Google China and the Future of Intellectual Property

The world stands at the precipice of a Chinese century. As has appeared increasingly obvious for several years, the United States, recently at the very pinnacle of its global power, is gradually ceding influence to younger, more dynamic developing economies. Of these rising nations, none stands in better position, or appears more poised to reap the benefits of a decline in US power than the People’s Republic of China (PRC). More and more, all events political, social, economic, and legislative must be viewed in the context of China’s prodigious ascent. As a vital engine of growth and investment for nearly every major player in the global economy, and an immense, rapidly gentrifying consumer market, China’s domestic actions and international aspirations are increasingly shaping the evolution of industries across the globe. The United States’ record industry is no exception. Long a leader of American cultural exportation, the industry is suddenly feeling the full brunt of this growing eastern influence. At a time of great weakness and uncertainty in the US record industry, a plethora of alternative business models and music monetization ideas have gained audience, at least in conceptual form. But with nothing even resembling a consensus yet reached on the ‘new way forward’, this still very 20th century industry appears rudderless and malleable in the hands of opportunistic 21st century business partners. An advertising revenue-based experiment recently launched by Google China in the PRC looks to harness and exploit the seemingly dire future of intellectual property, a pre-digital age concept nearly dead to the music industry. Can Google’s new model be the significant precedent the world has been waiting for? Is it even a constructive development? While the prospect of penetrating the world’s most populous consumer market makes most exporters giddy, this deal smacks of concession and defeat. I, for one, believe there is reasonable cause for such trepidation, and I will explore my concerns throughout the course of this article. I will argue that Google’s Chinese experiment represents a subtle yet telling departure in Western capitalist ideology, and heralds an awkward union between two very separate conceptions of intellectual property protection.
Google announced the launch of its long-rumored, legal music downloading service on March 30th, 2009. The service, called Google Music Search, is available exclusively to mainland China, and allows internet users the freedom to search within and legally download from an online catalogue of over 1.1 million copyright-protected files. Files located within the expansive database e are DRM-free but watermarked to allow the measurement of gross volume figures. The files are transferred through a downloading portal administered by Top100.cn, a Chinese company headquartered in Beijing. Google doesn’t charge users directly for the service, instead agreeing to split advertising revenue generated by the site with 140 participating music companies, including industry behemoths Universal Music, Sony BMG Music Entertainment, EMI Group, and Warner Music Group. Google, which has struggled mightily thus far in its effort to expand market share in China, acknowledged the deal to be an aggressive power play. China’s dominant search engine, Baidu, continues to attract a significant majority of all search queries within the country, reportedly around 62%, while its biggest competitor, Google, still attracts a mere 28%. But rebirth as an online music provider is certainly not Google’s ultimate aim, and the company readily admits its foray into the music industry is more of a means than an end. Google hopes its new role as China’s first fully legal music downloading hub will give it a boost in its efforts to catch Baidu, which owes much of its current popularity to the facilitation of illegal downloading.
The time for aggressive posturing is now, the California search engine’s executives reason, as no digital market will be as important, or as large, as China’s over the next century. With just 22% (approximately 300 million) of its 1.3 billion citizens online, China’s Internet market is already the world’s largest, and by many accounts, its most larcenous. The International Federation of the Phonographic Industry (IFPI) estimates that nearly 99 percent of all music downloads in China are of illegal nature. Baidu has been widely accused of aiding and abetting this behavior by providing the use of unlicensed music files to its users, and by offering links to popular illegal downloading portals. The powerful Chinese search engine, which has so far declined comment on Google’s recent moves, is already facing substantial legal action, including lawsuits filed by industry heavyweights IFPI, Music Copyright Society of China (MCSC), Universal Music, Sony BMG’s Hong Kong division, and Warner Music Hong Kong. Google’s quest to become China’s most powerful search engine would certainly be aided by a court ruling against Baidu’s practices, but there exists little optimism that any punitive ruling could ever truly alter the country’s entrenched culture of illegal file sharing.
Resigned to the sheer magnitude of online theft in China, record labels and publishers have grown increasingly skeptical of the profit potential offered by the immense market. Counterintuitively, it has appeared unlikely that the world’s fastest-growing consumer nation will ever provide an opportunity to boost, even partially, the record industry’s woefully sagging revenues. Thus, when over a year ago Google approached major music companies in the United States with the idea for a new, advertising-derived earnings model, the industry was eager to bite. The ad-based model, which at one time would have been considered an embarrassing concession, appears a sounder business strategy than stubbornly continuing to earn no money at all.
The basics of the deal are relatively easy to comprehend. Google, rather than its individual users, will compensate the owners of intellectual property downloaded on Top100.cn, presumably according to a pay scale determined through the watermarking data Google plans to collect. Beyond these basics, however, not much is known. The finer details of the financial relationship remain cloaked in opacity. Administration and payout responsibilities will belong to Google, but no information addressing the exact makeup or frequency of the payouts has surfaced, and none of the music companies involved in the deal have commented on what royalties artists and songwriters should expect to gain through the new model. The search engine and its partners have been remarkably disciplined in their public silence on financial aspects of the deal, merely insisting, when pressed, that projected revenue streams will be more than large enough to satisfy the desires of all parties concerned. One would hope so, but hard numbers and analysis would certainly be more convincing. The rarely discussed third party to the deal, Top100.cn, recently announced plans to pay for its position in the distribution chain by selling ad space on its site, as well, but substantive comments on its share of expenses and profits are nonexistent. From any angle, details of the agreement remain murky and closely held. This has not depressed morale, however, which appears fairly high among industry players. Chief Executive Officer of IFPI John Kennedy recently spoke enthusiastically of the deal, saying, “The launch of Google Music Search is fantastic news for artists, composers and producers as well as consumers across China.” Even so, the deal doesn’t lack detractors. Bob Garfield, host of National Public Radio’s On The Media recently described the new model with the following analogy: “I get burglarized, right? They take my TV and my stereo and my jewelry, so I put on a deadbolt, and they strike again, and this time they take my furniture… And I install a burglar alarm and they come back again, and gone are the rugs and the paintings. So I decide to unlock all the doors and windows and just put up billboards for the burglars to see while they’re stealing from me.” Indeed, a rational mind does ponder the economic perversions inherent in the deal.

While record industry executives have been busy patting themselves on the back for securing the bold new revenue stream, they’ve also managed to effectively ignore several glaring red flags. The biggest problem for intellectual property owners in the digital age has unquestionably been the infinite, unregulated “secondary market” (and I use the term market more than loosely), wherein the majority of profligate theft of unlicensed music occurs. It is a problem that remains wholly unaddressed by Google’s new business model. In fact, music companies have seemingly chosen to disregard the problem altogether, allowing Google to distribute completely DRM-free files to its downloaders, thereby squandering any chance once possessed of limiting potential value losses to the “secondary market”. The implications, mathematically, are dire. Once a web surfer has registered a “hit” on Google’s search page, he or she has ‘paid’ into the system via his or her exposure to the advertisements displayed on the page. Advertisers then owe and pay an advertising fee to Google, who divides fee income into respective shares and transfers agreed amounts into specified bank accounts around the world. Unfortunately, in the same time it takes to execute this complex financial algorithm, the single web surfer who originally downloaded the track will have had the opportunity to send out the file to an infinite number of computers, without ever directing a single new “hit” to Google’s search page. So, in theory, it is possible that if just one person visits Google’s page and downloads a popular song, triggering just one exposure-derived advertising fee, it will then be possible to provide the song to every internet user in China for the price of just one advert viewing. This model-breaking hypothetical, which I admit is impractical and mostly illustrative, would entirely extinguish the life-giving mechanism of Google’s new agreement: mass traffic streams. Without the immense advertising revenues generated by these mass traffic streams, music companies would be left with nothing to show for even their most dynamic successes, and Google would be left with only a split of a very weak trickle of advertising revenue, further hindering its own efforts to challenge Baidu. This unsettling risk has not been acknowledged or addressed publicly by any signatory of the deal. The record industry, through its marriage of convenience to Google, is endangering the scarcity and value of its own goods. I would urge executives of US record companies to carefully consider the longer-term consequences of Google’s vision for the future of the music industry.
Google’s new interpretation of the music market renders music a free and public good for one third of the world’s Internet users. Furthermore, the size of the deal is not limited by a static, capped population, but by the rate of internet proliferation in mainland China, the world’s most populous nation and fastest growing economy. While only 22% of Chinese citizens currently enjoy access to the Internet, that 22% minority consists of nearly 300 million citizens, representing the largest individual Internet market on Earth. Citing its 1.3 billion citizens, double-digit post-recessionary growth projections, and rapidly urbanizing rural population, China posits that its Internet market is ripe for further growth. The next closest internet market in sheer size, that of the United States, boasts a 72% rate of internet access, and still currently trails China by nearly 85 million internet users. The divide is stark. If China were to improve its Internet access to the same 72% rate enjoyed in the United States, its online market would comprise nearly 60% of the world’s web users. Giving away intellectual property to 60% of the world, potentially for free, and without addressing the property’s vulnerability to infinite reproduction, is irresponsible and disrespectful of basic capitalist principles. The record industry’s blind faith in Google Music Search is rife with inconsistencies, hypocrisy, and magical thinking.
The most potentially catastrophic risk of handing over free music to half of the world’s Internet users, however, is not simple, intra-market sharing. It is transnational proliferation. Multiple-market file contagion would turn a hitherto exclusively Chinese experiment into an unintended global experiment in mere hours. Let’s imagine that a student at Peking University downloads a file and sends it to 5 of his friends, including a cousin in Hong Kong. The cousin in Hong Kong shares it with 5 coworkers, including an old colleague in Singapore. From there, the file reappears in Sydney, Kuala Lumpur, Cape Town, London, and New York all within 24 hours. At each new location, the file is copied and distributed multiple times. By the end of the week, thousands of potential customers around the globe, divided by only a few degrees of separation, have been supplied with unlicensed, copyrighted material, causing demand for legitimate retail music to shrink. Physical and digital retailers, lacking projected revenue, begin to dry up, prompting further shifts into the illegal market. And since only in China is this “illegal market” legal, third-party downloading portals begin supplying customers with volumes of illegal free music once solely reserved for mainland China. Letting the free Chinese “market” (again, loosely) spill over into the other half of the world would be disastrous. Google asserts that its tech wizards have engineered around this risk by allowing the transfer of watermarked files only to computers with IP addresses inside of mainland China, but the rational money is, and always will be, on Chinese hackers. It’s not difficult to envision the undesirable effects this experiment has the capacity to create. Although, one optimistically supposes, with every crisis comes opportunity.
Perhaps by letting watermarked files leave China proper, policy makers can gain a means of conducting more effective studies on the international ‘shipping lanes’ of digital piracy. Or perhaps, more mischievously, the so-called ‘watermark’, ostensibly a harmless tool used to measure transfer volumes, can be used to track, document, and indict a transnational ‘crime ring’ of illegal downloaders and file sharers. This idea is more problematic than promising, though. Using such sensitive data in a court of law would certainly test the ethical boundaries of intellectual property protection (just ask Sony BMG about the perils of data collection via watermark), and one remains skeptical that the record industry could garner even a modicum of public sympathy after agreeing to the new DRM-free deal with Google, which all but concedes the death of intellectual property rights enforcement. The deal is likely to remain unpopular everywhere but China, where intellectual property rights and international law are frequently brushed aside in the name of state progress. It could be argued that the China-exclusive precondition of the deal disregards several ‘most-favored-nation’ clauses painstakingly negotiated by the World Trade Organization, and offends sensibilities reaching, potentially, as high as human rights. I offer this admittedly provocative viewpoint after reasoning the following: If Chinese citizens, and Chinese citizens alone, are entitled to engage in the copying and distribution of unlicensed intellectual property, then they possess a legal immunity unique to humans of their nationality. Copyright violations in China, rather than triggering proper legal consequences, have simply been legalized out of exasperation. And if merely ignoring international law is a valid method of altering international law, then what justice can logically be rendered against citizens of other WTO-member nations and Berne Convention signatories who attempt to procure intellectual property in identical ways, but are labeled criminals simply by virtue of their nationality, and often transitively, their ethnicity? While the 1.19 billion Han Chinese of the PRC constitute the world’s largest ethnic group, they do not constitute a group somehow immune from conventions of international law. Size should not justify exceptionalism, and 99.5% of all countries on earth are now effectively being punished for not stealing as egregiously as China has. Additionally, in the opinion of this author, the ‘right of copyright infringement’ is certainly not the most important human right missing from modern Chinese society, a point heavily punctuated this summer by the 20th anniversary of the Tiananmen Square massacre and by July’s appalling ethnic violence in the restive Xinjiang province. When considered in the context of China’s abysmal human rights record, recent western concessions like the US record industry’s Google-assisted kowtow appear even more damaging. Google Music Search is an innovative, laudable reconsideration of the monetization of music, but it sets bad precedent for the future of intellectual property. As a realist, this author can’t help but wonder how many other liberal western traditions are likely to suffer similar, convenient erosions. If the West still believes in the rule of its law, then it is obliged to stand strong and support its proud legal edifice, even as more and more policymaking bodies around the world begin to groan and warp under the immense weight of the Chinese economy.
Certainly, all this is not to suggest that the Chinese are somehow incapable of respecting intellectual property – quite the contrary, in fact. With over 800,000 patent applications filed in 2008 alone, China actually leads the world in domestic patent filings. Since 2006, the country has witnessed the world’s largest number of patent infringement lawsuits, and in the international arena, native Chinese firms have recently earned a spate of high-profile victories against foreign competitors. This would all seem to point to a strengthening capitalist tradition, and a growing respect for intellectual property, a concept not even recognized by the ruling Communist Party until 1985. It is occasionally argued that China’s recent appetite for patent filing represents an important generational shift in thinking. That would certainly be nice. However, as is the case with so many of the country’s positive economic indicators, these apparent shifts are not as much signs of a genuine cultural opening as they are byproducts of a brilliantly executed mercantilist policy. Predictably, China’s sudden, voracious appetite for patents has been deliberately fueled from above by its government, which has for decades been obsessed with buying up foreign debt and building staggering trade surpluses. Its suddenly fierce defense of Chinese intellectual property is simply a plank in a monolithic, overarching, state-first protectionist policy. Free enterprise is rarely free in the PRC, where the allowance of private sector growth and middle class wealth has simply been a government tool in maintaining stability. The boardrooms of most, if not all, of China’s largest firms are closely supervised by communist party officials. For the stewards of the PRC’s mercantilist apparatus, defending Chinese intellectual property is not about fostering innovation or wealth among individuals, but about cultivating another positive net balance for the state. The concept of intellectual property in China has been manipulated into merely another state-controlled weapon of economic warfare.
In light of all this, it might seem foolish to tie the future prosperity of the United States, or the world for that matter, to one massive Asian economy. But doing so will soon become an absolutely necessity. It should come as a relief, then, to find that China is not the United States’ sole conceivable suitor. China may be the fastest-growing, most powerful prospective partner for the United States, but the two countries have already reached several impassable ideological chasms, and appear ill suited for true symbiosis. I posit that a far more congenial, natural ally lies just across China’s southwestern border: India. A truly entrepreneurial nation, boasting the world’s second-fastest growing economy and the largest democratic system on earth, India mirrors the United States in ways China cannot. While its immense, cumbersome democratic process and detestable neglect of poverty often leave it in the shadow of better-disciplined China, its forthright embrace of individualism, entrepreneurialism, and human rights suggest it to be a much more compatible, long-term partner for the US. Furthermore, it is believed that while India’s grassroots economic growth has been slower and less stable than China’s state-run growth, India’s eventual growth ceiling may in fact be higher. Ever since sweeping market liberalizations in the 1980s, Indian premiers and economists have spoken optimistically about establishing meaningful economic ties with the west, including the United States. The relationship would certainly be worth pursuing, once current political turmoil has cleared. At present, the largest diplomatic obstacle to a possible co-development strategy is the United States’ close involvement with Pakistan, India’s politically unstable neighbor and historical rival.
Rarely have intellectual property rights stood on such perilous ground. As the digital music revolution grows into its third decade, each day sweeping the globe, reinventing realities and smashing analogue conventions, long-held western conceptions of droit d’auteur are being challenged and reshaped in the name of economic convenience. While the blunt, overly restrictive DRM regimes of early digital media have failed miserably, their presence has maintained, at the very least, the appearance of societal respect for intellectual property. Doing away with DRM explicitly, as many popular music purveyors (now including Google) are, invites an even more regrettable, lawless paradigm. In a market absent of all scarcity, distribution cost, production cost, and therefore physical value, a viable business model cannot exist. In a market in which consumers effectively choose whether or not to pay for the services they receive, rational behavior ensures collapse. In a digital world where law is unenforceable, ‘rights’ are simply quaint relics of an ink-and-paper past. Yes, an industrial evolution is necessary and underway. But any evolution must take into account the fundamental cornerstones upon which our capitalist tradition was built. If future developments of the global economy follow precedent set by Google in China, the age of intellectual property rights is, as we know it, over.
Works Cited
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