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1

Does weaker copyright mean stronger creative industries? Some lessons from China

Lucy Montgomery, Queensland University of Technology and City University London

Jason Potts, Queensland University of Technology and City University London

Abstract

We review the theory of intellectual property (IP) in the creative industries (CI) from the

evolutionary economic perspective based on evidence from China. We argue that many

current confusions and dysfunctions about IP can be traced to three widely overlooked

aspects of the growth of knowledge context of IP in the CI: (1) the effect of globalization;

(2) the dominating relative economic value of reuse of creative output over monopoly

incentives to create input; and (3) the evolution of business models in response to

institutional change. We conclude that a substantial weakening of copyright will, in

theory, produce positive net public and private gain due to the evolutionary dynamics of

all three dimensions.

Keywords: intellectual property, creative industries, economic evolution, China

1. Introduction

In the second half of the twentieth century ‘core copyright industries’ such as film and

music have been closely associated with a rhetoric that asserts that high levels of

copyright protection are crucial to the existence of and economic contribution made by

this sector of the economy (Boyle 2004). However, countervailing views about the

benefits of intellectual property protection have long existed within the literatures of both

law and economics. The history of intellectual property is one of contestation and debate

over the extent to which the economic and social interests of society are served by

granting a monopoly right to ‘authors’ – individual or institutional.i Boldrin and Levine

(2002, 2005, 2008) argue that there is no economic justification in theory or evidence for

2

intellectual property or, as they call it, ‘intellectual monopoly’ and advocate its complete

abolition. A similar line is taken by Van Schijndel and Smiers (2005) who propose a

radical re-formation of the copyright system that they argue is systematically failing the

creative producers it is intended to support. They argue that entirely new approaches to

ownership, creative production and distribution are needed.

In this article, we seek to buttress the argument for a significant weakening of

copyright. Drawing on our research on the role of copyright in the development of

China’s ii domestic film and music industries and work on economic models of the

creative industries, we explore the role of copyright from an open-system evolutionary

perspective. We argue that western IPR theory fails to recognize the open-system nature

of knowledge growth in the creative industries (CI). Furthermore, overly restrictive IPR

regimes act to prevent interactions between creative producers and restrict access to

creative resources that can be built upon, reducing overall growth effects in the creative

economy. This is particularly evident in a digital environment, where there is potential

for creators to quickly draw upon global pools of material in the production of new works.

We begin with some general observations about the shortcomings of current

approaches to IP. We then examine three important aspects of its role in CI: (1) the effect

of globalization, and specifically the Internet and ICT; (2) the relative economic value of

the reuse of creative output versus monopoly incentives to create input; and (3) the co-

evolution of business models and institutions in response to technological change. We

conclude with discussion of the theoretical relation between IP protection and CI

innovation.

2. Intellectual property law and the creative industries

The Department for Culture, Media and Sport (DCMS) defines the creative industries as

‘those industries based on individual creativity, skill and talent that have the potential to

create wealth and jobs through developing and exploiting intellectual property’ (DCMS

2008). Many industries within the CI definition have traditionally been regarded as ‘core

copyright industries’ – including film, television, music and publishing, as well as

computer software and interactive games (Allen Consulting Group 2001). It is thus

3

tempting to conclude that strengthening the IPR that allow creative goods and

information to be globally traded will help strengthen the CI.iii Yet the global market for

CI products and the apparent need for a single system that makes this trade possible

present major challenges. These are particularly evident in relation to the introduction of

copyright law in developing nations such as the PRC. It is well documented that US-

based copyright industry lobbies have influenced the current international protection

framework (Wang 2003; Arup 2000; Miller et al. 2005). The copyright law now in place

in the PRC and other new signatories to the Agreement on Trade-Related Aspects of

Intellectual Property Rights (TRIPs) reflects values and expectations established in the

United States and Europe.

Even within the United States, copyright is criticized for its inability to deal with

cultural diversity and its propensity to penalize creative traditions that openly embrace

copying as a natural part of creative innovation (Vaidhyanathan 2003: 148). Western

copyright systems have particular, specific ways of dealing with these issues – namely

fair use provisions. However, the question of how comfortably TRIPs-style IP law fits

with indigenous approaches to learning, creativity and the growth of new knowledge in

China remains open. Criticisms of western approaches to IP in the developing world are

also made on grounds of cultural imperialism and IP’s propensity to protect established

owners and exporters at the expense of importing nations and broader ‘public’ interest

(Drahos and Braithwaite 2002; Mertha 2005).

In an era in which content and culture flow globally, copyright faces an almost

impossible task. While international trades in cultural and intangible goods now form an

increasingly valuable portion of the economy, the concepts upon which copyright relies –

‘creativity’ and ‘originality’ – are difficult to transplant into new cultural, economic,

artistic, social and technological contexts (Alford 1995; Liu 2006; Mertha 2005). Given

the power of new technologies to break down physical barriers previously associated with

creation, distribution and use, it is important to thus reconsider the extent to which

copyright is in fact either necessary to, or useful for, the development of the creative

industries.

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3. Economics of intellectual property

The economics of IP are well known and need not be overly rehearsed here.iv The central

argument is that because new ideas are non-rivalrous (Romer 2002), under perfect

competition (price equals marginal cost) equilibrium supply is zero. A competitive

market undersupplies new ideas (Hirshleifer 1971). Intellectual property aims to realign

these incentives by creating an artificial monopoly to enable producers of ideas to capture

monopoly rents that at least cover their fixed costs of production. The standard example

is new drug development, in which fixed (sunk) costs may run to hundreds of millions of

dollars. The benefits of IP are thus the positive supply of a socially valuable good (new

ideas) and the costs relate to induced market distortions (rents). In principle, an optimal

level of IP protection balances these costs and benefits at both micro and aggregate levels

(Gilbert and Shapiro 1990).

However, the economics of IP have come under scrutiny in recent years for two

reasons. The first is the recognition that different industries and sectors use IP in different

ways. Intellectual property in pharmacology (patents) works differently to IP in music

(copyrights). Different kinds of creative activity are associated with sometimes extreme

differences in fixed costs as well as opportunity costs (Tabarrok 2002). Another

important difference is the extent to which different business models may be adopted and

rents created without reliance on IP. Many economists view copyright (especially within

the creative industries) as a pure source of rent and distortion, rather than a solution to the

problem of supply (Klein, Lerner and Murphy 2002; Romer 2002).v

The second reason relates to the arguments advanced by Boldrin and Levine

(2002, 2005, 2008), based on the work of Liebowitz (1985). Boldrin and Levine suggest

that IP needs to be distinguished from intellectual monopoly, particularly with respect to

the right to control subsequent use. As they explain:

Intellectual property has two components. One is the right to own and sell

ideas. The other is the right to control the use of those ideas after sale. The

first, sometimes called the right of first sale, we view as essential. The

5

second, which we refer to as downstream licensing, we view as

economically dangerous. (Boldrin and Levine 2002: 209)

They conclude that copyright is, in most circumstances, a highly inefficient mechanism

for achieving rent creation for idea producers. Our analysis of the effect of copyright in

the creative industries in China supports this view. Indeed, we shall propose three further

economic reasons in support of this theory.

4. Intellectual property in the creative industries

The CI serve as a useful test bed for theoretical developments relating to the role of IP in

a knowledge-based society because they are representative of sectors that are

simultaneously (1) predominantly global; (2) deriving value from the exploitation and

reuse of ideas as much as from the creation of globally novel content and work; and (3)

are part of the attention economy (Lanham 2006) and thus highly flexible in terms of

business models. This might seem a rather narrow set, representing somewhere between

one-twentieth and one-tenth of all economic value creation. But it is also a rapidly

expanding class of activity, growing at about twice the rate of the aggregate economy

(Potts and Cunningham 2008). These three characteristics of the CI raise questions about

how we understand relationships between economics and law in the creative industries.

Debates about the role of IP in the CI bring to the fore an obvious difficulty,

namely that the very definition of CI refers to intellectual property (DCMS 1998). We

think the problem here is in the definition of creative industries: political capture and rent

seeking associated with strengthening of IP law have had a significant effect on the way

CI are conceptualized. While it is not the purpose of this article to engage in definitional

dispute, we do believe that a better definition follows from the set of industries involved

in social network markets (Potts et al. 2008), which are essentially an attention economy,

not a property economy.

6

4.1 Intellectual property in the creative industries is a global issue

While there are many sectors of economic activity that are almost entirely local (e.g.

infrastructure, education, health), the CI are not. This has important consequences for the

economic affects of IP. Most companies and consumers of CI either produce, consume or

both, in global markets. Yet, in doing so, they are governed by national law. Although

efforts have been made to harmonize IP regimes globally, enforcement depends on

nation-based authorities and infrastructure (Liu 2006). This results in differential costs

and benefits that, in effect, make it more profitable, in the language of game theory, to

‘play’ cooperate locally and to ‘play’ defect globally. Intellectual property combined with

global distance thus results in a ‘mixed strategy’. We think the equilibrium of that ‘game’

or strategy set is universal non-cooperation, meaning that the dominant strategy for all

players in a competitive environment is to act ‘as if’ intellectual property was everywhere

weak. The tendency towards this equilibrium point is evident in the creative industries,

which are almost by definition serving global markets (Howkins 2001; De Vany 2004).

CI firms, even small ones, are often ‘born global’: whether in production, markets

or both. While this provides opportunities for value creation in production collaboration

and specialization, along with the general benefits of large markets, it also immediately

involves problems in dealing with IP protection in far-away places where seeking

enforcement may be prohibitively complex or expensive. Thus although firms may be

nominally operating locally under effective (low-cost) IP laws, in their global markets

this is not a given. Rationality therefore dictates a (Nash equilibrium) strategy of

behaving as if they were operating everywhere in the high-cost (weak) IP world. This

gives rise to a curious economic property of the interaction between IP law, global

markets and business strategy, namely that the presence of strong, effective and efficient

IP law may not benefit the creative industries. This is because strong and effective IP law

only matters if it is like that everywhere, i.e. globally. A corollary is that distance costs,

whether spatial, cultural or political, in terms of costs of transactions and enforcement of

property rights will be negligible. Law moves slowly and takes time to harmonize to a

global equilibrium; for the most part, it is in continuous disequilibrium. Therefore, to the

extent that the CI are mostly global, and that global IP law is mostly in disequilibrium

7

(such that ‘distance costs’ remain non-negligible), then we would expect that the

dominant strategy for CI firms to play is the ‘high-cost’ IP strategy: orienting business

models and consumption behaviours ‘as if’ IP was everywhere weak. That is, even when

IP is locally strong, in a global market, producers may still rationally choose strategies ‘as

if’ IP were weak. Strong IP will thus induce distortions that only benefit incumbents and

simultaneously penalize new entrants.

4.2 Incentives for creativity and value from reuse

The creative industries highlight not just the economic value of creativity and origination,

but also the significant economic value created by the reuse of ideas and content. We

suggest that the CI are not so much dealing with new ideas, but with particular

instantiations of new ideas and their reuse. Copyright therefore impacts directly on the

potential for economic activity in the creative industries.

In the economics of ideas and the information, growth and market theory it is

based upon, the focus is on ideas per se rather than the copyrighted work. Yet, copyright

law explicitly focuses on works, not ideas (Deazley 2006: 112). So, in the economic

model, it is the idea-connection that is the source of value (Dopfer and Potts 2008),

whereas in the legal model, it is the instantiation of the idea. The economic model leads

to focus on how to construct incentives to create new ideas. The legal model seeks to

implement these, and to do so by connecting it to cultural, social and political states and

processes.

However, there is also a ‘third’ option, which follows the conjecture that the

novelty creation aspect might not be the most important part. It may not be the reuse of

the idea, but the reuse of the particular instantiation of the idea that has the greatest

social and economic value. It is of course the case that IP law aims to confront this reuse

of instantiations aspect by forcing (market-negotiated) rents on such production situations.

However, this is a market model of reuse in production (as a factor input) or reuse in

consumption (as utility), but not of reuse in innovation, or of reuse in which production is

by definition novelty as, for example, in content production. This is an important and

much overlooked distinction that is highlighted in the creative industries, which while

8

certainly producing value by being creative in the classic sense of producing new ideas

and thus novelty, also produce substantial value through the reuse of content into new

mediums, messages and formats. IP was designed to incentivize value creation driven by

origination and to protect the resultant ‘property’. It was never designed to foster value

creation by reuse (a point also emphasised by Boldrin and Levine (2002)). Yet the value

created in the CI is significantly composed of, if not dominated by, value creation in

reuse.

The original value creation model leads to an exclusive focus on the incentives to

produce new ideas. The economics of IP is therein defined in terms of the trade-off

between creating incentives to introduce new ideas as against the efficiency loss due to

the creation of an artificial monopoly. This situation arises because ideas are non-

rivalrous goods (Romer 2002) with positive and sometimes very high fixed costs and low

marginal costs. Thus, under perfect competition (price equals marginal cost), equilibrium

supply is zero. Yet the production of new ideas always generates a net social benefit due

to the spill-over effects of these ideas. This classic ‘market failure’ argument is then

resolved in one of two ways: (1) public funding of the production of ideas; or (2) the

creation of artificial imperfect competition in the form of a temporary monopoly to

enable the idea producer to recoup, through monopoly rents, the fixed cost of production.

Intellectual property is obviously the latter path, and widely favoured over option (1)

because it preserves market incentives.

Most economists accept this as the full and proper analysis of IP in relation to

new ideas. The reuse issue is simply a derivative concept that implies resolution through

the existence of a secondary market. IP law follows the economists on this and intervenes

only to create a raft of possible exceptions. It is our view, however, that the CI effectively

demonstrate the implications of the opposite of this model, namely of a world in which

most economic value comes from reuse, which can occur in many different ways, and

over which many different business models may apply. The creative industries thus

illustrate several key points.

First, creativity is not in short supply; it is not incentive constrained under perfect

competition. The standard market failure model argues that under perfect competition,

9

sunk fixed costs of production and low marginal costs of replication, we should expect to

see zero or low creative supply. We should expect to observe a positive correlation

between strength of intellectual property and creative supply. Yet while that may be the

case in some industries (e.g. pharmaceuticals, nanotechnology, etc.), it is manifestly not

the case in the CI.vi In fact the problem is effectively the opposite: namely, an over-

supply of creative input, not because of, but in spite of IP and due, rather, to the shifting

opportunity costs of creative behaviour as incomes rise and the tools for creative

production become mass-adopted consumer goods rather than specialized industrial

capital (Towse 2001).

Second, the economic value of a novel idea is utterly dominated by reuse through

diffusion and adaptation. It is exceedingly rare (outside of pharmacology and

biotechnology) for a novel idea to be complete at first instantiation and not then subject

to ongoing adaptation and further modification through subsequent development to new

contexts and new applications. Pure unadulterated diffusion is uncommon, and soon

disappears as the time scale of analysis is extended. The creative industries are particular

exemplars of this general principle of the growth of knowledge because they exhibit this

principle on very short as well as long time scales.

Third, there are both private and public gains to reuse. The private gains accrue to

the production of communication in which the identity of the original source is itself a

source of value due to the social network prominence of the selected instance of reuse.

The classic academic example of reuse is referenced quotation, which is a paradigmatic

model of the value of reuse in a native social and cultural context. Explicit laws are

unnecessary to enforce this intellectual property. Reuse thus functions publicly as a

private good, and vice versa.

Fourth, there are diversity and entrepreneurship arguments to reuse. On the face

of it, reuse would seem to represent a species of replication that dynamically considered

would drive standardization towards uniformity as reuse predominates with increasing

returns. Yet reality is different because each instance of reuse occurs within individual

minds or agents that have particular, and often unique, systems of other ideas that the

reused idea will be combined with. The net result is that reuse of a particular idea-

10

actualization will interact with extant variety in ‘hosts’ so as to produce increased variety.

And with that comes exploration of entrepreneurial opportunity space, which is

simultaneously a private and public good. Examples of this in creative industries, from

jazz music to YouTube, are almost definitional.

Fifth, reuse ‘feeds-forward’ into other industries as a form of knowledge spill-

over. This argument is strongest in the general sense of flow of ideas from one domain to

another (e.g. from ideas about chemistry, and its industries, to ideas about biology, and its

industries). But it can also occur in the context of instantiated content and its industrial

flows or, as often, transmogrifications. This can be autocatalytic, as when visual art is

used in visual art, as well as being exocatalytic, to coin a term, as when content in one

domain is reused in another, as when visual art is used in advertising, or when music is

used in performance. The creative industries, while being as autocatalytic as any industry,

in the sense that its current technologies and markets shape the development of its future

technologies and markets, are unusually dominated by exocatalytic reactions in which

contiguous developments across industries and markets are as important, if not more

important, than past paths within industries and markets. Reuse thus generates a new, and

as yet unanalysed, kind of economic and sociocultural dynamic in the form of increasing

returns through such exocatalytic reactions. Indeed, with respect to the infusion of

cultural content into economic production, this may well be the primary mechanism

underlying the growth effects of the creative industries (Potts and Cunningham 2008).

Sixth, there are consumer co-creation arguments to reuse that also associate with

culture, identity and situated knowledge arguments (Potts et al. 2008). Open innovation

and production models rely on, and indeed exploit, the reuse of knowledge and in doing

so explore the space of possible business models premised on such assumptions. Some

practical reuse solutions to the restrictive nature of copyright in a digital environment

have already been found – notably the General Public Licence (GPL) and Creative

Commons (CC). Yet efforts to harmonize the creative and collaborative potential of new

technologies with existing copyright frameworks do not solve the broader problems

associated with the framework itself. The ability to easily build on the creative works of

others and to draw on a global pool of content (both instances of reuse), is potentially the

most powerful benefit of the Internet for creative workers and industries. Movements

11

such as CC provide opportunities for creators to make, share and remix works legally

through the application of easy-to-understand licences and metadata that ensures that the

terms upon which a work can be used are easily identified. While CC licences assist

amateur creators in asserting their right to decide the terms on which their work is used,

they do little to lessen the separation between creative resources generated by amateurs

and the commercial potential that entrepreneurs and the business community are

interested in.vii A more radical reformulation of copyright to allow reuse of content by

both amateurs and commercially focused creative entrepreneurs would thus seem to be a

potentially valuable advance.viii

What these arguments amount to is the notion that the reuse of ideas is the

overwhelmingly dominant source of value creation of ideas, and that while there is of

course no reuse of an idea without the initial creation of the idea, any legal or economic

argument about the value of new ideas needs to plainly recognize that this value is not

instantaneously created at the point of origination but accrues through the ongoing

process of adoption and adaptation (Dopfer and Potts 2008), a process that creates the

value of the idea through its catalytic effect in reuse over and above its germinal effect in

origination.

4.3 Business models adapt to legal systems

Our third point is that business models adapt to legal and other institutional systems.

Exploring the mechanisms that are allowing creative industries to emerge in nations with

weak copyright systems will thus be vital to understanding the role of IP in the contexts

of globalization and new digital potentials. ix Preliminary examination of the music

industry in China suggests that business models and industry structures do evolve to fit

the environment within which they must function. Although business models and legal

systems co-evolve, legislative reform often takes decades, while business models and

industry structures regularly respond much faster. The PRC provides an excellent

comparative perspective for scholars hoping to better understand this process. Although

media control and censorship remain important factors, commercialization of the cultural

sector, rapid adoption of new technologies and low levels of copyright enforcement are

12

resulting in novel approaches to the commercialization of content. In order to succeed,

businesses in China are developing strategies for operating in a context of very high

levels of copyright violation.x

We advance this as a further argument that IP may matter less to CI development

than previously assumed because, as China highlights, business models are very good at

adapting to the legal, social and technological contexts within which money might be

made. As new technologies and globalization increase levels of connectivity among both

consumers and creators, approaches developing in China may well turn out to be at the

vanguard of content monetization in a digital age. In turn, business models that have

evolved under strong IP regimes may now be at a strategic disadvantage in a global

environment. China thus offers an exemplary opportunity to study the relationship

between IP and the growth of CI.

The difficulties associated with attempting to control unauthorised copying and

distribution of music in China are playing an important role in the growth of a ‘music

industry’ in which record labels licensing copyright in music recordings are by no means

dominant players. Labels are being forced to rely on artist management and advertising to

generate revenue and royalties from the sale of physical copies of music play a relatively

small role in music-related income. Control of physical infrastructures for the efficient

distribution of music and music-related services, such as mobile phone networks, are

emerging as the most important factor in an ability to establish a dominant position

within the industry.

Technological change is exogenous, continuous and unpredictable. Yet business

models are endogenous, discrete and manageable, although always experimental at some

frontier. This is why business models adapt to exogenous events such as new technology,

which often happens fast, as well as to new law, which often happens slowly, in similar

ways (Beinhocker 2006). Business models are a form of (social) technology widely

overlooked both by economists and legal theorists. Yet this dynamic is precisely the

variable that makes every particular configuration of IPR institutions optimal under some

conditions. It is widely assumed that ‘the market’ executes this function, which it does,

but it is the adaptation of business models that is the market dynamic that produces this

13

result. Without business model adaptation, in other words, it really would be the case that

different IP laws mattered. Yet with business model adaptation, the converse follows: IP

laws do not matter if business models can change faster, more effectively and more

efficiently than legislation. Compare, then, the development of business models in the

United States and China within the same industry. In the early days of recorded music in

the United States highly specialized equipment was required to turn sounds into physical

products that could be sold in a mass market. Making multiple copies required hardware

that was not widely available, and so the production and distribution of music ‘products’

– physical copies of recordings – could generally be controlled and monitored (Gronow

et al. 1999). The creation of ‘neighbouring rights’ – which allowed labels to own the

copyright in sound recording they had commissioned (Laing 2002: 185) created

commercial opportunities for businesses willing to invest in the production and

promotion of music that could be sold to a mass market: record labels.

The dominant business model in the recorded music industry in the second half of

the twentieth century was based around record labels providing artists with access to

recording equipment, mass production and distribution channels, marketing and

promotion services, and remunerating them on a royalty basis. Artists received income

(and still do) on a royalty basis. Two factors were critical to the emergence of this

industry structure: the existence of assignable copyrights in sound recordings (Laing

2002: 185) and physical technologies that made controlled mass production and

distribution of music possible (Bettig 1996). Although developments in physical

technology, such as cassette tapes and recorders, presented challenges to the industry’s

ability to control copying, these changes occurred after markets, industry structures,

professional organizations and group collection infrastructures had become established.

As such, the industry was generally able to respond in a systematic way and incremental

developments in analogue technologies of copying did little to disrupt its overall structure

(Frith 2004).xi

In China, on the other hand, technologies for mass reproduction and consumption

of recorded music became available in the absence of copyright law, an organized

domestic music industry or clear legitimate channels for the distribution of most foreign

content. These technologies also became available as China was transitioning from a

14

planned economy to a market system. High levels of demand for popular music,

combined with readily available technologies for mass reproduction and consumption and

an absence of legitimate distribution channels contributed significantly to the rise of a

black market in music products and highly sophisticated illegal distribution networks (de

Kloet 2002). xii The Internet, personal computers and cheap MP3 players have

compounded the difficulties associated with controlling distribution: technologies that are

challenging approaches to the control and monetization of content globally.xiii It has been

estimated that most music downloaded from the Internet on to personal computers or

portable devices such as MP3 players occurs without permission from or payment to

copyright owners (Daniel 2007; Music 2.0 2008). As demand evolves, so does supply.

Not only are new technologies being adopted with enormous speed across China,

they are being embraced fastest by groups traditionally considered most likely to pay for

music. Young, educated city-dwellers with relatively high disposable incomes are now

the group most likely to have access to broadband Internet connections, MP3 players and

next-generation mobile devices (Kuo 31 October 2007 interview; CNNIC 2008).

Although the structures that define China’s commercial music industry are still

crystallizing, it is already possible to see important differences between the way it has

functioned in the West and the way that it is functioning in China. The Chinese

government has been reluctant to abandon cultural policies that place heavy emphasis on

the pedagogical and political role of cultural activities, often to the detriment of firms

operating in the emerging cultural industries. xiv In spite of this, opportunities for

commercially driven cultural industries are increasing (Liao 2006).

Baranovitch (2003) argues that the Chinese government’s monopoly control of

broadcast media, combined with ubiquitous piracy, has ensured that the state has been

able to maintain enormous power over the development of the domestic music industry.

Low levels of copyright enforcement have meant that musicians have been unable to

survive on album royalties. Instead, they have been forced to rely on concerts and

personal appearances for a large portion of their income. Because government approval is

required for large concerts, and the state continues to dominate the broadcast media,

China’s authorities have been able to exercise enormous control over mass publicity and

income-generating opportunities for musicians. Although alternative material – some of it

15

dealing with politically sensitive topics – is available in China, its mass impact has been

limited by a lack of access to promotional channels (Baranovitch 2003: 271). However,

while political sensitivities are still a factor,xv people are making and consuming music

widely, and businesses are finding ways to generate income around these activities.

Policies originally intended to control heterodox content in China have had another

important impact. It is arguable that they have created barriers to the legitimate domestic

market for foreign content producers, increasing incentives for the production of

domestic content and reduced foreign competition. In order to release an album, domestic

artists require a ‘publishing number’, which can only be obtained through a licensed

publishing company. Foreign companies cannot obtain a publishing licence, and so they

have no choice but to collaborate with a Chinese partner in order to distribute music.

Foreign albums must apply for pre-release censorship by the Ministry of Culture – a

process that takes significantly longer than simply applying for a publishing number from

a licensed distributor (Zhao, 9 August 2005 interview). In 2005, Huayi Music noted that

this had been a factor in their decision to concentrate on local music (Zhao, 9 August

2005 interview). There can be little doubt that policies ostensibly intended to prevent

heterodox content from being distributed are having more impact on the commercial

viability of some forms of content than on the population’s ability to obtain unapproved

material. As ‘piracy’ figures attest, unauthorized distribution remains the biggest source

of popular music. However, within the legitimate market, domestic artists are making the

greatest headway. It is estimated that international artists still account for less than 10 per

cent of the overall digital revenue of major labels operating in China (Daniel 2007).

This is an obvious source of frustration for international record label executives

and the governments of nations such as the United States, which possess established

copyright export industries.xvi But the success of China’s domestic music industry within

its own market might also be viewed as an encouraging sign by those who had feared that

the expansion of western-style intellectual property systems would have a negative

impact on the domestic cultural industries of developing countries, re-enforcing the

global dominance of established cultural exporters (Drahos and Braithwaite 2002; Arup

2000).

16

Why have the experience and accumulated content owned by major international

record labels counted for so little in China? Cultural policies that favour local content

have undoubtedly played an important role. However, business models that rely heavily

on public performance and personal appearances, and which are unlikely to produce

revenue on a large scale from the sale of physical units, provide limited opportunities for

international labels hoping to break into the Chinese market. Few established western

artists are willing to devote large amounts of time to concerts and advertising within

China – which is rarely viewed as a core market. Opportunities for concerts are subject to

censorship and control,xvii and, in any case, most contracts signed by artists with major

international labels do not include artist management or concert revenue. Even for

Chinese musicians and labels, public appearances can be difficult to manage and present

scalability problems (Zhao 2005).

This situation has provided Chinese businesses with an advantage. While major

international labels have been unwilling to invest heavily in the promotion of

international artists in a market where returns cannot be guaranteed, local artists and

labels have been developing business strategies capable of generating income in spite of

political sensitivities and very high levels of piracy. One strategy has been to rely on

personal appearances by artists, which cannot be replicated. As a result, there is less

emphasis on producing popular albums and more emphasis on gaining popularity and

profile through single hits that lead to lucrative product endorsement and live appearance

or performance deals (Wang, 2 August 2005 interview). However, even for Chinese

labels, relying on personal appearance and advertising revenue presents practical

problems, including limited scalability and continuing sensitivity over large popular

music events (China Music Radar 2008). Furthermore, advertising and personal

appearances are difficult to reconcile with the ‘long tail’ approach, which, in other

markets, allows back catalogues to continue generating revenue for labels and artists long

after the artist has been eclipsed by the latest trend.

The distribution of music to mobile devices is quickly becoming one of the most

significant sites of economic activity associated with music in China (Yao 2007). Just as

analogue technologies allowed a limited number of firms in Europe and the United States

to control the physical production and mass distribution of music for much of the

17

twentieth century, mobile networks make it possible for a few key players to control

distribution of content to mobile devices.xviii In other markets, record labels emerged as

the most powerful group in the western recorded music industry, controlling access to

capital, production of physical music products and distribution channels. In China,

mobile operators are on track to play a similar role. Mobile distribution has the added

advantage of providing access to new consumer groups: lower income demographics and

young people living outside ‘first-tier’ cities – reported to be among the highest spenders

on CDs and audio-cassettes (St Maurice and Wu 2006).

Rather than falling victim to globally dominant exporters of IP, China’s domestic

music industry is successfully building a market for local content, using the legacies of

censorship and cultural control to its advantage. The result is a dynamic industry that is

actively exploring the potential of new markets. However, we note that the existence of a

formal copyright law that allows creators to license their works to record labels and

mobile operators is playing a role in the development of the mobile music market. The

importance of a technological means of controlling access to content and collecting

micro-payments for use seems equally obvious in China, and may provide important

lessons for legal and cultural theorists eager to see successful approaches to

commercialization of culture that do not rely on monopoly structures (Montgomery 2005,

2007).

All rent seeking thus involves, in some way or other, the tacit presumption that

business models are parametric, like law. This is of course no less true in the creative

industries as in other industries. Yet the creative industries present much clearer

examples of the rejection of this assumption because, simply, they do it so often. Instead,

once we recognize that business models are not parameters about which law seeks to

form and solidify, but rather continually adaptive technologies that take particular

structures of law as aspects of the business environment, we arrive at a much clearer

perspective on the relation of intellectual property to economic systems: namely

economic systems always adapt to legal systems. In consequence, IP law does not really

matter; yet for a given IP law, what matters is who is most adapted to its weakest versions.

And that has been with the central lesson of our case study of China’s creative industries.

Strong competitive advantage thus flows from weak, not strong, IP environments.

18

5. Conclusion

Given two environments – a weak IP regime and a strong IP regime – we have argued

that the weak IP regime is evolutionarily superior, in that it advances operational value

over: (1) the prospects of global value added; (2) over the incentive to reuse ideas; and (3)

business model adaptation. Our argument, illustrated by a case study on China’s creative

industries, is that a weak IP regime can act as a competitive strength, both for producers

and consumers. Our model of globalization thus emphasized the strategic implications of

other nations not having the same high standards of IP protection and efficacy of use. Our

model of reuse sought to emphasize the economic value of incentives to reuse as

compared with the economic incentives to creation. We argued that in the creative

industries the reuse value of not just ideas but instantiations is both publicly and privately

much larger than the potential loss of novelty creation through weaker IP regimes (as

artificial monopoly). We then argued that business models adapt faster than institutions

of IP, and that this ordering determines dynamic outcomes. In effect, any IP regime will

appear optimal under some adapted set of business models. In this case, the argument for

optimality must favour weaker, i.e. less constraining, IP regimes. Adaptation of business

models thus mitigates many of the arguments for stronger or particular IP regimes.

We conclude that the creative industries are a special but illustrative case, because

their key properties – in relation to global context, knowledge reuse and adaptive

business models – are properties that are likely to become more common throughout the

economy, not less common. Our tentative conclusion is that the creative industries in

theory, as illustrated with supporting evidence from China, have far less reliance on

intellectual property than hitherto assumed. For empirical reasons, we reject the

hypothesis that stronger IP is the pathway to economic growth. Instead, we argue that

weaker IP is a much-overlooked source of evolutionary development.

Note

An earlier version of this article was presented at ‘The Creative Industries and

Intellectual Property’ conference, 22–23 May 2008, Birkbeck College, University of

London.

19

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List of interviews

Chillout, J. (3 August 2005), Manager/Producer, Newbees Music Production Company, interview with Lucy Montgomery, Beijing.

Huang, B. (10 August 2005), Marketing and Business Development Director, Warner Music China, interview with Lucy Montgomery, Beijing.

Ke, S. (17 May 2005), Managing Director, Taihe Media and Music Entertainment Company, interview with Lucy Montgomery, Beijing.

Kuo, K. (31 October 2007), Group Director for Digital Media, Ogilvy, interview with Lucy Montgomery, Beijing.

Wang, J. (2 August 2005), Deputy Channel Director, Easy FM, China Radio International, interview with Lucy Montgomery, Beijing.

Xu, L. (14 June 2005), Vice-President, Huayi Brothers Film Investment Company, interview with Lucy Montgomery, Beijing.

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Zhao, D. (9 August 2005), Vice-General Manager, Huayi Music, interview with Lucy Montgomery, Beijing.

Contributors’ details

Lucy Montgomery is a post-doctoral research fellow in the ARC Federation Fellowship program at the ARC Centre of Excellence for Creative Industries and Innovation, Queensland University of Technology and an honorary visiting research fellow at City University London. E-mail: lucy.montgomery@qut.edu.au She is currently based at City University London, Northampton Square, London EC1V 0HB. Jason Potts is an evolutionary economist at the ARC Centre of Excellence for Creative Industries and Innovation, Queensland University of Technology and an honorary visiting senior research fellow at City University London. E-mail: j.potts@qut.edu.au Jason is currently located at Queensland University of Technology, Creative Industries Precinct, Z1 - 515 Musk Ave, Kelvin Grove, Brisbane 4059.

i An excellent discussion of this history can be found in Deazley (2006). ii In this paper ‘China’ refers to the People’s Republic of China (PRC). iii Wang (2003), for example, argues that copyright is crucial to the proper functioning of the global information economy, and piracy is the single greatest threat to industries that rely on copyright. The opposite case it put by Raustiala and Sprigman (2006). iv An excellent survey can be found in Dixon and Greenhalgh (2002). v It is noteworthy that a parallel debate is occurring with the study of the economics of ‘open-source’ production and innovation (see Lerner and Tirole 2002). vi The recording industry is a perfect example of this phenomenon. In spite of the fact that it is routinely accepted that at least 90 per cent of artists signed to major labels will not generate a profit from albums, there remains an ample supply of popular music hopefuls. See Jones (2002). vii Presently, a large proportion of CC users choose to apply non-commercial licences to their work (Creative Commons 2008). For critiques of CC non-commercial licences see Moller (2005) and Hanckock (2006). viii Lessig also argues for a more radical reformulation of copyright, and suggests CC as a solution capable of functioning within current laws. ix A useful comparison is between China at present and Germany in the nineteenth century (Boldrin and Levine 2008), both of which exhibited weak IP regimes, yet were heavy adopters and importers of IP (both legally and illegally). x Search engines, web-based companies of all descriptions, ISPs, advertising firms and distributors of ‘pirate’ material in hard-media formats in the PRC have come under sustained attack for profiting, either directly or indirectly, from copyright ‘theft’. However, we suggest that a well-balanced debate about the economic costs and benefits of a copyright system must reasonably take into account overall growth effects and emerging business models associated with the use of content, legally or otherwise. xi Digital technologies and the Internet have had a much greater impact on the industry. Peer-to-peer file sharing has allowed consumers to circumvent centralized distribution models, challenging copyright owners’ ability to control and monitor copying and distribution.

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xii It has been estimated that levels of copyright violation remain as high as 95 per cent (MPAA 2004; Ke, 17 May 2005 interview; Chillout, 3 August 2005 interview; Xu, 14 June 2005 interview). xiii In 2007, 2.9 million MP3 players were sold in China (CCID 2008). xiv The impact of restrictive cultural policies is not limited to the music industry. It is also felt in film, television and book publishing. xv According to Jade Wang, Deputy Channel Director of Easy FM – a music programme broadcast by China Radio International, although a state-driven music sector still exists, it is largely distinct from the commercially driven popular music industry (Wang, 2 August 2005 interview). xvi The US government has repeatedly condemned China for its failure to better enforce copyright. See, for example, 2005 Special 301 Report (United States Trade Representative 2005). xvii The Western media widely reported the 17 July 2008 announcement by the Ministry of Culture that the political backgrounds of foreign performers would be checked, and those deemed a threat to China’s sovereignty would be banned. See Coonan (2008). xviii According to Kaiser Kuo, founding member of Tang Dynasty, often credited with being the country’s first heavy metal band: ‘[Labels] have a very different job here. Their job now needs to be entirely focused on digital and they should be looking toward full song mobile downloads’ (Kuo, 31 October 2007 interview). Search engines – groups who also control a key channelling point in a digital environment – are also flexing their muscles in China (Zhang 2007).