Going Legit
Movie Industry Tries to Fight DVD Pirates With Lower Prices

By Kate Kelly, Ethan Smith and Peter Wonacott
Staff Reporters of The Wall Street Journal

On a freezing afternoon in Shanghai, China, street peddler Cheng Meiyuan watches two women comb through his movie-disc collection, which features pirated copies of "The Aviator" and "The Incredibles." A few minutes later his customers are gone, having paid roughly $2 for two DVDs.

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.

Following Apple's Footsteps

The idea is to give consumers in those markets a cheap, legal alternative to pirated material. Warner Bros. hopes to get a foothold in the Chinese market by setting the price of its DVD movie releases there between $2 and $4. 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 the government, 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 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 CEO 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 Richard Parsons, chairman and CEO of Warner Bros.' parent company, Time Warner.

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," says an advertising executive shopping on a bustling street in western Shanghai recently. Legitimate movies don't offer much better quality than their pirated counterparts, he argues. 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.

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 their U.S. theatrical release. They will sell at two price points: $2.65 for relatively basic discs and $3.38 for fancier versions with extra footage and language enhancements.

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%.

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 big 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 Universal Music Group, EMI Group, Sony, 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 Mexican artists. The discs cost around $4.50. To find cheap ways to sell current hits, the music companies are working on budget-priced singles.

'Temporary Relief'

The Guadalajara program, which aims to augment, rather than replace, older tactics such as raids against pirate manufacturers, is being coordinated by the IFPI, the trade group. Raul Vazquez, 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. Vazquez. "Go in with the police, try to clean up the markets, make sure you hit 'em again. That only gives you temporary relief."

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 new album, "X," was released as a double CD, with a photo album and a video. EMI says the album sold about 40,000 copies in its first three weeks in stores in the U.S.