DVD Players and Intellectual Property Rights

By Hajime Yamada (GLOCOM)

On May 22, 2002, six American and Japanese companies, including Toshiba Corporation and Hitachi, Ltd., announced that they had concluded patent licensing contracts with 20 Chinese manufacturers of DVD players. Also, in late March of the same year, Sony Corporation filed a patent infringement suit in New York to prohibit sales of DVD players made in and imported from China to the U.S. These episodes represent recent intellectual property right activities stirring around DVD players.

DVD, or Digital Versatile Disk, completed standardization in the middle of the 1990s as a media for storing information. The capacity of a DVD is about eight times larger than that of a CD-ROM, and one DVD can store about two hours of moving images. Therefore, movies are increasingly available on DVDs, rather than video cassettes. Also, because DVDs can easily and instantly locate tracks or specified data, DVDs are regarded as the information accumulation media for the new era.

It took a while for the DVD player market to achieve success. In Japan, Toshiba was the first to put DVD players on sale, in 1996. However, the total shipment from the start until the end of 1999 was said to be no more than 825 thousand units. The high price of the equipment and slow release of popular movies in DVD were possible reasons, among others.

In March of 2000, Sony Corporation brought the PlayStation 2 to market. Although PlayStation 2 is primarily a TV game device, it can also be used as a DVD player. Moreover, the price is reasonably low at less than 40 thousand yen. In the first month, 1,410,000units were sold, because not only those who wanted to enjoy playing new games but also those who wanted DVD players leaped at the chance. This figure is greater than the total number of DVD player-only units shipped in the past five years.

This event started a wave of converting movies and music into DVD format. Together with the increased number of titles of DVD software, the software market has been growing steadily to achieve sales of 150 billion yen in 2001, exceeding that of video cassettes for the first time.

The DVD market as a whole started to grow due to the virtual circle of increased number of software titles in DVD and shipment of DVD players. However, total production by Japanese makers dropped from 122.7 billion yen in 2000 to 79.8 billion yen in 2001. Distribution of cheap DVD players manufactured in China, which had troubled many Japanese manufacturers, resulted in this situation.

DVD player-related patents are owned by at least ten corporations. These corporations are divided into three groups; an association consisting of the six companies mentioned at the beginning of this report, a group of three companies including Sony, and another group comprising a single company. No other parties are allowed to import or manufacture products unless licensed by the three groups. The situations are the same in Japan and in the U.S., because these companies have acquired patents in both countries. Chinese makers, however, started shipment of DVD players without any license at all.

According to a January 23, 2002 article by the Nihon Keizai Shimbun , any manufacturer of DVD players legally is required to pay about 14% of the wholesale price as a license fee, including the associated patent licensing fee. Chinese production reached as much as about one third of the worldwide production in 2001, but 140 to 200 million dollars in license fees are yet to be paid for this period.

It was under such circumstances that Sony filed a suit against import traders in the U.S. Also, the association of six companies have proceeded with negotiation of license contracts with Chinese companies, and concluded them in May.

China joined the World Trade Organization last year. As a result, they are obliged to protect intellectual property rights. They can no loger sell copied products or utilize other companys' intellectual property rights without permission. However, in actual practice copied products and use of patented technology without notice have been rampant. Recent movements surrounding DVD players might apply breaks to such practice.