BLOCKBUSTER CLOSES, BLAMES PIRACY

UNCLAS SAN SALVADOR 000429 SIPDIS STATE FOR EEB/TPP/MTA/IPC, WHA/CEN STATE PASS USTR USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EINV KIPR ES SUBJECT: BLOCKBUSTER CLOSES, BLAMES PIRACY SUMMARY -------------- ¶1. (SBU) El Salvador's Blockbuster Video franchise closed in March, blaming increased optical disc piracy for its financial woes. The local franchisee claimed a government policy of not targeting the small street vendors has caused an increase in pirated goods, especially in upper and middle income areas. U.S.-based theater chain Cinemark blamed piracy for $1.3 million in lost revenue, also citing the same government policy. On the other hand, local video chain GamesPlace, while acknowledging increased piracy, plans to expand and thought a good part of Blockbuster and the theaters' woes were caused by bad business decisions. According to a recent survey, 84 percent of Salvadorans buy pirated goods and a majority thought it wasn't harmful. Given El Salvador's broader crime problem and limited police resources, and with the 2009 elections approaching, the government is unlikely to risk a violent, unpopular confrontation with small street vendors in the near future. End Summary. BLOCKBUSTER VIDEO CLOSES DOWN -------------- ¶2. (U) In March, Corporacion de Franquicias Americanas (CFA),El Salvador's franchisee for Pizza Hut, KFC, Wendy's, and Blockbuster Video, announced that Blockbuster was ceasing operations and closing its remaining stores (NOTE: The same family also owns Benningan's, Tony Roma's, and Benihana franchises under a different corporate umbrella). CFA publicly cited increased optical disc piracy as the reason Blockbuster closed. ¶3. (SBU) CFA president Francisco Rovira told Econoff that they made the decision in November 2007, after Blockbuster "lost money for the last two or three years." Rovira said the rental business had been dropping about 20 percent per year, and some of their remaining stores were only taking in about $3,000 in revenues while paying $5,500 in rent. CFA had already closed 6 of 9 stores when the announcement was made; Rovira said they started closing stores in lower and lower middle income areas much earlier. Blockbuster charged around $3 for most of its rentals, while pirated DVDs sold for only $1. ¶4. (SBU) Rovira claimed a significant increase in optical disc piracy over "about the last three years." After a crackdown on vendors around the time CAFTA-DR was implemented, violent street protests, where protestors burned police cars and buses, led the government to announce that it would no longer go after the "little guy," only the "big fish." Since then, the number of small street vendors has increased dramatically, especially in the upscale parts of San Salvador where Blockbuster still did business. Rovira routinely saw pirate movie vendors coming into the Blockbuster parking lot next to CFA's headquarters and intercepting customers before they'd enter the store. Rovira said that CFA had raised small vendor piracy with all levels of the government, up to the President's office, but had received little response. He thought it was now "too late" for anything to be done. CINEMARK, MOVIE DISTRIBUTORS ALSO STRUGGLING -------------- ¶5. (SBU) Javier Alfaro, local head of U.S.-based Cinemark theaters, reported similar financial problems that he attributed to piracy. After investing about $8 million in the nicest movie theaters in El Salvador, Cinemark is now considering closing two of five their locations. El Salvador was Cinemark's only Central American market that wasn't growing. Based on rough internal calculations, Alfaro estimated that piracy cost Cinemark about $1.3 million in revenue in El Salvador last year. ¶6. (SBU) Alfaro, local 20th Century Fox and Columbia distributor Aranzazu Otaegui, and local Warner Brothers' distributor Mauricio Avila traced their current problems to the same source as Rovira. The government "basically gave the small producer and small distributor green lights," they explained, and they believed that the big producers had changed tactics to take advantage of this policy. They said that the motion picture distributors have urged the police and Fiscalia (attorney general),to no avail, to take action against the small vendors. ¶7. (SBU) Alfaro stated that the primary difference between El Salvador and their other Central American markets was that the piracy in those countries was "contained" to certain geographic areas, like central markets or city centers. Cinemark's middle and upper class customers are unlikely to travel to those often dangerous areas to buy pirated movies. In El Salvador, however, vendors are "selling on every street corner," even in the upscale neighborhoods. Alfaro said that Cinemark even has problems with vendors selling pirated DVDs in the parking lot outside their flagship theater in the upscale "La Gran Via" shopping mall. Salvadorans seem much more willing to "roll down their windows" than other Central Americans, he added. GAMESPLACE: A PARTIAL DISSENT -------------- ¶9. (SBU) GamesPlace Entertainment, a local video rental and "entertainment company," opened in July 1999 and operates two stores in upscale San Salvador neighborhoods. GamesPlace President Eric Acuna Jubis said that he, too, thought piracy was endemic and hurting his business. His rentals have dropped, and he reported having to pay a street vendor $50 per week to not sell directly in front of his Escalon store. Jubis acknowledged that, with piracy at its current levels, GamesPlace "wouldn't make (him) rich." Nevertheless, Jubis plans to open a new San Salvador (Merliot) store in October 2008 and hopes to expand to five stores by 2009. ¶10. (SBU) According to Jubis, GamesPlace offered a "total entertainment" experience that helped it compete with pirate products. First, he made their stores attractive to children, offering action figures, and video games and toys (that the children could try out while in the store). Creating a safe place where children wanted to come brought their parents, who would then rent. Second, he targeted the high-end film buff by expanding his selection of Blu-Ray discs (Jubis was not aware of any Blu-Ray piracy in El Salvador) and offering frequent renter promotions. Jubis reported that his clients rented an average of 10 movies per month, well above the industry average of 6 per month. Finally, he offered a large selection of video games, where piracy is less common. Jubis stated that video game piracy was largely confined to a few markets, and quality was very low. For example, the pirates could crack and duplicate the playable parts of a game, but not the cinematic sections that advanced the plot. ¶11. (SBU) Jubis thought that bad business decisions, not just piracy, were to blame for Blockbuster's failure. Blockbuster was only releasing about 15 new titles per week, he said, while he was releasing 40. Likewise, Blockbuster's stores were "poorly maintained" and their specials of "rent 5 and get a free coke" weren't going to draw repeat business. He added that Blockbuster held on to its stores in marginal market areas too long, but he thought they could have made a go of their stores in the upscale areas. ¶12. (SBU) Jubis similarly faulted the movie theaters, especially Mexico-based Cineapolis. He said that the local distributors and theater owners were risk adverse on anything but the biggest blockbusters, and wouldn't order the films until they "knew they'd be hits." Often, he would have the legal DVD release of a film before it was shown in the theaters, which also meant that good-quality pirated versions were readily available. Jubis also alleged that Cineapolis in particular was over-duplicating its studio masters (beyond what the studio authorized). This resulted in a lower-quality picture and audio problems in the theater; Jubis thought this made consumers more likely to accept the lower quality of a pirate DVD at home. Similarly, Jubis claimed that representatives of one of the local TV stations would rent TV season boxed sets from him as soon as they came out, only to return them a few hours later. That new series/season would then appear on the network's schedule a week later. ¶13. (SBU) While he, too, had approached the police to do more, Jubis agreed with the government strategy of targeting the "big fish" first. He described going with the police one day to crack down on some small vendors. They confiscated two boxes (about 200 DVDs) from one vendor. Thirty minutes later, the vendor had two new boxes. Going after the vendor would do little, Jubis thought, when the big producers could flood the streets again so quickly, and when confrontations turned violent. SURVEY: PIRACY ILLEGAL BUT NOT WRONG -------------- ¶8. (U) In late February, the American Chamber of Commerce (AmCham) released its second-annual public opinion survey on the impact of piracy in the San Salvador metropolitan area. According to the survey, 84 percent of Salvadorans bought pirated goods in the last year (primarily optical discs, clothing, and shoes). Consumers reported paying "less than half" the price of the original goods. 86.6 percent knew piracy was illegal, but 63 percent thought it should not be prosecuted (20 percent of that did not think it should be a crime). 70.9 percent thought buying pirated products was saving/being thrifty, not stealing, 66.9 percent thought it was helping the poor, and 55.8 percent thought it didn't harm anybody. COMMENT -------------- ¶14. (SBU) Post will continue to promote and support intellectual property rights enforcement with the Government of El Salvador. With El Salvador's broader crime problem, however, targeting the producers is likely the best use of limited law enforcement resources. Likewise, with memories of violent protests still fresh and elections approaching in January and March 2009, the government is unlikely to risk conducting an unpopular and probably violent crackdown on street vendors in the near future. End Comment. Glazer