The big record labels have complained for years about the damage that CD pirates do to their business in China. By some estimates, more than 90% of the CDs sold on the mainland are illegal copies. Intellec-tual-property theft is just part of a global music-piracy problem that combined with rampant tune trafficking over the Internet is cramping sales. After a drop in 2001 of 5% in terms of value and 6.5% in units, global music sales plunged a further 9.2% and 11.2% respectively in the first half of 2002.
But if the slumping music business is dying a death by 1,000 cuts, it would appear that some of the wounds are self-inflicted. That's because the discs clogging Shantou's warehouses aren't pirated. Some of the world's largest record companies, including BMG, EMI and Universal, produced them, and retailers such as French hypermarket chain Carre-four stocked themonly to dump them when they didn't sell. But instead of being melted down by recyclers, the unloved discs are diverted through a network of scrap dealers and middlemen like Li, ultimately finding their way into stores in China. They are sold there for as little as a tenth of the price of officially imported discs.
It's impossible to determine how many millions of these bargain-basement CDs wind up in China. Most music-label executives won't talk about it on the record, and no one is monitoring the traffic. (BMG in New York would not comment for this article; EMI in London and Universal in Los Angeles declined repeated interview requests.) But it's clear this amorphous gray market is entrenched. The discontinued or surplus CDs, generally known as "cutouts" in the West, are in China called dakou (saw gash) because some albums have a telltale notch in the jewel box and sometimes on the disc itself. Many music buffs prefer them to pirated copies, because the prices are comparable, quality is first rate and the selection of hard-to-find foreign bands is better: choice Shantou selections include artists such as Otis Redding, Iggy Pop, Run-D.M.C., Compay Segundo and Brigitte Fontaine. On some albums, a song track or two has been rendered unplayable when the disc was notched, which is supposed to make it unsellable. The increasing majority, however, are pristine, still in their original shrink-wrap and often carrying the price tags of the overseas retailers that couldn't unload them.
Abundant supply has fostered a cottage industry on the mainland. Inside a cluster of about 15 music shops at a popular Guangzhou mall, thousands of dakou albums are on offer. New shipments come in twice a week. "Competition is fierce, so we have to specialize," says a middle-aged shopkeeper dealing mainly in techno. A national subculture has sprouted, dubbed the Saw-Gash Generation. Dakou has its own fan and e-commerce websites, message boards and magazineswhich review albums only available on the mainland as saw gash and even print helpful Chinese translations of lyrics and liner notes. The home page of China's largest record company, Jingwen, features a 19-city dakou-shopping guide.
In 1997, the gray-market albums started showing up in major mainland cities, according to Giouw. The IFPI, which lobbies globally against piracy and copyright violations, traced the CDs to a single recycling company in northeast China and notified record companies. But, Giouw says, "at the time, none of the majors were concerned that it would have an impact on their business." Piracy was a much bigger issue. "This was the lesser evil," he explains. "Do you want these cutouts, or do you want pirates?"
The back-channel trade creates problems for the majors nonetheless. Legitimate albums that make it through the red tape of Beijing's draconian import procedures must vie not only with pirated copies but also with saw-gash versions. "It means we're competing in essence on three fronts," says an executive for a major label, who declined to be named. Michael Jackson's 2001 Invincible album, for example, was imported to China through official channels, after Sony Music removed several tracks with explicit lyrics to appease the Ministry of Culture. After the album flopped, large quantities of unsold European copies turned up on the mainlanduncensored and selling for a fraction of the price of official versions still on store shelves.
Dakou has the potential to cause friction between labels and their musicians. In an effort to recover some of the costs of overproduction and marketing mistakes, the majority of labels dispose of surplus or discontinued albums by selling them to middlemen for less than $1 per disc, according to industry executives. In most cases, artists who would ordinarily be paid royalties for album sales get nothing once their work is destined for the bargain bin or scrap heap, says Donald Passman, author of All You Need To Know About the Music Business and attorney to major acts such as Mariah Carey, Janet Jackson and R.E.M. Few musicians complain, how-ever, so "I don't think the record companies will get too concerned about it," says Giouw of the IFPI.
Still, at least one company is trying to stamp out the problem. Five years ago, Warner/Elektra/Atlantic (WEA, sister company of TIME Inc., which is the parent company of Time) in the U.S. began destroying all unsold albums in-house, crushing them before turning the waste over to scrap recyclers. "It's much cheaper to dump them," says Rick Wietsma, co-chief operating officer for WEA. But "it was enough of an issue with the corporation that we didn't want to leave any room for doubt." The new practice improved relations with artists, who don't have to contend with lost royalties, and with retailers, who no longer have to worry about competition from cutouts. "It's probably overall better practice to get out (of the cutout business) so that you can focus on how many albums you should make and sell," says Wietsma, "instead of kidding yourself that you can recover your costs at the back end."
Ultimately, dakou may become obsolete. The industry is slowly moving toward selling music over the Internet, which neutralizes the risk of making too many CDs by eliminating manufacturing altogether. As one record-company exec says, "In the very, very near future, we'll be digitizing our catalog, and we won't be deleting titles anymore." But as long as discs survive, it's business as usual for China's dakou dealers.