Cablegate: The Economics of Piracy (and Why It's Not Going Away)

VZCZCXRO1350
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHBK #4978/01 2280257
ZNR UUUUU ZZH
R 160257Z AUG 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 0947
RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE

UNCLAS SECTION 01 OF 03 BANGKOK 004978

SIPDIS

SIPDIS

USDOC FOR JKELLY, SWILSON
USDOC PASS USPTO FOR PFOWLER

E.O. 12958:N/A
TAGS: KIPR TH
SUBJECT: THE ECONOMICS OF PIRACY (AND WHY IT'S NOT GOING AWAY)

1. Summary. Low risk, low investment, and exceptionally high
returns are strong and consistent motives for distributors and
retailers to start, and stay, in business in the optical disc piracy
industry. Setting up shop to sell pirated discs involves dealing
with both organized crime and local law enforcement, but is
nevertheless considered a worthwhile profitable business,
particularly for small business owners with few other opportunities.
Legitimate CD stores have reduced prices to try to compete with
pirate shops, but price differences are still substantial and
prospects are bleak. As long as margins remain high and other
employment and business opportunities are seen as less remunerative,
enforcement efforts are unlikely to put a permanent dent in the
piracy business. End summary.

So you want to open a pirate CD stall
-------------------------------------

2. In a series of interviews, pirate retailers candidly explained
their motivation for setting up their small businesses. (Note:
Econoff is Thai-American and did not identify himself in interviews
as an Embassy employee.) For young Thais with few prospects, a
pirate CD shop is a low-cost means to begin a potentially highly
profitable business. One retailer at pirate-infested Pantip Plaza
told Econoff of her upbringing in a poor family, and said that her
parents could not support her and that she could never pay for
higher education. She claimed that she had very few options and
getting involved in piracy was her best choice to make money.
Capital costs for starting a pirate shop are relatively low and even
her family's modest financial situation was sufficient to begin her
small yet profitable shop. However, the money comes with risk as
well; she told Econoff she is constantly worried about the police,
and is always on the lookout, though had yet to be caught.

3. Nearly all retailers interviewed had no college education, and
related that few other business opportunities were available to
them. One retailer had a Business Administration degree from a
well-known local university, but told Econoff that the financial
return selling bootleg optical discs was far superior to other
legitimate job offers that he received upon graduation.

4. Market entrance costs can be minimal. The City Law Enforcement
Department (CLED), a branch of the Bangkok Metropolis Authority,
controls operations on public streets and authorizes establishment
of street stalls on about 300 public streets. All vendors must
receive a license to do so directly from the CLED, but the city
collects no application fee and charges no rent. Although
officially cost-free to open a street stall, a common practice is
for one person to acquire many licenses for the same street, then
rent out stalls to other vendors who wish to open shops. Rental
prices vary according to the frequency of shoppers of that
particular street, anywhere from 100 baht (USD 2.50) per day on a
less-trafficked street to 100,000 baht (USD 2500) for a prime
location. This practice became illegal in 2005 and the CLED is
making efforts to eliminate the practice. Like many enforcement
agencies, however, the CLED admits it is making little progress in
cleaning up the illegal renting activities and it seems doubtful
that these practices will stop any time soon. The Deputy Director
General noted that organized crime often has a hand in these types
of illegal rent operations, making enforcement all that more
difficult.

5. Similar rental practices take place in private malls, though
costs increase dramatically. Outlandishly high rent costs or down
payments can be the norm in a popular mall, and only high-profit
retailers, such as optical disc piracy retailers, can afford the
space. Pirate retailers told Econoff that space was at such a
premium that commonly many different retailers will share space and
the cost of rent in an area meant for a single shop. Often, a shop
will appear to be a single shop that sells different types of
optical discs, but each person in that area is a separate retailer
with their own products. They keep the profits of whatever they
individually sell but split the cost of rent with the other
retailers.

6. Though entrance costs can be low, other barriers await an
aspiring pirate. A retailer must have connections in the
supply-chain before being able to access the supply of pirated
optical disc merchandise, according to enforcement authorities.
Similar to the drug world, only a trusted person will be able to
gain entry into the pirate world. New retailers are often sent on a
wild goose chase for their first supply shipment, told to change
locations over and over until the supplier is satisfied that law
enforcement is not following. Even then, supplies and payments are
kept separate. The organizations that run these operations are
cautious about undercover agents and choose wisely whom they will
trust.

Profits and Costs
-----------------

BANGKOK 00004978 002 OF 003

7. Extremely high profit margins for pirated optical disc sales are
consistent incentives for the pirate industry. Pirated music CDs
and DVDs usually sell on the street for 100 baht and software for
130 baht. According to a Royal Thai Police Colonel active in
enforcement, the cost of making a single disc from a factory is
between 10 to 15 baht, depending on the quantity produced. The
wholesale price of a CD from the distributor typically ranges
between 25 and 40 baht, depending on the quantity purchased by the
individual retailer, and rarely exceeds 50 baht. (Note: current
exchange rate is 38 baht/dollar.) The Motion Picture Association
estimates that a sale of a retail pirated movie of a DVD-5 (4.7 GB)
will bring in about a 50 percent profit; a DVD-9 (8.5 GB) will bring
a 100 percent profit. DVD-9s sell for a price of 200 baht.
Multiply those profit margins by the hundreds of thousands of discs
produced annually, and the piracy business becomes a multi-million
dollar industry that produces more than enough revenue to cover all
other costs. Retailers consider the incredible amount of potential
money to be made to be more than worth the risk of getting caught.

8. There are several other fixed costs aside from the costs of
creating the actual disc. The deep involvement between organized
crime, government, and police in the piracy business creates a
continual need for bribery funds and bail money for jailed
retailers. Front line police officers are constantly paid off to
turn a blind eye to piracy activities and for tips on raids.
Thousands of discs are also seized by enforcement authorities each
year, resulting in losses for retailers of millions of baht.
Recording industry sources say that criminal organizations keep
thugs on the payroll for protection of their markets at the ground
level. Retailers are usually spared these costs as the powers above
them handle it. But even adding in these risks and external costs,
the piracy business still pulls in enough money to continue to
operate smoothly.

9. Incomes for shop employees are substantial, and retailers manage
to keep risks relatively low. A common practice by retailers is to
hire minors under 14 years old to run day-to-day business,
retrieving and sending discs to customers. Police have little
interest in arresting minors and courts have even less interest in
prosecuting. According to recording group Phonorights Thailand,
minor employees are paid a relatively handsome salary of 6,000 to
10,000 baht (USD 160 to 260) per month.

Legitimate retailers compete, barely
------------------------------------

10. Legitimate sales in the 4 billion baht (USD 106 million) music
industry are down 40 percent this year, according to industry rep
Phonorights Thailand. Phonorights gave three reasons for the
precipitous decline. First is the recent economic downturn, leading
consumers to choose to save money by buying cheaper, pirated music,
or no music at all. Second, a new type of music customer has hit
the market in recent years, with behavioral patterns that advocate
piracy. The younger generation's main experience with accessing
music is through pirated CDs and internet downloads and has little
experience buying legitimate product. Finally, supply of pirated
CDs is on the upswing owing to a surge of imported pirated CDs from
China and other neighboring countries, such as Malaysia and Burma.

11. Thai music makes up between 60 to 70 percent of the music market
in Thailand, but local industry is struggling against the effects of
piracy. Grammy, the leading record label in Thailand, reported a
loss this year for the first time in 20 years. To combat piracy,
and facing mounting pressure from the government, Grammy dropped
prices three years ago from 250 baht to 150 baht per disc. Company
reps said the strategy succeeded the first year but customers
quickly returned to the pirate market. Grammy responded by
requesting artists to produce more albums per year and increase
quality, which met limited success.

12. The international market has also been suffering recently.
Rumors abound that international music retailer CD Warehouse is
going out of business, and their general manager confirmed that
sales were low and declining. He predicted that the entire
legitimate music retail industry would be out of business within
five years. He recalled that when international record labels cut
prices from 400 baht to 250-300 baht several years ago to combat
piracy, sales stayed stagnant. A recent survey by the MPA showed
that, surprisingly, the primary reason Thais purchased pirated DVDs
was to avoid the censorship present in legitimate product.
Additionally, pirated discs for newly released movie titles are
available on DVD much faster and in more sales locations than
legitimate versions, often accessible the day after the movie is
released in theatres. Pricing was surprisingly found to be the
least important reason, though still a key motivator.

13. Comment: The recording, movie and software industries have long
pushed Thai authorities for stronger enforcement actions to combat

BANGKOK 00004978 003 OF 003

the widespread piracy of their products. However, it seems
increasingly clear that enforcement faces a long uphill battle
against not only the forces of organized crime and public apathy,
but the primal forces of the market. With low capital and
production costs and high margins, pirate disc shops will continue
to be an attractive small business opportunity. And while price and
accessibility of pirated discs exceeds that of legitimate product,
consumers show no signs of declining demand. End comment.
BOYCE

© Scoop Media