Walk the Plank!

Our special report on digital film piracy.

By Heinz Bulos
April 2003

t looks like a drug deal. A stranger o
dubious background accosts you
rom nowhere and whispers a
question ery discreetly. \ou nod and
whisper back. 1he man leads you to an
alley away rom the crowd. \ou enter a
shop that sells cheap clothes. An
accomplice is inside packing the stu. le
opens a secret closet and you behold
stacks upon stacks o the illegal material.
It does look like a drug deal. But it`s not
illegal drugs. It`s pirated DVDs.

It`s an open secret that malls like the one
where the aboe scenario is played out
eery single day are lairs or pirates. Stalls,
lea markets, and street endors hae been
selling pirated CDs, CD-ROMs, VCDs,
and DVDs or years. lrom Shoppesille
and Starmall to Quiapo and Makati,
optical media piracy has been rampant.
It`s hardly a local problem. Other
countries, especially in Asia and Lastern
Lurope, hae earned notoriety in digital
piracy. Pirated sotware and games in CD-
ROM ormat, music CDs, and moies in
VCD ormat hae long been problem
areas. But pirated DVDs are on the rise.
And it`s a problem that could get out o
hand.

1he numbers may shock you.

In Asia, the number o pirated DVDs
seized skyrocketed to 6.1 million in 2002
rom zero in 1998. 1hat represents 8
percent o the worldwide seizures, which
numbered million pirated DVD discs.

1he Philippines contribute >30 million,
about 5 percent o >642 million, the total
losses in ideo piracy in Asia Paciic. Not
bad, you think. But we hae one o
highest piracy rates in the region at 80
percent, at par with China ,91 percent,,
Indonesia ,90 percent,, Malaysia ,5
percent,, Pakistan ,95 percent,, 1hailand
,0 percent,, and Vietnam ,100 percent,.
\e`re already in the Priority \atch List o
the International Intellectual Property
Alliance ,IIPA,, since 2001 ,prior to that,
we were perennially in the \atch List,,
along with India, Indonesia, and 1aiwan.
China remains on top, howeer.
Combined with piracy in music, sotware,
and books, >116 million hae been
reportedly lost in the Philippines.

Michael Lllis, Vice President and Regional
Director or the Motion Picture
Association ,MPA, Asia Paciic Anti-
Piracy Operations, notes in a recent
launch o its DVD Rewards Program in
Manila, DVD piracy is a recent problem
that has grown out o the increased
popularity o the DVD ormat. It includes
the replication, mastering, and distribution
o pirate DVDs. Alarmingly, 8 percent o
the world`s pirate DVDs in the cases we
were inoled in were seized here in Asia
Paciic. Clearly, this is Piracy Central. 1his
is where replication is taking part.`

Richard O`Neill, Director o the Regional
Optical Disc Oice, warns, 1he
Philippines is in danger o becoming an
Asian dumping ground. 1hat sounds like a
harsh term. loweer, as pressure is
applied in certain countries, we know that
the lines migrate to other countries.
1hey`re starting to come here. I you look
at the VRB statistics, this is a homegrown
problem. 1he perception was this was a
airly sae place to undertake these
actiities. I think that the VRB under Mr.
Reilla are proing them wrong. 1he
I
Philippines has the capacity now to
become a manuacturing base, which is
why a tool like this is necessary, why we
think it will eectiely stop the problem at
its inancy.`

Jack Valenti, the long-time Chairman and
CLO o the MPA, has exclaimed in a
testimony beore the US Senate that the
US moie industry suers reenue losses
o more than >3 billion annually through
thet,` adding that digital thieery can
disigure and shred the uture o
American ilms.`

Lllis points out that eerybody suers
rom DVD piracy, rom the legitimate
street reseller all the way to the theatrical
employees. Nobody wins when DVD
piracy takes hold. Plus it has a negatie
impact on the Philippine economy. 1he
goernment loses by way o lost taxes and
jobs are going down the tubes as well.`

Says O`Neill, Piracy aects us all. lor us,
that means lost sales. lor your own
domestic industry, it means lost jobs.
1hat`s people`s lielihoods. 1hat means
those crews, the support personnel, the
suppliers all hae lost reenues. It`s a
shared problem. 1he impact o piracy is
greater in the host country than it is on
those who publish lost igures. In act,
you`re losing your industry, we`re losing
sales. \e think publishing our lost igures
alone does not tell the whole story, the
losers are the host countries. \ou may get
as a consumer what you eel is a bargain
but what you`re doing is oting or the
demise o your own local industry.`

According to a press release rom the
MPA, about 1 million workers are directly
and indirectly dependent on the local ilm
and entertainment industry, with 200
thousand already lost their jobs due to the
piracy problem.

O`Neill, in his presentation, noted that the
local theater industry suered a 30 percent
loss, or around P2 billion, in 2001 due to
piracy. lrom 1,200 local theaters, there are
now only around 80. Moie production
has gone down by 80 percent, and most
local ilms released are the sex ilms that
still sell. lrom 200 moies produced eery
year, now only around 80 are produced
and released. In terms o lost taxes, it`s
equialent to P1. billion a year. 110
thousand direct workers and 550
thousand o their dependents hae been
aected.

On the other hand, the numbers may not
disturb you at all. Ater all, there`s nothing
new about piracy. Our consumer culture
has long been accustomed to knockos
and imitations, rom Gucci bags and
Lei`s jeans to Lacoste shirts and Rolex
watches. 1hose brands are still in
business. Len ilm piracy is nothing new.
\hen the Betamax and VlS ormats
dominated in the eighties and early
nineties, ideo shops made illegal copies
or rent. 1he studios are still in business.

One thing, though, has changed. 1hat
thing is called digital. lrom analog sources
such as tape, digital ormats such as VCD
and DVD hae made it easier, aster, and
cheaper to reproduce copies.
Compression technology has made them
easier to store in computers and distribute
through optical media and oer the
Internet. And unlike analog where each
copy cycle degrades quality, the 1000
th

copy o a digitized moie or instance is as
pure as the original.

1he DVD player happens to be the most
successul product in consumer
electronics history. lirst enisioned in
1992 and patented by 1oshiba and
\arner lome Video in 1993, it
supplanted laser disc players in 199 and
reached sales o >1 million in the US in
1998. It took DVD players only 5 years to
sell 30 million units, less than hal the time
it took VCRs to reach critical mass with
US consumers, which is 13 years. In
comparison, the CD player took 8 years,
the PC 10 years, the cell phone 12 years,
and color 1V 1 years to sell 30 million
units. DVD sales already surpass VlS
tape sales in 2002. 1otal DVD sales and
rentals are also expected to oertake VlS
sales and rentals.

1he irst major DVD titles were released
in Japan in 1996 and the United States in
199. \ith 500 lines o horizontal
resolution, image quality is ar superior
compared to VlS and VCD, which is
largely a Southeast Asia phenomenon.
1hat plus the widescreen iewing, reeze
rame control, scene selection, language
options, subtitle unction, 5.1 channel
Dolby Digital surround sound, and bonus
eatures such as director commentary,
behind-the-scenes interiews, moie
trailers, production notes, cast proiles,
short ilms, and \eb site links make
DVD the preerred ormat or ilm bus
and collectors.

DVD piracy makes it accessible to
millions o people who otherwise can`t
aord the price o a DVD title. It has also
made possible a radical shit in consumer
behaior - rom mere renters o ideo to
buyers and een collectors. 1hat has neer
happened to VlS on a mass scale.

1he reason is obious: price. 1here is a
latent demand or moies on ideo,
particularly the DVD ormat. lollywood
is a global orce and the moie-going
public just can`t get enough o Julia
Roberts and 1om Cruise. Intellectual
properties, such as music, books,
sotware, and ilms, are price sensitie and
highly elastic. I you just bring down the
price o moies on ideo, people will buy
them.

But that`s not how lollywood intended
things to work. 1o make the most o each
moie produced, it has to go to a
systematic progression o so-called
windows o exhibition`. A ilm will be
shown in theaters rom 2 weeks to 12
months, depending on its popularity.
\ithin a ew days to 6 months, it`s
released internationally. 1hen, it`s released
on ideo, which has a protected window
o around 6 weeks, meaning it can`t be
bought and rented in any other way. Ater
that, it`s oered on pay-per-iew cable
and satellite systems, with its own
exclusie 2-6 weeks window. 1hen, it can
be shown on premium cable channels
such as lBO and Star Moies, which lasts
or approximately 18 months. Ater which
it goes to network 1V or one or two
runs, an interal that lasts 12-18 months.
linally, it goes into syndication on
network teleision or cable network or 5
years. In each window, lollywood takes a
cut. According to 2000 research study by
inestment bank ABN Amro, 26 percent
o reenues come rom box oice sales,
28 percent rom 1V, and 46 percent rom
ideo and DVD.

DVD piracy messed it all up. Instead o
watching moies in theaters or renting
them, the general public is going straight
to purchasing titles on ideo. At a price
ranging between P60 and P100, it
becomes cheaper to buy a pirated DVD
than go to the moie theater. \hile it may
still be cheaper to rent at P15 to P35, the
discrepancy has become so nominal that
buying a title outright makes more
economical sense. \ith a per capita
income o only Just as important, there`s
no need to wait or moies to be shown in
theaters. Days or een weeks beore
they`re released in theaters, illegal DVD
copies o the latest moies are already
aailable.

O`Neill says, In another country, just two
days ago, I picked up a new DVD o a
title that`s still in the theaters called Dare
Deil. It was banned in the country where
the pirate was distributing that same
uncensored ersion. \e can`t distribute
that title, he can. \hat we ask local
agencies, leel the playing ield a little bit.
1he economic losses, you can quantiy
them a dozen dierent ways. It`s his gain,
it`s our loss, it`s your loss.`
Valenti, in his testimony, exclaims, 1he
cost o making and marketing moies, or
example, has risen to nere-shattering
heights. In 2000, the total cost to the
major studios or making and marketing
their ilms was, on the aerage, an
astounding >82 million! Only two in ten
ilms eer retriee their total inestment
rom US theatrical exhibition. 1hose ilms
must journey through arious marketplace
sequences: airlines, home ideo, satellite
deliery, premium and basic cable, oer
the air 1V stations and internationally.
1hey must make that journey to try to
break-een or eer make a proit.`
1oday as that moie traels its
distribution compass course, it is exposed
to great peril, especially in the digital
enironment. I that moie is ambushed
early on in its traels, and then with a click
o a mouse, and without authorization,
sent hurtling at the speed o light to eery
nook and cranny o this planet, its alue
will be seriously demeaned. \ho on earth
would continue to inest huge sums o
priate risk capital when the chances o
redeeming that inestment become
remote, i not impossible`
But anyone hardly cares. People oer all
sorts o excuses or buying pirated VCDs
and DVDs. It`s only or hard-to-ind or
unaailable titles. 1he moie industry is
already making tons o money, so what`s a
ew millions 1he cost o reproducing a
DVD is only a ew pesos, so why should
they sell it or P500 to P1,000 Julia
Roberts gets paid >20 million per moie,
or around P1 billion, she doesn`t get my
sympathy. lollywood has been
hoodwinking the public or years, this is
payback time. Studios and celebrities can
earn in other ways, such as merchandising
and product endorsements. 1here`s no
real lost sales or them since I won`t buy
anyway, i piracy doesn`t exist and only
original copies are aailable. 1echnology
kills industries and people hae learned to
cope, deal with it. Piracy helps spread
technology adoption. It gies access to
cheap entertainment to the masses. 1he
list goes on.

But there`s one good excuse why people
buy illegal copies o ilms: it`s there.
Increasingly, the piracy problem is
becoming like the drug problem. 1here`s a
huge demand and a huge supply. Cut the
supply and you suppress demand. But the
supply is oerlowing.

Supply side
ow, we look at the supply side
that dries piracy. Right now,
there are around 9 optical disc
plants with 23 production lines operating
in the country. 1he total estimated
production capacity is 80.5 million,
according to the International Intellectual
Property Alliance ,IIPA,.

Richard O`Neill, Director o the Regional
Optical Disc Oice, in a orum hosted by
the Motion Pictures Association ,MPA,,
the international counterpart o the
Motion Pictures Association o America
,MPAA,, warns, 1he Philippines is in
danger o becoming an Asian dumping
ground. 1hat sounds like a harsh term.
loweer, as pressure is applied in certain
countries, we know that the lines migrate
to other countries. 1hey`re starting to
N
come here. 1he perception was this was a
airly sae place to undertake these
actiities. 1he Philippines has the capacity
now to become a manuacturing base.`

Atty. Lualhati Buenae o the Video
Regulatory Board ,VRB,, notes, \e hae
coniscated 1 replicating machines
already or VCDs. I asked Mr. O`Neill i
the Philippines has the capacity to
produce pirated DVDs and he said he has
no inormation yet. So I assume pirated
DVDs are those coming rom outside.`

O`Neill replies that there are indications
o upgraded machines that are moing
into the direction o the Philippines.
Maybe there are here already. At the time
it is conirmed, we`ll pass on that
inormation to your authorities.` Atty.
Carlo Omingo, also rom the VRB,
howeer, conirms, \e already hae one
replicating DVD machine that has been
coniscated last year.`

1he Philippines is indeed a haen or
pirate syndicates rom Malaysia, long
Kong, and 1aiwan as their own countries
are becoming less hospitable to their ilk.
1he underground plants in the country are
mostly operated by oreigners. A plant
raided in Bulacan contained stampers
supplied by a long Kong-based
syndicate. 1wo plants in Metro Manila
employed illegal immigrants rom
mainland China. Another was set up by
Malaysians. Len some o the 431 local
legitimate actories manuacturing optical
media, including those inside the Special
Lconomic Zones, are reported to engage
in pirate operations at night.

1here is also a growing problem o illegal
CD-R burning` commercial operations.
In January this year, 165 CD-R burners`
were seized. lrom small, retail shops, it
has become a mass production problem.
Still, the bulk o the supply comes rom
large-scale imports. 1he trail, traced by
Newsbreak magazine, starts in long
Kong, a so-called one copy` country,
where a trader buys an original or master
copy called a molder` rom an insider in
one o the legitimate lollywood
distributors. 1he molder then is sent to
Malaysia or China or mass production.
lrom there, the pirated copies, which
come in stacks o 50 to 60 discs per batch,
are smuggled into the Philippines, in
either Metro Manila or Zamboanga. 1he
stickers and cases are purchased rom
China. 1hese are then packaged together,
oten within the stalls that sell them.
Mostly lilipino-Chinese distributors, or
organizers`, supply mostly lilipino-
Muslims in Quiapo, who then sell to
indiidual retailers in malls, bazaars, lea
markets, and small shops.
Loose Laws
s to why pirates can operate with
such impunity, we oer ie
reasons. lirst is that our existing
laws, particularly the Intellectual Property
Code o the Philippines ,Republic Act
8293,, do not hae sti penalties. lor
instance, or the irst oense,
imprisonment is rom one to three years
and the ine ranges rom only P50,000 to
P150,000. Len the maximum penalty is
only P1.5 million, peanuts or pirates.

And o course, there is a need to update
the law. IIPA members, including the
MPA, wants the Philippines to pass an
optical disc law, which controls licensing,
production, and trade o production
equipment and optical discs.

1he Optical Media bill ,louse Bill No.
5225,, sponsored by Rep. Imee Marcos
,and earlier iled by Rep. larry Angping,,
includes proisions or centralized
licensing o manuacturing o optical discs
A
and production parts, centralized licensing
o export and import o optical discs,
license record keeping requirements,
registration requirement or commercial
optical disc duplication, and seize and
seizure authority.

It also requires that all optical media carry
a source identiication ,SID, code that has
to be secured rom the goernment. 1he
idea is to regulate the container, not the
content, so that a disc not bearing the
code can be assumed to contain
something illegal. 1he Optical Media bill
also proposes the reorganization o the
current Video Regulatory Board into an
Optical Media Board with wider-ranging
scope. And it imposes tougher penalties
on iolators, including imprisonment o
one to nine years and a ine ranging rom
P100,000 to P3 million.

Piracy is a crime, and so is thet,` says
O`Neill. It`s the same thing. And that`s
how it should be addressed. And that`s
how it`s being addressed.`

1he original bill, more than a year since it
was iled, is still hanging in the Senate. It
has already passed the third and inal
reading in plenary at the louse o
Representaties, albeit the approed
ersion excludes sotware as a concession
to the Senate, which elt that the
regulation o sotware piracy is anti-
poor` and elitist`, since that will cut the
people`s access to inormation technology.
Senate science and technology committee
chair Sen. Ramon Magsaysay Jr. admitted
that it`s unlikely the bill will be tackled as
economic reorm bills are being
prioritized. louse o Representaties
committee on trade and industry chairman
Rep. larry Angping expressed pessimism
anything will done, gien that the 2004
national elections are at hand.

Weak Lnforcement
hen, there is the problem with
enorcement. \hile the number o
raids and searches against ilm
piracy are signiicant, 1,534 in 2002, with
around 5 million pirated discs and
ideocassettes impounded, post-raid
enorcement has been ineectual. It`s a
well-known act that ater a raid, the next
day or een the ery same day, the
retailers selling pirated VCDs and DVDs
are back with a engeance. 1here are
other problems that beset enorcement.
Oten, planned raids are leaked in
adance. Ater coniscation, the pirated
goods are sold by the authorities to the
public or returned to the pirates. 1he
IIPA, in its 2003 Special 301 country
report, also complained about delays in
obtaining search warrants, the poor
coordination between the VRB and the
National Bureau o Inestigation ,NBI,,
and the unreasonable personal
knowledge` requirements ,that the
enorcement oicer has to hae personal
knowledge that a crime is committed,
rather than basing the issuance o a search
warrant on the inormant`s aidait
alone,.

Slow Wheels of Justice
those successul raids, an
alarmingly low number o
administratie cases were iled,
just 31 percent or 480 cases out o the
1,534 raids and searches conducted in
2002. But surprisingly, each o those cases
resulted into a coniction, with >10,000
leied as ines ,although only >,63
recoered,.

But those were administratie cases. O
the 259 raids in 2002 conducted in pursuit
o criminal coniction o motion pictures
pirates, only 3 cases were iled and remain
pending in court.

O`Neill stresses that the MPA has a policy
o pursuing criminal cases to the end, not
1
O
out-o-court settlements. 1he MPA does
not receie a single penny. Around the
region, we had ,000 criminal
prosecutions last year. 90 percent o those
cases resulted in successul prosecution.`

Sadly, in the Philippines, the record has so
ar been 0 percent. Not a single optical
plant disc owner has eer been conicted.
And there has been passing the blame.
1he IPO blames IP owners or
compromising with settlements beore
coniction, allowing pirates to go back to
their illegal operations ater paying a sum
o money. IP owners, on the other, blame
the courts or the slow proceedings. Since
litigation can drag or ie years or more,
they understandably end up settling out o
court.

Sazon explains, 1here are two ways o
looking at the protection o copyright
holders. 1he irst one is goernmental. In
this role, there is a ast tracking o
prosecution. I someone or example
carries an illegitimate DVD, then you just
report this to the VRB and they can
immediately carry on. Now, Republic Act
8293, which is the copyright law, is a more
tedious way o running ater the pirates.
But the penalties are stier. It is a more
expensie way o prosecution. Sometimes
what happens here is a compromise
settlement between the person that
iolates and the person that owns the
rights. I you ask i justice has been done,
to a certain point there is. \ith the
compromise settlement, the iolator
agrees not to iolate once again, he pays a
certain penalty or the inringement.` But
then again, in reality, the big-time
operators just resume rom where they
let o.

1rue, the criminal justice system in the
Philippines leaes much to be desired. As
noted in the IIPA report: Deendants
can delay prosecutions and keep
straightorward piracy cases out o the
courts by employing means by which
eidence can be examined and re-
examined, including an appeal process all
the way to the oice o the Secretary o
Justice.`

Another problem is the lack o specialized
IP prosecutors, which was introduced
beore but disbanded in 2000 due to the
enormous general case workload and
limited number o prosecutors. And while
the Supreme Court designated 48 courts
nationwide to hear IPR cases, and
expanded them to 24 municipal courts, in
reality, those courts hear other non-IPR
cases as well, urther clogging their
backlogged dockets. So now, IPR-related
cases are brought to regional prosecutors
who are not as experienced in copyright
cases. Inestigations take months to be
completer and decisions to prosecute can
still be eleated to the Department o
Justice ,DOJ, or appeal, whose inal
decision can take months, i not years.

Porous Ports
he problem with a country with
more than ,000 islands is the
obious diiculty in guarding its
ports o entry. Smuggling is a major
problem in the Philippines, and this has
made it easier or pirates to import and
export pirate goods and equipment. 1he
Bureau o Customs ,BOC, has diiculty
in detecting illegal shipments partly
because pirates practice both outright
smuggling and technical smuggling, that is,
misdeclaring goods replication machines
as plastic extrusion machines`. 1he BOC
has already created an Intellectual
Property Unit to strengthen border
control oer pirated goods.

Industry Response
he MPA has been ery aggressie
in combating piracy worldwide in
behal o its members, namely the
1
1
\alt Disney Company, Sony Pictures
Lntertainment, Inc., Metro-Goldwyn-
Mayer Inc., Paramount Pictures
Corporation, 1wentieth Century lox lilm
Corp., Uniersal Studios, Inc., and \arner
Bros.

Its international anti-piracy program
consists o educational outreach and
publicity eorts as well as rewards
programs or inormants, such as the
recently launched DVD Rewards
Program. Michael Lllis, Vice President
and Regional Director or the Motion
Picture Association ,MPA, Asia Paciic
Anti-Piracy Operations, describes the
purpose o the program, 1he MPA`s
DVD Rewards Program will support the
Philippines in any way it can. 1he
program oers signiicant rewards to
indiiduals who proide aluable
inormation that leads to a successul raid
at a pirate production acility.`

But it`s more actie behind the scenes,
pressuring goernments to implement or
strengthen copyright laws, assisting
enorcement agencies in inestigating
pirates, and initiating litigation against
iolators. 1he local ilm industry is
certainly riding on the coattails o the
MPA, doing its part in lobbying Congress
or stronger legislation.

1he MPA also has resorted to pushing or
technological ixes to the ery same
technologies that endanger its existence.
lor instance, it took years beore
lollywood embraced the DVD ormat,
out o ear that being digital makes it a lot
easier, cheaper, and aster to copy, which
is true. And so, the consumer electronics
industry incorporated the Content
Scrambling System or CSS. CSS
encryption was designed to be
unbreakable, until a teenager rom
Norway cracked it. Apparently, the
copyright industries neer learn: anything
can be hacked and cracked.

Lately, the MPA is pushing or two new
technological ixes in the US. One is a
broadcast lag`, a digital marker that
preents broadcast programs shown on
1V rom being redistributed on the
Internet. 1wo is to plug the analog hole`
with a watermark detector. Since
teleision sets and stereos nowadays can
conert analog signals to digital that can
be stored in a computer, songs or moies
can be recorded easily and redistributed
illegally.

It`s these lobbying eorts that bear closer
scrutiny. 1he MPA and its umbrella
organization, the IIPA ,which also
includes as members the Association o
American Publishers, American lilm
Marketing Association, Business Sotware
Alliance, Interactie Digital Sotware
Association, and Recording Industry
Association o America,, hae earned a
notoriety or their alarmist warnings on
the death o the entertainment industry,
their exaggerated statistics, their bully
tactics in getting goernments to crack
down on piracy, and their anti-consumer
stance.

1he Sky is Ialling
ack Valenti, the MPAA`s long-standing
and powerul President and CLO
,since 1966,, has been criticized by the
media or being a chronic alarmist. In a
March 2003 Congressional hearing, he
linked international pirates to terrorists
and organized crime. In a lebruary 2002
report entitled I \ou Cannot Protect
\hat \ou Own, \ou Don`t Own
Anything!`, he warned that the uture o
moies is in danger o being shrunk and
squandered by an increasing thieery on
the Internet.` In April 2001, he testiied
beore the Senate Judiciary Committee,
\ith all the passion I can summon I tell
J
this Committee that i copyright is allowed
to decay, then this nation will begin the
slow undoing o an immense economic
asset, which will squander our creatie
uture.` In January 2001, in a speech to
1he International 1rademark Association,
he emphasized that the ictims o using
ree that which belongs to others are the
US economy - the creatie community -
and the country`s citizens who want
entertainment at a air and reasonable
cost.` 1his rom the same man who, in
1982 when the moie industry ell
threatened by the emergence o the
ideocassette recorder, amously said that
the VCR is to the American ilm
producer and the American public as the
Boston strangler is to a woman home
alone.` 1oday, o course, ideo sales and
rentals account or 46 percent o studio
reenues, almost double the 24 percent
earned at the box oice.

lollywood, he claims, loses >3 billion
annually in potential worldwide reenue
due to piracy, not counting losses due to
Internet piracy. \et, lollywood is
reporting record reenues. US box oice
reenues in 2002 reached >9.5 billion, a 13
percent increase rom the preious year,
the highest in 20 years, and it`s a long-
term uptrend. 1he number o ilms
produced and released goes up and down
through the years. One can`t say there are
less ilms created because o piracy. 1he
number o people employed in the ilm
industry has not drastically changed
through the years. Sales and rental o VlS
cassettes declined by 24 percent in 2002
but DVD sales and rentals more than
compensated ,and sere as explanation,
or the loss, with a total o 02 million
units, a hety 84 percent increase.

Len international box oice reenues hit
record leels in 2002. Reenues grew 20
percent to >9.64 billion. Asia Paciic
contributes 40 percent o that, around
>3.8 billion. In the Philippines, in 2001,
\arner Bros. generated P342 million in
reenues, a 40.6 percent increase, and net
income o P. million, a 185 percent
jump. Columbia Pictures made P298
million in sales and P36 million in proits.
United International Pictures` reenues
increased by 3 percent to P228 million
and net income increased by 85 percent to
P2 million.

low could an industry that`s posting
record highs be in danger o demise
Len the music industry, which decried
that MP3s being reely distributed on the
Internet, is ar rom dying. lorrester
Research estimates music sales declined by
only 15 percent in the past two years, and
not exactly due to Internet piracy. Stan
Liebowitz, a proessor at the Uniersity o
1exas at Dallas School o Management,
published a comprehensie estimate o a
worst-case scenario that sales will drop by
20 percent. In the country, Sony Music
Lntertainment lost P39 million on sales o
P220 million in 2001, albeit the decrease
in reenues is only 13.5 percent. Not
exactly the end o the industry.

1he Philippines, the IIPA reported,
contributed 1 percent, or >30 million in
losses due to piracy. Lduardo Sazon,
executie director o the Association o
Video Distributors o the Philippines
,AidPhil,, conducted a study which
alleged that out o P10 billion in reenues
generated by the theatrical, ideo, cable,
and music sectors, almost hal or P4.4
billion was lost to piracy in 2001. lor the
theater industry, the loss amounted to P2
billion, or a 30 percent loss. In 2000, the
legitimate ideo industry earned P1.05
billion as opposed to P2.45 billion earned
by ideo pirates. 1he goernment loses
P1. billion in unpaid taxes eery year due
to piracy. And close to a million workers
and their dependents are aected, with
close to 200 thousand haing already lost
their jobs.

Now, could it be that the decline in the
local moie industry, admittedly aected
by piracy, has as much to do with
declining quality, or to be precise, low
standards Our ilm industry stalwarts
hae been complaining about the
diiculty in competing with lollywood
releases and the exorbitant taxes leied on
them. 1he latest gripe was, o course, the
imposition o the alue-added tax on
proessionals, which coer the
entertainment industry. \et, they keep
churning ormulaic moies and low-
budget sex ilms, with the rationale that
only these sell to the masses. Shouldn`t
the all o the Philippine moie industry
be blamed as well on the industry itsel

1he Philippine Motion Picture Producers
Association ,PMPPA, and the Moie
Producers Distributors Association o the
Philippines ,MPDAP, recently identiied
the actors that restrict the growth o the
industry, which includes the escalating
costs o ilm production, onerous and
numerous taxes, alling box-oice receipts
o domestic ilms that are losing out to
bigger-budgeted oreign ilms, ilm
censorship, ilm piracy, cable 1V, and the
star system`, with superstars charging as
much as P3-4 million, aside rom ancillary
rights and other ringe beneits, taking up
a good chunk o the typical production
budget o P15 million.

At the 3rd Cinemanila, ilmmaker and
estial organizer Amable "1ikoy" Aguiluz
noted that what the local moie industry
needs is the introduction o new people
with new ideas, the trying out o new
themes and new media, the telling o new
stories, and the use o new methods in
telling them.`

1he MPA, parroted by the local
counterparts, hae oten resorted to guilt
trips to get consumers eel remorseul
oer their buying preerences. Sazon says,
\e beliee as legitimate distributors that
piracy creates a culture o criminality and
deception. Besides being a criminal
oense because it is an act o stealing, the
problem is this: it`s piracy that`s actually
anti-poor. \e pay taxes to the
goernment. Goernment proides the
necessary the poerty alleiation
programs.`

le adds, \e represent 98 percent o the
legitimate business. \e serice 800 outlets
nationwide. \e carry all the major US
titles as well all the local productions. Our
business is the irst business that gets
aected. Because in our business, we
cannot release our ideo titles unless they
are irst publicly exhibited. \e hae a
window period rom a minimum o 2
months or local productions and 6
months or oreign moies. As you
probably know, right ater the US theaters
release a moie, 2 days ater, the titles are
on DVDs and VCDs.`

Also,` Lllis warns, piracy is
undermining Philippine creatiity and
threatens its competitie adantage in the
Asia Paciic region. 1hereore we need
strong laws and eectie enorcement to
help restore the country`s reputation and
protect the local economy.`

O`Neill says, Now, we call them pirates.
Perhaps it`s too noble a term. 1hey`re
thiees. lrom whomeer they steal it,
whether it`s yours, whether it`s ours, it`s
thet. \ou may get as a consumer what
you eel is a bargain but what you`re doing
is oting or the demise o your own local
industry.`

Both the US and local ilm industries hae
used the guilt-inducing populist argument
that they`re only protecting the interests o
the little people - the bit actors, stuntmen,
camera crew, production assistants,
makeup artists, writers, and what not.
,Not surprisingly, it`s the same argument
posed by local actors complaining about
the imposition o VA1 on them, who
stormed the Senate, albeit wrongully
since it should hae been the Department
o linance they should hae stormed,
which they did ater the Senate patiently
pointed this out to them., \et, the moie
industry is notorious or the wide and
mind-boggling disparities in income
between the big shots and the little
people. At least, the actors, directors, and
producers earn well. In the music
industry, the actual creators - the
composers, musicians, and recording
artists - receie a paltry sum ater the
recording studios take their cut.

1he other argument, which resonates
more with the public, points out that
creatie people will hae little incentie to
create their work and business people will
also hae little incentie to take risks i
piracy only steals what ought to be theirs.
1he aerage production cost o a
lollywood eature ilm is >58.8 million in
2002. 1he aerage marketing cost is >30.6
million. 1hat`s a total o >89.4 million.
Only two in ten ilms recoup their
inestment rom US theatrical exhibition.
I consumers opt to buy pirated VCDs
and DVDs instead o going to the theaters
or waiting or the legitimate ideo release,
producers will not take the risk o making
new moies.

I guilt doesn`t work, they use ear. 1he
standard line is to link pirates with
organized crime and terrorist groups.
1here is reason to beliee the ormer,
gien that the cost o operating a
production plant is enormous. A single
replicating line, or instance, already costs
P80 million, way aboe the league o a
small-time operator. Certainly, it`s not
hard to beliee criminal syndicates with
links to big business, powerul politicians,
and corrupt police oicers are behind
these. And who wants the Philippines to
become the next Colombia

Statistics Plucked Irom the Sky
hese alarming statistics that can
shock the most hardened
consumer o pirated VCDs and
DVDs are actually estimates made by the
same industry groups that publish them.
low objectie can that be

lor motion pictures, the IIPA estimates
losses to piracy or partially deeloped
markets like the Philippines in this
manner: ,a., 1he number o legitimate
ideo product sold or rented in the
country each year is subtracted rom the
estimated total number o ideos sold or
rented in the country annually to estimate
the number o pirate ideo product sold
or rented annually in the country. ,b., 1he
resulting total number o pirate ideo
product sold and rented each year in the
country is then multiplied by the percent
o those pirate ideo products that would
hae been sold or rented legitimately and
adjusted to relect the US producers` share
o the market. ,c., 1he igure resulting
rom the oregoing calculations is an
estimate o the number o legitimate sales
o US motion pictures that are lost each
year in the market due to ideo piracy.
1hese estimates are adjusted to relect the
wholesale price o legitimate ideo
product, to equal losses due to ideo
piracy.`

Now, how does one estimate the total
number o ideos sold or rented in the
country annually,` that include pirated
copies And more diicult, how does one
come up with the estimate o the number
o legitimate sales o US motion pictures
that are lost each year in the market due to
1
ideo piracy` Perhaps you bought a
pirated copy o Maid in Manhattan` ,or
shame,, but does that mean you would
hae purchased a legal copy i only that
were aailable

No wonder Department o 1rade and
Industry ,D1I, Secretary Manuel Roxas II
raised doubts about the IIPA`s statistics in
the past, questioning its one-on-one ratio
and simplistic methodology. Quezon Rep.
\igberto 1anada denounced the IIPA`s
bully tactics or lobbying the US 1rade
Representatie to keep the Philippines in
its Priority \atch List.

Bully Pulpit
uch is the enormous power o the
IIPA. lor years, lollywood has had
a cozy relationship with the
Democratic party, in much the same way
the energy sector has with the
Republicans. It`s campaign donations` tit
or legislatie support`s tat. In an excellent
\ashington Monthly report entitled
lollywood and \hine`, author Brendan
Koerner noted that nearly 80 percent o
the >30 million campaign donations gien
by the entertainment industry during the
2002 election cycle went to Democrats.
Payback comes in the orm o riendly
legislation. 1here`s the lR 5211 bill that
will allow media companies to hack into
ile-sharing networks like Kazaa and
Morpheus. Another inappropriately called
the Consumer Broadband and Digital
1eleision Promotion Act criminalizes the
sale high-tech deices that don`t hae
goernment-approed copy-protection
hardware. And another called the
Anticountereiting Amendments o 2002
that restricts consumers rom playing their
legally purchased CDs on multiple deices
by prohibiting copyright holders rom
altering or orging digital watermarks,
een i only or personal use, such as
recording a 1V show or conerting an
analog tape to digital ormat.

Intellectual property, ironically, is a
relatiely new concept. In the past,
creatie output and knowledge were not
considered as property that must be
protected. Creators and artists were
commissioned or their work but their
work belongs to the public domain, which
can be reely shared. But the Industrial
Reolution introduced the concept o
patents, mainly on machinery, which later
on eoled into the notion o copyrights
and intellectual property. But een then,
the original intent o copyrights, as
articulated in the US Constitution, was to
appropriately reward creatiity while
ensuring the steady low o new
knowledge into the public domain. In
other words, rights on intellectual
property were limited compared to the
rights bestowed on physical property.
Originally, the term or protection was 14
years. Since 1960, that term has been
extended 11 times. Now, it`s 95 years,
applied retroactiely.

\ith great pressure rom Big Media and
Lntertainment, punishing iolators o IPR
has become more seere. O`Neill notes,
Goernments around the world are now
realizing that stealing intellectual property
should carry the same kind o sentencing
as stealing a physical good. lor example,
in long Kong, i you are caught selling a
hundred pirate DVDs, you can go to
prison.`

But intellectual property is not exactly the
same as physical property. 1he
Constitution guarantees the concept o
air use` and that intellectual property
should be turned oer to the public
domain ater a limited period. lair use
means you can quote other writers. It
means you can use screen shots o a \eb
site i you`re doing a reiew o it. It means
you can record an episode o Buy the
Vampire Slayer` or personal iewing. lair
S
use is not something you can apply to
physical property.

Now, the concept o intellectual property
is under ire because with the adent o
digital technologies, it`s easy to replicate
and distribute. 1he Internet is bringing up
a generation o consumers used to the
idea that inormation ought to be ree.
1he open source moement urther
reinorces that philosophy. People are
getting ed up with the commercialization
and monopoly o intellectual property by
Big Business. Naturally, the copyright
industries are ighting the
commoditization o inormation and
entertainment.

1he media and entertainment industries
hae long betrayed their technophobia, or
to be precise, their ear o new
technologies that could dismantle their
monopoly. In 1908, the music industry
took to court companies that made paper
piano rolls based on the publishers` sheet
music. 1he Supreme Court ruled against
it. In 1931, a group o composers did the
same to a hotel which played their songs
on the hotel radio. 1he court disagreed. In
1968, a book publisher sued a library or
photocopying pages rom its journals or
research purposes. 1he court again
disagreed, citing air use`. In 1969, the
1V networks brought a case against
CA1V stations ,precursor o cable 1V,,
and lost. In 1984, the moie industry iled
a suit against a manuacturer o VCRs,
and lost. Recently, it managed to kill
Napster and MP3.com and has sued
SonicBlue, the maker o Replay1V
,although while the industry dropped the
suit, SonicBlue eentually went into
bankruptcy,.

What About the Consumer?
n the ight against piracy, regular
consumers are painted as thiees.
And in the search or solutions, the
copyright industries hae oten introduced
anti-consumer ixes. 1he use o copy-
protection technologies that limit the use
o media on certain deices, or instance,
iolates the Constitution`s guarantee o
air use. lollywood`s own Internet
oerings, such as MoieLink, hae limited
choices and inlexible subscription terms.

And it has the tendency to resist as long as
it can to adjust pricing, perhaps the single
most crucial actor in combating piracy.
Instead o cutting prices, it has resorted to
oering an alibi. O`Neill explains, I you
steal something, o course you can sell it
cheaper than someone who produce the
same thing. It`s common sense. I I go
and steal your watch, I can sell it or a
raction o the legitimate price.`

Sazon adds, People graitate towards low
pricing. \ou can get a pirated DVD or 90
bucks, while our customers will settle or
450 and 50 pesos. \hat`s the dierence
\e import our DVDs, we pay custom
duties, we pay a certain amount o
brokerage ees and excise taxes and so on,
we also pay our 10 percent VA1, we pay
royalties so that the producer who put in
the inestment can recoup his inestment,
we proide the necessary sales and
promotion campaign to be able to create
demand, we also an oerhead expense as
well as distribution charges. So in eery
country where piracy is supposed to be a
problem, the legitimate owners will always
say that when it comes to combating
piracy, pricing is not a actor to consider.`

But it is. 1he moie and music industries
are an anomaly. 1hey are bucking the
trend o decreasing prices. Instead o
going down, as is the logical progression,
prices o CDs and DVDs go up or remain
the same. One would expect the price o
audio cassettes, or instance, would
decrease with the substitution o CDs, but
it hasn`t. 1he major cost o intellectual I
property industries is incurred during
creation, but the subsequent reproduction
is nominal. So one would expect that the
more they reproduce and sell, the cheaper
it gets or them, and thereore the lower
the price that ought to be charged. But
that doesn`t happen. One would think
that the cost o production o a well-run
business should decrease to relect
increasing eiciencies, but the cost o
producing and marketing moies just keep
on growing. Something must be wrong
with the entertainment industry then.
Perhaps they`re paying Julia Roberts a tad
too much Maybe their distribution model
is ineicient Sure, the high ailure rate o
moies and short shel lie o actors are
conenient excuses. But that`s their
problem. Other industries such as
consumer electronics suer rom the
same risks o product deelopment and
product lie cycle, but their prices are
decreasing. 1hey`re not passing on the
cost o ailure and obsolescence to
consumers.

1here`s also something wrong with their
pricing policies. \hy charge the same
price to deeloping countries In the
global economy, a company has to adjust
the price o its products to relect the
world aerage o purchasing power, or
adopt dierential pricing. A P450 CD or a
P50 DVD is a strain on the pockets o
ordinary lilipino consumers. \hy should
access to entertainment or sotware be
restricted rom the masses 1o be sure,
sotware and entertainment companies
hae responded grudgingly by lowering
their prices. Microsot, or example, oers
olume discounts and discounted prices
or certain sectors. \arner Bros. has
lowered the price o VCDs rom the P400
or so a ew years ago to the more
aordable P150 today. Len DVDs hae
gone down rom P1,000 plus to as low as
P45 today. Some CDs, particularly local
ones, can be purchased or P100. So it`s
obious that prices or these goods are set
artiicially high. Piracy is orcing the
entertainment industry to set the prices o
these goods to their true alue as dictated
by the market, not by the industry.

Intellectual property products are highly
elastic. Lower the price and you increase
the olume. At the right price, people will
buy the original. It`s the simple law o
supply and demand. Certainly, there will
still be many who would opt or the illegal
no matter what, since it`s close to
impossible or the legitimate industry to
match the pirates` prices. But they will be
able to get many more consumers to
switch to legitimate purchases.
Lquilibrium in pricing is possible to attain.
Piracy only proes that, right now,
equilibrium does not exist.

Big Lntertainment doesn`t want to
relinquish their monopoly. It wants to
control how consumers should listen to
music ,good and bad songs in one CD,
only in CD ormat, only using your stereo,
and watch moies ,wait months beore
you see them on ideo, limited bonus
eatures or DVDs depending on which
region you lie in, expires ater 24 hours
ater you download them,. \ears ago,
lollywood didn`t want us to watch their
moies on our VCR or on our cable 1V.
But it managed to adjust its business
models and make tons o money. So it
needs to igure out alternatie business
models to surie in the digital age, and
not get in the way o consumers and new
technologies.

1rump Card
nortunately, lollywood is acing
this challenge dierently. I all the
educational, publicity, legislatie,
enorcement, and judicial eorts don`t
succeed, then it still has its trump card -
trade sanctions.

U
1hat`s one thing that will get goernments
to crack down on piracy. O`Neill warns,
I piracy continues and i it grows, you
will hae continued attention rom oreign
trading partners. But we hae ull
conidence that this will not happen. 1his
will stop dead in its tracks and brought
down to a manageable leel. And that will
happen soon.`

1he trump card is the Generalized System
o Preerences ,GSP,, a US trade program
that allows duty-ree exports o certain
products into the US rom deeloping
countries like the Philippines. lor the irst
11 months o 2001, >62.2 million o
Philippine goods ,or 6 o the
Philippine`s total imports to the US rom
January to Noember, entered the US
under the duty-ree GSP code. 1o keep
on beneiting rom such unilaterally
granted trade preerences, the US 1rade
Representatie ,US1R, must be
coninced the Philippines meets its
criteria including whether it proides
adequate and eectie protection or
intellectual property rights.`

\ith the Philippines in the Priority \atch
List, we`re in danger o losing the GSP
priilege. \e are at a disadantage
because we`re not a major trading
powerhouse in the irst place. China, on
the other hand, can aord to piss all oer
Bill Gates and he will continue to gie
away \indows or ree. It can continue to
produce pirated DVDs and the US will
continue to kiss its ass. So when it boils
down to that, our goernment will hae
no choice but do lollywood`s bidding.

But will piracy eer go away \e might
pass that Optical Media bill into law and
increase the number o raids, een conict
a ew pirates. \e may een bring down
piracy leels to something more
manageable, as the Business Sotware
Alliance has done. But it`s not going away.
And lilipinos couldn`t care less.

1o really get deeloping countries like the
Philippines to respect intellectual
property, then eeryone should ind better
solutions. Certainly, creators and
producers should be properly
compensated. Criminal syndicates should
be squashed. Consumers should be
educated and persuaded to buy the
original. Goernments should pass and
enorce strong laws.

But the copyright industries should do
their share, and not just bully
goernments and consumers. lere`s good
adice: Lower your prices to relect the
true alue o your products as dictated by
your market. Look or alternatie business
models and not persist in milking
consumers. Use technology not to thwart
us consumers but to make it easier,
cheaper, and aster or us to enjoy
entertainment. It`s a dierent world. Deal
with it.