Of Fake Rolexes, Pirated DVDs, Property Rights, and Incentives

On one level, I can't say I blame the MPAA and RIAA for what they do. The ease and rapid proliferation of high speed bandwidth seem to have left the way their members have traditionally made money in the dust.

The issue is not dissimilar to the pirated brands you can get in China and, to a lesser degree, Hong Kong. I was in Hong Kong a few days this past week with a few friends. Beyond the usual tailored shirts and the like, we found a less than upstanding storefront of fake watches. These weren't the bad fakes you can quickly find on the streets of New York or on the streets of Shenzhen (though they seem to have cleaned this up some in the last few years).

To say this place was dodgy is an understatement. After first showing our passports to prove that we weren't cops, they led us behind the store front through a short hall and behind a dirty curtain, to a small badly decorated closet. There were a few stools set up and they handed us worn books with pictures of everything from Rolexes, Tag Heuers, Bulgaris, etc.. There were already a few other foreigners sitting around and negotiating. The way it worked was that you chose from the book, the "salesguy" tells a runner what you'd chose, who in turn came back with the product 5-10 minutes later. Perhaps the greatest part of the experience was watching my friends, whose fight or flight responses were obviously triggered. One refused to sit, and looked totally nervous (his wife told me he was talking about it for days as he thought we would be robbed). As a side note, I would never do this in China, but this was HK in the heart of Tsim Sha Tsui.

Anyway, the reason why I mention this is that the fakes were pristine - it's like the real life equivalent of the charicature of people who break down the door only to find out the door was open all along. Excellent quality, detail and precision. I confess that another friend bought an automatic a few years ago which still runs quite well. Compared to a real Rolex, it seems to be the same weight and was indistinguishable. These fakes didn't come cheap though - at about $90-120 USD a pop (after extensive negotiations - we were there for almost an hour).

There's another prominent shop in HK that also goes to great lengths in selling their pirated software. You have to go through the colour copied covers of empty cd copies, write down the number that you want, pay the cashier about $1.50 USD/disk and then you wait for about an hour and go to the top of the stairs where someone hands you a paper bag of the software. I'm told they only operate on Sundays because that's when the cops who focus on such stuff have their day off.

Now at the bottom of the apartment complex I'm live in (in Guangzhou), there are a bunch of fake DVD hawkers. The one thing here that I find remarkable, is how professional the packaging appears for DVD's that haven't even come out on the market yet. Mind you some of them are horrible looking in-theatre copies, but you wouldn't be able to tell from the packaging that appear professionally developed

I think the lesson here for marketers who seek to control what in essence is the intellectual capital developed by music, movies and brands, is to understand the value they create and provide economic alternatives and price accordingly. For record labels and distributors, technology may have dealt them a fatal blow given their dependence on the medium, not the value of message. The disconnect/gap between the value their traditional customers have and the cost they charge is too wide. Though I think they get it, they understandably cling to what's been a profitable business.

The war on drugs also proves instructive. Burning down the fields of farms without crop alternatives/destroying the livelihoods of people doesn't exactly win hearts and minds - particularly in places like Afghanistan and Columbia. I don't believe this is to say that I think Rolex and the like price too high - given that they're selling aspirational ideas, part of the cost of doing business is enforcement but I wonder if another alternative is co-opting. What if the Rolexes of the world, (or even working with the Timexes of the world) with strong knowledge of distribution channels contracted some of these companies instead to produce a value brand watch? The machines that would be required to make such impressive fakes do not come cheap (think at least a million dollars, given the precision). As both Brink Lindsey and Hernando de Soto point out in their respective books, informal enterprises also carry significant costs/barriers and have difficulties in achieving growth, and it doesn't get much more informal than this.