China Chatter: Between a Rock and a Movie Theater

Hollywood is slowly beginning to realize that it’s better off courting Chinese moviegoers than railing against DVD piracy. If it wants to maintain the lucrative trade relationship with Beijing, Washington should handle the intellectual property is

In April, the U.S. trade representative turned up in Beijing with several pirated DVDs and announced that the U.S. government was filing a WTO complaint against the Chinese over intellectual property piracy, and a lack of market access for U.S. published goods. Late last week, the U.S. ambassador to Beijing admitted that the complaint not only didn't accomplish its goal, but actually resulted in the Chinese slowing their efforts to halt piracy. Nobody-not even the Chinese government-will point to winners in this dispute. But what seems undeniable is that if elements in Washington and Hollywood have their way, China's urban middle class will no longer be able to afford its American film and television habit.

Hollywood isn't the only American industry unwilling to adjust its prices (downward) to the realities of the Chinese marketplace, but it might just be the most clueless. On a recent Sunday night, tickets for Ratatouille, the computer-animated Disney cartoon were selling for sixty yuan (U.S. $8) at my local Shanghai multiplex. The takers were few: When I peaked into the theater, there were two couples lost among a sea of empty seats. There are two competing explanations for this sad state of affairs: Either ticket prices are too expensive or low-cost piracy is cutting into the theater business. The latter explanation is favored by the Motion Picture Association of America (MPAA), the film industry's trade group, which claims that the U.S. motion picture industry loses U.S. $244 million per year in China due to piracy (the total Chinese box office take was U.S. $336 million in 2006, and much of that was for Chinese films-which are also heavily pirated).

Meanwhile, the former explanation is favored by one of the two friendly gentlemen who own my favorite Shanghai-area pirate DVD emporium, who were kind enough to chat with me about the entertainment market in China-so long as I didn't name them. "Chinese people can't afford those [ticket] prices," scoffs one partner, as he stocks the bins with newly arrived copies of I Now Pronounce You Chuck and Larry. In fact, most Chinese people can't often afford the six or seven yuan (U.S. $.80-U.S. $.93) that a pirated DVD costs at this shop, either. According to Shanghai government figures, the average monthly salary in Shanghai was RMB 2,464 (U.S.$328) in 2006. Assuming that, say, 10 percent of that average salary is disposable (a big assumption), then a U.S. $9 movie ticket becomes an outrageous luxury, and a $.93 DVD is only marginally justifiable.

Of course, Hollywood isn't courting the average Shanghainese salary-earner. It's seeking the above-average one who drives a new car, owns an apartment, and doesn't think twice about movie tickets. As a percentage of the population, they may be small, but-in China, like nowhere else-small percentages can hide large populations. And that's who shops at my favorite DVD shop. According to one of the owners, the customer base is 70 percent local Chinese, and 80 percent of what they purchase is foreign entertainment. "But they aren't as rich as the Americans, either," adds the partner. True enough: Middle class in China-income of roughly U.S. $10,000, annually-isn't middle class in the USA. Other American businesses have figured out that they have to lower their prices to compete for these earners.

Today, among the educated classes in China's more affluent cities, "Desperate Housewives", "Friends", "The Sopranos" and years worth of Hollywood blockbusters are common touchstones for conversation (especially with U.S. citizens). True, the "Spiderman" franchise isn't exactly the Federalist Papers, but it's far better known than even the most popular European serials and films. The studios and the MPAA will never acknowledge it, but the mass audience that American culture now enjoys in China would never have developed if the studios had controlled the distribution and-most important-the price of their products.

From a business standpoint, there is precedent here. In the late 1990s the U.S. music industry found itself confronted by declining sales that it attributed to the sudden proliferation of mp3 music files distributed freely via file sharing services such as Napster. Instead of finding a way to compete with file trading, the music industry-via its trade group, the Recording Industry Association of America-chose to litigate and lobby. Meanwhile, Apple figured out a way to monetize the demand for digital downloads. The rest is business history: Today, Apple dominates the digital music marketplace and the rest of the recording industry is trying to figure out a way to compete with a computer company.

Similarly, until recently the MPAA and Hollywood have appeared determined to treat mass Chinese demand for low-cost versions of their products as an affront, and not an opportunity. Instead of figuring out a way to compete with the pirates, they've spent resources complaining to Washington. Fortunately, some studios are beginning to realize that even if they are granted total market access and a ban on pirates, they'll still need to compete for the limited discretionary income of Chinese citizens. And so, in the last year, Twentieth Century Fox and Time Warner have begun selling DVDs in China at prices just slightly above those charged by the pirates. And, reportedly, those DVDs are selling. When I asked my local DVD seller about these titles, he nodded. "Sure, the quality is better for not much better price," he told me. "I'd like to sell those, too."