The Hutong view of the intellectual property issue in China

Why China is the Make or Break Market for the Digital Home

In the Hutong
Going through my latest Amazon order
1454 hrs.

Ron Enderle of ECT news did his year-ender piece “The Three Big Tech Battles of 2007,” informing us that the big battles this year will be for our the digital home, our pockets, and our laps. No rocket science, there, but I give him credit for filing the story at 0400 on New Year’s Day.

One thing Ron wrote that got me thinking was how the biggest obstacles to digital homes are not the widely varying approaches of the equipment manufacturers, but “the Recording Industry Association of America (RIAA), and the Motion Picture Association of America (MPAA) and the content owners that are so concerned iwth piracy they have almost made it impossible to create a solution that offers an experience that the market will find compelling.”

He’s right, of course, but in contemplating that conundrum my eyes were drawn to a single word in that sentence, repeated twice: “America.”

It would seem, therefore, that if you were a consumer electronics company and you wanted to build your digital home business, you’d go someplace where the RIAA and the MPAA are regarded for what they are – preachy lawyers hiding behind the fig leaf of an antiquated legal system, defending content owners who keep clicking their heels and wishing themselves back in 1985.

In other words, you’d come to China.

Not because China doesn’t have a copyright protection system – the recent judgement handed to Sohu is proof that copyright protection is actually starting to take effect – but because the system has not yet ossified to the point where it will be allowed to obstruct the development of an innovative electronics business.

So if the Digital Home has a chance to make it anywhere, I’d say it’s right here in China. Where else do you have an immense and rapidly growing base of consumers with:

1. A demonstrated preference for in-home and personal entertainment systems;
2. Ready access to a wide variety of recorded content delivered on media without any form of digital rights management;
3. A significant percentage of new home-owners home electronics system purchases;
4. A mobile culture that will support mobile viewing devices;
5. Some of the worst TV and radio options in the northern Hemisphere;
6. Few decent cinemas;
7. Tiny record stores with limited options; and
8. Plenty of time on their hands?

In other words, apart from wealthy college students in the US, China is your market.

So my prediction for 2007 – watch for the digital home wars to come alive in China, driven by the global players and by local companies pushing EVD as part of the solution.

The Voices Behind Standards – Appended

Back in the Hutong
Recovering from 5 Days in Tokyo
0913 hrs.
Appended a day later
0855 hrs.

Scott Kennedy at the National Bureau of Asian Research, a U.S. think-tank, has produced a compelling paper that underscores the importance of business coalitions in standards battles in China.

Scott uses different wording, but his point echoes one that Susan Tomsett and I have been making for a very long time – what moves regulators, policy-makers, administrators, and GONGOs in China is a chorus of voices of domestic entities all pushing in one direction, with foreign voices faint if present at all.

You can download his paper (a pdf) here.

Clarification
Scott dropped me a note and pointed out (correctly) that his paper does not suggest that foreign firms have little input in the process, but that they are more successful when Chinese speak out on the same issue.

This is absolutely the case, and the record bears growing testament to support Scott’s point.

Where Scott and I perhaps diverge in our thinking is, I believe, a matter of focus. Looking at what has been successful to this point, Scott is spot-on: it has been a foreign entity taking a stand that is supported by local voices that has historically won the day. When I was working with Qualcomm in the late 1990s, that is essentially the tactic we used to help gain final approval for CDMA.

Looking ahead to what will be required in future efforts to move the regulatory needle in China, I frankly see the role of foreigners speaking for themselves as being in steep decline. The broader trend will be for local coalitions to assume a greater and greater role in the standards debate (and in most debates around IT policy) and for foreigners to gradually step behind the screen.

When you look at the policy direction toward independent innovation, away from foreign investment, and a process infused with a growing discomfort with foreign participation in regulatory issues, you can understand why local voices will become even more important in the process than foreign voices. Indeed, foreigners are probably best advised to step behind the screen and counsel the locals in the process, stepping forward to provide an independent voice only on when appropriate.

Bottom Line
Building coalitions of influential local entities is essential in the standards process – Scott Kennedy has documented that amply. Going forward, those local entities are going to become the primary drivers of policy, with foreigners playing an increasingly subordinate, supporting role – David Wolf contends this.

Thoughts?

Bain Almost Gets It

In the Hutong
Checking the Prevailing Winds and my home radiometer
1129 hrs.

Bain & Company is now telling Hollywood that if it doesn’t want to be crushed by digital piracy, it needs to build a strong electronic distribution system, and fast.

Great point, guys, but why stop there? Why not take the next, logical step, and suggest that the most important step Hollywood could take to end piracy in any form has less to do with lawyers and a lot more to do with distribution.

Warner Home Video gets it – they sell legitimate DVDs of Warner Brothers movies and TV shows for $1.50 – $2.75 in 8,000 stores all around China. And they’re making money as China’s increasingly affluent want higher quality DVDs to show on their plasma TVs.

Laws and law enforcement will not end the piracy problem. Giving consumers a better alternative, on the other hand, will close the gap faster than raids and regulations.

Now if only Disney, News Corporation, Viacom, Sony, and Universal would figure that out, instead of sending the MPA to come to Beijing, bang on the table, and make the whole industry look like a bunch of school kids.

Nokia, SARFT, The Next Standards Battle, and the Future of a Medium

Camp Silicon Hutong
Somewhere on the Kohala Coast
Hawaii
0017 hrs

Nokia has been tossing a press release of sorts around China announcing that they are bringing DVB-H, the mobile television standard most favored by The Boys from Espoo, to China to test. They even have a single model of a phone that can actually use that standard for the eyebrow-raising price of RMB 6,000.

Welcome, DVB-H and Nokia. Glad you could join the party, especially since QUALCOMM has been here testing MediaFlo for at least two years, and the local team has managed to modify their Digital Multimedia Broadcast standard (DMB – I know, not the smartest acronym around, but go figure) to include wireless handheld devices.

If it has taken this long for Nokia to start testing, something is seriously wrong, especially since the word coming from the west end of Chang’an Avenue is that SARFT is about to crown DMB-T/H [grin] as the standard of choice for China. Nokia is basically showing up at the 11th hour.

Frankly, I think something much bigger is going on.

Gunfight at the T.V. Corral

Word around the campfire in Beijing is that China Mobile and China Unicom have actually been testing all of the standards for some time. What makes this particular standard decision different than, say, the decision on what 3G standard to use or what frequency allocation each standard will get is that this decision will NOT be made by the Ministry of Information Industries, or MII, the regulatory entity that oversees the telecommunications industry.

For complex political reasons I won’t go into here, the decision will be made by the State Administration for Radio, Film, and Television, or SARFT, because mobile television is seen by many senior government officials and Party cadres as a broadcast medium and thus under SARFT’s purview.

Now, I suspect the mobile handset manufacturing industry in China would like to see DVB-H or MediaFlo win, certainly not because of any deep love of either Nokia or QUALCOMM, but because these are international standards and phones made to use these standards are thus sellable overseas. If China can build a healthy market in DVB-H or MediaFlo phones, there are waiting markets overseas and the Chinese manufacturers would have enough economies of scale at home to be competitive abroad. In theory, at any rate. For carriers, the equipment is tested, in commercial use, and reliable, and thus good for business.

SARFT, on the other hand, likely favors the DMB standard because it has been reviewing it for terrestrial television broadcasts for some time, because it is a local standard (thus providing SARFT an opportunity to show its own overseers how it supports local innovation) and, frankly, because deep down inside they know that selecting it will cause a few cases of indigestion over at the MII.

Nokia – and the carriers – all know this. And it doesn’t make any of them very happy.

“Doc, Wyatt and I are Going to Check on the Horses. Wanna Come?”

So here is what I think is happening:

• The testing – from a technical standpoint, is done. That’s not what this is really about.

• Nokia applies for permission from SARFT for a test network, with a view of doing the test with (in all likelihood) China Mobile. SARFT won’t want to do it, but China Mobile will push very hard both at SARFT and the State Council to get Nokia permission, on the grounds that DVB-H deserves more than just a lab test.

• With such a test approved, it gets harder for SARFT to make an immediate decision about a standard. After all, testing is still taking place, right?

• The Test Network will be a “test” in name only. What it probably will be is a full commercial rollout in a limited geographic area. (After all, why announce a retail price for a handset if you’re just “testing” the network?) SARFT can’t cry foul on this because SARFT and entities under it use the “commercial test” method for technologies in television as well.

• Once the Test Network is up and running with customers paying for service, it gives the MII, China Mobile, and Nokia an opportunity to have greater influence in the final decision about a standard, and in the process of appealing SARFT’s selection at higher levels of government, like the NDRC or the State Council.

If this is the case (and mind you, I’m speculating here), Nokia is playing a dangerous game. It is not wise to interpose yourself between giants, and especially between organizations like the MII and SARFT. By fronting for its patrons in China, Nokia may well make itself some powerful entities. In a place where memories are long, the structure of the government is still evolving, and officials bounce around on a regular basis, that’s asking for trouble.

If I’m wrong, if there is nothing more to this than in the current release and Nokia is truly appealing to SARFT on its own behalf, then Nokia is far less China-savvy than even I had thought. Apart from the fact that this request should have been made a long time ago, it should have come from a local company, not a foreign enterprise. That would have made it much harder for SARFT to say no, and it would have put DVB-H on a more balanced footing with DMB.

Nokia’s China people know this. And that’s why this all seems so strange.

The Shots Heard Round The World

While seemingly esoteric, this fight has a profound importance that transcends the realm of the propeller-heads in the mobile phone business.

Sometime over the last year, something quite amazing happened. In the largest television market on the planet, with over 350 million TV households, the number of mobile phone subscribers surpassed the number of homes with televisions. At the same time, quietly, a small cottage industry has been growing around delivering both general and highly targeted marketing to multimedia-enabled mobile devices.

Meanwhile, a growing number of very large advertisers in China – and their agencies – are losing their patience with the rising advertising rates and the falling returns on spot television ads on Chinese television. They’re unhappy with having to fight harder for better air time, with the TV industry’s continued inability to deliver a ratings system anyone could swear by, and with growing evidence that Chinese are spending less time watching broadcast TV and more time on their computers and on the go.

The more visionary of those advertisers and agencies are taking a long, hard look at mobile TV (MoTV), China’s increasingly mobile population, and the ability to get more and more meaningful viewer information and feedback through mobile. This, understandably, worries the folks in the TV business. Even if they wind up supplying the content to mobile TV, they’re going to have to share their ad revenues with the carriers, and they’ll at best be in a weakened position when it comes to setting their rates.

We’re talking about potentially millions and eventually billions of RMB moving out of broadcast TV and into MoTV, more than enough to support the medium and to use China to make a global case for MoTV.

If a decision is made by SARFT – or someone who could override SARFT – to select a standard that is market-ready (like DVB-H or MediaFlo), MoTV could become a reality quite quickly, meaning that the shift of dollars would start taking place comparatively soon. If the decision was made to go with DMB – which still needs development work before it is commercially ready – the market would require many more years before MoTV became more than a blip for advertisers.

What is at stake, then, is the future shape of the Chinese Media Environment, and the flow of millions if not billions of U.S. dollars, completely disregarding any monies to be earned by royalties on technology, which could also run into nine or ten figures.

That’s a high stakes fight. And The Boys From Espoo are now squarely in the middle of it.

Good luck, Nokia. You’ll need it.

Piracy: Is It Going to Get A Lot Worse Before It Gets Better?

Beijing
In the Hutong

In a widely reported story released last week the Motion Picture Association of America (MPA) has finally released the data from an extensive third-party study it commissioned two years ago on piracy. Apparently, the moguls on the MPAA board held back the study – seems they weren’t too hot on what it had to say.

Feeding us the Appetizers…

The summary of the data, available here from the MPA, points to some interesting facts.

• One surprise was that leading the rogues gallery of countries in total piracy – and in piracy of MPA members (the big studios) was none other than the Good Ol’ USA, a fact that was partially obscured by the way the data was presented. Indeed, the U.S. accounts for nearly $2.6 billion in losses to studios due to piracy.

• Another surprising fact was that the MPA membership – again, the largest studios – lose more in the U.S., Mexico, Britain, France, and Russia each year than they lose in China. Interesting that these issues are not as publicly addressed with Messers. Fox, Blair, Chirac, and Putin as they are with Mr. Hu. But let’s leave that for a bit.

• China allegedly does far more damage to its own industry (and, presumably, independent filmmakers) than it does to the MPA, causing an estimated $2.1 billion in loses to non-MPA member companies and its own local industry.

…but holding back the meal

All of these numbers are interesting little factoids, but before a case can be made to advocate specific policies to address the implied problems, we need to know more. To date, however, the MPA has only released 4 pages of charts and tables and 3 pages explaining MPA people do with their work days, with no promise of when – or if – more is to come. What the MPA has produced, frankly, poses more questions than it answers.

For example, how is piracy is conducted in China versus how it is conducted in the U.S. and some of these other countries? Is downloading a substitute for bootlegging, or does it actually increase the level of piracy in a given country/market?

How was the data collected? Is it possible that developed countries, with superior statistical systems and a different cultural approach to research, are giving better data? Could we be underestimating – or overestimating – piracy in some countries?

Where are some of the trends? All we see in the data presented are snapshots – we need to see which problems are getting worse, and which are getting better (i.e., downloading getting worse, bootlegging getting better.)

What are some of the “best practices?” What is working? What isn’t?

If the MPA is genuinely interested in serving the its members, the industry, and the public at large, we all need an opportunity to parse some of this data, allowing the information to stand on its own in the face of public scrutiny, and indeed to allow the report to make an independent case for change.

Don’t Make This “Hollywood vs. The World,” Because Hollywood Cannot Win That Battle

Being selective and slow with the release of information like this damages the credibility of the report, the MPA, and its membership. For a problem of this size and importance both to the industry and to Sino-U.S. relations, if the MPA expects to continue to play a role in the process, nothing short of public honesty is acceptable. Otherwise, the studios and their captive association lose legitimacy as honest brokers in this process.

At that point, the MPA becomes nothing more than the self-interested voice of a handful of large corporations, a public-relations dinosaur that will be ignored by all sides. That would be a great shame, because involving all of its constituencies in the effort to combat piracy presents the MPA with an opportunity to demonstrate that what is good for Hollywood is indeed good for the world.

How Do You Translate “Phyrric Victory” Into French and Chinese

In the Hutong
1021 Hours

So the owners of New Silk Street have been told by a Chinese court that they shouldn’t allow the sale of cheap knockoffs of Chanel, Prada, Burberry, Gucci, etc. A VICTORY for the forces of all that is good.

The courts award damages of $13,000. Oooh. Now there’s a deterrent.

All of these major international brands actually GET someone in law enforcement in China to gather evidence. They hire lawyers. They go to court. They spend legal fees, valuable management time, and use their ultimate weapon – the courts – to get the most notorious purveyors of knockoffs in the city to cease, desist, and pay damages.

And they get $13,000.

As Philip Lin at Pacific Epoch points out, the fake goods are still available, but they’re just stuck in the back room.

Philip asks, not facetiously, I think, whether this case and Starbucks’ victory in Shanghai marks the beginning of a new era in IPR protection in China.

I’d say no. Until there is a demonstrable, long-term trend of these verdicts with pirates and counterfeiters having to shut their doors, their goods burned, their bosses packed off to prisons, and any officials that covered for them reprimanded or sacked, this is ought more than window dressing for China at the WTO.

But a much less noticed case holds the promise of greater things.

China Telecom’s broadband portal ChinaVnet has been sued for by a local film company, Ci Wen Films, for copyright infringement for running Tsui Hark’s film Seven Swords on the Internet without permission. Frankly, this is the case to watch. Intellectual property protection will become a national priority in China when local companies begin losing their shirts to counterfeiters and pirates.

The Next Great Intellectual Property Battle

…But for those of us who see massive intellectual property battles as good theatre, there is a battle coming that is sure to beat even the SCO – IBM infringement suit in terms of reams of press and depth of passion on both sides: the battle over TD-SCDMA.

…That then turns into a huge global debate about technology standards and royalties that will likely extend to intellectual property generally, forcing at some point in the next decade a WTO round on trade and protection of intellectual property and the role of IPR in global standards.

There is a small but rich cottage industry in Beijing built around the defense of intellectual property rights in China. There are legions of law firms, public affairs firms (not lobbyists in the pure sense of the word, but close), consultants, investigators, and the like in the business of helping global firms seek out infringers and try to get the enforcers to do something about it. At the moment, their collective attention is all turned to this 90-day anti-piracy search-and-destroy sweep through 15 provinces.

But for those of us who see massive intellectual property battles as good theatre, there is a battle coming that is sure to beat even the SCO – IBM infringement suit in terms of reams of press and depth of passion on both sides: the battle over TD-SCDMA.

For those not familiar with it, TD-SCDMA stands for Time Division Synchronous Code Division Multiple Access. Forget what that all means. Put simply, TD-SCDMA is an ostensibly Chinese developed cellular mobile system for delivering high-speed broadband over cellular. It competes with two other standards, CDMA-2000 1x, developed by Qualcomm, and WCDMA, developed by the Europeans with significant helpings of Qualcomm’s intellectual property.

TD-SCDMA possibly offers a few advantages over the other two standards, but apparently only if you build out a very dense network of base stations. It is quite telling that the world’s major cellular service providers aren’t even considering the standard. Apparently, whatever TD-SCDMA offers isn’t THAT much better than what’s already out there.

The Chinese claim that TD-SCDMA is totally locally developed. The folks at Qualcomm beg to differ, and say there are large chunks of Qualcomm technology in TD-SCDMA that require royalty payment. This really upsets the Chinese telecommunications policymakers who are backing the standard, since they see TD-SCDMA as an opportunity to stop having to pay royalties to foreigners.

A TD-SCDMA test network is rolling out starting this month. The Chinese want to go commercial with the technology next year. And that’s about the point when the legal battle would begin. And what a complex battle it would be.

Qualcomm has their claim, and has likely been preparing this case for several years. The Chairman of Qualcomm China, Wang Jing, is a U.S. educated attorney who came to Qualcomm from a white-shoe law firm in Washington. Jing is erudite, intelligent, has a proven talent for defusing the nationalist argument, and he knows the law. Expect Qualcomm to make him their front man in the battle. Qualcomm’s biggest strategic question will be to decide in which jurisdiction to file the suit, having to balance between winnability (almost anywhere outside of China) and enforceability (anywhere within China, including Hong Kong.)

Datang, the primary local developer, will fight back ferociously, both in the courts and in the court of public opinion. They know that the very success of their company depends in part on not having to pay foreign royalties, and that much of their status with the market and policymakers rests on the contention that they did it all themselves. Expect a massive counter-suit, possibly overseas, and a public relations campaign designed to smear Qualcomm with anything and everything.

The Chinese government is in a huge quandary. They want Datang to win this case, dodge having to spend hard currency on IP, and prove China’s technological prowess. At the same time, China is facing a potentially large and damaging case in the WTO over its continued failure to protect intellectual property. It must demonstrate to the world that companies can do business in China without fear of having their IP stolen. Assuming Qualcomm’s case has merit, letting the case go to trial in PRC courts is a no-win situation for China’s policymakers. If Datang wins in Chinese courts, observers will claim the verdict was fixed. If Datang loses, the government will not only look foolish for having supported Datang’s claims, they will be faced with the unpalatable choice of either compelling Datang and the local manufacturers to pay royalties, or openly defying international IPR conventions.

My bet is for the government to push for a quiet settlement.

So, here is how it will play out.

1. The MII announces 3G licenses, and the first ones go to carriers for TD-SCDMA networks.

2. Manufacturers start selling phones.

3. Qualcomm sues

4. Everyone makes a lot of noise for 6 months to two years.

5. All parties involved, battered in the public eye by the entire affair, wind up settling.

6. Lawyers collect massive fees.

7. Nearly all international manufacturers and most locals wind up paying royalties to Qualcomm on TD-SCDMA phones anyway.

8. We go into round two, where everybody and his brother get together to try to dictate to Qualcomm what royalties it can charge for its IPR.

9. That then turns into a huge global debate about technology standards and royalties that will likely extend to intellectual property generally, forcing at some point in the next decade a WTO round on trade and protection of intellectual property and the role of IPR in global standards. Indeed, the discussion is likely to attack the broader question of rationalizing copyright, trademark, and patent law around the world, on enforcement, and fair use.

Get ready. Qualcomm vs. Datang over TD-SCDMA will help start the most important global legal battle of the 21st century.

Watch closely, because this will wind up affecting all of us.

China’s Record Labels Make Warner, EMI, UMG, and Sony Look Positively Progressive

In the Hutong
Avoiding the Motorcades
1009 Hrs.

Baidu has apparently signed agreements with no less than 16 local recording labels to give away for free online the songs of about 100 performers.

Uh, hello?

Did anybody consult the performers about this?

Supposedly Baidu did this as a slap at the big global players. In the end, though, this is going to backfire, because eventually the artists are going to realize that they’re getting the short end of this deal and tell the local recording companies where they can stick their little agreement. Well, maybe not ALL artists, but any that are commercially viable and thus worth keeping are not going to be happy. And if the music is all from artists who nobody knows or cares about, none of this will be very much help to Baidu anyway.

The Internet fundamentally weakens the labels. Despite his close cooperation with the big recording labels, one thing Steve Jobs realized very early in the iTunes saga is that the silent power behind the online media revolution is the artists themselves. Every single move in the iTunes business model is implicitly designed to reward and empower the artists.

In China, you don’t have anything like the Supreme Court and the associated body of intellectual property law and precedent to protect artists. So the artists are going to have to protect themselves.

All of a sudden, the performers signed to contracts with TR Music and its fellow members of Baidu’s Pan Music Alliance look like the IPR equivalent of sharecroppers. And I’ll bet they don’t sit still for it for long.

Technology. The power to make a good deal with your label, or simply to tell your label to get stuffed and go direct yourself.

China Begins 90 Day Drive Against Piracy. And then?

Airport Expressway, Inbound
Beijing
1036 hrs.

Jonathan Landreth did an excellent piece on the Ministry of Culture’s circular requiring authorities in 15 major Chinese cities and provinces to spend the next 90 days cracking down on piracy and pornography. THis was apparently in advance of Bush’s visit (“See, Dubya? We’re tough hombres on pirates”) and in response to the WTO demand on Chin to prove it’s getting tougher on pirates.

All public relations value of such activities aside, one feels compelled to prevail upon the esteemed comrades at the Ministry of Culture about the potential efficacy of such an activity.

> Why only 15 cities and provinces? Why not everywhere? Does this mean to ignore nearly half the provinces in the country? Talk about a loophole so big you could fly a large asteroid through. They even NAME the provinces and leave out such notorious centers of piracy as Hainan and the entirety of the northeast. Attention all pirates and pornographers: please move here for the next 90 days. Thanks.

> As much respect I have for the Ministry of Culture, I have to wonder whether the nation’s police forces really feel compelled to drop everything they’re doing and follow an MoC directive. Would it not have been more compelling to the police forces of the land for this to come from the PSB?

> Question: After 90 days, then what? Business as usual?

Jonathan also points out the sheer stupidity of announcing this all IN ADVANCE of the enforcement effort. They may as well phone the factories before coming by. (Or maybe they do that, too?)

This all has the look of a cross between a PR opportunity and a Vietnam-era search-and-destroy operation. High fives for the cameras, but the bad guys will get away. And it almost looks like that is what the authorities want to happen.

Welcome to China. Cynicism, Unltd.

IPR Goes to the WTO: Big, Fat, Hairy Deal

In the Hutong
Enjoying the Magnificent Fall Weather
1447 hrs.

As I sat in Starbucks in FullLink Plaza last Thursday talking to global strategist and educational publisher Hanya Kim about tech and agriculture, who should run by looking slightly harried but Jonathan Landreth, The Hollywood Reporter’s Beijing bureau chief. Gentleman that Jonathan is, he apologized for not stopping to chat, but he was heading next door (the Ministry of Foreign Affairs) to hear the party-line response to the WTO complaint about China’s lax IPR enforcement.

Jonathan wrote a good article that subtly made the point that putting China on 90 days notice to provide a full report on its IPR record was a tad impractical. Here in the Hutong, however, the whole thing looks irrelevant. And here’s why:

The Playground Dynamics of IPR Enforcement

The biggest problem with the international neé American neé Hollywood approach to the IPR problem in China is that it is fundamentally selfish. Essentially, Hollywood shows up and says “you guys better stop letting your people make money stealing our stuff, or we’re going to tell mom on you.”

Beijing’s policy-makers understand that the constituency that keeps them in power is NOT Hollywood, but the local party and industry. Keeping people working, even if they’re manufacturing, transporting, distributing, or retailing pirated DVDs, is far more critical than the happiness of the film, television, and music moguls of the world. So they make polite noises, a couple of politically convenient and highly-publicized busts, and that’s it.

So Hollywood runs and tells mommy (the US Government), who then uses the exact same tactics that Hollywood used, petulantly demanding that Beijing play by the rules or it will run and tell the WTO, fully expecting (apparently) that Beijing will be more afraid now that the challenge is coming from the government instead of the industry.

Same response from aforementioned Chinese bureaucracy.

So now, its off to the WTO, and invariably three months from now we will face the specter of the WTO showing up with some tough questions. And once again, China’s policy makers must ask the question for which they have yet to get a satisfactory answer: “if we go and shut down all of the pirates, what’s in it for us?”

Let’s assume this goes to its ultimate, logical conclusion, which would be to impose some form of WTO-based trade sanctions on China. What sorts of terms and conditions could the WTO impose on China? Could the WTO reasonably demand that China end piracy?

They might. More likely they will demand some lesser level of compliance, including a demonstration of stepped-up enforcement against the most serious violators, because a fair argument can be maid that China needs more time and resources to expand its enforcement infrastructure. If this is the case, there will still be a lot of piracy for a very long time.

No Silver Bullets

Even if the WTO goes all the the way and brings down the hammer on China, the awful truth is that piracy won’t go away – it will just go underground. As long as the financial rewards of piracy remain large, pirated and counterfeit goods will simply go the way of moonshine, marijuana, and grey-market cigarettes: deep underground, where its hard to chase.

The other reason the IPR problem is naturally resistant to a single, comprehensive solution is that it is not a simple issue. On the legal and regulatory side alone, China’s IPR problem is partly a matter of an adequate body of laws (now largely but not completely solved,) investigative and policing resources, judicial procedure (in terms of evidence and sentencing guidelines), and of China’s complex brand of federalism that puts provincial and local authorities at odds with – and often in the way of – enforcement driven from the central authorities.

And there’s even more to it than that.

It’s About the Money

People forget that there is a huge commercial component to the IPR problem.

They forget because industry is really uncomfortable saying things like “people love our products but they don’t like paying so much for them.”

They forget because it is incredibly embarrassing for the executives of fast-moving consumer goods companies to admit that the biggest source of counterfeit goods is coming from within their own supply chains – and sometimes their own organizations.

They forget because it’s much easier for entertainment executives to blame piracy for a failure to build a market than it is to admit that one hasn’t pursued all of their commercial options, or thought creatively about taking market share and building revenue regardless of the legal environment.

They forget, indeed, because it is much easier to cast aspersions on China than on an industry that has yet to figure out one important fact: as soon as a failed IPR regime is demonstrably and severely hurting local interests, enforcement will get better fast.

These are issues that cannot be addressed directly by laws and enforcement, however stringent those systems. Anyone who doubts that need only look at the U.S. With arguably the worlds most robust IPR protection regime, software and music piracy is still huge in the U.S. The trade in counterfeit luxury goods is driven as much by American tourists as it is by local buyers. And the United States Bureau of Tobacco, Alcohol, and Firearms is discovering that its biggest challenge in overcoming smuggling of grey-market cigarettes is the internal systems of the tobacco companies themselves.

At the danger of oversimplifying, lets put it this way:

Chinese want DVDs of U.S. films. If they can’t go to HMV or a Virgin Megastore to buy legitimate goods, where are they going to go?

Dangerous Interlude: The Wal-Mart Factor

Here’s a tickler. A little out of left field, perhaps, but something to think about.

The WTO cracks down on China, placing putative tariffs on a wide range of exports. The company that suffers the most and the fastest is China’s largest customer, buying over $10 billion in a wide range of products from China and seeking a bigger role in China’s retail sector.

Wal-Mart.

Now here’s an interesting fact. The largest customer for some of the companies most aggrieved by China’s IPR regime (P&G, Unilever, Disney, Time-Warner, etc) is Wal-Mart.

Is it beyond conception that if this came down to details that Lee Scott, looking at his disappearing cost advantage and a Chinese government increasingly hostile to his expansion in the PRC, might pick up the phone and starting to apply some very angry pressure on these companies to back off?

Indeed.

But we digress.

Fixing the Problem

I am by no means advocating that anyone stop pushing the Chinese to continue to improve their enforcement of their IPR laws. But I think it’s time we all demonstrated how sincere we are about solving the problem by:

> Recognizing that there are no simple solutions to a complex, multifaceted problem.

> Taking a more sophisticated, multi-faceted approach to the legal and regulatory issue, and doing so in a concerted (rather than piecemeal) way.

> Working in concert with local IPR owners on helping them improve their own IPR protection, and making THEM, not the Seven Sisters of Hollywood, the true aggrieved parties in the process.

> Forgetting for a moment the lawyers and the politicians, and instead thinking creatively about the measures that can be taken at the enterprise level. There are already great examples of this (Time-Warner has, remarkably, a huge and growing legitimate home video business in China; some consumer goods companies are aggressively moving to shut down internal fraud). There need to be more.

> Addressing the commercial issues behind piracy: poor control over supply chains, bad pricing, bad or non-existent distribution systems, and

> Coming up with more creative ways to move into the market and to protect IPR as China develops, rather than standing on the sidelines fretting about poor legal controls.

I’m sure this will upset a lot of lawyers and career trade bureaucrats. But that’s okay – solving China’s IPR problem is about building businesses based on ideas, not about an annuity for the legal profession.

Games, Gambling, Girls, and Gasbags

In the Hutong
2000 hrs

For those of you prepared to give any credibility to the agreement between Japan and China to develop a 4G mobile phone standard, please take a step back. Apart from the historical distrust between Japanese and Chinese, and the failure of China to come up with cash for little things like, say, royalties on the VCD standard, these folks are just late to the party.

The battle over the next generation of mobile wireless has already been joined, between Intel leading the development and marketing of WiMax and QUALCOMM, with it’s purchase of Flarion, holding out the promise of extending CDMA with Flash-OFDM technology. Both technologies are near-commercial. Any expectation that Japan and China may have to slap something together and beat QUALCOMM, Intel, or both to market appears pretty wishful.

This is another one of these feel-good transnational projects that in the end will produce lots of good feelings but, in all likelihood, little of commercial significance.

On the other hand, expect the project to go forward, and fully expect the Chinese to learn much from it that will redound to their benefit moving forward.

The U.S. Patent System is Broken. One Wonders About China

The War Room
Silicon Hutong Plaza

In an outstanding article in IEEE Spectrum in December, Adam Jaffe, Dean of Arts and Sciences at Brandeis University, and Josh Lerner, a professor at Harvard Business School, explained in pithy, easy-to-understand terms why something is horribly wrong with the U.S. Patent System. So sick is this system, it appears, that we are on the verge of enabling the tort bar to all but strangle a hell of a lot of day to day business in America, and an even larger chunk of innovation.

Having just finished the article, I am navigating with great haste to Amazon to order their book Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What To Do About It.

What is bothering me so much is NOT that the world’s largest and most respected system of intellectual property protection is broken – stuff breaks all the time, and the Master of the Universe has given us the wherewithal to fix things like this.

What is deeply disturbing when you read this is: if this is how messed up the best system in the world is, how much worse is the system here in China? I mean, every abuse of the system taking place in the U.S., where small companies are being bullied by giant firms with lots of lawyers and some patents, could happen here – and worse. Not only is there no decent system of enforcing patent judgements, there is no independent judiciary to try cases of patent abuse and to protect small innovators.

People look around China and they see big companies like Lenovo and they think “look, China has a robust tech sector.”

Ugly truth #45: until China has a system that enforces intellectual property rights and an independent judiciary to ensure that those rights are used in an effort to sustain a system that encourages innovation, China’s tech sector will continue to be about knock-offs, copycats, and other such derivative effort that simply seeks to steal somebody else’s idea and sell it for less money.

There are, and will always be, exceptions to this, but they will be notable in that they buck – not represent – the broader national trend.

Intellectual Property Circus

In the Hutong.
Chinese New Year. Day 3.
Late Afternoon

The part of me that genuinely believes that Linux will actually amount to something like a mainstream operating system joined Penguins the world over celebrating the judicial ass-kicking that SCO took from U.S. Federal Judge Dale Kimball yesterday for not coughing up any evidence to support its IPR violation claims so far in its legal action against IBM.

What increasingly concerns me, however, is what the Chinese may make of this. Here we are trying to make the case to the Chinese to protect our intellectual property, even taking it to the WTO, and at the same time showing them how IPR can be used by a frustrated, pissant company to stifle the growth and development of an important technology.

If I were a Chinese judicial or technology official watching this from afar, I would say “these sorts of legal piff-paffs are fine for a developed economy, but we cannot afford to have every opportunist and his brother tying down the development of our most critical sectors because they think their rights have been violated.”

And even though that’s obviously a single-factor view of the issue, it has its points for China.