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Visiting the Pirate's LairWhere to buy fake DVDs in Shanghai? Try a fake restaurant.

By Henry Blodget
Posted Friday, April 1, 2005, at 7:24 AM ET
Fake restaurant coming soon?

The twentysomething American who offered to show me around Shanghai Monday evening was battling a cold, so, at a banquette table at Sasha's, a converted 1920s mansion near Sun Yat Sen's house, he stuck to tea. After my blurry night with the Cleveland cell-phone entrepreneur, this sounded soothing, so it was tea for two.

According to my host, an ex-Wall Street analyst turned novelist and Mandarin student, and his friends (a TV producer, an English-language magazine columnist, and the recipient of a technology fellowship), there are two types of expatriates in Shanghai: Those who work for multinational corporations and those who don't. The former enjoy plush "expat packages," which include humongous salaries, chauffeurs, maids, and villas in Pudong. The latter pursue creative or "deadbeat" jobs while nurturing entrepreneurial fantasies. What everyone seems to have in common—expats and natives alike—is a penchant for collecting pirated DVDs.

One of the expats at our table had amassed 200. Another, 400. All looked at me funny when I asked whether anyone had any moral or legal qualms about this. Later, in Beijing, when I asked the same question of a business-school professor, the head of a trade organization, and two CEOs—the sorts of serious people, who, in the U.S., might become apoplectic about, say, file-sharing—I saw the same quizzical look, with one of the CEOs adding that having to spend more than $2 for a DVD or $10 for Windows XP was an outrage. At Sasha's, the expats explained that buying real DVDs wasn't an option, especially for the Chinese, because real DVDs cost 10 times more and weren't even available. (The TV producer claimed she knew of a store that carried them, but the others disputed this.) Fake DVDs, moreover, often were real DVDs: The same factories that produced and shipped real ones during the day produced and shipped fake ones at night.

Fake DVDs could be found almost anywhere, my host said, but, for a wide selection, I should check out the Jade Garden (name changed at his request, because of worries that he would be ostracized if I inadvertently got the place shut down). After tea, he led me down a street in the French Concession where he pointed out other forms of Shanghai entertainment, including massage parlors disguised as hair salons and smoky Internet cafes packed with people playing computer games. (Online gaming has spawned such amazing stock-market moonshots as Shanda Interactive.) Then we flagged a cab and headed for the Jade Garden.

Trafficking in pirated DVDs is technically illegal in China, but given the prevailing attitudes, you could be forgiven for missing this. Still, the need to keep up appearances explained, in part, why the Jade Garden bothered to engage in a comically lame charade. Ostensibly, the place was a restaurant. The opened door revealed a small, fluorescent dining room, with empty tables and chairs and bottles of booze on the bar. The only person in the room, however, was the proprietress, who was watching television and reading a newspaper. She jumped up as we entered, but then didn't bat an eye as we strode past her into a dark corridor. We walked deep into the gloom, past a kitchen filled with dirty dishes, and then stopped at a closed door that might have been a linen closet.

Behind the door was a bustling, bright retail operation that, rumor has it, rakes in about $1 million a year. It was the size of a large newsstand in Grand Central Station and just as busy. The shelves on the walls made it look like, well, a video store, and the merchandise was organized by genre. As least 20 shoppers, laowai and Chinese alike, were combing through the place, with the sounds of discussions, negotiations, and/or transactions filling the air. On tables in the center were piles of loose DVDs. I picked up Shark Tale, an authentic-looking box emblazoned with an odd blurb from the Chicago Tribune: "Dated … and only intermittently funny." Shark Tale was a movie I would not have paid to see and would not have bought for full-price. At $1, however, why not?

This, of course, reveals one of the two fallacies in the media industry's assertion that file-sharing and DVD piracy are the same as "stealing": Some of the supposed damages from "lost sales" would never have been sales in the first place. The other fallacy is that the "theft" of digital property is the same as the theft of physical property—which it isn't. When someone steals a physical product—a car, say, or a DVD from the shelves of Blockbuster—the owner has lost more than a potential sale; he or she has lost inventory. When someone buys a copy of a digital product, however, for which the owner of the copyright has paid nothing, the owner has lost only a potential sale. This doesn't make file-sharing or DVD piracy OK—there must be some way for producers and packagers to get paid—but it does explain, in part, why millions of people who would never shoplift are so eager to collect pirated DVDs.

At the Jade Garden, my host asked a roving cashier with a fistful of renminbi where the DVDs came from. "The middle of China," she said, reflexively, and then clammed up. Most people I spoke to later agreed that, if one followed the money-and-production trail all the way back, one would eventually arrive at the government—although which government, local, regional, or national, was a question. This, combined with the fact that the fake DVD industry creates thousands of jobs and pumps millions of dollars into the economy, explains why law enforcement is, shall we say, spotty.

But spotty doesn't mean nonexistent. Last summer, for example, a joint strike force composed of the Motion Picture Association of America, the U.S. Immigration and Customs Enforcement, and the Chinese Ministry of Public Security culminated a three-year investigation by storming into the Shanghai penthouse apartment of one Randolph Hobson Guthrie III, the 37-year-old son of a rich Manhattan family. Guthrie, according to a Wall Street Journal article and other sources, had moved to Shanghai in 1995, MBA in hand, and after trying and failing to find satisfying work at a multinational, founded a highly profitable business with a great product and ecstatic customers. Alas, the MGM attorney who clicked on Guthrie's ad (on eBay) for an otherwise-unavailable boxed set of James Bond movies was not awed by his entrepreneurial genius, and, when the authorities raided his apartment, they reportedly found 210,000 pirated DVDs, seven computers, and mountains of cash.

The bust gave the Chinese government the opportunity to look tough (and blame the problem on Americans) and gave U.S. authorities an opportunity to pacify griping media companies (and blame the problem on China). Earlier this year, Guthrie was convicted of "operating an illegal business" and now faces up to 15 years in a Chinese jail.

******

Thanks to everyone who trekked out to Sasha's last Monday, and especially to the generous Slate-reading novelist who organized the evening. As always, please send feedback, comments, and suggestions to .

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Henry Blodget is the editor of Silicon Alley Insider.
Photograph of DVD on the Slate home page © David C./Corbis.
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