COMMENTARY

------By Kim Hunter Gordon

For all the noise that has been made to help eradicate it, piracy has played an important part in getting the Chinese market ready for the day when it can afford the real thing.

Since Wen Jiabao declared last year that protecting intellectual rights is now "national policy", there have been a flood of very public arrests. In October, nine people from Ningbo and Xiamen were sentenced to 13 years in prison for selling DVDs and software. Then in November came the biggest bust so far, with twelve in a pirating racket in Guangxi sent down, including one man who was jailed for life.

Perhaps even more telling of the change is that pharmaceutical giants AstraZeneca and Novartis are spending US$100 million-plus on research facilities in China. They expect that by the time they have developed their first new drugs, the risk of counterfeit will have already become acceptable. Toyota feels confident enough to make its Prius hybrid car only in Japan and China. With manufacturing industries having already disappeared to the East, it must cause some concern to legislators in the West that research is already looking set to follow.

Staying visible

Fast improvements in safeguarding intellectual property are undeniably good news for those who want to bring patented technology to the Chinese production line without it being stolen. But for Western companies trying to carve a market for their branded goods in the China, the end of counterfeiting would not only spell the end of the Chinese market as they understand it, but also their most valuable marketing tool - brand visibility.

One of the most famous beneficiaries of piracy is none other than Microsoft. Until recently, new computers in China came without an operating system in China. That means the shop installs a hacked version of Windows for the customer at no extra charge. Microsoft, for all its formal complaints, did sensibly little to actually prevent this from happening. As a result, Windows is now the standard operating system in China, and Microsoft Office the standard working platform. Had hacked versions been unavailable, Chinese computer owners may well have opted for an open-source platform like Linux or local pretender Chinese Star.

It is not just Windows that has benefited from piracy in this way. Just as a drug dealer gives his clients freebies to get them hooked, cracked copies of all software - be they computer games, Adobe InDesign or Macromedia Dreamweaver - are creating a demand that, one day, a price can be put on.

President Hu Jintao has already promised that all government computers will make the switch this year to legitimate software. That is already a serious windfall. Next follows any Chinese company large or small that, for whatever reason, wants to "go legitimate." It is also worth remembering that, without access to pirated software, many start-ups may not ever have developed into profit-making businesses that can afford to go legitimate.

Status sells

One crucial difference between China and the West is that in China it is not just companies that need to go legit. People do as well. The Chinese consumer is driven by status, and there is nothing better than being able to claim something is "real". Without the sea of fake Rolex watches, Nike trainers and Gucci handbags out there for the masses, there would be less of a point in spending over the odds to be differentiated by having a real one. Nothing could justify such a vast difference in cost, certainly not reliability. If that were driving demand, perhaps Apple would have renamed the iPod (Yipode, or Ò×ÆƵÄ, in Chinese) to something which didn't sound like it could mean "easily broken".

For the creative industries, who bizarrely make the most noise on this issue, piracy not only derives very obvious benefits, but the same problem is faced all around the world. Whether you live in New York or Changsha, the download is quickly becoming the format of choice for digital media, and getting it for free is not very difficult if you know how.

Consequently, record companies and film studios have for some time been looking into other ways of generating revenue. Universal records, for example, recently announced it is going to provide free downloads of its music, making money from advertising space instead.

Hollywood has long used product placement and merchandising to back up box office and hard copy sales. Casino Royale, for example, has been dubbed "the Ryanair of Bond movies" for shamelessly kitting 007 out with a Sony Ericsson phone, Sony Vaio camera, Omega watch (which Bond girl Vesper Lynd calls "beautiful"), and a Ford car. None of this advertising is lost on the Chinese market, whether they see it at the cinema or - as is far more likely - on a pirated DVD. Revenues are collected accordingly.

As only 20 foreign films are given a licence for release each year in China, pirate copies are the de facto method of distribution. Without them, films simply wouldn't be seen. Encouraging China to eradicate pirated DVDs before it starts licensing more films is self-destructive for the film industry. This is particularly the case for European films, which seldom, if ever, make it on that list of 20. The European film industry needs pirated DVDs in order to grow a market for its product in anticipation of the day when they are licensed.

The music industry operates under the same restrictions. This year, for example, Bob Marley will issue his first-ever release in China. Without illegal downloads and pirated CDs, bands such as the Rolling Stones or Black Eyed Peas have amassed such a following in China that they are able to stage enormous concerts that generate millions of dollars in ticket sales, television rights and merchandising.

Ironically, the physical record and its sleeve are now the most sought-after piece of merchandise the Chinese music fan can buy. They download for free, decide they like it and after a time feel it's time to go legitimate.