Silicon Hutong

IPR Protection: Beyond Law and Enforcement

In the Hutong

Sore from power-walking

1635 hrs.

In conducting my technology and intellectual property rights (IPR) panel with the Notre Dame Medoza b-school students last week, I realized in the midst of Eric Priest's comments that the problem of IPR protection in China was too often painted as a two-dimensional issue.

Laws, cops, and jails

The first dimension is law, or the extent that China has on its books the statutes, treaties, regulations, and administrative procedures to protect patents, trademarks, and copyrights. I'm no lawyer, but I defer to the three attorneys on my panel (two of whom were Ph.Ds) who seemed to agree that the legal structure to protect intellectual property rights is in place in China.

The second dimension (and the one that gets all of the attention) is enforcement. Okay, China, the world seems to say, you have all of these wonderful laws to protect intellectual property of all kinds. So why are companies, individuals, and institutions violating these laws everywhere in China with seeming impunity?

And here we have the problem. The lawyers, organizations, and government negotiators fighting to protect intellectual property rights in China are focused on getting more cops to shut down more factories, arrest more people, jail them longer, fine them more, and prove to the rest of the population that messing with intellectual property law is a ticket to jail. They use that old logic "kill one to save a hundred."

As much as it might enrage some of those defenders of intellectual property rights to say this, there are not enough cops, jails, or judges in China to end the problem purely by judicial means. (In fact, I'd suggest that even in the most developed societies, the tools of enforcement were only ever meant to be used in the relatively rare cases of overt, commercial violation of patent, copyright, and trademark laws.) And there never will be.

The Law is Not Enough

Eric Priest, one of my co-panelists at the Notre Dame seminar, is a trained lawyer with two law degrees, and even he is impatient with those who leave the IPR to their attorneys:

"Both domestic and international entertainment companies have tried the litigation path in China with little success. Major Chinese search engines like Baidu.com and Yahoo.cn have deep pockets and are far and away the most popular channel for accessing free music files online in China, so they were natural targets for contributory infringement suits. But murky legal issues (Baidu won on appeal because the court found it only aggregated links to content but did not in fact serve the content itself, while Yahoo.cn was found iable for infringement under similar circumstances) and notoriously low damages for infringement available under Chinese law have left copyright owners with little recourse, and emboldened internet companies to continue to conspicuously serve up free, unlicensed content."

Eric suggests that the better approach is to create business models that ensure compensation for the artists and labels as well as the company profiting from their distribution. In the paper he lays out three potential business models that could be used in China. Without doubt, new models need to be created, tested, revised, and perfected, and therein lies a major part of the opportunity.

The problem with the model approach is that any new model hoping for adoption must deliver a experience that is superior for the consumer to the model it is replacing. A painful number of models fall short of that promise. Some of the largest companies in the world have failed to deliver a superior book-reading experience on a mobile device, and the jury is still out on Amazon's geographically limited (and still expensive) Kindle. Conversely, home video has taken off because it offers an experience that is in many ways superior to the cinema. And iTunes turned music downloads into a mainstream experience.

In China, technologists cannot stop at creating business models that satisfy the music supply chain: they have to offer something that is so much superior to free music that people will be willing to pay for it. And then the people will need to be sold. Ask Steve Jobs: even the best experiences in the world don't sell themselves. For all of its virtues, Apple had to market the hell out of the iTunes experience to drive uptake beyond an initial core of users. Success for any business model will require a greater effort still.

Win their hearts and minds and their wallets will follow

Which brings us to my point. As much as lawyers may wish us to believe that law and enforcement should be adequate, as much as engineers may wish us to believe that technology offers a silver bullet, as much as entrepreneurs believe that smart models are the solution, they are all ignoring one more important piece:

Compliance. Voluntary compliance.

I'll put that in short words: people have to want to do the right thing. Then you have to give them an opportunity (business model.) Then you have to make non-compliance inconvenient (DRM, or something better that replaces it). Then you have to make breaking the law downright costly (laws/cops/courts/jails/fines). You need every element in that chain if IPR is ever to have any value. Because you can put all of the technical and legal solutions in place that you want, but until you have convinced the consumer that compliance is in his best interest, too, he or she will find ways around it.

You make it personal. You make it meaningful. You make a civic and more importantly a social virtue out of compliance. You make that individual feel like he or she is doing something important every time they lay cash down for something they could get for free. No. I will not do that. It's not right.

Is doing that going to be easy? Absolutely not. This is what management texts refer to as "a big, hairy-assed goal." But the industry uses the size of the task to justify not undertaking it. They tell themselves "it is too hard. You cannot change Chinese culture, and anyway it is easier and cheaper to hire more lawyers and get our industry associations to talk smack about the Chinese government in congressional hearings."

Yes, it will be a long, difficult, and costly process, but so is the current effort to push for enforcement. The industry has spent millions pushing for better laws in China. It is spending tens of millions on enforcement and litigation. How much is it spending on getting people to want to pay for something they are used to getting for free?

It may take a generation or more to change the way people behave. But it can be done, and it must be done if artists - songwriters, composers, and performers - are ever to have a trade in China, and if the music business as a whole is ever to thrive.

And the time to get started is now, if not sooner.

PRC IPR for MBAs

Starbucks Pinnacle Plaza

Sucking Indian Summerbreeze

1354 hrs.

Last week I had the opportunity to moderating a panel on technology and intellectual property rights in China for a group of MBA students from the University of Notre Dame's Medoza College of Business.

Lawyer, Lawyer, Lawyer, Me

The panel was made up of myself and three speakers, all of whom were accomplished attorneys. I have to admit to being worried about that before getting there, but it turned into probably the most dynamic public discussion I've heard on the topic in ages. We never got sucked into a China-bash, but kept things focused on how you protect your IPR in the face of "what it is" in China.

All three speakers acknowledged that after three decades and an China's IPR laws are in place, so James Luo from Bird & Bird dove into why enforcement in China is possible but not easy. James is a great speaker, and a nimble opponent when questioned. I tried to corner him with a question about how collusion between local IPR violators and enforcement authorities undermines efforts, and he dodged the bullet with grace and humor.

The other full-time attorney on the panel, Ray Moroney of Rouse & Co., focused on prevention as the best cure, underscoring that IPR protection begins long before your business arrives in China. Of all of the foreign IPR attorneys I've met, Ray is perhaps the most commercially-minded of the bunch. He told the group that you cannot come to China with a fixed business model around your IPR - you have to think creatively. I'd rate him as more than just an attorney, but a true counselor on the subject.

The third speaker was Eric Priest who, while an attorney by training, has given up on the practice of law to actually dive into business. He is involved in a couple of ventures, notably Noank Media, a global music licensing concern. Eric is one of a growing breed of what I would call merchant-scholars, people who combine serious intellectual pursuits with entrepreneurial tendencies. Eric actually put the whole discussion in a broad business context, explaining that China does not have just one intellectual property problem, but several.

The Takeaways

The underlying messages that the students took from the hourlong program (just before they jumped on buses to go look at the problem firsthand in Zhonguancun and the Silk Market) confounded the impressions they had taken from the media at home, to wit:

• The IPR problem in China is much more complex - and nuanced - than it is often presented by western media and the various industry players and lobbyists for whom this is the issue;

• You have to think creatively about solving your IPR issues: lobbying, factory raids, and lawsuits alone do not an IPR strategy make. You have to rethink your business models, your business structure, and your entire regime for protecting proprietary information when coming to China;

• The players in China's IPR debates are not oblivious to the cracks occurring in America's vaunted intellectual property protection regime. Debates over patent trolling, overly-aggressive enforcement of copyrights, the effects of technology, and the free and open culture movement* are watched and noted with interest; and, of course

• Intellectual property protection in China will make only limited progress until local enterprises and institutions are suffering from counterfeits and piracy at least as much as foreigners are. In the meantime, Hu Jintao probably does not wake up every morning worried about IPR issues.

No surprises for the initiated, to be sure, but one more indicator that much of the problem in the fight over intellectual property comes from the way executives, pundits, and policy-makers abroad perceive and frame the problem.

I walked away with a few other conclusions, but that's the subject of another post.

The Students

The 46-odd students in the group were primarily executives working with some of the largest firms in the U.S. After a few days in China it was pretty clear that they were reaching that stage of sensory and mental overload as they tried to absorb it all. At the same time, I didn't see the distant stares that usually accompany such whirlwind immersions. These students were all really jazzed about China and wanted more.

If I were a cynical person, I would suggest that any MBA student looking at the prospects for a robust US job market after graduation would be wise to be interested and enthusiastic about opportunities overseas. But it was not like that. It was more like they sensed something in the air - opportunity, maybe, or post-Olympic optimism, or perhaps that hum that you feel more than you hear when you land in China.

I suspect most of them will be back, and soon.

*(I will resist the temptation to create an acronym around "free and open culture movement" for fear of pronunciation issues)

China and the Salvation of Windows XP

Pacific Century Starbucks, Beijing
Dust in the wind
1343 hrs.

Galen Gruman at IDG publication InfoWorld has done the technology industries a community service, building a petition signed by 100,000 computing industry professionals imploring Microsoft to continue selling Windows XP after June 30, the date Microsoft plans to remove the older version of its personal computer operating system from the shelves. Getting 100,000 IT professionals to do anything together without the incentive of a free t-shirt, free software, or an opportunity to meet females is quite a trick, so IDG's survey is an illustration of how emotional this issue has become for those of us not using some flavor of Linux or Mac OSX (our favs here in the Hutong).

At least, it is an illustration of how emotional this has become outside of China.

While I am certain Microsoft CEO Steve Ballmer would say that the (relative) lack of uproar in China about the impending forced-march upgrade to Vista is due to the fact that Vista is the most loved OS in China's history, I beg to differ.

I would say piracy is the reason for the silence.

Jack Sparrow, Vista Killer

People are somewhat less worried about the availability of Windows XP in China because they know that XP will be available here for as long as anyone wants, and for a very small price. (Without Microsoft support, certainly, but available.)

Microsoft has made tremendous progress against piracy in China over the past several years. The problem is far from beaten, but the company has more than doubled the percentage of people paying for their Microsoft software.

But by taking Windows off the shelves, Microsoft appears to be creating a perverse incentive for people who might otherwise buy legitimate software to resort to piracy. Indeed, Microsoft appears to be creating the ideal conditions for a thriving market in illicit copies of Windows XP after June 30, and not just in China.

Certainly, Chinese users who prefer Windows XP to Vista will have few compunctions about turning to one of the thousands of enterprising vendors to be found on our city streets for a budget-priced DVD if they cannot find it in legitimate places, like Federal Software or on the hard drive of their new computer.

But it won't stop there. Microsoft is almost inviting China to play a leading role in the global anti-Vista backlash. Imagine, if you will, hundreds, even thousands of visitors passing through China during the Olympics, picking up a copy or two of XP to take home.

Imagine IT consultants all around the world continuing to install those copies of Windows XP in new computers - for a service fee.

Imagine computer dealers and manufacturers offering (nudge nudge, wink wink) to install XP in the new computers as an option. It will certainly happen here in China.

Imagine a thriving online marketplace in downloads of Windows XP.

It will happen. Commerce, like love, will always find a way.

What Microsoft would kill, pirates will revive - and sustain.

Inviting a Challenge

In fact, the issue is already causing many people here in China to wonder whether there is a legitimate principle (under fair use or some similar legal tenet) that wokuld support enterprising merchants who wish to sell - or give away - copies of a software product for which there is a continued, legitimate demand after the manufacturer has removed it from sale.

We in the Hutong are no fans of IP pirates, nor are we particularly fond of people who break any law because compliance is inconvenient. We remain firm believers that creators of intellectual property have the right to be rewarded for their efforts. We believe that if you disagree with intellectual property (IP) law, the proper response is not to ignore the law, but to change the law or challenge its underlying principles.

By pulling XP from the shelves when people still want to buy it or use it merely to compel people to spend more money on (what they believe to be) an inferior product, Microsoft may be opening a legal can of tubular invertebrates, if not in the U.S., certainly in China.

The root of legislation is perception, and the perception that Microsoft may be taking advantage of intellectual property laws to hold users over a barrel may be just enough to incite a legal challenge in China not only to Microsoft, but to the core of the relatively young body of law protecting the rights of software companies.

The logical principle is this: if Microsoft stops selling an IP-based and there is still a market, could a case be made that Microsoft has abandoned the product, and that the law should allow for someone else to sell it?

Even Galen Gruman, no man's idea of a socialist, suggests in his InfoWorld article that the very ubiquity of Windows has made it a public good supplied by a private entity, thus subject not to the normal system of rules regulating commerce, but to those principles that govern utilities like the power grid, phone service, and air transport. Galen's implication is that the Windows case calls for a suspension of normal rules, if not direct government intervention.

Policy makers in China, who have long watched Microsoft's growing power with consternation, will likely at some point join their counterparts in the European Union as activist watchdogs over Redmond's global business practices. Stung by what they see as the America's overenthusiastic use of intellectual property law to protect its creative an innovative companies, the Windows XP issue may well provide the high ground for China to take a stand against a flawed body of intellectual property laws imposed on China by its WTO accession.

That's a slippery slope.

Thinking Beyond Vista

No doubt Microsoft wants Vista to succeed. What worries me is that the company's leaders may well have convinced themselves that Vista must succeed for the company to survive.

It is time for Microsoft's leadership to take a step back and ask themselves if killing XP to save Vista isn't a step too far, and to recognize that the unintended consequences of their efforts could have a far more deleterious long-term effect on the company's prospects than would the failure of Vista (and the continued success of XP).

eKarma: Have a little Virus, Pirates

Third Ring Road East
Breathing deep the inversion layer
1022 hrs.

Steven Schwankert of Village Grouch fame wrote an excellent piece for IDG (picked up here in The Washington Post) describing how Chinese fans seeking to download illegal copies of Ang Lee's excellent film "Lust, Caution" are finding on their hard drives not a copy of the film, but with software that pops a nasty little trojan virus into their systems.

There are several interesting aspects to this story.

Virus? What Virus?

First, it was apparently found and addressed by Kaspersky Lab and Rising Software well before it came up on the collective radar screens of Symantec, McAfee, and TrendMicro. One wonders why this is the case, particularly given that Symantec and McAfee tout the value of their software in part based on their global scanning for viral threats. I am especially concerned about TrendMicro, who have a huge presence in China and who make a great deal about their expertise as an "Asian" security company.

It also suggests that the malware threat in China is growing and diversifying. From dorm rooms filled with budding software engineers, to the challenges facing the country's law enforcement teams, to the quiet but rapid growth of China's cyberwar military-industrial complex, the country has become as much a haven and spawning ground for creators and distributors of Malware as the United States or any other country. This would seem to argue for greater investment by the computer security vendors in local labs who can not only find but anticipate new threats.

As an aside, it would also seem that companies like Symantec are destined to become major defense contractors. But we digress.

The Empire Strikes Back

Second, it seems that Hollywood (including the music and TV people as well as the film side of the business) and the software industry may have inadvertently discovered a way to slow online piracy and perhaps even the growth of downloaded content. All the studios - or, better yet, the MPA and the Business Software Alliance - need to do is hire a few good hackers to come up with some particularly nasty viruses and spread them around online disguised as illegitimate digital copies of random applications, movies, and music files.

Sure, the viruses would not deter the most determined or careful downloaders, and the anti-virus companies would inevitably come up with fixes. But imagine, for a moment, the fear, uncertainty, and doubt this would wreak among the less-expert. The mere possibility that these files would include viruses would be enough to drive a lot of marginal downloaders away from illegitimate downloading (and probably a few away from legit downloads as well).

Naturally I would expect clearer heads in the PR and legal departments of these organizations to prevail, ensuring that neither Hollywood nor the software industry would ever actually subsidize - or even publicly condone such practices. But you can easily imagine how such an option must tempt some people in places like Redmond and in the Black Tower.

Indeed, if the matter of digital rights management has proven anything, it has proven that Hollywood and many large software concerns believe that extremism in the defense of intellectual property is no vice, and that goodwill is readily sacrificed in that battle. If anything will keep hackers from high-powered lunches at the Ivy or the Fulton Fish market, it is the fear of court costs.

Nonetheless, it is fascinating, if not a bit disconcerting, to think that there is a commonality of interest between the creators of malware and the creators of movies.

Engineer, Engage the FUD Pump

What I do expect is that the IPR-driven industries will kick into gear a semi-coordinated propaganda effort to ensure that stories like the "Lust, Caution" become as widely known as possible, so that the threat is seen as being far larger and more serious than it really is. This costs them little, supports their goals magnificently, and enables the studios and developers to position themselves as defenders of the public interest.

Which, frankly, is the smarter way to handle it. You steal, you pay. Or, you pay, we protect.

For all the failings implicit in Hollywood's approaches to the IPR issue and digital entertainment, let's not lose sight of the most important fact - downloading illegal files is theft, theft is wrong, and anyone who does so willfully probably deserves a hard drive filled with malware.

Piracy - To Win The Battle, Identify the Enemy

In the Hutong
Using WMD against mosquitos
2058 hrs.

Shaun Rein fired me a link to his recent BusinessWeek op/ed about how it is possible to win the piracy battle. It's worth a read.

He and I are often in general agreement, and I enjoy reading his stuff. In this article, he's touching on one of my favorite themes: an economic approach to reducing the size of the piracy problem will beat a moralistic approach any day.

For the sake of advancing the argument rather than denigrating Shaun's excellent piece, I want to call out one issue that his article brings to light.

We Got 99 Problems But The Law Ain't One

Shaun's article is broad, covering almost the entire issue of IPR theft in China, including pirated software, counterfeit luxury goods, knockoff pharmaceuticals, tainted food, bootleg DVDs, and fake consumer electronics. It is a perfect example of one of the unspoken reasons we have not managed to solve the IPR issue in China yet: we have collectively failed to recognize that each of the manifestations of IPR theft is a separate, distinct problem with its own causes and solutions causes us to search for simple solutions.

We need to recognize that China does not have one gigantic IPR problem, but several quite large IPR issues that each need to be addressed separately.

For a simple example, let's compare bootleg DVDs and knockoff pharmaceuticals. Consumers are complicit in the first. They are unwilling victims of the second. What drives these two issues are quite different: in the case of DVDs, it is a combination of price arbitrage ("it's too expensive to buy the real thing") and failed distribution ("I want the real thing, but there's no place I can buy it.") In the case of knockoff pharmaceuticals, the problem (as I understand it) is a combination of lack of awareness, profiteering medical administrators, and a distribution system that mixes the real with the fake.

The problems are different, the solutions should be as well.

The old saw about how to eat an elephant ("one bite at a time") applies here. Fix the problem by breaking it up into its component parts. Create solutions for each type of piracy one at a time.

Your Mercedes or My Life

As an aside, we must also recognize that some piracy issues are more serious than others. Motion picture and software piracy are bad things, and we focus on those issues in The Hutong because they're close to our heart. Pirated copies of Windows VISTA and Terminator 3, on the other hand, are not likely to kill people the way, say counterfeit aircraft parts, pharmaceuticals, or batteries might.

As we disaggregate the piracy problem, we could all start spending a little more time focusing on the parts of the issue that are potentially lethal but not quite as glamorous.

Where The Law Does Matter

As Shaun himself appears to grant in the last paragraphs of his article, engaging on the legal/moral side does have value. There are two important qualifications to that. First, the victories Shaun cites are Chinese companies suing Chinese pirates. These cases, which cannot be framed in "us vs. them" nationalistic terms, are superb examples of why the battle in the courts is best framed with Chinese as the plaintiffs rather than foreign ones.

Second, these victories come not to companies who abstain from full participation in the market, but those who focus first on gaining full and legitimate access to their customers in China. Apart from the fact that this makes great business sense, it recognizes a often overlooked phenomenon: when a foreign company builds access to its customers in China, it automatically enlists a host of de facto allies in its fight to defend its IPR: Chinese companies who serve as partners, suppliers, distributors, retailers, promoters, developers and the like.

Legal and commercial tools to protect IPR march hand in hand. But the commercial means must be applied first, the law second.

Hollywood, take note.

Our Greatest Ally

At the core of Shaun's argument - and mine - is that we have to look beyond the government for solutions. Even if the government woke up Monday morning and said "okay, let's fix the IPR thing," they would not be able to achieve a solution via fiat. They will turn to industry - us - and say "okay, given the limitations on our police resources, how do we create a lasting solution to the issue?"

We'd better have some smart, specific, commercial answers, and we be ready to mobilize our greatest assets in each fight: the ordinary Chinese who are being hurt by each specific form of piracy. Consumers, businesses with their own IPR, filmmakers, and the companies who rely on legitimate foreign IPR or IPR-based products for their livelihood. Only can the battle be won on the streets, and only then will the politically controlled police and court systems recognize the value of consistent, vigorous enforcement.

If They Can Knock Off Disneyland...

In the Hutong
Mixing a cold cocktail of one part disgust, one part mirth, and three parts burnout
0016 hrs.

So the world has discovered that Beijing has a theme park that significantly knocks off Disneyland. While park executives deny any relation to Disney, the place's tagline is "because Disneyland is too far."

Right. Check out the article in JapanProbe and judge for yourself.

Here's a thought: what hope is there of having the government shut down pirates in the provinces if they're allowing a state-owned enterprise knock off an entire theme park right in the nation's capital?

The government will not help IPR property owners as much as they can help themselves. Focus on building a path to your customers, then go after the miscreants. You'll have a better shot at moving the enforcers to action when your enterprise is employing people and paying taxes, too.