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06BANGKOK4978 THE ECONOMICS OF PIRACY (AND WHY IT’S NOT GOING AWAY)

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“74986”,”8/16/2006 2:57″,”06BANGKOK4978″,

“Embassy Bangkok”,”UNCLASSIFIED”,””,”VZCZCXRO1350

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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

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USDOC FOR JKELLY, SWILSON

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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

—————–

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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

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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

Written by thaicables

June 22, 2011 at 4:43 am

One Response

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  1. All the economic explanations are hardly surprising. What I always wonder — and wonder why the question was not asked — is whether the pirates consider the moral issue: whether they believe they are stealing someone else’s intellectual property. I would think that, especially in a Buddhist country, this would be an important factor to consider.

    InBKK

    June 22, 2011 at 6:27 am


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