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 Doing business with the pirates

By Chris Buckley International Herald Tribune TUESDAY, OCTOBER 4, 2005

BEIJING Digital pirates are big business in China, where bootleg music and films are a staple of home entertainment, as cheap and available as a bowl of noodles. But a Chinese company called R2G hopes to profit in a novel way - by doing business with the pirates.

R2G hopes to shrink China's market for pirated music recordings by offering itself to Chinese and foreign entertainment corporations as a bounty hunter and agent. For a fee, R2G hunts down Web servers and sites that offer unauthorized downloadable recordings and pressures them until they either shut down the offending links or, better still, sign up for licensed, fee-based services.

Jun Wu, the Beijing-based company's 34-year-old chief executive, acknowledges that the business that he and several partners started two years ago is still an experiment in a country where teenagers are used to downloading music from more than 7,000 sites, often for free, and where a bootlegged CD or DVD costs 8 yuan, or about $1.

But Wu said he believed that Chinese audiences and entertainers were ready to buy legitimate music, for the right price. "We believe this is a business problem, and we're trying to find a way that all the parties involved can benefit," he said.

More and more, experts say, entertainment and information technology companies are coming to see China's piracy as a long-term business challenge, not just as a headache for lawyers to fight over in court. But winning over paying Chinese customers who now are used to free or cheap copies requires new sales strategies, marketing channels and often cheaper legitimate products, said David Wolf, president of Wolf Group Asia, a Beijing-based firm that advises companies on China's media market.

"They've left this hole open for so long that there's an increasingly legitimate market for these pirate products," Wolf said of multinational companies in China's entertainment market.

"But you've got to solve this as a business issue. The preaching doesn't register here."

Entertainment corporations worldwide worry about a generation of consumers accustomed to free downloadable music, but they worry most about China - a potential market of 1.3 billion people, many of them used to playing by Napster rules and selling bootleg copies to the rest of the world.

Last year, 95 percent of the film discs sold in China were pirated copies, as were 85 percent of music recordings, according to the International Intellectual Property Alliance, a coalition of U.S. industry groups.

R2G, whose name is based on "red to green," as in traffic lights, hopes to profit by tracking down pirate music sites on the Internet and promoting licensed portals that charge for downloads.

Already, R2G has signed deals with Universal Music Publishing, Warner Chappell Music and BMG, which represents the Taiwan singer Jay Chou, probably the most widely downloaded pop artist in China.

R2G uses Internet detection programs - known as spiders, wasps and worms - and dozens of employees to track sites unlawfully providing bootleg copies of music by artists signed to these companies. It then uses legal threats to cajole the sites into signing up, with R2G as the agent, for legal downloadable music.

Baidu.com, which runs China's most popular MP3 search service, last month agreed to cut off thousands of links to pirated music after losing a lawsuit in Beijing to a subsidiary of EMI, the British recording studio. Baidu also is being sued by other leading music companies and their local subsidiaries with nearly identical claims.

Baidu is in talks with R2G to revamp its MP3 search service so that it produces links only to licensed music. The two companies have reached a preliminary accord, and Baidu is expected to introduce a revamped MP3 search service by the end of 2005, according to the Interfax news agency.

R2G is also suing two of the biggest music Internet portals in China, 9sky.com and 21cn.com. But there are thousands of other sites that offer free music. Wu said he hoped Chinese government regulations issued in April, with others planned for late this year, would make it easier for R2G to sue pirates by spelling out the responsibilities of Internet services.

In their own ways, other entertainment and software companies are also following this path of attempting to lure consumers from pirated entertainment and software by offering expanding sales channels and relatively inexpensive products with extra features.

Warner Home Video started a partnership with a Chinese video maker in November and cut the price of its DVDs to about twice that of the higher-quality pirated discs while also offering quality guarantees and additional features to entice customers to pay the extra money. It now also has close to 2,000 retail outlets across China, said Mark Horak, the company's executive vice president for China/Asia-Pacific and Latin America.

"The key to our strategy in China is the recognition that there needs to be a balance between our business strategy and our legal strategy," Horak said.

The company came to realize that costly DVDs were a "bad value proposition for consumers" and that the delay between a film's theater release and its availability on DVD "gave pirates a window of opportunity," he said. "We want to take away the advantage from the pirates."

Symantec offers Chinese consumers a Chinese-language version of its Norton AntiVirus software that is less than a quarter of the price of the English-language equivalent, and Microsoft sells a cut-price version of its Windows XP operating system in several counterfeit-saturated third world countries, though not yet in China. In September, Adobe Systems announced it was cutting the Chinese price of its standard suite of document and image-handling software to 4,310 yuan, or $530, from 10,500 yuan.

China's huge appetite for bootleg films and music is not going to just disappear, however, especially while government censorship and limited distribution hinder access to legitimate products.

"You cannot stop piracy if you don't provide legitimate channels," said Wolf, the media analyst. China has an average of one movie theater for every 450,000 residents, he said, which is "as if all of L.A. had only one multiplex."


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