Industry Committee on Oct. 18th, 2012

[Diane Lank]

I don't think the U.S. scheme of having overbroad patents has anything to do with protectionism. I think it has to do with the fact that the patent examiners in the U.S. are timed. They have to produce so many patents and they have to review so many files, and stuff gets through very, very easily.

[The Chair, Conservative, David Sweet]

Thank you, Madam Lank. Thank you for your testimony and thank you for the great quote too.

Mr. Blanchette, you have five minutes.

[Denis Blanchette, NDP, Louis-Hébert, QC]

Thank you very much, Mr. Chair.

My thanks to our guests. What we are learning this morning is very interesting.

Ms. Lank, thank you for your testimony. It may perhaps encourage the government to better prepare companies to start exporting in a climate of innovation.

Mr. Kee, the video game business has developed a lot in recent years. We moved quite quickly from computers to game consoles, which provide more robust environments. You said the piracy is done using chips. Does your association feel that piracy has significantly decreased since video games have moved from computers to consoles?

[Jason Kee]

No, unfortunately not. It's partly that the nature of the piracy has just evolved. It went from a hard goods piracy, where people would buy on discs, to where people download games now. Year over year we see the number of infringements that we detect online increasing as it becomes more popular. Also the means by which individuals can bypass the copy protection is also evolving to become more sophisticated. Our methods become more sophisticated, and their ways of breaking it become more sophisticated. We're also seeing an increase in terms of that.

I would say certainly in Canada we now detect more infringements on an annual basis than we have historically. Typically it varies but we see an increase of at least 25% to 50% year over year.

[Denis Blanchette, NDP, Louis-Hébert, QC]

So actually, generations of consoles are practically at the end of their useful life and manufacturers are soon going to put new generations of better equipment onto the market. In the first years, we will see a drastic drop. But as you say, the war on piracy is a war that never ends.

Since we are talking about intellectual property, I would like to know, given that we are dealing with closed environments, whether intellectual property can be arranged in such a way as to encourage innovation among your members. Perhaps it is an entirely different issue and it is just a business reality. Now that competitors are working in closed environments, they first sell the console, then they sell the games. Whatever the case, the environments are definitely closed. In those conditions, does the intellectual property game have any impact on your members in terms of innovation?

[Jason Kee]

I agree. You're right that the games industry tends to operate in what you might called closed environments, assuming it's a console. Whether or not it's a closed environment versus a more open environment—and there's a lot of what the word ”open” might happen to mean as an impact to innovation—I think it depends. I think there's a good place for different types of models.

You also wanted an example of a closed environment. I call it Apple. Apple has a very closed ecosystem with respect to how it operates, but it's extremely innovative. It's constantly iterating its products. Every year it releases a new updated smart phone. It has an entire marketplace of well over half a million apps that are available, many of which are games. It has been an entirely new market for us to explore.

Because Apple provides a closed ecosystem, it's made it very attractive to the games industry. We've done extremely well on that platform. You contrast that with the Android platform, which is operated by Google, and probably has more activations per day than Apple has. It has a wider imprint, but because it is open it's more challenging to earn revenue on the distribution of games to that platform.

Conventional wisdom is that most people tend to release on Apple as opposed to Android, or do both.

I think these are ecosystems that operate in competition with each other. In fact, Apple is compelled to release new products, as are my own members, in terms of Microsoft and Sony, and so forth, because they have to compete with other ecosystems, like the PC and Android, in order to keep up.

[Denis Blanchette, NDP, Louis-Hébert, QC]

Games are very expensive when they are put on the market. Have you looked at when a price is low enough to circumvent piracy and make a profit at the same time?

[The Chair, Conservative, David Sweet]

Very, very briefly.

[Jason Kee]

It's a good question. I don't have an answer, mostly because games, specifically console games, actually remain at a fairly consistent price.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Kee and Mr. Blanchette.

We'll move on to Mr. Wallace for five minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair. Thank you to our guests for coming today.

Mr. Kee, your clients aren't going to like me because I've never owned a console and have never allowed one in my house. We have no games at my house. I have never played any games, or maybe I have at somebody else's house.

[Jason Kee]

Okay. We'll change that eventually.

[Mike Wallace, Conservative, Burlington, ON]

It's just not my thing. My game is in 3-D at the House of Commons. It's a different kind of game.

I'm interested in your comments. Copyright is important to you. Trademarks are important to you, but patents, not so much.

In terms of your industry, who are the thieves, the people who are doing the stealing? It's stealing when somebody takes a copyright and doesn't pay you for it, and reproduces something. They're stealing it from your organization. Who are the thieves? Are they in this country? Are they in other countries? I don't understand the industry, so I'd like to know.

[Jason Kee]

It's all of the above in terms of where they are. The core groups that stand to gain from widespread piracy of video games, and also of music, movies, and so forth—we're all in the same boat here—and some regular software as well, tend to be, in our case, those who offer, often for money, ways of breaking the copy protection. They actually charge for that because it's a service they offer.

If you want to open up your console and solder in a chip, that takes a level of technical sophistication that most people don't have. You'll pay someone to do it for you. They'll charge you $100 and another $80 for the chip. They've earned a nice little tidy profit and suddenly your console is open to the world for playing pirated games. Those guys tend to be more local. We have a lot of them in Canada because we don't have a prohibition, legally, against this activity until the bill actually comes into force. That would be one class.

The other would be the people who are offering the games available online. As I said, the number of local guys who used to offer the games at the Pacific Mall or flea markets and so forth is diminishing, as everyone is moving to online methods. Websites or hosting sites are springing up online. Megaupload and The Pirate Bay are notorious ones. They basically offer games and other forms of content and they earn advertising revenue. They want to attract a number of users. The more users they have on their sites, the more advertising revenue they get. Therefore, they want us to offer other people's content for free because it actually makes them money.

They operate in multitudes of jurisdictions, including in Canada. This was another aspect about the copyright bill's new enabling infringement provision that will enable rights holders to take action against these kinds of guys, which is something we were seeking in the past.

[Mike Wallace, Conservative, Burlington, ON]

Ms. Lank, I'm from Burlington, not too far from Kitchener-Waterloo. There's a company I've visited a number of times, a manufacturer. They're privately held, but they're not in the software business. They actually make a bearing for large ships. They refuse to have their bearing patented because they don't want anybody to see how they do it. Even for a politician like me going through their plant, they put up a curtain around where the Ph.D.s are doing their work. The formula that makes the bearings and the materials the bearings are made from are important to them.

Tell me if I'm wrong, but your advice to them is they should be patenting that as a protection against others trying to steal it. Their view is that as soon as they patent it, the formula will be public, and somebody will tinker with it enough to get around the patent and be a competitor head-on and will produce virtually the same product. Are they right or are they wrong? What's your view?

[Diane Lank]

Mr. Wallace, I'm not going to tell you that you're right or wrong or that your constituent is right or wrong. Again, I am not a patent lawyer, but it's my understanding that if something is substantially similar, you still have a case.

I would encourage them to get advice from a very well-qualified patent lawyer. Many, many Canadian patent lawyers are also licensed in the U.S.A. There's a lot of cooperation from that standpoint.

My gut feeling would be they ought to look into that to see whether, even if someone tinkered with it a little, especially with a hardware piece—but it would seem to me it would be more likely to have good patent protection.

[The Chair, Conservative, David Sweet]

Thank you, Madam.

Thank you, Mr. Wallace.

We'll go on to Mr. Harris again for five minutes.

[Dan Harris, NDP, Scarborough Southwest, ON]

Excellent. Thank you very much.

There are many more things to follow up with.

The evolution of piracy is quite astounding. In some cases you don't even need that modchip, on a Nintendo Wii, for instance, because it can accept SD cards. You can download something from the Internet, put it on an SD card, throw it in the machine, and you're done. You don't even need technical expertise, and it doesn't require any illegal products. It doesn't require anything across the border.

Certainly with modchips and other counterfeited goods, they do have to come across the border. There's been a concern in the Canadian Chamber of Congress—rather, Commerce. Sorry.

[Hélène LeBlanc, NDP, LaSalle—Émard, QC]

Canadian Chamber of Congress.

[Voices]

Oh, oh!

[Dan Harris, NDP, Scarborough Southwest, ON]

It's because we're thinking about Canada and the U.S.

It has concerns and has requested that border guards have broader powers of search and seizure to stop counterfeit goods. It applies a little bit less to software, but there are certainly physical discs, whether you're talking about DVDs or Blu-ray, in counterfeit console games perhaps more so than PCs, because that is where the money is these days.

Do you think it would help to stem the tide if border officers had the ability to seize counterfeit goods and counterfeit-enabling goods, things such as the modchips themselves?

[Jason Kee]

Yes, absolutely. Actually, it's a fancy way of saying it, but when I say giving customs officers the ex officio power to seize, that's exactly what I mean.

Right now customs officials do not have the power to seize on their own power things they identify or suspect to be counterfeit or pirated. They can do so only if they have a court order in hand, which a rights holder like me has been able to get—which would mean that I magically understood that the goods were being smuggled across the border and knew when it was going to happen—or if they've received a request from the RCMP to detain. These are the only circumstances in which they can do these sorts of seizures, even if they know, even if they are able to identify it. It's actually customary in most other jurisdictions; they do have the power to seize. That, essentially, is what we're asking for.

To the point that was raised earlier, it's a temporary power. There is the issue that they can suspect, but IP enforcement is one of those areas where law enforcement and rights holders need to cooperate much more closely than do other sectors, because they're going to rely on rights holders to identify what's infringing and what's not.

You want to avoid the possibility of having customs officers seizing stuff that turns out to be legitimate. The issue is basically that they can seize and then they call the rights holder to say they've identified something they think is counterfeit and the rights holder has x amount of time to get down there to let them know whether or not it is counterfeit. If it isn't, then they'll release it into the stream of commerce. This is the kind of measure that has been set up in other jurisdictions, which is the kind of measure we're talking about here.

[Dan Harris, NDP, Scarborough Southwest, ON]

Ms. Lank, you can answer this, as well.

Do you think better communication and working together would be facilitated if we had an IP office in Canada, a place that was responsible for IP that would be able to help law enforcement and the border work together? Do you think that would be of use?

[Jason Kee]

Absolutely. Actually one of the recommendations that a number of groups made is the notion of an IP crime task force, which would be representatives from rights holders, from private industry, from government, and from law enforcement who all stick together. There is an informal ad hoc working group of representatives from the RCMP, border services, and some rights holder groups which gets together once in a while, but it's very informal. It lacks any formal government authority. As a result, it's limited in what it is capable of doing.

Facilitating information sharing on a regular basis in a more formal way is critically important.

[Dan Harris, NDP, Scarborough Southwest, ON]

Do you have anything to add?