This post by Tom Melcher is a few days old, but intriguing enough to dig its way out of my Inbox:

Two of China’s biggest video sharing sites just raised lots of money from prominent American VCs.  Yet these sites publicly admit that almost all of their traffic is due to pirated video.  The same is true for similar websites in the music vertical.  Yet these companies keep getting funded, at amazing valuations.

I find this fascinating. 

If these companies were in the US, they would have a hard time getting funded.  And if they did attract money, they would immediately move to get in compliance.  But in China, widespread piracy seems to be accepted as a “cost of doing business.”  Even though it’s very clear under Chinese law that stealing intellectual property is illegal.

Which makes me wonder: if I worked for the RIAA, IFPI or the MPAA, why would I waste my time meeting with Chinese officials and filing suits in Beijing?  Why wouldn’t I call a press conference in LA to announce a major lawsuit against the name-brand American VCs who are funding Chinese start-ups who steal?  And a parallel lawsuit against the American investment banks who take them public?

Going after VCs from a PR standpoint against IP infringement? I honestly had not heard that before. A+ for creativity.

As to the merits, it’s certainly true that some of the big IP infringers in the West would not be able to get funding from certain sources because of the taint of IP infringement. Pirate Bay comes to mind, although perhaps that is not the best example – those guys are waving the IP infringement flag way out there for everyone to see. They don’t try to hide it, they sell t-shirts with pirates on ‘em for heaven’s sake.

OK, what about YouTube, which was just sued for $1 billion? A significant amount of traffic (don’t know how much) on YouTube is from clips that infringe someone’s copyright. No funding problem there. What’s the difference?

I think platforms that have, or can say they have, a legitimate non-infringing purpose, plus have some sort of reasonable take-down policy, are good enough to pass the smell test and get funding. This is purely a guess on my part but sounds right from a legal due diligence/risk management perspective. Obviously if 98% of a site is infringing content, that probably doesn’t cut it, and if a take-down policy is purely window dressing, a court will not be very forgiving.

Chinese sites can also point to their take-down policies and tout the merits of legal file sharing, and if the agreements they sign with the VCs include standard representations and warranties, the risk will be considered acceptable in the current weak enforcement environment.

Now fast forward a couple of years. If enforcement ratchets up for some reason and a couple of file sharing or video streaming sites have lost some well-publicized civil suits, or have been shut down by the PSB or MII, then that risk equation will change.

There have already been some interesting cases of shut-downs of video steaming sites because of the relatively new Internet A/V Rules. However, you never really get a clear idea of what exactly is going on, certainly not enough information to make an informed judgment for risk assessment purposes — all the chatter today about 56.com is a good case in point as no one knows what’s really happening. For file sharing, there’s a lot less information to go on.