Visual China Is Not Alone: The Companies Whose Real Profit Center Is the Legal Department

Copyright and patent lawsuits pay well, and some large companies that once looked down on them have joined in.

One picture of a black hole landed Visual China in trouble.

On April 10 the company listed the black-hole photo with a “commercial use requires payment” tag. Then came the unstoppable outcry on social media over copyright abuse and shakedown tactics, and then the Cyberspace Administration summoned the company and ordered it to suspend operations and put its house in order. Within two days Visual China's shares hit the daily limit down and 2 billion yuan of market value had evaporated.

Several similar sites were exposed along with it. Quanjing Visual and Oriental IC both shut down after Visual China; the main business of both is acting as agent and distributor for visual material. Oriental IC had already been bought by Toutiao and works out of Toutiao's headquarters.

Visual China is the biggest of the three: it holds the copyright to 270 million images, works with 17,000 photographers, owns a large stock of picture and music rights, and has 40 percent of the market.

Companies like Visual China represent a particular business model — they produce no content of their own, and their most important profit center may be the legal department.

Picture agencies go back a long way; the earliest of the world's four great ones — Magnum, Sygma, Gamma and Sipa — dates to the 1940s. Their original purpose was simple: to act as agents for photographers and help creators earn money from their work.

And to protect authors' copyright. From the start, Magnum's rule was that the photographer owned every right to the picture; the agency was not in the business of selling copyright.

In practice, an infringer usually has more money and more patience for a lawsuit than the creator does, so creators really do need well-resourced institutions to defend their rights. In China that job has fallen mainly to the very companies that just took their sites down. Oriental IC, for one, holds Magnum's rights.

Visual China became the center of the argument because of who owns some of its pictures. But most of the time it is also true that the infringing party used an image without permission, and that the litigating companies stayed within the law. The business model decides who holds the whip hand: from the revenue split to the flow of information, creators are not the side in charge.

This argument over charging for copyright is not confined to the picture business.

In the United States, companies that make nothing and rely on their legal departments to file patent suits for profit are called “patent trolls.” In music, academic papers, video and software patents, suits worth anything from a few hundred dollars to several billion play out every day.

How do these companies work?

Copyright protection and money-making, bundled together: Visual China and its peers are the biggest winners in the licensing chain

Visual China was founded in June 2000 and runs China's largest online trading platform for visual-content copyright. Around that enormous pile of images, it has filed thousands of copyright suits in the past few years.

In April 2017 Visual China said a systematic comparison had turned up nine works it held the copyright to being used by WeChat in corporate accounts and on Weibo. The court found that Tencent had infringed. A month later the two companies announced a licensing deal, and Tencent's Penguin Account platform got the right to use Visual China's pictures.

That is a typical example of the 8,273 lawsuits Visual China went through in two years. Over those two years it took part in more than 11 suits a day on average, and as plaintiff it won 92 percent of first-instance cases.

The method is to compare images, find the infringing ones, and then have the legal department send an infringement notice together with a sign-and-settle agreement. Now that the user of an infringing image is often a mobile app, Visual China will go straight to Apple's App Store and demand the app be pulled. Companies that flatly refuse its price get sued — and once they sign, the suit is withdrawn.

Visual China is in substance a copyright agency. Its rights come from work photographers upload and from licenses obtained through deals with other agencies. When a user buys an image, the platform splits the money with the photographer. At present Visual China keeps about 75 percent of the usage fee, and photographers cannot see what their pictures actually sold for.

Users can also come to Visual China themselves and pay to use images on the platform. The rate depends on the size of the platform and the number of pictures used. In 2017 the image community Jandan, sued for infringement, was handed a Visual China contract package: 2,000 images a year for 144,000 yuan, or 72 yuan each.

The image-comparison system mentioned in the Tencent case is Eagle Eye, an online copyright-tracking tool Visual China built and launched in 2017. Like Google or Baidu image search, it crawls the web for pictures and then matches what it finds against the company's copyrighted library.

Visual China's 2017 annual report says the number of potential customers found through Eagle Eye grew more than 84 percent year on year, and the number of new annual-contract customers signed through it grew more than 54 percent.

Court records show that after Eagle Eye went live, Visual China's copyright suits rose 119 percent from the previous year. Of the 8,273 cases, nearly 70 percent ended with the suit withdrawn. Withdrawal means a settlement, a payment, sometimes a long-term partnership: Tencent announced its deal a month after the case closed. And an uncountable number of deals were struck before any suit was ever threatened.

Not every Visual China suit stands up, and it has sued over pictures it did not own. On April 12, snooker world champion Stephen Hendry said that Visual China had taken photos of his own matches from its platform and sued his management company for using them. Under civil law, Hendry is the one who owns the commercial rights to pictures of himself. Something similar happened to Pan Shiyi. In 2017 Visual China used promotional photographs of Wangjing SOHO to sue SOHO China. “We built the building, we took the photos — how does it become Visual China's copyright the moment someone else uploads it?”

Visual China holds more than 40 percent of the commercial stock-image market. Quanjing Visual and Oriental IC hold 20 percent and 5 percent, on the same revenue model.

Both draw on more than 300 picture agencies at home and abroad. After Toutiao bought Oriental IC in 2016, it took up the same approach — search for images, then approach the infringer about a deal. Like Visual China, both use litigation to defend their copyright interests and to pick up customers along the way. In 2018 Quanjing Visual filed 1,167 suits, most of them over copyright. That same year Oriental IC sued Baidu over 76 images; the Haidian District Court's final ruling ordered Baidu to pay 210,000 yuan.

According to the financial reports published since its 2014 listing, Visual China's core “visual and content” business made up 70 percent of total revenue, with an average gross margin steady above 55 percent. In the first three quarters of 2018 that share rose to 83 percent and brought in 600 million yuan.

In 2017 the picture business took in 580 million yuan, paid 180 million yuan in copyright service fees, and ran a gross margin of 68.87 percent.

Those copyright service fees do not all reach the photographer. First the agency has to pay Getty, Agence France-Presse and others for their licenses; only then does the agency split with the photographer — and if the agency bought the picture outright earlier, the photographer gets nothing more.

Academic copyright is a business too, and CNKI is Tsinghua Tongfang's best money-maker

Here is how CNKI, controlled by Tsinghua Tongfang, runs its doctoral-dissertation publishing business:

It buys the copyright with a CNKI reading card worth 400 yuan plus 100 yuan in cash, then opens the dissertation for download at 25 yuan a copy. A master's thesis gets a 300-yuan reading card and 60 yuan in cash, and then sells at 15 yuan a copy.

It is a business with one small up-front cost and rising returns on every copy after that.

Ding Maozhong, who heads the Competition Law Research Center at Shanghai University of Political Science and Law, told Legal Daily that measured against what a master's or doctoral thesis is worth, CNKI's payment is very low: “Looked at as abuse of a dominant market position, CNKI is highly suspect.” Huang Wushuang, dean of the intellectual property school at East China University of Political Science and Law, says much the same: the payment model looks like an exploitation of dominance.

CNKI is China's National Knowledge Infrastructure, and its creation and operation are generally seen as shielded by administrative monopoly. It runs a core journal and also serves as the database holding Chinese and foreign theses, conference papers and other literature. Universities and government bodies are its main paying customers. Publicly posted tender documents show that Tongfang CNKI almost always wins as a sole-source supplier, at an annual fee usually somewhere between 100,000 and 200,000 yuan.

CNKI is also the country's main plagiarism-checking service for theses. Figures from NetEase's data desk put its checking fee at 68 to 350 yuan depending on the type of paper — per word, well above rivals such as Cqvip and Wanfang.

These academic publishers all say that the licensing agreements they sign with universities and journals require those institutions to pass the author's payment back to the author. For degree theses, the school is required to get the student to sign an agreement authorizing CNKI's use.

In 2017 Tongfang CNKI, the entity that runs the service, took in 970 million yuan and netted 195 million. In the first half of 2018 it took in more than 500 million yuan at a 58 percent gross margin. Since 2014 its revenue and profit have grown by more than 50 percent, making it one of the most profitable subsidiaries Tsinghua Tongfang has.

The suspicion that CNKI uses its dominant position as a monopoly has never gone away. It has also been sued repeatedly over copyright. Tianyancha records show that CNKI's operator is party to some 200-odd legal cases, a considerable share of them alleging copyright infringement.

In 2018 the China Written Works Copyright Society sued Tongfang CNKI and the China Academic Journals (CD Edition) Electronic Publishing House for opening works it manages to paid public download without permission. The court sided with the society and ordered CNKI to pay 10,000 yuan.

Brian Nosek, who directs the University of Virginia's Center for Open Science, once said that “academic publishing is the perfect business model for making big money,” because the people who produce the content and the people who consume it are the same people — researchers — and they may know nothing about what copyright is worth on the market.

“As a researcher, I created this scholarly report, and I want it to have the greatest possible impact, so what I care about is its reputation and its readership,” Nosek said. “Once it is finally accepted, I will sign whatever form is sent to me. I don't know that I have signed a copyright agreement, or what that will do — and I don't care, because it doesn't affect me. The reward is publication.”

Huang Wushuang makes a related point about how university papers are published: at graduation, a postgraduate cares about getting out the door, not about payment, and many licensing statements get signed in passing under exactly those conditions. “Behind this there has to be something CNKI demanded of the university in negotiation.”

Academic monopoly is in fact a global issue. Elsevier, of the Netherlands, is one of the largest academic publishers in the world, with revenue of £2.54 billion last year. But in March the University of California — which publishes about a tenth of all American papers each year — said it would stop subscribing to Elsevier's database. One reason was that it wanted papers opened to the public as soon as they were published, and Elsevier could not do that. The other was that the subscription cost too much. At the end of 2017 a German university alliance also broke off talks with Elsevier over price and open access, and more than 200 institutions stopped ordering the journals Elsevier sells.

“It is time to change a system that hands publishers enormous profits while refusing the public free access to research,” said John Cox of the James Hardiman Library. One of the ways academia measures a researcher is by the number of papers published, along with a measure called the journal impact factor: the more often a journal's articles are cited, the higher it ranks. So researchers in a hurry to prove themselves hand over their articles for free — or pay to do so — and sign away their copyright, and in return they get to publish in a well-known journal.

Without anyone quite noticing, this trade has made knowledge expensive to reach.

Aaron Swartz, a brilliant programmer and one of the inventors of the RSS protocol, had long argued that institutions should open a wide range of important copyrighted documents to the public. In July 2011 the U.S. federal government charged him with computer and wire fraud; the evidence showed he had broken into the network at the Massachusetts Institute of Technology and downloaded more than 4 million academic papers from JSTOR, the paid database MIT subscribed to, then made them available free. The New York Times reported at the time that he could face 35 years in prison and a US$1 million fine. In January 2013, three months before he was due in court, Swartz hanged himself at home. He was 26.

KTVs pay royalties for the songs, and the company collecting the money is not the label

Part of what you spend at a KTV is meant to go to whoever owns the songs.

In October 2018 the China Audio-Video Copyright Association (CAVCA) issued a notice ordering KTV equipment and system suppliers (VOD vendors) and KTV operators to delete more than 6,000 songs suspected of infringement. The long list included Yang Yuying's A Bright Sunny Day (《一片艳阳天》), Shin's Love You to Death (《死了都要爱》) and G.E.M.'s Bubble (《泡沫》).

That episode introduced a lot more people to CAVCA, and to the music-copyright agency business running behind it.

Before 2006, a KTV operator in China bought a machine from a VOD vendor, paid a small maintenance fee, and got a large library of pre-installed songs with it. VOD, or video on demand, means the song-selection console you see in a KTV room; the vendor simply copied the songs onto the machine.

The people who actually wrote the songs had no reasonable, lawful way to collect anything. In 2006 the National Copyright Administration ruled that from January 1, 2007, a KTV operator wanting songs had to pay a copyright usage fee to the China Audio-Video Association at 12 yuan per room per day, and the collecting body would distribute what it took in to the rights holders. Having KTV operators and VOD vendors pay copyright holders one by one would be chaotic, the administration reasoned, because rights holders are scattered and karaoke operators are scattered even more widely. Karaoke venues also use an enormous volume of music and music video, so the best answer was a single third party managing it centrally.

That duty was carried for a time by the Music Copyright Society of China (MCSC). In 2008 CAVCA was set up — an audio-video collective-management body approved by the National Copyright Administration and registered with the Ministry of Civil Affairs — and, on MCSC's authority, took over collective management of audio-video program copyright and related rights.

CAVCA is a non-governmental body. To reach the thousands of KTVs across the country, it in turn appointed Tianhe Culture Group as the outfit that actually collects karaoke copyright fees. Tianhe's own website describes its main business as “collecting karaoke program copyright usage fees under commission,” and it currently has 29 branches around the country.

Neither Tianhe nor CAVCA owns any music copyright, yet both take a cut. Tianhe collects licensing fees from KTVs everywhere and passes them to CAVCA, which passes them to MCSC. According to a report by Entertainment Capital, the money is finally divided among rights holders according to how often songs are picked, how many times they are played, and how many copyrights each record company holds.

The published rate, per CAVCA's “Notice on the 2018 Karaoke Copyright Usage Fee Standards”, is a daily charge that varies by province and city, from 8 to 11 yuan per room per day.

But who along that chain deserves how much? CAVCA is both referee and player. The National Karaoke Copyright Usage Fee Distribution Plan it published in 2010 gives CAVCA 4 percent, Tianhe Group 25 percent and the Karaoke Copyright Operations Center 21 percent, leaving 50 percent for the rights holders — the people who actually own the music.

Beijing Youth Daily reported that CAVCA collects around 160 million yuan a year in copyright fees from KTV operators, which means CAVCA, holding no copyright at all, and Tianhe should in theory be taking in 6.4 million and 40 million yuan a year. The real figures are higher: a 2012 CAVCA announcement said Tianhe Group's “collections topped 100 million yuan for five straight years from 2009 to 2013, with coverage nationwide.”

Figures published by MCSC, one layer above, show its total licensing revenue passing 300 million yuan in 2018 to reach 316 million — up about 46.23 percent on 2017, another record.

CAVCA has not said how much of that came from lawsuits, but the notices on its own website show there are plenty. The most recent was in July 2018, when the Yuncheng Intermediate People's Court in Shanxi ruled on a CAVCA suit: put simply, Shanxi Wanli Kadiya Entertainment had not paid for its copyright, and the first-instance judgment set damages at 5 yuan per room per day, for a total of just over 50,000 yuan.

The arrangement between CAVCA and Tianhe has now fallen apart. By CAVCA's account, Tianhe repeatedly dragged its feet on settling the copyright money, and the two terminated their agreement in November 2018.

The patent companies that only litigate and never build: they are called “patent trolls”

There is a kind of company known as a non-practicing entity, or NPE — more plainly, a patent troll. They are the purest example of making money out of a legal department. Anyone can be hit by a sudden patent suit, from Apple and Microsoft, worth hundreds of billions, down to a startup that has barely begun.

Apple, Samsung and Google sue each other too, but those companies actually make products and spend heavily turning ideas into goods. What sets a troll apart is that it has no product at all, or almost no revenue, and instead collects ownership of patents and makes its money by suing.

In February 2014 Apple said in a statement that it was the biggest target of patent trolls, sued more than 100 times in three years. The case that cost Apple the most was an eight-year patent fight with VirnetX.

VirnetX is an American network-security software and technology company. It develops technology and buys and files patents, but it does not make anything; then it uses those patents to sue other technology companies over their products.

Starting in 2010, VirnetX sued Apple in the U.S. District Court for the Eastern District of Texas, claiming iOS infringed four of its patents covering FaceTime, VPN and domain names. Two years later the court ordered Apple to pay VirnetX US$386 million.

The litigation did not stop there. While Apple appealed, VirnetX filed more suits, arguing that all of Apple's phones and electronic devices infringed its other patents. In 2017 the Texas court's final ruling ordered Apple to pay US$440 million.

Legally, an NPE that lives off litigation is doing nothing illegal; it is simply working a gap in patent law. The America Invents Act and the courts' civil procedure both lean toward protecting a plaintiff whose patent has been infringed, and NPEs win on that lean.

Intellectual Ventures, the best-known American NPE, holds nearly 60,000 patents, the fifth-largest portfolio in the United States and 15th in the world. Over the past decade it has put Microsoft, Yahoo, Apple, Google and Lenovo, among others, in the defendant's chair.

Between 1990 and 2010, the constant patent suits NPEs filed cost companies at least US$500 billion. In the past ten years the number of NPE-related cases has climbed steadily, peaking in 2010, when more than 2,000 companies were dragged into patent litigation — eight times as many as a decade earlier — at a cost of US$80 billion in legal bills and disrupted product launches.

NPEs like to sue on vaguely worded patents. Uniloc once held a patent on a product that gathered physiological information through a wearable “acquisition unit.” It used that to sue Apple, arguing that the Apple Watch's heart-rate measurement infringed. The looseness of “acquisition unit” and “physiological information” was what gave Uniloc its opening.

A typical patent-infringement case has already cost US$1 million or more before it starts, and even a win runs to US$2.5 million or more by the end.

It is that expensive because patent cases demand far more documentary evidence than other cases, and specialist lawyers have to spend a great deal of time assembling it. NPEs, meanwhile, usually cast themselves as the injured plaintiff, and their costs run far lower than the defendant's.

NPEs also tend to file in Texas, whose Eastern District federal court leans toward patent plaintiffs. In 2016, 57 percent of all patent suits were filed there; Apple's defeat is a direct example.

Faced with huge costs and unpredictable rulings, small and mid-sized technology companies generally pay up and settle. Since 2014 the average NPE settlement has been US$1.5 million, and 78 percent of settlements came in under US$500,000.

Patent and copyright litigation pays well, and the big companies that once looked down on it have joined in

A widely shared cartoon captures how Oracle looks in Silicon Valley today: a legal department several times the size of the software-engineering team. The reality is probably less extreme, but the impression itself says something.

In recent years Oracle has sued TERiX, SAP, Google, HP and Apple, among others, for infringing its patents. The largest and most consequential was the Android case against Google.

In April 2010 Oracle bought Sun's Java patents and copyrights. Four months later it sued Google, alleging infringement of seven Sun patents, mostly over the use of APIs in Android, and demanded US$9.3 billion — more than Oracle made in a full quarter.

Forbes called the case the arrival of a new kind of patent troll in Silicon Valley, and said Oracle had grown used to turning patent suits into profit. After eight years of back and forth, the case ended with the court finding that Google had not infringed Oracle's copyright and dismissing the damages claim.

Litigation has nothing to do with Oracle's actual business, and it became a new source of profit anyway. SAP, which builds resource-management software, did not get off as lightly as Google. Oracle first took SAP to court in 2007 over intellectual property, and SAP eventually chose to pay a settlement of US$330 million.

James Gosling, the father of Java, criticized Oracle for suing Google. Gosling had spent years at Sun, and he thought the case had little to do with patents or programming languages and a great deal to do with money and power. “During the Oracle acquisition, when we went after Google for infringing our patents, you could see the Oracle lawyers' eyes light up.”

To Gosling, Sun was not a company that ran on patent suits — only one patent in his name was ever involved in litigation. It was the formidable legal machine Oracle had built up selling databases that let it sue Google four months after the purchase closed.

Oracle's talent for using its lawyers goes back to its early years. In 1983, several University of Wisconsin researchers ran a quantitative benchmark of database performance, and Oracle's flagship product did badly.

Oracle tried and failed to get the university to fire the professor who ran the study, then barred itself for a time from hiring the school's graduates, and added a clause to its product license forbidding any user from publishing benchmark results for Oracle databases. Microsoft followed, putting the same restriction on its SQL database.

Patent suits have often paid Oracle handsomely. It sued TERiX and collected US$57.7 million. It sued SAP, which settled by paying US$356.7 million. It lost to Google in the end, but it won the first round and came close to US$9.3 billion.

The spread of patent litigation is already under way.

Many of the companies filing suits at scale were once innovators. But when the company, or one of its businesses, goes into decline, it starts making money off its patents.

In 2012 Kodak, then seeking bankruptcy protection, took Fujifilm to court, claiming its digital cameras infringed Kodak's digital-imaging patents. A month later it sued Apple and HTC, saying both had infringed Kodak's digital-photography patents.

Kodak also sued Samsung over five patents related to digital imaging. All five were broadly worded; one covered an electronic camera that could grab a still while previewing video. In its filings Kodak stated that “every company involved in infringing these patents should pay Kodak a royalty.”

Kodak's total failure in digital cameras had nothing to do with patents.

Microsoft did much the same after its phone business fell short, using its patents and its legal muscle against Android companies. In Microsoft's own hands those patents never produced anything as good as Android or the iPhone, and they did not help it hold on to the smartphone market. What litigation finally earned it was a level Windows Phone never reached — more than US$1 billion a year from Samsung alone.

After giving up phones itself, BlackBerry, sitting on more than 4,000 patents, sued Typo, a maker of iPhone keyboard accessories, again and again. Typo ended up settling out of court and agreeing to stop selling keyboard accessories for devices under 7.9 inches.

BlackBerry also sued Facebook, Twitter and others, claiming the encryption in their mobile apps infringed its patents. Paul Grewal, Facebook's deputy general counsel, replied that “BlackBerry has run out of innovation of its own, and is left trying to tax everyone else's.” Around the time Facebook was founded, BlackBerry had its own messaging service, BBM — but it spent years serving only BlackBerry phone owners, and missed its chance to become WeChat or WhatsApp.

Nokia likewise began filing patent suits in earnest once its phone business was spun off. In December 2016 it sued Apple in Germany and the United States over 32 patents. The next year it sued Huawei and HTC.

Nokia and Apple had already sued each other over patents for years; the fight only paused in 2011, when the two reached a licensing deal in which Apple paid up and both sides cross-licensed patents for their phones.

But with Nokia's phone business gone — Nokia-branded phones today belong to another company — Apple no longer had any Nokia handset to threaten with its own patents. Six months of litigation later, a Nokia that makes no phones collected US$2 billion from Apple, and its legal department had a new source of income.

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