Digital Media in Asia Blog

New regulations go into effect July 1 in China targeting distributors of unauthorized content online. The regulations, which carry a maximum administrative fine of approximately US$12,000, target search engines like Baidu, which are the backbone of online file sharing in China, as millions of users can search the various Chinese search engines for links to thousands of unauthorized copies of songs and movies.

Bloomberg.com quotes one analyst as saying that “Baidu will be under a lot of pressure to stop offering links to illegal MP3 files and may have to stop their MP3 search service.” Stop offering links to illegal MP3 files? I don’t see it. Providing links to unauthorized content is a cornerstone of Chinese search engine revenue–not just for Baidu, but for all the Chinese search engines. A $12,000 fine is not going to intimidate any search engine; they’ll just chalk it up to the cost of doing business.

But they’re painted into a corner, and effectively, copyright owners have forced their hand. These search engines want to go legit and play ball with copyright owners. But if Baidu were to give up its MP3 links, as the analyst quoted above suggests, they’d be committing suicide. The other Chinese search engines would gladly take Baidu’s share of the music search traffic, administrative fines and all. Copyright owners are not going to win a shoving match with search engines.

But, in the words of Obi Wan Kenobi, “You can’t win. But there are alternatives to fighting.” For example, search engines have offered to give copyright owners a portion of their ad revenue in return for licensing the content, but the major entertainment companies will have none of it. Some Chinese record companies–like Taihe Rye, a successful domestic Chinese label–recognize that online piracy is a fact of life and business, so Taihe has made special arrangements with Baidu to clamp down on pirate links for the first two weeks after a new release. This allows Taihe to capture the majority of its expected revenue from a release while not eviscerating Baidu’s revenue or market share. $12,000 fines won’t do it. Frankly, even bigger penalties are unlikely to have much effect. But copyright owners have alternatives.

Today (5/30/06), Berkman’s Digital Media in Asia Project co-founder Eric Priest will give an informal lunchtime talk on Asia’s role in shaping the future global entertainment industries. Info is as follows:

Berkman Tuesday Luncheon Series, Tuesday, May 30 – 12:30 pm
Berkman Conference Room, Berkman Center
1587 Mass. Ave., Harvard Law School, Cambridge MA

Guest: Eric Priest
Topic: Asia at the Cutting Edge?

Some believe Asia is at the cutting edge of twenty-first century entertainment industry business models. A combination of high copyright piracy levels and high-tech populations has led entertainment companies in places like China, Hong Kong, Taiwan, and South Korea to embrace the internet and emerging digital and mobile technologies as they seek innovative new revenue sources. This includes a massive new market for citizen-created media (music and movies) on the internet in China. What are the trends and are they really leading to sustainable business models for the rest of the world to emulate? Is the conservative state-run media in China creating a strong market for alternative, citizen-created Internet media and what are the implications for Chinese society, politics, and the entertainment industries? With all the emphasis on technology, is creativity increasingly an afterthought?

Eric Priest is a research fellow in the Berkman Center’s project on Internet Filtering, and a cofounder of Berkman’s Digital Media in Asia Project. He is also a visiting researcher at Harvard Law School, and an adjunct professor of law at Chicago-Kent College of Law.

Bio: http://cyber.law.harvard.edu/home/eric_priest
Digital Media in Asia project blog: http://blogs.law.harvard.edu/dmablog/

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A teenager was arrested in Hong Kong for hosting 600 songs for download on his computer, and a court sided with the movie industry, requiring internet service providers to turn over the names of users sharing movies online.

Speaking privately to people in the Hong Kong entertainment industry last week, there is pessimism that these tactics will yield results. The fact is, they acknowledge, that young people view the likelihood of getting sued or arrested on par with the likelihood of winning the lottery.

I’m currently in Hong Kong attending the Music Matters Asia music industry conference, where, unsurprisingly, digital media and internet file sharing is the hot topic. The slogan of Day 1: mobile is the future.  The primary growth area (and really the only meaningful growth area) for music through 2010 is monetized mobile downloads.

Here are some highlights from yesterday’s panel discussions.  I’ll add info about more highlights over the next day or two.

-Major labels in Asia claim to embrace and look forward to digital, online music distribution as an opportunity more than a challenge.  I’m not sure if this was conference-induced exuberance or whether it’s a real sentiment (probably a little of both).  I’m also not sure whether this professed excitement is shared by the major label home offices in New York and London.  It would not surprise me if Asia executives were in fact more rosy about the future than their bosses because high piracy rates have historically forced music companies in Asia to be flexible and adjust to new situations, so embracing new revenue sources is natural for them.

-I thought the best panel of the day was “Meet the Neighbors,” the only non-music industry panel.  On this panel were executives from “neighboring” industries: videogaming/online gaming, television, and mobile communications.  They raised two of the most prescient points made all day.  First, one of the panelists remarked: I’ve been listening all day and I haven’t heard anyone talk about musicians.

1) Everyone talks about ringtones, downloading, market share, but what about the artists?  Cliche, yes, but it is an absolutely key point that the industry can only survive if people are able to connect and experience artists and technology and business models enable and encourage artists to create great music.

2) The industry has to get over it’s centralist, top-down mentality.  Music is not just what record companies distribute to passive consumers.  Consumers today want to create, and share their creations.  They want technologies and business models that enable that and are seeking and finding those regardless of what the business model record companies push.

According to China’s Xinhua news agency, “Only one in ten films made in China last year attracted an audience, indicating major problems in the domestic cinema market.”

Piracy, of both the optical disc and internet varieties, is a major cause of the lack of a solid Chinese film market. In my view, it not only leads to a lack of financial resources that can be reinvested into the Chinese film industry to stoke innovation, but it also causes Chinese filmmakers and studios to be extremely conservative with their creative choices. Thus, most Chinese films are highly formulaic because the margins are so slim that filmmakers are only comfortable going for the broadest possible tried-and-true market. This result is often the reverse of what’s intended–so many Chinese films are so similar that the market is awash with films that from the cover alone look identical. Rather than attracting customers, this causes many films to cancel each other out in the marketplace and leave customers dissatisfied and disinterested in general.

Of course, Hollywood suffers from the same disease to a lesser degree, but piracy in China amplifies the problem there significantly.

Last year, Warner Brothers reportedly introduced cut-priced DVD versions of its Hollywood movies for 22-28
yuan (2.7-3.4 dollars) in China. The price cuts were a direct attempt to compete
against pirated versions of the same movie which sell in supermarkets for as
low as 5 yuan (about 60 cents).

However, MSNBC reports that
less than a year later, Warner is further lowering its Chinese prices once again, by about 50%, to
12 yuan ($1.50). The new cut-rate releases, called “simple pack” editions,
contain cardboard packaging and few special features, compared to the typical
plastic DVD case and loads of special features like deleted scenes and
director’s commentary.

US film companies are betting that the Chinese population is ready to accept
paying a premium for legitimate Hollywood DVDs. Indeed, as the urban middle
class becomes more affluent, they will naturally want, and can now afford,
luxury items like DVDs. Through the internet and the Westernization
of China’s middle class, Chinese interest in Hollywood films is increasing. For
years now, Chinese films have stood alongside Hollywood films in Chinese video
rental stores. With the government allowing only 20 Hollywood movies to be
shown per year in theaters, and a general dearth of theaters, watching DVDs
(and VCDs) at home is the way in which most Chinese consumers are able to enjoy US (and Chinese) films.

Despite favorable conditions for Warner Brothers to sell its
DVDs, it’s unlikely that Chinese consumers will switch from buying pirated DVDs
to legitimate copies. For one, the price point for DVDs, at about 5-7 yuan, has
been ingrained for years. Also, the quality and packaging of pirated DVDs are
currently very comparable to what Warner is offering. So, while a growing number of Chinese can certainly afford twice what they currently pay for DVDs, they have little incentive to do so.

In the West, some incentive for purchasing legitimate goods arguably stems from a culturally instilled sense that purchasing pirated goods is moral and legal wrong. However, in China, these ideas are nascent, if they exist in any meaningful way at all. Buying pirated content is the norm, and finding a legitimate copy of
media is the exception.

So unless Warner can convince consumers that its product is
superior to pirated versions, either through incentives, moral justification,
or legal pressures, it’s unlikely that they will have success selling their
product at twice their competitors’ price.

The IP First Society, a nonprofit organization based in Shanghai, will host the Shanghai International Forum on Digital Media and Intellectual Property. The forum is being held in connection with the Shanghai Intellectual Property Week, and is designed to “bring together global leading thinkers, venture capitalists, bankers, investors, professional advisors, regulators, and policy makers to explore the interplay of digital media and intellectual property from strategic, economic and regulatory perspectives.”

I’ll be appearing on a panel entitled, “Where is the Way-out: Lock & Key vs. Open Access,” discussing whether content owners are better off allowing more open access to their works or employing technological protection measures (DRMs).

The abstract for my talk:

“Competing with Free”

Digital technologies and the internet give consumers unprecedented control over how creative works can be enjoyed and shared. The increase in consumer control results in a corresponding decrease in traditional entertainment companies’ control over their content. In response to this shift, large entertainment companies employ a combination of Digital Rights Management (DRM) and copyright enforcement to extend established business models online. The strategy is unlikely to succeed, however, because strict copyright enforcement and restrictive technological protections are out of line with consumer expectations. Consumers want value and flexibility from their digital content, and piracy offers both while DRM-protected content offers neither. The best way for legitimate content to compete with free content online is to structure a DRM-free internet entertainment distribution model that provides consumers with a combination of flexibility, convenience, service, and features superior to what illicit file-sharing services can offer, at a price point low enough that the switch from pirated to legitimate content is painless.

Please join the Digital Media in Asia Project April 19th 4-6PM in the Berkman Center conference room for Professor Bill Hennessey’s talk “Are there ‘Special Characteristics’ in Chinese IP Law?”

Bill Hennessey, Professor of Law and Chair of the IP Faculty at Franklin Pierce and Co-Director of the Intellectual Property Summer Institute at Tsinghua University School of Law since 2002, will talk about his experiences with IP policy makers in China since the “opening up” of the PRC in 1979, and offer some speculations about where China’s IP law and policy will be a decade or two from now. The second edition of Prof. Hennessey’s casebook, Int’l IP Law & Policy (with Dinwoodie and Perlmutter) will be published this summer by LexisNexis. He holds a Ph.D. in Chinese Language and Literature from Michigan.

Refreshments will be served.

A podcast of Jesse Parker’s April 11 discussion hosted by the Berkman Center’s Digital Media in Asia Project is available for download here.

Jesse is the Founder and Managing General Partner of Dragonvest Partners – a fund that invests in talented Chinese entrepreneurs. He has over 25 years experience in the technology business sector and the Greater China marketplace. In this podcast he offers his unique perspective on how technological change has impacted China, his knowledge about the growth of digital media industries in China, and his strategy for how or why he invests in Chinese digital media companies.

Jesse Parker, an expert on investment in Chinese digital media ventures, will lead a discussion on Tuesday April 11 at 5PM in the Berkman Center Conference room.

Mr. Parker is the Founder and Managing General Partner of Dragonvest Partners – a fund that invests in talented Chinese entrepreneurs. He has over 25 years experience in the technology business sector and the Greater China marketplace. Come hear about his unique perspective on how technological change has impacted China, his knowledge about the growth of digital media industries in China, and his strategy for how or why he invests in Chinese digital media companies. Snacks and refreshments will be served. Please contact Susie Lindsay (slindsay@law.harvard.edu) for information.