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Breaking free of the 'Gold Rush' mentality
December 6, 2010, Monday
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THE gloves are off. Tensions over recent weeks between China's major Internet players have been rising precariously.
As interactive entertainment provider Shanda accused search engine giant Baidu of copyright infringement, Tencent's instant-messaging provider QQ and anti-virus company Qihoo 360 blocked each other's online products and services amid allegations of users' privacy being violated.
But as attention grabbing as these run-ins might be because of the sheer size of the firms involved, they are pedestrian in a sector in which intellectual property (IP) and copyright infringements and other underhandedness are commonplace.
For an analogy, some might consider the lawless days of California's Gold Rush back in the 1800s. Internet entrepreneurs are the modern-day prospectors staking claims in a vast and wild frontier, where sheriffs are few and far between.
"China is an extremely rapidly developing economy that has undergone tremendous change in the past 20 years, you could almost say that there hasn't been time to establish universally accepted ethics or business practices," says Mark Natkin, managing director of Marbridge Consulting in Beijing. "There is a certain Gold Rush or 'land grab' mentality in China."
The number of Internet users in China has already overtaken that of the US, although in terms of revenue the market is still relatively small. Nevertheless, with growing take-home salaries and a steadily increasing Internet user base, the country is a gold mine where businesses aggressively fight to gain turf and defend it.
'Land grab'
Tim Smith, a Beijing-based IP lawyer for international law firm Rouse, has a similar take. "What principally motivates companies in China is a 'land grab.' It's a brutal commercial environment and they will do whatever they need to gain commercial territory."
Smith, who has represented recording industry clients in lawsuits against leading search engine Baidu and Yahoo China, says, "They will seek to - as any company would if faced with the same situation - filibuster, slow down, defend as vigorously as they can any proceedings that suggest that their business model is infringing on anybody (else's) rights."
In spite of the challenges, there is no shortage of investors willing to join the Gold Rush.
William Bao Bean, managing director of SingTel Innov8, a Singapore Telecommunications-backed venture capital fund, notes that investors see China as a big pool of profitability, even though innovation may be lacking.
"China is the place where the services are being created, perhaps not the high-level tech, but the services," says Bean. "Talking about regulation and lack of enforcement probably made sense five years ago ... but these days the real focus is on where the value is. For us, we're looking for game-changing technologies out of the US, and we are looking for money-making services out of China."
For investors like Bean, whose fund seeks to discover products and services that SingTel can bring to other markets, what's being created for China can be ideal.
"When a US company comes into China, it tries to take a developed-market service and modify it to become a developing-market service. Whereas (Chinese companies) are developing services based on ... mobile, short messaging and SMS as opposed to e-mail." These services, he says, are easier to transfer to Southeast Asia and Africa, parts of the world where SingTel is present.
A major complaint - and perhaps excuse - among Western firms is the country's weak or underdeveloped regulatory system, particularly in areas such as IP and copyright protection.
While that may be true, Dan Harris, founding partner of Harris & Moure, a boutique law firm specializing in US investments in China, says the entire system needs to be put into context. "Americans are always complaining about the lack of enforcement in China," he says. "But what they really mean by that is, 'The government is not doing enough to stop someone from manufacturing fake Adidas.' Well, in the US the government is not that active either."
Rouse's Smith adds that a lot of the challenge is just a reflection of the sector's immaturity, as was once the case in the US. In the early days of Internet technology, he notes, many top US firms grew their businesses through similar tactics.
Bad behavior
Harris says the Chinese legal system - while generally good at dealing with complaints in a fair manner - is not as effective at penalizing bad behavior.
"The reality is that Chinese courts do not have the same power to enforce judgments as courts in the US do. In the US, if you get a judgment for US$5,000 against a US company and they don't pay, you can bring in the sheriff and start seizing furniture and bank accounts," says Harris. "You can do that in China too, but it's a lot more difficult."
In spite of imperfections, Smith notes that the legal system is increasingly used for conflict resolution in China and proving capable of handling an increased caseload.
"There were 30,000 intellectual property claims filed last year in China. It's the most litigious IP jurisdiction in the world ... but the system is quick. You expect to get a decision in the first instance within six months and on appeal within a year," he says. As more Chinese Internet companies break free of the Gold Rush mentality and begin investing more in R&D and innovation, it is argued that they will seek legal protection for their own IP.
The government may encourage this, Smith notes, since the development of both innovation and a larger domestic consumer market will likely be central pillars of the next five-year plan.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. All rights reserved. Shanghai Daily condensed the article.)
As interactive entertainment provider Shanda accused search engine giant Baidu of copyright infringement, Tencent's instant-messaging provider QQ and anti-virus company Qihoo 360 blocked each other's online products and services amid allegations of users' privacy being violated.
But as attention grabbing as these run-ins might be because of the sheer size of the firms involved, they are pedestrian in a sector in which intellectual property (IP) and copyright infringements and other underhandedness are commonplace.
For an analogy, some might consider the lawless days of California's Gold Rush back in the 1800s. Internet entrepreneurs are the modern-day prospectors staking claims in a vast and wild frontier, where sheriffs are few and far between.
"China is an extremely rapidly developing economy that has undergone tremendous change in the past 20 years, you could almost say that there hasn't been time to establish universally accepted ethics or business practices," says Mark Natkin, managing director of Marbridge Consulting in Beijing. "There is a certain Gold Rush or 'land grab' mentality in China."
The number of Internet users in China has already overtaken that of the US, although in terms of revenue the market is still relatively small. Nevertheless, with growing take-home salaries and a steadily increasing Internet user base, the country is a gold mine where businesses aggressively fight to gain turf and defend it.
'Land grab'
Tim Smith, a Beijing-based IP lawyer for international law firm Rouse, has a similar take. "What principally motivates companies in China is a 'land grab.' It's a brutal commercial environment and they will do whatever they need to gain commercial territory."
Smith, who has represented recording industry clients in lawsuits against leading search engine Baidu and Yahoo China, says, "They will seek to - as any company would if faced with the same situation - filibuster, slow down, defend as vigorously as they can any proceedings that suggest that their business model is infringing on anybody (else's) rights."
In spite of the challenges, there is no shortage of investors willing to join the Gold Rush.
William Bao Bean, managing director of SingTel Innov8, a Singapore Telecommunications-backed venture capital fund, notes that investors see China as a big pool of profitability, even though innovation may be lacking.
"China is the place where the services are being created, perhaps not the high-level tech, but the services," says Bean. "Talking about regulation and lack of enforcement probably made sense five years ago ... but these days the real focus is on where the value is. For us, we're looking for game-changing technologies out of the US, and we are looking for money-making services out of China."
For investors like Bean, whose fund seeks to discover products and services that SingTel can bring to other markets, what's being created for China can be ideal.
"When a US company comes into China, it tries to take a developed-market service and modify it to become a developing-market service. Whereas (Chinese companies) are developing services based on ... mobile, short messaging and SMS as opposed to e-mail." These services, he says, are easier to transfer to Southeast Asia and Africa, parts of the world where SingTel is present.
A major complaint - and perhaps excuse - among Western firms is the country's weak or underdeveloped regulatory system, particularly in areas such as IP and copyright protection.
While that may be true, Dan Harris, founding partner of Harris & Moure, a boutique law firm specializing in US investments in China, says the entire system needs to be put into context. "Americans are always complaining about the lack of enforcement in China," he says. "But what they really mean by that is, 'The government is not doing enough to stop someone from manufacturing fake Adidas.' Well, in the US the government is not that active either."
Rouse's Smith adds that a lot of the challenge is just a reflection of the sector's immaturity, as was once the case in the US. In the early days of Internet technology, he notes, many top US firms grew their businesses through similar tactics.
Bad behavior
Harris says the Chinese legal system - while generally good at dealing with complaints in a fair manner - is not as effective at penalizing bad behavior.
"The reality is that Chinese courts do not have the same power to enforce judgments as courts in the US do. In the US, if you get a judgment for US$5,000 against a US company and they don't pay, you can bring in the sheriff and start seizing furniture and bank accounts," says Harris. "You can do that in China too, but it's a lot more difficult."
In spite of imperfections, Smith notes that the legal system is increasingly used for conflict resolution in China and proving capable of handling an increased caseload.
"There were 30,000 intellectual property claims filed last year in China. It's the most litigious IP jurisdiction in the world ... but the system is quick. You expect to get a decision in the first instance within six months and on appeal within a year," he says. As more Chinese Internet companies break free of the Gold Rush mentality and begin investing more in R&D and innovation, it is argued that they will seek legal protection for their own IP.
The government may encourage this, Smith notes, since the development of both innovation and a larger domestic consumer market will likely be central pillars of the next five-year plan.
(Reproduced with permission from Knowledge@Wharton, http://www.knowledgeatwharton.com.cn. All rights reserved. Shanghai Daily condensed the article.)
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