Standing on the top floor of a large, mall-like shopping center in downtown Xi’an, there was no way for me to know that the shrink-wrapped King of Fighters collection was an illegal copy. My Chinese was good enough to get around the streets, but it wasn’t up to grilling a salesman on authenticity. The packaging was a little garish, but not so much that it was out of line with other games I’d seen from SNK Playmore, developers of the fighting game series. And I didn’t remember hearing about any PC ports, but I’d never really gone looking. The package even had an ISBN! Only real software has one of those, right?

When I returned home a month later, I’d be lying if I said I was surprised to find that the CD actually contained a copy of the WinKawaks arcade emulator and six Neo-Geo ROM dumps. The ISBN was a fake, and the manual was a blatant hack job. Even worse, it wasn’t even a functioning disk: The file system was corrupt, so you could see the files but couldn’t access them. Here’s a moral question for you: How evil is it to download pirated ROMs and an emulator in order to “fix” my 22-yuan (~U.S. $3) Chinese bootleg? Let’s just say it wasn’t one of my proudest moments.

I like to think of myself as a reasonably ethical person. But deep down inside, I knew I wasn’t buying a legitimate piece of software – and somehow, I just didn’t care. For visitors to the People’s Republic of China (PRC), the temptation to buy bootlegs is hard to resist. Piracy is everywhere, and not just for software. Clothing labels, music, movies, books – they’re all fair game to counterfeiting rings. For the Chinese, caught in a developing economic mash up between Maoist philosophy and capitalism run rampant, piracy is a way of life.

Gradually, the rest of the world is beginning to wake up to the power of the Chinese economy. Entertainment software is no different in that respect. Like all market transactions, the prevalence of piracy can be broken down into the forces of supply and demand. But is there any way out of this criminal market and into a more virtuous one?

Demand is keeping me down
In 2003, between my second and third years of learning Mandarin, I traveled through China for about a month with a group of other Washington, D.C., undergraduates. We spent about a week in both Shanghai and Beijing, but the bulk of our trip was centered around Xi’an Jiaotong Daxue, a large university in the central Chinese city of Xi’an. Once the capital city of the Qin and Han dynasties, periods which formed the identity of China as a unified empire, it is now a curious mix of the ancient and the modern. Busy downtown traffic flows around city walls dating back hundreds of years, while massive hotels stand only a few blocks from the Big Wild Goose Pagoda, where Buddhist monks translated their religion’s first holy texts. As much as any city can represent the sense of progress combined with the weight of history that comprises modern China, Xi’an does.

Despite its advancement in other areas, my host university’s internet access was a joke. To get online, I paid a couple of yuan an hour at the internet bar just off campus, and I was in good company: Although Chinese computer ownership has skyrocketed over the last decade, cafes are still scattered liberally, and they’re still popular. At any time, they were packed with kids surfing the web, chatting with friends using QQ messaging software, or playing games like Counterstrike, Diablo and various MMOGs. And no matter where I went in China, the boot screens invariably read “Windows ’99” or other blatantly hacked displays, trumpeting their pirated status for anyone to see. Somehow, I doubt that the rest of the games and software were any more legitimate.

In fact, the International Intellectual Property Alliance country report for China states that piracy rates (i.e., the percentage of the citizenry’s installed software not legitimately purchased) for entertainment software reached 96 percent during my visit. That’s a high point since 2001, but only this year has it dropped below 90 percent. The IIPA valued the Chinese stolen game market at $590 million, and that number is based on what people paid for the bootlegs, not what the actual retail price would’ve been. That’s a lot of loose change falling between the metaphorical sofa cushions.

Why so much? Well, for one reason, China’s enforcement of intellectual property laws is notoriously inconsistent. It’s not that they don’t have them – if the laws were followed, China would be probably have piracy rates closer to the United States, around 21 percent. But while the PRC pays lip service to copyright violations during trade talks and may even temporarily crack down on the criminals, it almost always immediately loosens what little grip it had on the black market. For example, laws passed to shut down offending service providers might require overly-specific citations of which materials are being stolen – as a result, ISPs simply ignore the citation on a technicality.

And why would the communist leadership take serious action? Pirate knock-offs (of all products, not just games) are the engines behind the Chinese economy, along with the sheer brute force of its massive low-wage labor market. Both factors have the effect of lowering the country’s cost of manufacturing to almost nothing. Meanwhile, China argues that its population can’t afford to pay market prices for games – convenient, since cheap pirated Western entertainment no doubt distracts Chinese workers from the same low wages that contribute to the country’s manufacturing success; it’s a Catch-22.

Of course, publishers aren’t staying idle in the face of all this theft. They’ve discovered that some games can be profitable in China – namely, multiplayer online games that charge by the hour, often through pre-paid cards or state-owned cell phone accounts (World of Warcraft uses the former). Companies also try the legal angle when possible. According to a high-level industry figure, who would only agree to speak off-the-record, gaming companies continually lobby international agencies to force China to follow its obligations under the U.S.-China Joint Commission on Commerce and Trade (JCCT) talks. The industry hopes that multilateral pressure from countries like Japan and the European Union will also be able to exert pressure.

“How’s that working out for you?” I asked.

There was a pause. “Not so well,” he replied. “But as a last resort, there’s always the big guns: concerted action under the WTO trade agreements.”

Not likely, according to Ted Fishman. He’s the author of China, Inc., a book about how China is charging to the forefront of global trade. Over the phone, the soft-spoken Fishman stated that “piracy is one of the very top issues Americans face in China,” but was pessimistic about the possibility of WTO action under the Trade Related Aspects of Intellectual Property Rights agreement, also known as TRIPS. The Clinton administration was much friendlier with China than the current White House, said Fishman, and yet still managed to bring more than 40 suits against the Chinese for violations under TRIPS. The Bush administration, after six years in office? Zero. Why so few?

“It’s mysterious!” he said. “I can’t figure it out.”

Fishman could only advance the theory that the Republican-controlled government is more consumer-focused, more interested in low priced Chinese goods than taking action that might raise prices at Wal-Mart.

Additionally, Fishman is far more generous toward the Bush administration than I am. But no matter what your political persuasion, Fishman noted that WTO negotiations simply take more time than U.S. publishers can afford to waste. But every day, pirates continue to chip away at the “bottom line” – and even online games aren’t immune, since server farms that mimic legitimate games spring up constantly.

The real shame of it all is that China is a market just waiting to be harvested. With more than a billion potential customers in a rapidly developing country, companies that figure out how to sell to the Chinese will make a killing. Of course, that’s assuming the Chinese don’t manage it themselves. When it comes to the supply side of the market equation, they’re not exactly inexperienced …

Air Supply
About a year ago, Blizzard Entertainment launched World of Warcraft in China, and to kick it off, they co-hosted an event with Coca-Cola. There was even a lavishly-produced ad campaign revolving around a Taiwanese pop group, called S.H.E. And by all accounts, the game has been a success. Sure, there are those pesky government censorship issues, but all in all it’s been a smooth progression. Much is owed to partnerships with Chinese companies, who are running the day-to-day business of the game and providing localization, most likely at extremely reasonable rates, by American standards.

Yet, consider it from the perspective of a Chinese entrepreneur. Developing something like WoW at market rates in Irvine, CA, where Blizzard is based, can’t be cheap. And then, there’s the maintenance for those servers, patches and customer support. But the market rates for all of those services are much less expensive in China, where the average per capita income is only $6,800 a year. Low wages and government control ensure China’s dominance of low-cost manufacturing industries. Why couldn’t they do the same thing for more high-level media design, like gaming?

In fact, that’s exactly what is happening. Much the same way that India took technical outsourcing and turned it into a growing software design and consulting industry, Chinese businesses are starting to consider the possibility of moving into IT and other innovative industries. Ironically, China’s high piracy rates make this much, much easier. While American companies might pay thousands of dollars for tools like compilers, source control and art design programs, the cost is virtually zero in China’s little-enforced software environment. And Chinese companies may soon be able to pirate legitimately, noted Fishman, thanks to the so called “triangle-trade,” where other countries help China work on open-source alternatives to popular computer programs in order to undermine American software engineering dominance.

Outside companies, aware of outsourcing shifts in manufacturing fields, have not missed the importance of this trend. EA, Take-Two and Ubisoft have all opened studios in Shanghai. Currently, they act as localization hubs, adapting current products to fit the language and government requirements for the country. But there’s no reason the process can’t work the other way – games designed, developed and programmed in China, then shipped to a smaller U.S. or European studio to be adapted for other markets. The process would need to be refined, but the problems aren’t insurmountable, as Ubisoft (originally a French company) has proven.

Oddly, these two trends (the rise of local companies, as well as outsourced studios) may be one of the best hopes in the fight against piracy. As companies in China begin to move from simple production houses to IP-generating firms, the country will want to protect that domestic work from theft. The possibility is that standards will be tightened as China reaches a level of development comparable to the U.S. and Japan. A wild card in that scenario is the unpredictable communist leadership. They’re certainly capable of controlling market infringement – the Jet Li action/propaganda film Hero, with substantial government money behind it, was pirated only in miniscule numbers – but they’re also capable of changing the rules to fit their needs at any given moment.

The color of the cat
When I left China, the impression I had formed was of a country still in conflict between its past and its future. What else can be expected from a country that began modernizing less than 40 years ago? Ever since Deng Xiaoping announced that “it doesn’t matter if the cat is black or white, as long as it catches mice,” the People’s Republic of China has rushed forward, stumbling to catch up with the United States. Go to Shanghai, and if you look up at the shining buildings and bright neon signs, you’d almost believe the country has made it. Just don’t look down at the streets filled with litter or the beggars in dark doorways; refugees from the poorer rural areas. China may have imported the technological advancements it was previously denied, but implementing the changes that go along with this industrialization is more complicated than the country is willing to admit.

Thomas Wilburn went to China, and all I got was this lousy T-shirt.

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