Wednesday, March 09, 2005

The Economics of Piracy

Daniel Gross has written an article in Slate commenting on Hollywood's decision to sell DVD's in China at a low price to compete with the pirates. He thought this would lead to people in the US importing the discs because they were so much cheaper than the ones sold in the US.

As he soon realized from reader comments, Hollywood thought they had the grey market covered by imposing region coding, which means that discs sold in one region should only be playable on DVD players sold in that region.

Like any other commodity, consumers of DVD's have rapidly discovered that there is a difference in quality and price between the various region releases. Code 1 discs released for the North American market are better quality, with more features (sound choices, special documentaries) and come out first. The result is the availability of multi-region players, first under the table, and now openly from legitimate retailers.

In the face of instant information, it is almost touching that Hollywood believes they can release a movie in one market months before another, and then stagger release of the DVD.

Anyone interested in supply chains must give credit to the incredible efficiency exhibited by the pirates, who can obtain a copy of a new movie from (say) a "voter" copy given out to Academy members and have it duplicated and in full distribution within a week.

As Gross points out, you really need to look at value pricing instead of costs when discussing piracy. Whether a Cartier watch or a DVD, the raw material inputs and manufacturing labour are a small fraction of the eventual selling price. In Singapore, a blank recordable DVD-R costs more than a pirate DVD from China with full packaging.

And that is the whole point. Piracy is theft, clear and simple. But it is also an indication of market demand at a certain price. Why is Hollywood so ignorant of economics? The market is saying that there is near infinite demand at $2 a disc. Why spend a fortune on regulation and bullying customers when they clearly want to buy your product?

The exact same reality applies to computer software. Why does Microsoft charge $500 for Office and then complain about pirates? The market wants the product, but at a much more realistic price. Piracy only exists when there is a pricing mis-match.

The real answer is that you don't get to earn $20 million to appear in a film and live like a king if discs sell for $2. You get to earn a decent living like everyone else doing a job and making a margin on their labour.

And where is the fun in that...?

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