How a Chinese Startup Made $50 Million in 3 Months by Stealing US and UK Intellectual Property

Update, 2020 February 18:
After reporting by publishers, the original app has been removed by Apple from the App Store. However, to get around this, the company has released another app called XiaoXiongHuiBen (小熊绘本) or "Little Bear Picture Books" under a personal developer account Lu Fang. The new app is the same as the original, just with a different logo.

Original Article Below:

For years, the United States and other foreign countries have accused China of stealing intellectual property. The US-China trade war has focused attention on high profile areas like military technology, telecommunications, and artificial intelligence.

This story is about how a Chinese startup is currently profiting from stolen IP out in the open. In fact, their app can be downloaded from the Apple App Store right now. 

In just a few months of launching, it claims to have sold one million paid lifetime memberships to their app for 358 Chinese yuan each, which totals to about 50 million US dollars. Insider information suggests it is likely that this figure is exaggerated, with the real number of paid subscribers at just over 100,000. Pirated IP comes from companies like Disney, HarperCollins, Scholastic, Oxford, Heinemann, McGraw-Hill, Penguin Random House, Studio Ghibli, and many, many more.

At its core, this app is a highly organized and effective way of selling access to pirated content from children's book publishers from around the world.

This company first caught my eye when its marketing claimed to have over 10,000 picture books on its app. I became curious as to how a company less than one year old had managed to accumulate so much content so quickly. By comparison, the leading American app, when it was three years old, had accumulated 14,000 books. Is this a story of Chinese technological leapfrogging, something that has happened in online delivery and consumer drones? Or is this a story of cutting corners and cheating, something that makes people skeptical about Chinese products worldwide?

The company in question is HangZhou QuXuele Technology Co., Ltd. (杭州趣学乐科技有限公司), founded in late December 2018, less than one year ago. A few months ago, it released an app called QiCaiXiong (七彩熊) or "seven-colored bear." The app is a digital library for English children's books. Let's refer to the app from now on as just QCX.

Pirating From the Market Leader American App

When you open QCX, you see that there are many books - some free and some only for paid users. The book covers with a "Read to Me!" logo on the bottom right corner immediately caught my attention. This "Read to Me!" logo is the exact same as found in the American app I mentioned earlier. In the American app, the "Read to Me!" logo indicates that this book has a special feature where, as the audio plays, the words are highlighted. How this feature is implemented is unique to the American app.

American App "Read to Me!" book example

When you open a "Read to Me!" book in QCX, you will find that the audio (produced by the American app) and the highlighted words feature are the same. QCX has captured each page of the book from the American app as a video and displayed it in its own app. While the American app likely renders the highlighted words with code (using less data), QCX displays a video, necessitating the user to download everything before viewing the book.

QCX "Read to Me!" book example (same book as above)

Users on loading screen are those who have read along with this book

QCX's pirated books from the American app (Part 1)

QCX's pirated books from the American app (Part 2)

QCX infringes upon the IP of the American app and that app's licensed publishers.

Pirating from Physical Books

The next type of piracy is obvious with some knowledge of the children's book publishing industry. QCX has thousands of books from very well-known publishers, such as Harper Collins (I Can Read), Scholastic (Magic School Bus), Penguin Random House (Dr. Seuss, Step Into Reading). These publishers are strict with licensing digital content and often do not license digital content at all. Their contract negotiations are long in order to cover any and all possible scenarios of content usage. In addition, any license comes at a high price for the buyer. The company behind QCX is less than one year old and is completely privately-funded with no famous founders. For a company so young and cash-strapped to have signed contracts with all of these US and UK publishers in just a few months is impossible. Perhaps this is why when you open any QCX book, there is no information about the author or publisher, which prevents the average reader from investigating further. Most of these books are scanned from physical copies.

QCX's pirated books overall (Part 1)

QCX's pirated books overall (Part 2)

Catalog of pirated publishers and series:

• ABDO
• Barefoot: Singalong
• Bullfrog Books
• Candlewick Press: Maisy series, My Very First Mother Goose
• Child's Play
• Disney: Kung Fu Panda, Wreck-it Ralph, Despicable Me, Toy Story, Zootopia, Frozen
• Eric Carle: Brown Bear, Polar Bear, Panda Bear, From Head to Toe
• Farrar, Straus and Giroux (BYR): My Mom, My Dad
• Free Spirit Publishing: Learning to Get Along
• HarperCollins: How do dinosaurs, I Can Read, Pete the Cat, Splat the Cat
• Hasbro: My Little Pony
• Heinemann
• Holiday House: Olga the Cloud
• McGraw Hill: Wonders
• Mo Willems Elephant and Piggie
• OUP Oxford: Winnie the Witch
• Random House: Dr. Suess, Step into Reading, I Am a Bunny
• Scholastic: Blastoff! Readers, The Magic School Bus
• Studio Ghibli: Totoro
• Usborne
• Viking Books for Young Readers: Llama Llama series
• Wheeler Publishing: Cartwheel Books: Fly Guy

Obfuscated Piracy!

Just from the main parts of the app, we've already uncovered tons of pirated content. Almost everything is pirated. But there's more! Let's go deeper into the app, into the somewhat hidden "online storage account" feature. This is where QCX hides more pirated content that is too sensitive to show prominently in the app. In order to add content to your own "online storage account," you need to first tap on a web link outside of the app. This is to avoid having a centralized location for users to view the more sensitive "user-uploaded" content. 

Links to more sensitive content sent by private message through WeChat

In descending order:
Oxford Reading Tree
Red Rocket Readers
HarperCollins Big Cat
Random House Leveled Readers
Heinemann Leveled Books

Links all go to shimo.im, which is China's equivalent of Google Docs.

Result of clicking on the link for Oxford Reading Tree, organized by level

A user can click on any of these links and add these books to their own "online storage account." The books can then be accessed within the app.

Accessing pirated content in app after adding through external links

The idea behind this "online storage account" feature is to give plausible deniability to QCX, because it claims these books were uploaded by users, offloading legal risks to individual "users." In the app, we can see that the "user-uploaded" content only has about five unique uploaders out of 100,000 to one million paid users. In the best case for QCX, it is offering a service similar to Napster or Limewire with real users sharing pirated content with one another; in the worst case for QCX, this content is being uploaded by employees posing as regular users.

"Original" Pirated Content

In the app, there is also a lot of Disney content. Disney makes children's books, so having Disney content is not suspicious in and of itself. However, Disney doesn't license to just anyone, and none of the book titles is familiar or Disney-sounding at all. These books don't exist online. They exist because QCX took video captures of Disney shows and movies and presents them as books in their app.

Several Disney "books" created by video capture.

And it's not just Disney--My Neighbor Totoro from Japan has had the same done to its IP. Even the content that QCX produces itself is pirated.

Poking Holes in Their Story

What makes me so confident that QCX is pirating everything? Recently, QCX acquired non-exclusive digital rights for Red Rocket Readers from New Zealand's Flying Start Books for the mainland China market. It adjusted its marketing pitch immediately to include a picture of this license. From a marketing effectiveness perspective, it makes no sense to flaunt a digital license from Flying Start Books if you already have licenses from Disney, Scholastic, or Penguin Random House. Instead, QCX is attempting to hide its piracy by showing any license at all, hoping users will be hoodwinked into believing that all of its books are licensed.

License granting QCX non-exclusive digital rights to a portion of Red Rocket Readers for only the mainland China market starting 2019-12-01.














It should be noted, however, that Red Rocket Readers was on QCX months before the start date of the license (2019 December 1). They still have links to Red Rocket Readers for their "online storage account" used to hide sensitive books.

The "online storage account" link for Red Rocket Readers shows a last updated date of 2019 September 22, months before QCX acquired the license it now shows as evidence that it doesn't pirate content!

Instead of pursuing legal action against QCX, the Chinese agent for Flying Start Books sold a license to QCX. I will address the incentives of Chinese agents that may have caused this to happen in a later section.

Ill-Gotten Gains

Within just three months of launch, QCX has acquired somewhere between 100,000 and one million paid users.

The primary reason behind this is due to their understanding of what Chinese users want - high volume and low cost. It advertises access to 10,000 books, which is equal to or more than any other Chinese competitor. The subscription fee is 358 Chinese yuan or about 50 US dollars upfront for lifetime access. This amount is affordable for even lower class families in China.

A "poster" distributed on WeChat advertising QCX's lifetime subscription to 10,000 books for just 358 Chinese Yuan (about 50 US dollars). Long pressing on the "poster" in WeChat will take the user to a platform's purchase page. The QR Code has the "promoter's" information, allowing the platform to know which "promoter" to associate this sale with.

By itself, lifetime access to an app with licensed content, which is always for a fixed term, should raise eyebrows to publishers. To allay concerns about licensing, QCX has always said that it has licenses for all its content, and since acquiring the license for Flying Start Books, the license has featured prominently in their marketing.

QCX has relied heavily on partnerships with online platforms that specialize in selling education-related products. In exchange for the massive customer base these online platforms provide, QCX gives a cut of the subscription fee to the platform. These platforms come with their own set of "promoters" (推广人 "promotion people") who are mostly stay-at-home moms looking to get rich quick. These "promoters" advertise the platform's products to their friends, and, when a sale is made, the platform gives a cut to the "promoter." The closest model that exists outside of China is probably affiliate or multi-level marketing, as "promoters" get paid more by mentoring other "promoters" and get a cut of their sales as well. These "promoters" are not QCX employees but take on marketing and support roles, as their incentives are aligned. This allows QCX a layer of plausible deniability to make false claims and distribute pirated content (the "online storage account" links are distributed through "promoters").

Sales are done by "promoters" who talk up 10,000 books and famous IPs like Heinemann, Random House, and National Geographic. Because the "promoter" is not an employee of QCX, QCX employees cannot be caught marketing pirated content.

Some of the platforms selling QCX:

https://shop43203577.m.youzan.com/wscgoods/detail/2fwo9mauho175

https://shop42133185.m.youzan.com/wscgoods/detail/3f0gr0ev7iyg9

Why Has QCX Gotten Away With This For So Long?

Until now, why hasn't anyone found out about QCX? Firstly, there is a language barrier that prevents non-Chinese people from knowing about the facts on the ground in China. While there are millions of Chinese living abroad who can inform China about the world, there are many fewer native English speakers who can inform the outside world about China. Additionally, due to the "Great Firewall," there are basically two internets - China and non-China. In China, people use local competitors instead of Google, Facebook, Instagram, WhatsApp, and YouTube. Outside China, Chinese products are rarely used. The level of English proficiency within China is low. This means that the average QCX user will not report piracy to publishers. These factors allow QCX to slip under the radar of publishers in spite of having many active users.

Often, non-Chinese publishers who wish to enter the China market will hire Chinese agents who handle all China-related business. The Chinese agent is paid based on the business it generates for the non-Chinese publisher. It is likely that Chinese agents are not compensated for pursuing legal action against copyright infringers. The more profitable option is to wait for the infringing company to gain enough money to want to acquire a license. This is likely what happened for Red Rocket Readers and Flying Start Books.

Who's Really Behind QCX?

Aside from subscription money, what else does QCX gain from pirating so much content? To figure this out, I had to dig deeper into a company closely affiliated with QCX. This company is Hangzhou KaiBoDun Technology, Ltd (杭州凯伯顿科技有限公司), with its website at kaibodun.com. If that domain looks familiar, it's because the same domain is used for adding pirated content to QCX's "online storage account." In August 2019, the QCX app was still released under KaiBoDun.

QCX still released under KaiBoDun on August 8, 2019 (version 2.1.9 of app).

QCX's current company and KaiBoDun share a physical address in Hangzhou.

QCX's company is at 杭州市滨江区IX-Work大厦C座402室

KaiBoDun is at 杭州市滨江区IX-Work大厦(Same building)

What might KaiBoDun have had to gain by marketing QCX so aggressively (after moving it to another company to avoid legal risk)?

KaiBoDun owns Hellokid, a product that offers one-on-one English tutoring by pairing English teachers and kids in China. Hellokid is relatively unsuccessful compared to the market leader VIPKid. QCX in its membership includes some Hellokid classes. From this relationship, we can infer that QCX is a way for KaiBoDun to attract a new targeted user pool for Hellokid, whose price and profit margin is much higher at around 10,000 Chinese yuan (about 1,400 US dollars).

Piracy pays off: recent Hellokid post on LinkedIn urgently calling for teachers

What Can We Do?

In discussions about intellectual property, it is often said that no one is hurt by piracy. Intellectual property can be freely copied, while physical property cannot, so what's the harm? The harm is to content creators. The production of a high-quality children's book requires illustrators, writers, editors, publishers, and marketers, a process that on average takes months. By pirating and selling this content, QCX is stealing money from creators. Fewer people will be able to work creating content, and more people will be able to work stealing content. Honesty is punished, and cheating is rewarded. Much of the pirated content is presented in very poor quality, because they are scanned from physical books. It's a shame that children's books, which people pour their heart and effort into, are presented to kids in such a shoddy way.

There are honest players competing in the same space as QCX in China. These companies buy digital rights from publishers and make their own original content, hiring illustrators and writers and creating a content ecosystem. But because of QCX's aggressive and dishonest tactics, they cannot compete fairly, when the average consumer cares most about bang for the buck -that is, how many books I can access for the lowest price. It is entirely possible that QCX will emerge as the market leader in China if nothing is done.

So what can we do about QCX? Well, now that you know about them, if you work at one of the publishers whose content has been pirated, please make your legal departments aware of this company. The first step you can take is to report to Apple that the app is infringing upon your IP. China's Android app market is fragmented, but major players like Tencent are required to abide by IP regulations as well. The fact that QCX is afraid to acknowledge their blatant piracy means that it fears legal action - and for good reason. In 2018, the ringleader of a children's book pirating cartel was sentenced to six and a half years in prison. Finally, if your company has a Chinese agent, make sure they take action on your behalf.

If we do nothing, then QCX wins. If we allow QCX to transition to a legal business, it wins as well. The revenue that would have gone to content creators allows an unethical company to grow larger, potentially into an unstoppable leviathan. The more users QCX has, the stronger its bargaining power. And once QCX has sucked enough money out of the huge Chinese consumer base, it can hire professional content creators and leapfrog existing publishers from the pure profits of piracy. Based on past actions, we can infer that the people behind QCX are highly evasive. It is likely that they will take further measures to hide QCX's piracy once concerted action is taken by publishers.

Please share this article with your friends in the publishing and content creation industries.

Update: As of 2020 February 18, QCX has been removed from the Apple App Store.

All information in this article was obtained by publicly available sources and interviews with former and current employees of KaiBoDun, Hellokid, and QiCaiXiong.

If you 1) are an English-language news outlet looking for someone to cover China tech or 2) have an interesting idea for a story, please reach out at china.tech.confidential@gmail.com.