A Chinese Puzzle
The China Daily reported late last week about the continuing dispute between Chinese DVD manufacturers and the 10 companies whose inventions form the majority of the patent pool. “Two Chinese-based DVD manufacturers have filed a lawsuit against the 3C Patent Group in the United States, alleging that it violated US laws, leading to unfair competition. Patent fees of around US$20 per unit are currently levied on manufacturers of Chinese DVD players, accounting for some 20 to 30 per cent of their production costs. However, US manufacturers’ patent fees are much lower, only 3 to 5 per cent of their production costs. ”
What US manufacturers? you may be thinking. Could they mean Thomson, the 1C? Last I heard, they were still headquartered in France. The Japanese won most of those jobs years ago and now they are losing them to Taiwan, South Korea, India, and China. Time Warner is the only other possibility, and they do not manufacture hardware. Never mind, that’s not the point.
Chinese manufacturers have been resisting paying royalties, dragging negotiations while increasing shipments, for three years until finally Philip convinced customs officials in the UK and Germany to block imports of Chinese DVD players in early 2002. US customs followed suit, as it were, and by 2003 the market share previously commandeered by Chinese makers with lowest-priced goods thanks to not paying or escrowing royalties reversed itself.
Opto-electronics require R&D of staggering sophistication. Dr. Dave Davies, one of the inventors of laser disc manufacturing while at 3M in the 1980s and later at failed start-up DataPlay, once said that focusing a laser beam on a CD track was similar in scale to landing a 747 on a human hair. Twenty years later, as a student pilot, that image popped into my head with greater vividness than ever before. Achieving reliability in manufacturing billions of devices and tens of billions of discs such that consumers have few support requirements is a role performed by R&D that firms connecting and packaging pre-made components do not see, and therefore do not value, but could not be in business without.
License fees are an increasingly important method of recouping research expenses and funding new work as shifts in manufacturing costs separate invention from production. Organizations would not be willing to foot the bill for R&D without such incentives, and governments ability to fund even the basic research in the midst of growing social costs is strained.
But it is not the immediate concern of the Chinese factory manager. Wrote China Daily two years ago, “This problem exists not only in the DVD industry, however. The top 100 domestic electronics manufacturers, for example, invest a mere 3.6 per cent of their revenue in developing key technologies.” This is slowly changing, as China’s increasingly educated work force, who also work at lower salaries than their developed nation counterparts, are attracting foreign investments in laboratories as well as in assembly shops.
Patents and licensing are not forever going to show up exclusively on the expense side of the Balance sheet for Chinese businessmen. Intellectual property laws enacted in the US have swept through the legislatures of virtually all developed countries in the past five years to the extent that there is soon to be a global legal stand against piracy of content as well as technology IP. Developing countries such as China are regarded as outlaws as the rest of the world circles the wagons, appearing to be harboring such underground replication operations by their apparent lack of enforcement.
Perhaps the only way to demonstrate the value of IP protection will be when license fees are a receivable and not only a payable. As China flexes its muscles with EVD and FVD, versions of DVD that are based on national technology, will Africa become (excuse the pun) the next sweat shop to exploit the invention by producing what amounts to pirated goods?
The other good outcome of all this is what must be the new regard consumer electronics firms have for the creative IP in content properties. What pundits at the dawning of the Internet age called the friction-free electronic economy, where information and entertainment content that bore zero cost to transmit would no longer be able to command payment from consumers, did not come to pass. The content industries adjusted, evolved, and fought back.
The hardware and telecoms companies, the latter which were most arrogant about entering and taking over the information publishing business after the AT&T divestiture in 1984 to the extent that Judge Greene specifically prohibited it in the original decree, have come around to the position that they need the premium, high-concept, high production value content to stimulate their hardware sales and network usage.
Now it seems that the gating factor in who will win the next generation DVD contest will be the group who produces the most attractive content rights management solution. More than slightly ironic that the same companies sued by the movie studios at the onset of the videotape product cycle 25 years ago for aiding the illegal copying of filmed entertainment are most intent this round on keeping those movies safely under lock and key.
posted by julia b schwerin