Last week, Microsoft announced a cooperation agreement with the city of Hangzhou that would, among other things, boost IPR enforcement. Since the announcement was made, I’ve been trying to figure out whether this was a good thing or a bad thing. Before I get to that, some facts are in order.

From the AFP story:

Microsoft and authorities in a Chinese city have linked up in the US giant’s latest bid to fight rampant software piracy in the key Asian market.

The deal, which the company hopes to be a model for other cities, will see it help Hangzhou develop its IT industry, while officials will encourage the use of genuine software by consumers, government agencies and enterprises.

[Microsoft's Alec] Cooper said Microsoft and Hangzhou city would initiate steps such as rewarding enterprises that use legal software, and making sure all schools and PC shopping centres in the city are free from counterfeit software.

My initial reaction to this concerned two issues. First, what did Microsoft need to give up to get these concessions, and was it worth it? Second, what was Hangzhou really obliged to do here, and could they deliver?

In the meantime, I came across some commentary on the China Economic Review blog, the author of which seemed to have the same concerns:

Hangzhou will crack down on counterfeiting of Microsoft products in return for deep discounts on those products, and a sizable (though undisclosed) investment in the city that will include the building of new technology centers. The hope is that Hangzhou will set an example for other cities that are vying to become technology hubs – thus stemming piracy from the ground up rather than the top down.

Okay, CER gives us a little more information to deal with. As I expected, Microsoft is on the hook for a certain amount of investment (read pay off) into Hangzhou. Offering to discount products is more surprising to me.

Quite a few problems here:

1. Can Hangzhou deliver on its promises? What does cracking down on Microsoft IP infringement really mean? Will the company be looking at infringement statistics in the area as a measure of success? How accurate are those stats anyway? Will they be looking instead at sales figures, and is that in any way a reliable yardstick?

2. What does Microsoft consider to be the largest problems here? Do they want to go after large vendors through criminal actions? Will the city help with that? Do they want more resources for copyright authorities, AIC, PSB, judicial training, etc.?

3. If Microsoft ends up paying money to the city in return for a shifting of public resources towards a specific goal, perhaps one that narrowly benefits Microsoft more than anyone else, is that a good idea? Not only do I see this as a problem for Microsoft (they really can’t expect to travel across the country buying local government cooperation), I’m not sure it’s such a good idea with respect to governance. We are essentially talking about a private enterprise forcing government policy via a quid pro quo in the form of sizable investments. I know, this is nothing new, but the way this is being done right out in the open is a bit startling.

4. I’m also not sure this sets a good precedent with respect to federal/central government policy. If private companies start “sponsoring” IP enforcement activities, this may ease some pressure from a resources point of view on other parts of the government. I don’t think that’s helpful in the long run (i.e. if I’m a legislator, maybe I’ll respond by slashing budgets and let private companies pick up the slack).

5. Finally, and this is merely a private enterprise issue, Microsoft runs the risk of having a patchwork of pricing systems around the country if they expand this program. I think this is untenable and would create huge business problems.

The CER take on all of this pretty much follows my mixed feelings:

Will it work? Who knows? There are issues of scalability in this strategy. In how many cities can Microsoft build new technology centers? And the plan does have the ring of “we will pay you to stop stealing from us.” Then again, the previous strategy hasn’t exactly been gangbusters. Furthermore, as anyone in the IPR field will tell you, the problem with IPR infringement in China isn’t central government support, but rather the lack of local enforcement. Co-opting the cities to protect your brand from IPR infringement, in theory at least, is one way to incentivize IPR protection at the grassroots.

So ultimately is it a good idea? Very hard to say. Microsoft has had a very turbulent history in China in enforcing its IP. I’ve written about this several times over the past few years, being critical or sympathetic as the situation warranted.

I think they’ve gotten their act together quite a bit recently, and I’ve defended the “black screen of death” tech-based solution and applauded successes on both the government procurement and PC manufacturer software installation campaigns. Piracy rates have gone down significantly as a result, although of course as with any digital media, current rates are still skyhigh.

Maybe this local government approach is the next best thing. If this is just one of several new initiatives that Microsoft will be rolling out to combat piracy in China, and this approach will remain limited to areas where the company wants to make major investments, then maybe the downside is limited. However, if this is a pilot project that would be expanded on a large scale if successful, then I have serious doubts.

By the way, there is a lot going on out there in this area, including initiatives in the private sector, the public sector, and through cooperative efforts. Just today I had a conversation with a friend who runs an IT company in Shanghai. He had been in contact recently with the local tax authorities regarding their new online services. In discussing the government’s capabilities in this area (specifically which operating system could be used), the government official bluntly informed him that if the company wished to utilize the online system, they better make sure that they were running a licensed/legal copy of Windows XP.

I don’t think the tax bureau has any enforcement capabilities in this area, but the fact that this discussion took place surprised me and made me slightly more optimistic than I usually am when considering the future of IP protection for digital media.