Category: Uncategorized

I was reading the print edition of the latest issue of Fortune, and chanced across this article: Not Exactly Counterfeit. [That feels so good, to be able to link to a new story that I read as a paying subscriber, and then finding I can actually link to it and share it with others for free, without a digital barrier in sight. No sarcasm intended. That’s how it should be, and for this relief much thanks].

The story is all about ” a bug in the outsourced economy”, referring to unauthorised production cycles and “third shifts” that sell cheap excess into otherwise protected markets.

To me, the heart of the story is apparently about a guy named Horace Chang and his dealings with New Balance. We pick up the action in the early 1990s: the italics below represent direct quotes from the article, and the bold straight bits are mine:

New Balance began outsourcing in the early 1980s, using factories in Japan, then South Korea, then Taiwan. In the early 1990s its Taiwanese suppliers began moving their factories to mainland China. One of those contractors was Horace Chang, now 59, a tough, keen businessman. (Chang declined to be interviewed for this article, citing New Balance’s legal proceedings against him.)

At this stage God’s in His Heaven and All’s Well with the (Friedmanian Flat) World.

In 1990, Chang built a factory in Yang Jiang City, in Guangdong province near Hong Kong. At first his factory, which can employ up to 4,000 workers, made New Balance shoes only for export. But in January 1995, at Chang’s request, New Balance licensed him to also distribute its shoes to the Chinese domestic market.

Everything’s copacetic. After all, who wouldn’t want to go after the Chinese domestic market as a by-product of what was an export-only factory? Everybody wins.

Chang’s sales were initially modest, according to Ed Haddad, 57, New Balance’s vice president for intellectual property. But soon he had success with an inexpensive style known as a “classic.” It’s a colorful fashion shoe with “no technology,” Haddad explains – meaning none of the fancy midsole engineering that defines a high-performance shoe.

Now let me understand this. Sales aren’t too good, then suddenly Horace breaks through with a simple inexpensive style. So far so good. Not an IP leak in sight. Implied or otherwise.

In June 1999, Chang stunned New Balance executives at a meeting in Boston by announcing that he was projecting sales of 250,000 pairs that year – quadruple what he’d sold the year before.

“We were amazed,” recalls Haddad. But not pleased. New Balance executives feared that the company’s name was becoming associated in China with a fashion shoe, jeopardizing its reputation as a performance brand. They told Chang to pull back from selling classics.

“He was dumbfounded,” Haddad recalls. “He came here thinking he was doing a great thing – like the cat that brings you the dead mouse – and we slapped him on the hand.”

Now it gets interesting. The guy comes to Boston and says “I’m going to sell your socks off. Because the customer wants the Classic and I intend to give it to him”. A quarter of a million times. NO discounting. And his management rap his knuckles. Silly Boy. Give the customer what he wants? You’ll be wanting to run a charity next.

Chang didn’t pull back. Rather, he ordered materials to produce 450,000 pairs, as the New Balance sourcing department reported to its alarmed management later that year. Soon Chang’s inexpensive shoe was seeping out of China into premium markets like Japan. Licensed New Balance distributors there were furious.

Now we have something to talk about. A local manufacturer and distributor, a legitimate part of the global supply chain, wants to increase sales of a product that he produces legally and distributes effectively. His global management don’t agree, they would like to see the premium market protected. He feels he knows what his customers want, in terms of spec and price.

Houston, we have a problem. But as far as I can make out, not an IP issue. But things aren’t as copacetic any more, with inexpensive grey product seeping across borders into premium markets and all that jazz.

In August 1999, New Balance notified Chang that it was terminating his license to make and distribute classics, effective Dec. 31, 1999.

“What happened then is when everything went crazy,” Haddad recounts. Upon termination, the contract called for Chang to return to New Balance all its confidential technical, production, sales, and marketing information, including molds, specifications, signs, labels, packages, wrappers, and ads. He didn’t.

“He continued to sell,” says Haddad, “and was actively trying to sell product outside the country: in Taiwan, Hong Kong, Italy, Germany.” (It’s unclear whether Chang continued to make classics after 1999 or sold stockpiled inventory. Chang told the Wall Street Journal in late 2002, when it wrote about the situation, that he still considered himself entitled to make New Balance shoes.)

At New Balance’s request, the provincial divisions of China’s Administration of Industry and Commerce (AIC) seized about 100,000 pairs of Chang’s shoes from his stores and factories. During one raid New Balance made an alarming discovery: Chang had launched a competing line of classic-style sneakers under his own brand.

These he called Henkees (a meaningless word in Chinese), and he marked them with a logo on the saddle that purported to be a distortion of “Hi.” At a glance it looked a lot like New Balance’s block N saddle design. Chang had obtained a Chinese trademark on the Hi logo without New Balance’s noticing.

They said tomayto he said tomahto. And their ways parted. And we get the first taste of something to do with IP. He didn’t send back the specs, and may have (not sure here) kept on producing shoes to the classic spec. May have.

His crime? To produce and sell shoes they weren’t planning to sell, to people who weren’t planning to buy what they wanted to sell them in the first place. They wanted to control the product and its price and its placement and its promotion and however many other Ps you want to add. He wanted to sell his customers what they wanted at a price they were happy with.

Very intriguing. Maybe my perspective’s warped. But as far as I can make out, he did not change the design or the price.

Just the quantity. Upwards.

Like most Western companies doing business in Asia, New Balance had inserted arbitration clauses in its contracts so that it wouldn’t have to deal with foreign courts. Disputes were to be heard by an international arbiter applying Massachusetts law.

But while an arbiter could assess damages, he could not provide New Balance what it needed in this crisis: an injunction stopping Chang from selling New Balance classics. To get that, the company had to sue in the Shenzhen Intermediate People’s Court for Guangdong province. In late 2000 it did.

By this time I was not worried about IP leakage any more. I was worried about IP lobotomy.

I really don’t get it.

This is not about IP. It is about using tenuous arguments related to IP to try and lock customers in to products they don’t want at prices they don’t like.

It’s not going to work. IP or no IP. This is not really about New Balance or for that matter Horace Chang.

It’s about the customer.

 

It’s the customer who owns the customer. It’s the customer who selects the product. And the price.

And I think there’s a lesson here for all of us, particularly in positioning mainstream and luxury products in India and China.

The Innovator’s Dilemma appears to have mutated and grown. And we need to prevent this particular strain from getting traction.

There’s an apocryphal story about India, prohibition and unemployment, one of my absolute favourites. It goes like this:

1977. Elections, out with the old, in with the new. Prime Minister’s a teetotaller, declares the country “dry”. And so it is, except for the odd exception. You could drink if you had a permit. You could only have a permit if you were (a) a foreigner spending welcome foreign currency or (b) if you had a medical condition that required alcohol, and a doctor’s certificate to prove it.

So there was a new industry. Government departments busy churning out permits on the back of doctors busy churning out certificates on the back of patients busy claiming unusual alcohol-requiring medical conditions and underpinning their claims with unwanted soft-currency rupees.

A few years later, everyone’s had enough of this game. The dialogue changes. Let’s remove prohibition. You cannot be serious.  Do you realise how many people work in the permit offices? What are we going to do with them? We cannot shut down the permit offices. Ergo prohibition must continue.
Wisdom of Solomon moment. Archimedes and tub and Eureka. Paul and Road to Damascus and scales from eyes. Newton and apple headache. Lightbulb. All that jazz.
I know.

Don’t shut the permit offices down. From tomorrow everyone can drink.

But everyone needs a permit.

Time for another apocryphal story.

An august group of people concerned about intellectual property rights debate whether to create a new one, a right with a difference. This new one will be designed to benefit people who cannot get a copyright, because a work belongs to someone else (the person or group that created it), or because the information is in the public domain. The new right is not a “copyright,” but a “broadcaster” or “webcaster” right.

I only wish it was apocryphal. Sorry, it’s happening now. Please read James Love’s post on the WIPO meeting, which you can find here. I have a lot of time for what James Love has to say about IPR in general.

The implications are worrying.

Middleman rights that increase the very transaction costs that the web seeks to decrease. Middleman rights that make distribution a bigger source of lock-in than ever before. Middleman rights that enforce the orderly transfer of savings generated from lower distribution costs to… the distributors and not the customers.

Some years ago I remember reading about attempts being made to patent the curative powers of turmeric, ginger, garlic, chillies and the like. Attempts that failed. Attempts that will succeed if WIPO do what they are thinking of doing.
[Gordon, thanks for the tip-off which I saw while travelling.]

I was sad to learn about the death of Jane Jacobs last week.

Her books and approach were (and continue to be) significant influences on me, particularly when I seek to understand how communities work. What damage can be done by (often well-meaning) politicians, developers, financiers and industrialists.

How to keep remembering the humanity that is, and should remain, at the heart of everything we do.

Thank you Jane Jacobs.

Thanks to David Benbennick for the Zen koan-like sight of one thumb opposing.
Whenever you’re in a conversation about identity, two things come up regularly:

• The need to support confidentiality and secrecy and privacy of information

• The need to support confidentiality and secrecy and privacy of identity

I, for one, am distinctly underwhelmed by the arguments for either of these things.
If these things were obvious, then I guess there would be less need to blog about it. Conversations where people have undiluted, potentially dogmatic or even bigoted certainty can be pretty boring. There’s a Baconesque doubts-to-certainties vulnerability about blogging. And all I am doing here is sharing my doubts, to try and set a few more snowballs off.
Why am I doubtful about confidentiality and privacy and secrecy and their relationship with identity? Here’s the thing. Of late I see that people start speaking of disaggregating information to unit pieces, associating each unit piece with a sell-by-date and a time-stamp. And I smell a rat. Why?

Back to Cluetrain and conversations. Back to Doc Searls and African pastors. Back to Middle Eastern souks and Indian bazaars. Relationship before transaction. Relationship. Relationship. If I trust someone then I am willing to converse with that person and share confidences, in the knowledge that the information will not be misused. Period. And if there is any granularity or continuum to find, it is in the relationship and not the information. Which I will come to later.
Granular time-sensitive information feels like a myth created for bad DRM and bad IPR and bad IMS. People who want to control things because they can. Not consumer or community driven, but vendor-directed.

It’s like itemised billing for telephone calls, and no different from region-encoding on DVDs. We need to be very careful here.

I want to make calls. And if I were to design how I want to be billed for them, I would choose always-on eat-as-much-as-I-like call-anytime call-anywhere call-anyone. I do not need itemised billing for this.

The only reason to have itemised billing is because someone else, not me, wants the ability to charge me by item. Not because I want to pay by item. I want to pay on an unlimited basis. [ A tangent: I can visualise the possibility of there being different levels of unlimited, much like Cantor’s different infinities. As long as we keep it simple, it could work].
Just see what happens when you allow such thinking to continue. Before you know it, you have people employed in organisations whose raison d’etre is to check other people’s telephone bills. Because they can. Not because there is any value in doing it. There is no value in finding out that John Smith spent $5.83 on personal calls using his business cellphone in March 2006. The statement is a function of the existence of itemised billing. If John’s employers had a contract with unlimited calls for a fixed tariff, the statement would not exist.

It’s the sort of thinking that will install bugs in watercoolers and coffee shops and lifts. Because they can. You, sir, have been found guilty of discussing the merits of Liverpool Football Club in the lift at 1.49pm yesterday. How do you plead?

What tosh.

More worryingly, as soon as you allow people to impute “confidentiality” and “time” to a piece of information, you allow for differential charging at every point in the process. Processor and chipset. Connection and network. Software.

And all for no value. Exactly like region coding of DVDs.

Confidentiality is about trust. When the merchants of Lombardy sat on their benches and conversed and transacted, what held them together was relationship and trust. My word is my bond. Semper fi for the financial community. Not granular or selective. Covering the entire relationship.

And when trust was unacceptably broken, the relationship was over. Not a transaction, the relationship. All nine yards of it. The bench the guy sat on was broken. The banco was rutto. He was bankrupt.

So. About confidentiality. I am all for confidentiality, but at the relationship level, without granular information and without time decay. What you share you should be able to share unconditionally. And guess what? Relationships are about covenants, not contracts. They do not understand time the same way computers do. And don’t want to understand time that way either.
Confidentiality within the relationship is important, even crucial. Parent-child. Teacher-student. Pastor-parishioner. Bank-customer. Attorney-client. Doctor-patient. Journalist-source. Copper-nark, or policeman-informant. Even whistlelistener-whistleblower. And in a perfect world, government-citizen.

The confidentiality should cover the entire relationship. That is what trust is about, what builds trust and what trust builds. And I cannot for the life of me figure out what anonymity has to do with it. Here be dragons.
Allowing anonymity to be protected creates a whole new set of problems for us. These are tactical responses that in Michael Hammer speak pave over the cowpaths. Digital anonymity cures the symptom and not the disease.

Once we start worrying about showing who we are, we cause new problems. Even prisoners of war gave out their name, rank, serial number. Todd Beamer did not seem worried about his privacy of identity when he challenged the terrorists on board Flight 93. And he could not have paid a bigger price. But he did the right thing. And will remain an inspiration for me for the rest of my life.

You cannot tackle cowards with anonymity. They will keep returning, whether as terrorists or control-freak states or even schoolyard bullies.

When people ask for anonymity, we are better off trying to fix their reason for fear, not hiding the people in digital equivalents of witness protection.

I could be wrong. But my gut feel is that confidentiality and privacy and secrecy cover entire relationships and not pieces of them.

Relationships are always-on. Unlimited use. Not transaction-priced. And identity needs to be designed to understand this, not to support vast emperors-new-clothes edifices of transaction pricing and false concepts of anonymity.

I’m in the middle of moving offices, with all the packing/unpacking/throwing away it entails. There is a cathartic feel to it.

And, for an information ferret like me, there is enormous temptation to stop and read bits of things I have resolutely refused to throw away. Occasionally, I give in to that temptation. To read. Never to throw away.
This morning I came across an old New Yorker article by Malcolm Gladwell, one that I had filed for a different reason…… to remind me to order a copy of any book that contained the article “The  Dark Side of Charisma” by Hogan, Raskin and Fazzini.  Which I finally did today, nearly four years later, by ordering  Measures of Leadership by Kenneth E. Clark & Miriam B. Clark (Eds.)..

But I couldn’t help re-read the Gladwell article. And just loved the ending. I quote:

They [the consultants] were there looking for people who had the talent to think outside the box. It never occurred to them that, if everyone had to think outside the box, maybe it was the box that needed fixing. Fossilfool time again.

I think the same is true for walled-garden approaches to information and permissioning. In true sixties Suppose-They-Gave-A-War-And-Nobody-Came fashion, what happens if there are DRM/IPR walled gardens everywhere, but all the co-creation is taking place in the open spaces in between? We’re soon going to find out.