China Ripe for Non-Practicing Entity Suits

A short time ago, I wrote about an article by Ma Si in the China Daily concerning the likelihood of an increase in patent suits filed in China.  On November 7, 2016, the Wall Street Journal has published an article by Juro Osawa, titled "China's Patent Lawsuit Profile Grows," about a Canadian non-practicing entity's (NPE) suit against Sony in Nanjing, China.  The article notes that China's IP enforcement system has changed substantially in the last few years and is less expensive than other systems making it an attractive place for NPE litigation for licensing leverage.  For one, according to the article, enforcement of the NPE's patents could result in stopping Sony from exporting infringing parts manufactured in China.  Notably, China's government has made clear its intention to move to an innovation and services based economy for continued economic growth and intellectual property protection will play an important part in that move.  The focus is usually on developing Chinese companies and protecting their technology, but there are obvious opportunities for other companies as well.  Indeed, I was in Beijing recently at a conference and there was talk concerning making patent enforcement in China even stronger than in the United States.  

China currently has three specialized IP courts: Shanghai, Beijing and Guangzhou.  It will be interesting to see if there is soon an expansion into other cities with intellectual property courts.  [hat tip to Professor Ed Lee of Chicago-Kent College of Law for the lead to the Wall Street Journal article] 

Consumer electronics and IP: it's about management, stupid

It remains the great unknown: to what extent does IP contribute to the success or failure of a

company (or even an entire industry)? In truth, the possible answer to the question will depend upon the circumstances—pharma will certainly yield a different analysis to that of a media company. Even recognizing the diversity of the context, however, this blogger has had the long-felt sense that we are still far away from generalizable analytical structures that will allow us to reach reasonable conclusions across multiple settings. Against this background, I read with great interest an article that recently appeared (July 12th) in The Economist. Entitled “Eclipsed by Apple”, here, the article sought to explain the fall of the Japanese consumer electronics industry. Wherever one turns, decline in this industry is noticeable, whether it be Sony, Hitachi, Panasonic, Sharp, or lesser-known Japanese companies, with the likes of Apple and Samsung taking their place. This fall from commercial grace is particularly puzzling if one considers the various IP assets that these companies appear to possess.

Let’s begin with the power of the strong brand. I remember having lunch with a senior official of a major international IP organization who said categorically, “at the end of the day, it is not about patents or copyright. The only really valuable IP asset is brands and the goodwill that is embodied in one’s marks.” So what about the role of branding in the consumer electronics business? The Economist observes: “A strong brand is no longer enough to justify a sharply higher price” (pointing to Samsung’s recent decline in operating profits). The article attributes this in part to the fact that the consumer electronic business “is an impossible business for nearly everyone.” But that proves too much. In a cut-throat market, one might reason that a strong brand can help one stand out, even if the brand does not have the power to command as premium a price as might be desired. But that does not seem to be the case. As strong a brand as Sony once was (think of the Sony Walkman or Triniton TV), the brand seems to have been (and is) only as formidable as its latest product. A strong brand can perhaps continue to command a premium price for a while, but ultimately it is coming up with new products that matter. (Apple and Samsung, are you listening?)

If a powerful brand does not provide a sure-fire, long-term anchor for success, what about the products themselves? On this, the article had this to say:

“If their chief executives were visionary leaders willing to take risks, Japanese electronics firms could do much to regain their lost lustre, says Roderick Lappin, who heads the Japanese operations of China’s fast-rising Lenovo. Their unrivalled engineering, though often in excess of customers’ needs, is still an advantage, he says. They sit on a trove of intellectual property in the form of patents. Much of this could prove invaluable in the field of “wearable” technology or the much-hyped “‘internet of things’ …“.

It would appear that these companies have great engineering know-how and a lot of patents, particularly in a couple of emerging fields. That sounds like a great double-dose of valuable IP. But the engineering know-how seems to be detached from customer wants. As for the patents, they appear to own a lot of patents for wearables and the internet of things. But we are not really told why this “trove of patents” will make a difference for these companies in these emerging industries. Moreover, to the best of my understanding, some of these companies possessed patent troves for past and present technologies, without these patent portfolios necessarily being translated into oversized commercial success. Why will the current patent trove be any different? Or will the value of these troves be measured only if the companies do not enjoy significant success in the field of wearables and the internet of things? If so, this will be redolent of, e.g., Nortel and Kodak, both of which sold their patent portfolios because they had no other choice.

At the end of the day, perhaps the most encouraging thing said in the article about the industry was in connection with Sony, where its smartphones and tablets are enjoying some success due to “one simple, customer-centered innovation—making them waterproof.” But this does not seem to be the stuff of high-level engineering or massive patenting, but simply a shrewd management decision to give the client what it wants (or needs). If so, neither the woes nor the possible solutions to the crisis of Japanese consumer electronics rest primarily with IP. While IP and what it embodies are not unimportant, ultimately what matters is enlightened management, including, but in no way limited to, the effective creation and utilization of IP. But our understanding of how IP fits into the broader picture of successful management still has a long way to go.

Contents versus Distribution: Nothing New Under the Copyright Sun

Why is it that the current issues facing Sony are simply another instance of the basic challenge that has characterized the commercialization of contents since the emergence of the printing press and the rise of the autonomous author over 500 years ago? The reason is simple--then and now, the ultimate questions are (i) whether to be on the creation or distribution side of contents; and (ii) if one wants to be on both sides of the content equation, how to successfully coordinate between them?

Then, the struggle was between the publishing guilds and the interests of creators of independent contents. Now, the struggle is between the creators of contents and the platforms for their distribution and delivery. Despite the distance in time and the advances in technology, the basic issue remains the same--how are contents commercialized and who profits from such commrecialization?

These questions came to mind in reading a report in the June 21st issue of Bloomberg Businessweek entitled "TVMakers Move into Online Content." Generally, the article discussed how hardware manufacturers are about to "introduce a new generation of Web-connected televisions and servicess that will stream movies, TV shows, and music over the Internet and onto those sets." The goal is to enable you and me to bypass cable, and thereby to disintermediate cable as a content delivery vehicle. The ultimate dream is to enable the user to use these new tv-like devices so as to enable one to create his/he own personal set of television channels.

How does Sony fit into this? (The ultimate answer is hardly trivial, given that
the company is reported to have lost $1.4 billion during the last two years.) According to the article, Sony is about to introduce "the prototype of a TV that will deliver video and music over the web in partnership with Google." Earlier this year, Sony unveiled Qriocity, a so-called video-streaming service. Qriocity will link the Sony high-definition Bravia tv sets and Blu-ray players, both of which have internet connectivity. The service will also be available to the reported 35 million owners of a Sony PlayStation3 game console, which also enjoy internet connectivity.

Looked at otherwise, Sony seems to be seeking two different sources of income. First, it wants to increase hardware sales of the so-called Google television, which seems like a pure hardware play. Down the line, but way, way down the line, it hopes to get a chunk of revenues from the contents themselves. In 2010, online video revenues will earn $180 million revenues, compared to the reported $51 billion (!) to be earned this year by cable and braodcast companies for advertising alone. Second, Sony seeks revenues through its Qriocity service, whereby a charge of $2.95 or more will be assessed each time a person clicks to view a movie.

All of the above seem to be versions of providing delivery platforms for copyright contact. Don't forget, however, that Sony is also one of the major Hollywood studios, which puts Sony in an interesting position, at least with the timing of the showing of their movies. That is because movies are first shown at movie theatres and only later displayed via other means and devices. While the time gap between the showing of a movie at a theater and later distribution through other means is decreasing, the basic point remains. Movie theaters want to have the first bite at the apple.

This means that for Sony, the movie studio, it has to walk a tight rope between satisfying the demands of movie theatres and those of other means of content distribution, so as to maximize its revenues from the display of its contents on multiple platforms. For Sony the television manufacturer, however. with aspirations to link televisions with internet delivery, the goal is to make these products as attractive as possible at the expense of other means of content delivery. Obviously, one of the key elements here is the ability to show movies as soon as possible after their initial release, even if this might jeopardize the relationship of Sony studios with the movie theatres.

In other words, Sony has to navigate between being a contract provider and being a distributor of contents. The question is whether, in being challenged to find the golden mean between content provider and content distributor, it is not putting itself ultimately in a competitive disadvantage in comparision with competitors who are focusing one of the two sides of the content equation. Ecclesiastes was so right--there is nothing under the proverbial copyright sun, even for those in the Land of the Rising Sun.