Posted on Saturday, January 4, 2003

Technology, weak institutions spawn piracy

By Dave L. Llorito, Research Head

Conclusion

Intellectual property rights infringement in the Philippines — particularly of optical discs — may look like just another case of government not doing enough to stop activities that are patently illegal.

A closer look, however, shows that the problem is more of a clash between rapid technological change and weak, obsolete public institutions rendered more helpless by the cold forces of economics. And it’s a global problem requiring global solutions.

The most relevant questions are: Why is it so easy to pirate optical discs? And why can’t the government deal with piracy effectively? The answer to these two questions lies beyond the country’s borders.

Optical media industry sources say the last decade saw the shift to the use of optical media as a way to distribute copyright products worldwide. Optical media include formats like CD, DVD, CD-ROM, and CD-R. They are called optical media because their content is read by using optical devices, such as a laser.

Apparently, the shift toward the use of optical media came with the overall shift toward digital and electronic formats. In addition, the shift was accelerated by the growing popularity of personal computers and electronic notebooks equipped either with CD-ROM, CD-RW, and DVD drives capable of handling audio-visual and other multi-media content. Technologically, all this made it so easy to copy from material from these formats.

Then the forces of economics came into play. Anticipating rapid growth in PC and electronic sales as well as greater demand for optical devices, entrepreneurs in many countries, particularly Taiwan, invested heavily in industrial facilities for producing blank CD-R and built manufacturing plants to produce pressed CDs. Expansion in production capacity was particularly rapid in Taiwan in 1998 and 1999 when its entrepreneurs opened about 80 factories in anticipation of increased sales with the advent of CD-RW technology.

By 2001, Taiwan alone accounted for three-fourths of the world’s CD-R and CD-RW media. In the same year, the total disc pressing capacity of Taiwan reached eight billion as against its domestic legitimate demand of only 200 million for all discs (See Table 1). For that year, total pressing capacity of Taiwan was equivalent to 52 percent of total world capacity. The production capacity of Taiwan, mainland China and Hong Kong combined reached 83 percent of the global capacity in 2001.

As early as 2000, the optical media industry had started to realize they had a problem, says Melissa J. Perenson, industry analyst for PC World. She says the industry then realized they had surplus of about one billion CD-R discs.

“The small- and medium-size Taiwanese and Hong Kong manufacturers had to sell [CD-R and CD-RW] media below market prices to try to achieve the high sales volumes necessary to recoup their operating costs,” says Peter Brown, removable-storage industry analyst, as quoted by Perenson. “Many of those manufac­turers have gone out of business … because they were losing money or were purchased by larger businesses.”

All these developments brought about two effects. First, the sharp decline in prices of blank CD-R/CD-RW media; and second, the proliferation and the widespread availability of cheap CD-R equipment and high-speed, high-volume burners as well as cheap, second-hand replication equipment.

According to the International Federation of the Phonographic Industries, these two effects have “sharply lowered the barriers to entry for commercial pirates.”

“A typical commercial pirate operation now comprises rows of high-speed CD burner towers stored in a garage or CD-R laboratory,” says the IFPI in its 2002 Music Piracy Report. “[Also], advances in technology have lowered the barriers of entry for pirates [in pressed pirate CD], as less skilled staff are needed.”

It is no wonder why pirated optical discs containing music, movies, business software and applications, and entertainment software, among others, started to flood the Philippine market in the late 1990s. By 2000, one could buy these pirated stuff almost everywhere: in sidewalk and street vendors’ carts, corner stores, malls, and in LRT and MRT stations. Since then, selling pirated optical discs became a “micro-enterprise” for office emplo­yees sell the stuff to officemates during lunch and coffee breaks.

“The problem of piracy really aggravated because of technology itself,” observes a top VRB official. “Now you can copy an optical disc in 15 seconds, five seconds, or less, depending on the machine used.”

Internet aids intellectual piracy

Making the problem worse is the rapid rise of Internet access and the increasing availability of broadband facilities for the Web.

“While broadband offers exciting prospects for the legitimate dissemina­tion of copyrighted materials of all kinds, too often its immediate impact has been to enable online piracy by making it faster and easier to distribute copies of sound recordings, software, videogames, literary material, and increa­singly, even motion pic­tures,” says Eric H. Smith, presi­dent of the Inter­na­tional Intel­lectual Property Alliance, in his letter to the USTR early in 2002.

“Prior to the advent of the Internet, pirates … served mostly local or regional markets … The unprece­dented growth of the Internet, coupled with increased availability of broadband connections, has provided pirates with an even more highly efficient distribution network to the reach global market,” adds Smith.

Internet technology has really helped the pirates a lot because of the abundance of pirated products that can be easily downloaded from the Web. Lawyer Bienvenido A. Marquez of the Quisumbing-Torres Law Office, who specializes in intellectual property rights cases, says there are now about two million Web sites worldwide selling or distributing pirated software. He says 90 percent of the software sold online at auction sites is illegal.

Systemic failure of judicial system

While technological advances have made piracy a lot easier, it made law enforcement even a lot more difficult. This is because when optical disc piracy started to take root in the Philippines sometime in 1999, the country had largely no adequate or effective legal and administrative framework to deal with the problem. In 1998, the Philippine Intellectual Property Code or IP Code came into force but copyright industries claim that the law suffers from ambiguities and is not sufficient to dissuade piracy.

The main complaints of copyright industries abroad has been the lack of an “optical disc law” that should regulate and control production of all kinds of copyrighted materials, and control as well the importation of production equipment and raw materials. The law should also contain requirements for producers of optical discs to use unique source identifiers to enable law enforcers to determine where a pirated disc was produced. Copyright industries claim that it is this absence of regulations on optical disc production equipment that enable pirates to bring in the tools that they use to pirate copyright materials.

Copyright industries in the US particularly disdainful of the country’s “porous borders” brought about by the lack of capability of the Bureau of Customs (BOC) to stop the import and export of pirated products. They were also concerned about how slowly the wheels of the judicial system grind vis-à-vis IPR cases. It also upsets them that there is an utter lack of effective enforcement coordination among the various agencies dealing with IPR protection.

These complaints appear to be valid. For instance, enforcement agencies have con­ducted 121 raids against estab­lish­ments pro­ducing, using or dis­tri­bu­ting pi­rate products in the first nine months of 2002 that netted about five million of pirated copies of motion pictures and 60 stampers. Despite the high number of raids, no one has been charged, no one held in pre-trial detention, no one convicted. In effect, most of the pirates just move to other locations and continue with their illegal activities. This is the reason why, copyright industries think, government actions that consisted mainly of raids have not deterred piracy.

In its Oct. 30, 2002 report to the USTR, IIPA complains: “Problems in enforcement in the Philippines start at the raid and end at senten­cing, whether adminis­trative and judicial. At every step of the way, right holders expe­rience deep frustra­tions. Problems in­clude: leaks by enforcement agencies to the suspect that is the subject of the raid …; delays in obtaining search warrants …; the sale of seized items (pirated goods) by enforcement officials to members of the public; failure of authorities to seize clearly infringing works, or to seize or dismantle machinery used to replicate infringing optical discs.”

“This long list of actual problems … indicates that rights holders encounter a long series of obstacles that make it nearly impossible to move an enforcement case through the system …” the report adds. “This systemic failure to deliver effective enforcement is the best explanation for why piracy is a thriving business throughout the Philippines.”

Global problem

But looking beyond the country’s borders, one could see that it is not just the Philippines where institutions are having difficulties dealing with the pirates.

In fact, much of the world does not yet have any effective regulatory framework capable of tracking optical media production capacity as well as cross-border trade of production equipment and raw materials. Only a few countries impose licensing controls on the operation of optical media mastering and replication facilities. Only recently did China, Bulgaria, Hong Kong, Macau, and Malaysia require licenses and this was due mainly to international pressure. Indonesia, Thailand, and the Philip­pines are still in the process of develo­ping its own regulatory regime.

Based on USTR’s list, countries that have higher piracy rates than the Philippines are Ukraine, Paraguay and China that are in the “priority foreign country” list. On average, piracy rates in these countries average 87 percent in 2001, indicating that about nine out of 10 copyright products sold in these countries are pirated.

Other countries that are in the same category as the Philippines are Argentina, Brazil, Costa Rica, Dominican Republic, Egypt, India, Indonesia, Israel, Kuwait, Lebanon, Russian Federation, South Korea, Taiwan, Turkey, and Uruguay. These are countries that are within the “priority watch list” based on their high rates of piracy. Average rate of piracy in these countries is 64 percent.

Carmen G. Peralta, director of the documentation, information, and technology transfer bureau of the country’s Intellectual Property Office (IPO), says that the information provided by IIPA does not give the whole picture. For instance, it does not include the piracy rates and trade losses experienced by rich countries like the United States, European countries, and Japan.

She says that data provided by the Business Software Alliance, however, show that most of the countries on the priority watch list are not even in the top 10. Indeed, The Manila Times made the computations based on the methodology suggested by Peralta and the results proves her contention.

As shown in Table 2, the highest amount of trade losses suffered by producers of business software are within the borders of the top 20 countries comprised mostly of rich countries including the USA. In this category, the top IPR violators in terms of actual damage to copyright industries are the US, Japan, China, France, Italy, India, Brazil, United Kingdom, Canada, South Korea, Mexico, Hong Kong, the Netherlands, Taiwan, Russia, Spain, Poland, Malaysia, and Australia.  These coun­tries account for 86 percent of the total losses suffered by software companies worldwide. This infor­mation suggests that rich countries, particularly the United States, are just as guilty of widespread IPR violations within their borders.

“So why are they singling out the Philippines?” Peralta complains.

Legal framework

“The legal framework for IPR protection in the Philippines is well in place,” Peralta claims. “The law [referring to the IP Code] is substantially compliant with the Trade-Related Intellectual Rights (Trips) component of the World Trade Organization. We have the right legal infrastructure.”

In terms of the proposed optical disc law and the supposed modernization of the Philippine copyright system, Peralta says that several bills have already been filed in Congress to address the concerns raised by the copyright industries. Congress might eventually pass these laws sometime in 2003.

Also, she stresses that the country has been training a lot of judges so these can handle IPR cases effectively. Nevertheless, she admits that there are weaknesses in enforcement.  These, she explains, are primarily due to financial constraints.

“But then again, the entire govern­ment is short of funds,” she explains. “Besides, IPR is a private right; we only respond to complaints by rights holders.”

There are many cases when, after law enforcers had intercepted or confiscated the pirated products, the complainant would not show up to file the charges. Peralta says this makes their work difficult and leads to law enforcers being hau­led to court by the IPR violators. She stresses that since IPR is a private right, the effectiveness of IPR enforcement really depends on the vigi­lance of the rights holders.

“IPR is like having a plot of land; you have to be vigilant to ensure no one squats on it,” she explains. “Let your guard down and you’ll wake up one day seeing that there are other people occupying it.”

She says that given the complexity of the problem, the ultimate solution to piracy is educating the public to stop buying the pirated products. There will be no piracy where there are no buyers of pirated matter.

For Rafael Ragos, chief of NBI’s IPR division, the information and dissemination campaign should focus on the dangers of pirated and counterfeit products.

His message: “Counterfeiting and piracy is an economic menace. This criminal violation is a threat to life, limb, business, and property … Our music industry and the singers are deprived of their economic gain. The government is deprived of taxes. We buy fake pharmaceuticals that may contribute to the early death of a sick person because often times fake medicines have no efficacy. It is believed that these pharmaceuticals come from Pakistan and India and that this is one source of funding of the al-Qaida … Substandard electrical mate­rials may result to the burning of a building or fire, and more.”

Will Filipinos eventually get this message? Law enforcers hope so. But they also concede that people with less money in their pockets would always be tempted to yield to their economic instincts.

Part 1 | Part 2