DVD Region Codes and Pharmaceutical Safety

At first blush, you might not think that region codes on DVDs and complains about imported pharmaceuticals being unsafe, but the two concepts are indeed very similar.

Books, movies, computer software and pharmaceuticals have similar cost structures: they require an incredible amount of effort to make the first item, and then a tiny amount of effort to make each additional item. Once the book is written, the movie filmed, the software developed or the drug researched, it's pretty easy to make the next item. (Books that retail for $25 cost only a few dollars to print; a CD for computer software costs pennies, and the actual chemicals in each pharmaceutical prescription are usually not a significant portion of the cost). Up to a point, airlines and hotels are similar: flying an airplane that is half full costs almost the same as flying one that is full, and having a hotel room with half the rooms empty doesn't cost the hotel much less than having all the rooms occupied.

Translating a book, movie or computer software into a foreign language requires some effort, but not nearly as much effort as was required to produce it originally. Pharmaceuticals of course work just the same if your mother language is English or Italian or anything else.

Companies often sell products in different markets, where there are different regulations, different competitors, different incomes, etc. Therefore, these companies attempt to price these market segments differently. These markets need not be separate countries: they can be separate groups of individuals.

Book publishers bring out hardbacks months before paperbacks. Hardbacks have a much higher profit margin (paperbacks cost less to print, but not that much less). The hardback buyers are the "must have this now" types, and are the ones really eager to read the book. The paperback buyers are less enthusiastic about the book, but by bringing out the paperback after the hardback, you can sell to those who are really willing to pay a lot, and then after they've bought the hardbacks, you release the paperbacks in the general market for the "nice to have" types who aren't willing to pay as much.

Airlines charge less if you're staying over Saturday night. Does it cost them any less to fly you if you stay over a Saturday night? No. But the airlines know that business travelers are willing to pay more, and they also know that few business travelers are willing to stay over a Saturday night.

The key to serving different markets, where the people are willing to pay different prices for the same good, is to prevent the expensive group from buying the product that is aimed at the cheap group. If the expensive group can buy at the cheap price, then your total scheme fails, and you can have only one price.

Books, movies and software sell in different countries, with significantly different prices. However, the language barrier prevents Americans from purchasing Tagalog versions of Windows or the latest thriller from Tom Clancy. Books are also relatively bulky, and shipping them around the world may eliminate any savings. Currently, In English-speaking countries, prices for the exact same book can be very different.

Take Thomas Friedman's The World is Flat, which is the current #1 bestseller on Amazon. It retails in the United States for $30, but is available at Amazon for $18 in Hardback, with paperback not available yet. However, in India, the English language edition sells for Rs. 721.6 ($15.43). Thus, the list price in India is just over half the list price in the United States (Amazon is likely shaving most of its profit off the book to use it as a "lost leader"). The Indian online bookseller is likely not selling the book at a loss, and the wholesale price in India is likely quite a bit less than Rs. 721.6.

I would imagine that if someone began importing a large number of bestsellers from India, the US publishers would almost certainly attempt to stop it. There is almost certainly going to be a condition in that the Indian publisher can only sell in India and maybe some other countries. If there isn't a restriction, I am surprised that no one has started importing popular book titles from India since they can be purchased for significantly less.

DVDs usually have multiple audio channels, and when DVDs of American movies are sold in Europe, they almost always have the original English audio track, since enough people can understand English. Movie releases are usually different in Europe, and they are priced differently in various countries. In some cases, movies are released on DVD in North America before they even hit the theaters in Europe. If people could order DVDs from North America over the Internet, this could put a damper on movie ticket sales in Europe (especially in Spain and France, since DVDs sold in North America usually include Spanish and French audio tracks). How do movie companies prevent Europeans from buying American DVDs?

First, television standards are different in the US and Europe, but with the ability to watch DVDs on computer screens, this is not a major issue. DVD companies came up with another line of defense. They instituted DVD regions: DVDs come in six different regions, and a DVD purchased in North America won't work in another region, and vice versa (unless you get a DVD player that has been modified to allow the playing of discs from multiple regions).

Many liberals, including Hillary Clinton and Al Gore, have recently written books which are available in India at lower prices. Yet these same authors also claim that Americans should be able to reimport drugs from Canada, were they are priced cheaper.

Canada has a board that essentially determines the prices of pharmaceuticals. By and large, the pharmaceutical companies don't care that much: as long as the cost to produce the drug is less than the cost to sell it (and once the research is done, this is almost certainly going to be the case), the drug company is happy because they are getting some money from another market. If the drugs were priced at Canadian prices in the US market that would be a problem: the drug company wouldn't make enough to recover its investment in R&D, but if the drugs are sold only in Canada at the lower prices, it's no big deal. (In some cases, US companies simply license the drugs to a Canadian manufacturer, and then needs to do nothing else).

Just like an author doesn't really care that much if Indians pay less for his or her book, the pharmaceutical company isn't hurt substantially if foreigners pay less for the drugs. But if people reimported books from India in large numbers, then the author would receive less of a royalty and perhaps decide that writing books was probably not worth the few rupees he ended up getting.

The drug companies have tried to stop reimportation from Canada, and have used the safety bogeyman. This is not the true reason they oppose reimportation. It may have some merit, but if they were that concerned about safety, they probably would protest that Canadians could get their hands on fake drugs. Rather, the drug companies are worried that if large numbers of people reimport their prescriptions, this would cause their development overall not to be profitable.

Unlike DVD sellers, drug companies cannot put some sort of region coding in their drugs that would render the drugs ineffective if an American took a drug made in Europe or Canada. So remember that the next time some Hollywood star speaks out about unfair pharmaceutical prices, the same star benefits from almost the exact same principle by having region codes on the DVDs.

And I really hope that the next time Hillary Clinton writes a book, some enterprising import firm imports large numbers of them from India or whatever English language market has them really cheap, to undercut the local market. If the US publisher sues, then I think it would be hysterical to use the exact same argument to promote the book import as Hillary used to promote pharmaceutical imports from Canada. ("Americans cannot afford the high prices of Hillary's wisdom, and why are the evil publishing companies selling her tome in other countries for less? It's unfair, and we should be allowed to import books from overseas.")

(Actually, if enough prescriptions from Canada were imported that they started to have a major impact, US drug companies would likely fight hard by either making the Canadians pay the same price as Americans or by simply not selling at all in Canada. Shipping costs largely keep individual consumers from importing books, DVDs or software from other countries, as well as the language barrier. However, if these were being imported from cheap countries in large numbers, the companies would likely raise the prices in those markets to prevent the reimportation, as the US market is more important than these ancillary markets).