie in China) and hundreds of other classics that are even branded with the name of a Chinese distributer in the credit roll, all for around a dollar apiece. I can't imagine how cartons of counterfeit DVDs get through customs and on to the streets of Los Angeles, but they somehow do, hawked by vendors in various parks. Los Angeles, a car city, doesn't have much street traffic, but these disks still somehow sell.

The counterfeits aren't just from China, but from South America and other places in Asia. They are pressed in the U.S. as well. In 2003 a L.A.P.D. captain (later suspended) was arrested for possession of pirated DVDs and sued in 2004 by major studios. Her boyfriend had a connection with a local post-production house.

I remember when I was active around the record business how perpetrators of in-house pirating--a legitimate pressing plant adding a shift to press more hit albums than had been ordered and supplying the overage to record stores through back channels--were caught supplying much anticipated major releases ahead of the record companies. Distributers somehow noticed that the albums were in stores before they were actually released! I recall also, although I don't remember the details, that an album whose sales fell well short of expectations was returned (albums were distributed on consignment) in numbers that exceeded what was legitimately pressed. Piracy is not new to America, but domestic piracy would appear to be under control. Now that foreign counterfeits have infected the market, the potential for economic chaos in the affected industries is staggering. The film industry claims a $3.5 billion dollar loss to counterfeits. But unless they begin to understand the chain of supply and demand, its going to get a lot worse.

I happen to disagree that each counterfeit sold (as if the MPAA could really do a credible accounting) deducts from a projected sales total. There is value in having American films, arguably America's most effective export, sought after in third world countries with growing economies. It may be the only way left to win the hearts and minds of the rest of the world, which is demonstrably disgusted with our foreign policy. Popular culture exports American values (is that a dirty phrase already?) American stories and American free expression, all of which cultivate creativity and interaction more valuable than commerce. And I put forth the proposition that penetration, however achieved, only engenders more popularity which inevitably creates a better market. Exploiting this phenomenon takes vision beyond futile efforts of legislative or punitive control.

When DVDs cost 20 US dollars, well beyond the reach of consumers in a country like China whose economy is growing rapidly but unevenly, how can you stop the demand for DVDs priced at a dollar? Are DVDs really worth $20 USD? Is charging what the market will (not) bear a recipe for undercutting?

What if major releases of U.S. movies had a three-tier release strategy. The first CD release would sell as priced, and a second, later release might be priced much lower, much as paperbacks follow hardback books. The third tier would be a legal license to sell an agreed-upon number of copies at a price determined by the licensee. It might not replace the alleged $3.5 billion that the MPAA estimates as a loss, but some remuneration is certainly better than none.

The Chinese government regularly proffers strong warnings, stages counterfeit destruction demonstrations and has recently lowered the conviction criteria of Intellectual Property Rights violations. (You'll have to wade through a bit of Chinglish to read this story in People's Daily.) They are extremely concerned that counterfeiting will injure the robust trade relations it has built up and bring WTO sanctions. Chinese people have few opportunities to fly in the face of their government, but in the matter of keeping demand for counterfeit CDs and DVDs lively, they continue to sell them and buy them in enormous numbers that can hardly be tracked.

It's time to deal with counterfeiting as a fact of life instead of a problem that can be eradicated in a conventional manner. As we've seen from the history of MP3 trading on peer-to-peer networks, the ingenuity of culture vultures and the appetite for popular culture knows few bounds. It's going to take a new paradigm to drive--or ride--these healthy trends within the entertainment business.