Innovation's Crouching Tiger (Second Edition)

新創臥虎(第二版國際英文版)

Jili Chung, 鐘基立

• Publisher: EHGBooks
• Year: 2020
• eBook ISBN: 9781647844080
• Edition: 2
• Topic: Law
• Subtopic: Intellectual Property Law
• Index: Law

Chapter 1 IP Monetization in China: An Overview

Chapter 1 IP Monetization in China: An Overview

.1. The Formation of Sizable IP Pools

China is well-known for its large population, consumption, and foreign exchange reserves, among many other economic facts. Small variations to the large volume of these economic factors often cause changes of a magnitude that makes the global economy take notice.

This dynamic of small shifts causing changes in a large sector of the economy holds true for the IP sector too. This is good news for IP monetization. The voluminous base of IP may serve as a potential “IP pool” for monetization deals and to increase the value in the value chain activities. The sizable volume can best be understood through a comparison with other global players illustrated in chart 1.

At the global level, the volume is also growing astonishingly quickly. This is happening not only in China’s total numbers but is also true for certain industries, a fact that has strategic implications for the next generation of technologies.

At the industrial level, patents relating to the application of AI and big data in financial technology (fintech) provide an example. Fintech will serve as an essential part of modern service industries in the coming years. Those who dominate fintech will most likely extract the greatest value from the sector’s robust growth. The statistics in chart 2 show more than three Chinese players (i.e. PingAn, Alibaba, and Tencent) who have occupied a strategic position through their accumulation of patents in these areas.

Chart 1: Worldwide Invention Patent Application Filing Trends Report (2004-2017)

Chart 2: The Top Twenty Companies by Fintech Patent Application Number (2018)

.2. The IP Pledge

The IP pledge uses IP, such as a patent or trademark rights, as collateral for a loan; see Part II for a detailed definition and illustration. It is an important tool for structuring IP monetization. Patent, trademark, and copyright pledges all work similarly, as loan collateral. Both the volume and complexity of IP pledge deals in China have been increasing in recent years. The summary below shows the big picture.

The Patent Pledge

• In 2017, 14,144 patent pledge transactions were recorded and continued to grow in the following years.¹
• In 2019, the accumulated loan balance collateralized by patent pledges reached CN¥110 billion.²
• The number of enterprises filing patents increased from approximately 1,000 in 2013 to 2,000 in 2015. In 2017, the number increased to 2,300.³
• During the five years prior to 2014, the annual growth rate of the accumulated loan balance was about 100%. The growth rate slowed from 2015 through 2019 but remains robust.
• After some debate on the practice of the patent pledge and correction of the development direction from 2017 to 2019, the relevant regimes have undergone certain reforms and again demonstrate high growth potential. A more in-depth analysis of the implications for IP monetization is provided in Part II.

The Trademark Pledge

• Accumulated loan balance in 2019: CN¥41 billion.⁴
• Making a trademark pledge is a common practice in China.
• The average size of a loan using trademark rights as collateral: CN¥1 million.
• Largest loan on record: CN¥200 million (the underlying pledged trademark right in this loan is assessed at CN¥5 billion).

The Copyright Pledge

• In 2018, the accumulated loan amount backed up by copyright pledges totaled to CN¥84 billion in 380 transactions. This consisted of software copyright pledges for CN¥47 billion in under 350 transactions and pledges of non-software copyright work for CN¥37 billion in under 50 transactions.⁵
• The copyright pledge is common for television and movie production, cultural and creative industries. To name just a few:

- As early as 2005, the movie Curse of the Gold Flower⁶ secured a loan of US$10 million with collateral of the pre-sale contract of the box office (i.e., the rights to the sales revenue under the pre-sale contracts, a form of royalties derived by the copyright, are pledged to the lender).

- In 2007, the movie Assembly⁷ secured a CN¥500 million loan with IP as collateral in its early stage of production.

- In 2008, the Beijing municipal government launched a pilot program for copyright pledges. Three major market players⁸ secured packaged loans with the collateral of a joint IP pool formed by their underlying copyrights.

The trajectory is clear: massive growth in IP pledges with underlying government support.

1.3. The Tracks of Experimentation in Novel IP Financing

.3.1. The IP pledges

As mentioned above, the IP pledge is an important tool for IP monetization and is growing in China. The following three models have become commonplace for copyright and trademark pledges：

• Pledge the IP directly to the lending bank.
• Pledge the IP to a guaranty company, who provides financing to the IP owner.
• Pledge the IP to a guarantor who guarantees the IP owners will repay the loan to the bank.

These models are also utilized in the pledges of patents. Patent pledges are more challenging than copyright and trademark pledges for reasons detailed in Part II. However, they also present new opportunities for IP monetization.

.3.2. The monetization of future IP

In 2008, Huayi Brothers Media Corporation⁹ planned to shoot 14 TV serials. To finance this project, Huayi and the lending bank worked out a creative structure for financing. As collateral for the loan, Huayi pledged the scripts and copyrights in development but that were not yet completed, meaning that the collateral was IP yet to be created, thereby monetizing “future IP”. The deal worked. This became a novel model for IP monetization.

Observers consider the success of this transaction a positive sign. It signals that the legal regime and markets are respectful of the parties’ autonomy. It also suggests a lenient attitude towards experimenting with IP monetization in China.¹⁰

.3.3. IP monetization through crowdfunding

Seven years after that creative trial, in 2015 the legendary blockbuster Monkey King: The Hero is Back¹¹ set a new milestone for IP monetization in China.

The movie producer made good use of two IP monetization tools created in the internet era: crowdfunding and social media.

It is easy to understand how crowdfunding played a role in this IP monetization deal. The practice is the same in China as in other countries. However, it is quite amazing how social media contributes to IP monetization from the point of view of financing, promotion, and regulatory compliance.

Social media, combined with crowdfunding, provided a platform for more than 100 people to invest in this project. They shared the securitized interest in box office proceeds of CN¥300 million, as well as future royalties from derivative products and other licensing activities of the underlying IP. More analysis and details of this case are provided in Part II.

Case Study 1 FEATURE ARTICLE: How Social Media Is Fueling IP Monetization in China^12 This August, The New York Times featured a profile of WeChat^13, describing how it has changed people’s everyday life in China and created a new profit model envied by its foreign precursors, including Facebook and Line. The story balanced the positive news with a warning that this form of convenience comes at a cost to the privacy of individual users. The story did not go into a phenomenon that may be of interest to IP professionals, however, namely how social media in China has become a potential platform for monetizing intellectual property rights. The Legend of the Movie, Monkey King This phenomenon is best illustrated by the 2015 blockbuster Monkey King: The Hero is Back.^14 This animated movie was based on a popular, classic Chinese novel, Monkey King. The movie production itself is aimed at exploiting the value of the script. Copyright protection is, of course, the main way in which the value of the intellectual property inherent in the script is protected. As such, financing the movie production itself can be viewed as a form of IP monetization. The movie producer raised funds to produce the film through the “Moments” feature on WeChat, which is similar to Facebook’s timeline. Individuals an...

Table of contents

• About the Author
• Preface
• Foreword by Tianpeng Wang
• Foreword by James Hou
• Praise for Innovation’s Crouching Tiger
• Acknowledgments
• CONTENTS
• Charts
• Case Studies
• Chapter 1     IP Monetization in China: An Overview
• Chapter 2     Observations From Behind the Scenes
• 2.1.     The Planned Economy and Regulatory Regimes
• Chapter 3     The First Lens: IP Creation and Transfer – IP In-kind Contribution
• Chapter 4     The First Lens: IP Creation and Transfer – Securitization
• 4.1.     Overview of the Practice
• Chapter 5     The Second Lens: IP Pledge
• 5.1.2.     Highlights of development
• 5.2.     Obstacles and Challenges
• 5.2.1.     Fading rosy pictures
• Chapter 6     The Third Lens: IP Risk Mitigation
• 6.1.     Overview of the Practice
• Chapter 7     Nine Key Points for Success
• Chapter 8     Stand at the Gateway of IP and Never Be Defeated
• Notes