Rocking on the Tonle Sap: November 2007

By Phoebe Leung

** I wrote this entry on Intellectual Property Rights because I researched on the subject, especially related to China, during the summer of 2007. I realized that the debate surrounding the protection of IPR is very skewed towards developed countries because they have a "first-mover" advantage. There are many misunderstandings towards why developing countries resort to piracy.

If you have ever seen the movie “About A Boy,” you must remember Will, a character played by Hugh Grant. He is a rich, yet do-nothing, London bachelor who invented a son to hit on single moms. It is a story of Will learning to accept responsibilities for people that he cares about, and eventually become able to hold a committed relationship. Will’s story, however, goes way back before that. His personal background alone arouses curiosity: how can a person live in London, one of the most expensive cities in the world, without having a wage-earning job? It turns out that his wealth comes from the royalties he collects from his father’s one-hit wonder, Santa’s Super Sleigh. That is, Will lives off the copyright payments collected from radio stations, superstores, and all other users of the song.

Will’s story is only one of the many anecdotes that disgruntled users of intellectual property rights (IPR) can tell. And precisely because of the imbalance between right holders and right users, royalties and the collection of royalties have become very contentious issues in recent years.

Perhaps one of the hottest topics related to IPR is the royalties of DVD players. To add to the heat of this debate, around 60% to 80% of today’s DVD players (approximately 100 million of them around the world) are produced in China, a country frequently bashed at for its IPR violations. However, beneath the physical flow of goods across the Pacific, large sums of money flows back to the patent holders in the U.S., Europe, Japan and Korea. Today, the industry claims that $14 to $27 is collected as patent fees for each DVD player. These charges have led to outcries from DVD player manufacturers, who are obliged to pay the royalties. You may think that these charges only amount to 30% of the player’s final selling price; the rest, 70%, still goes to the pockets of the manufacturers. The picture shows us that the realities of intellectual property right holders and users are far more complicated. (A list of required royalties for a DVD player: http://www.4shared.com/file/30200368/c87ab570/07202007_List_of_Royalties.html).

First and foremost, patent holders are more organized and powerful than patent users. Manufacturing DVD players involve the use of numerous patents for reading discs, compressing digital data, converting images for screenplay, etc., owned by different technology development corporations. Approaching separate patent owners for licenses could be costly and time-consuming. Hence, in the 1990s, the U.S. Judiciary approved the formation of patent pools so as to provide one-stop joint licensing at predetermined royalty rates, given that these licenses contain only “essential patents” for the production. By bestowing a certain degree of monopoly power to patent owners, patent pools should provide convenience for manufacturers in return. But it has become questionable whether they are using their using their monopoly power in a responsible manner. The three dominant patent pools for DVD-related technologies today are the DVD6C Licensing Agency, the 3C DVD Patent Pool and the MPEG LA. In the past few years, they have all been summoned to court for lawsuits for including of non-essential patents in their licenses, charging unreasonable prices for their licenses or engaging other forms of anti-competitive behaviors. Some others wonder why DVD player manufacturers will have to pay for over 400 patents even though they only pick a minority of them for their specific functions. Therefore, manufacturers of DVD player face a monopoly market where they have few choices but to subject to high prices.

To add to the high prices, manufacturers in developing countries find that most core technologies are owned by technology developers in developed countries. DVD’s technical standards and specifications are also determined by developed countries that started to research and develop the technology well before DVDs were introduced in 1994. For instance, while China exports large amounts of DVD players, Chinese scholars have argued that over 50% of related core technologies belong to multinational corporations (MNCs). Only 0.03% of China’s enterprises own patents to core technologies. In this way, Chinese manufacturers are reliant on foreign technologies and have to send huge sums abroad every year in order to produce exportable DVD players. Also, the monopoly of core technologies is bad news to technology developers in developing countries. It is almost impossible for developing countries to develop relevant technologies without first using existing DVD formats, mp3 or Dolby audio soundtracks, and video codec systems.

Third, developed countries, where most right holders are, tend to have a longer history of IPR development, IPR management (both from a corporate or national level) and IPR enforcement. In such countries, high wages and land rent have pushed out manufacturing plants. Instead, their economy is very much technology-based, meaning that their earnings come from asserting their intellectual property rights. On the other hand, in developing countries, the concept of IPR is quite foreign. Take China as an example again. Prior to market reforms in the 1980s, the closest legislation to modern day IPR laws was the “patent certificate” that required inventors to “donate their ideas to the state in exchange for a reward.” Copyright laws were non-existent due to ideological control. However, under new a trade agreement with the U.S. in 1979, China joined the World Intellectual Property Organization (WIPO) in 1980 and established its Trademark Law (1982), Patent Law (1984) and Copyright Law (1990) within 10 years. It also joined important IPR treaties such as the Berne Convention (1992), the Patent Cooperation Treaty (1996), and more recently, the WIPO Copyright Treaty (WCT) and the WIPO Performance and Phonograms Treaty (WPPT) in 2007. Today, contrary to common misperceptions, China’s IPR laws are more or less compliant with international standards. But public polls have indicated that the IPR legal regime is evolving much faster than the public’s mentality and business practices. As a result, foreign companies are more likely to take legal actions against any IPR violations while Chinese companies may just use traditional, under-the-table means to settle IPR problems. The same is true for other Southeast Asian countries like Indonesia and Malaysia, who started to adapt to the international IPR regime only in the 1990s. In China, at least, local companies are becoming more aware of their intellectual property rights. In some cases, they even sued MNCs for trademark or patent infringement. However, in possession of most core technologies and ample financial resources and legal expertise, right holders from developed countries still hold an upper hand in the enforcement of IPR laws.

Fourth, right users, such as manufacturers, are often not the biggest beneficiaries of trade. The final selling price of DVD players, which is lowered from around two to three hundred in 1999 to less than $100 today, is far higher than the amount manufacturers get. This is because DVD player manufacturers are often Original Equipment Manufacturers (OEMs) themselves. That is, they are under contracts to produce brand name products according to standards provided. In turn, the brand name company will purchase products from the OEM and resells the products as its own. The contract manufacturing price could be less low as $30 to $40. Therefore, patent payments as high as $27 can significantly undermine the OEM’s marginal revenue. Instead, the middlemen often reap the biggest piece of the pie by pulling up the price of DVD players.

In sum, as developed economies adjust to a technology- and knowledge-based economy, intellectual property rights have become a money-spinner for developed countries and multinational corporations. In developing countries, intellectual property rights have also emerged as a necessity for economic development and technological innovation. The contention, therefore, lies at whether the current IPR legal regime provides a fair ground for competition, or whether it favors first-comers only. There could be some room to review the prices of current IPR fees, but a more practical means to alleviate the debate involves helping to stimulate technological development in developing countries. These means could include: (i) enhance academic and technological exchanges between intellectual and scientific community by way of, for example, scholars program or research fellowships; (ii) encourage right-holding enterprises to enhance exchanges with their counterparts in the developing world, especially on strategic IPR management and brand name protection; (iii) exchange legal knowledge and ensure fair representation of developing countries in IPR disputes. In order to alleviate some of the contentions in the current international IPR regime, broad-based engagement will be necessary. Indeed, governments, businesses, legal experts and scientists from both developed and developing countries will all need to participate in this effort.

Rocking on the Tonle Sap

Tuesday, 20 November 2007

Broad-Based Engagement Key to Narrow Technology Gap