A recent report by the DoC claims to provide this evidence. Unfortunately, even a first reading demonstrates that the report is worse than worthless, it is downright misleading.

Introduction

What is the effect of IP rights on the economy and on innovation?

There is very little empirical evidence on this question.

The basic question is (or should be): are IP rights, defined as temporary monopolies that serve as a tool for innovation policy, effective?

In other words, do we actually have more or better innovation and creativity because of the exclusive rights granted to IP holders?

In March 2012, the US government’s Department of Commerce (“DoC”) issued a report called “Intellectual Property and the US Economy, industries in focus”. You can find it here.

It was prepared by the Economics and Statistics Administration  and the USPTO (the patent and trademark office).

The report aims to answer the question described above.

But unfortunately, it does nothing of the kind. Both the way in which the questions are formulated, and the methodology to come to an answer, are fundamentally flawed.

How are the questions asked, and why is that wrong?

The report sets out to identifying what are called “IP intensive industries” and examining their characteristics and contributions to the overall economy.

At the introduction, the report starts by making two fundamental mistakes.

First, the report states that “One important way to help encourage innovation is through the protection of Intellectual Property (IP).”

This statement is made without any reference or evidence. But this is exactly the key question in the IP debate – is this assertion correct?

Therefore, the report is fundamentally flawed, since it postulates as a paradigm a completely one-sided approach to the key question which is at the heart of IP debate: is high protection good or bad for innovation?

The second fundamental mistake of the report is in line with this approach. Throughout the report, the expressions “Intellectual Property” and “IP rights” (or IP protection) are used intertwined.

But they are not the same, and the distinction between Intellectual Property on the one hand and Intellectual Property Rights on the other is essential. Intellectual Property (a misnomer, it should be called Intellectual Capital) is the combination of know-how, innovation and creativity that is at the heart of innovative industries.

Intellectual Property Rights, on the other hand, are the legal tools like patents and copyrights, allowing businesses to claim distribution monopolies for certain aspects of Intellectual Capital.

But Intellectual Capital is much, much greater and more important than Intellectual Property Rights.

To give an example: it is the difference between a book and the copyright in that book. They are not the same, and their values are not the same, or even remotely connected.

The combined works of William Shakespeare have tremendous value in society. There is no copyright on those works.

But, in the approach of this report, the value in the works of William Shakespeare is used as an argument to state that “IP intensive” “copyright-based” industries have a lot of value and contribute a lot to society.

This is so deeply intellectually dishonest, that it actually boggles the mind.

You might as well make the claim that, because in the US, people of the catholic religion are involved in 25% of the total production of the US economy, there is a clear case for forced conversion of the whole population to Catholicism.

The findings of the report effectively mean that we have a lot of Intellectual Capital in the US, and that innovation and creativity are essential. I don’t think we needed a study to establish that.

But what is the connection with patents, trademarks and copyright? Not a single sentence in the report clarifies it.

That which must be proven, is taken for granted.

Methodological problems

So, apart from establishing that the report, in its initial approach, is wrong and worthless, we also see some pretty fundamental mistakes in its methodology, to the effect that even if we were interested in understanding the value of Intellectual Capital, this report does nothing to help us.

The report tries to identify “patent-intensive”, “trademark-intensive” and “copyright-intensive” industries.

By overlapping these three IP rights, it makes a first fundamental mistake.

Trademark is not about innovation or creativity, but about identifying a business’ goods or services against those of competitors. While that is important, and represents a lot of value, it is not creative or innovative – no new technology is developed as a result of a trademark registration.

In other words, using trademarks to establish the importance of patents or copyrights is very, very sloppy thinking indeed.

A second fundamental mistake is how “patent-intensive” is defined. It is defined based on the number of patent registrations, but not on the number of patents actually used by businesses for the products or services they offer to the market.

Now, as any patent attorney can tell you, anywhere between 90 and 98% of all patents granted are never actually used, either for licensing or in another way.

In other words, this report measures something massively insignificant, and then extrapolates that information.

A third fundamental mistake is the definition of “copyright-intensive”, where hardly any mention is made of the software industry.

This is telling – most software is in principle covered by copyright, but the report does not find it necessary to regard software as an important copyright-based industry – it focuses almost exclusively on content protected by copyright (books, music, film, etc).

A fourth fundamental mistake, along the same lines, is how the report ignores open source or creative commons. The words are not even mentioned.

However, with more than a third of all software now in Open Source, that is plainly ridiculous.  Especially since, according to the reasoning of the report, any use of Open Source would clearly demonstrate the importance of strong Intellectual Property Rights. This is rather absurd, since the claimed purpose of Open Source is to deny the applicability of Intellectual Property Right protection (with the exception of trademarks).

A fifth, and interesting, mistake is that the report seems to consider revenues of patent trolls as economic value created by patents. I think many would disagree with that approach – and the really interesting point here is, of course, that the report seems to avoid to go into this debate.  My guess is, on purpose.

A final mistake clearly illustrates how the report’s methodology is pretty much worthless. The “Trademark-intensive” calculations show how certain companies and industries rely on trademarks to protect their brand.

The report’s methodology (again, based on registrations, not on actual use) indicates that companies such as IBM, Intel, General Electric and McDonald’s are not “trademark-intensive”. I think I can rest my case on that.

Conclusion

So, we have a report that aims to show that “IP-intensive” industries are important, and contribute a lot to the economy.

When we translate “IP-intensive” as “based on innovation and creativity”, the report says something we knew all along, but uses a methodology that is completely unreliable to come to its actual numbers – it is a waste of time and money.

When we translate “IP-intensive” as “based on Intellectual Property Rights” – as the report confusingly does sometimes, but not consistently – the report is downright misleading.

This is a great pity.

The debate on how IP rights affect innovation is an important one, and one that has entered the public debate, as evidenced by the SOPA, PIPA and ACTA discussions.

What is the best way to ensure more innovation and creativity? Stronger IP rights? Weaker IP rights?

Since IP rights are a tool of innovation by governments, shielding certain innovations from market efficiency, in the hope that the additional rent will cause additional investment in further innovation and creativity, it is important to know if we get this balance right.

Unfortunately, this report only muddles the water, and is an affront to the US government.

Rimini Street is a fairly young business, it was founded in 2005. But it is growing very rapidly. Rimini Street offers offers support services on enterprise software products, such as legacy Oracle products. Rimini Street offers these services at prices that are much, much lower than Oracle’s own support services.

Rimini Street is not the only one doing this, and Oracle products are not the only ones targeted by such 3^rd party support providers.  They also target SAP, JD Edwards, Siebel (both now owned by Oracle), Computer Associates, etc.

The essence of 3^rd party support providers is that they are offering support on someone else’s products, without the authorization of the original product company.

Large corporate customers, who have spent large amounts to automate parts of their business processes, find themselves with technology that, while not the youngest, is mostly working fine. And, more importantly, it has been configured and customized at great cost for their specific needs, and can deal with their internal data.

So, one thing those customers often do not want to do, is follow that technology in all its upgrades. And certainly not when such upgrades mean they have to go through configuration and similar efforts all over again, at considerable internal cost, and, in addition, have to pay extra license fees.

Around 50% of all Oracle’s revenue comes from such “old” customers, and the support, maintenance, upgrade and customization fees charged. Those fees effectively only enable customers to use something they already have.

And a lot of customers don’t like that. They prefer 3^rd party support providers, like Rimini Street, who come in and commit to maintain such legacy systems at 50% of the cost.

And Rimini Street is doing very well indeed. 32% revenue growth year over year, and $400m in backlog are serious numbers.

Oracle, in return, doesn’t like those pesky 3^rd party providers.

Oracle dislikes it so badly, that they are suing Rimini Street. While that may be preferable over suing its own customers, in a way, you could argue that Oracle, indirectly, is trying to use the courts to force its customers to stay.  A legal vendor lock-in.

Oracle uses alleged copyright infringement as the basis of its claim. It works like this: because Oracle has copyright on the code in its products, the customers only have those usage rights as set out in the original license.

And Rimini Street, obviously, has not paid any license fee to Oracle.

But, in order to provide support services, a 3^rd party provider will typically do things to the original software for which it needs a license. These can include setting up a test environment, modifying certain parts of the code, interfacing (or change existing interfaces), developping small bits of code on top of it, to make it work better, reverse engineering certain parts, etc.

There are three possible arguments Rimini Street could use to say it doesn’t actually need a license from Oracle.

The first is that Rimini Street only uses the license granted to the customer. In other words, Rimini Street should, from Oracle’s perspective, be considered as the customer.

That doesn’t necessarily solve the problem.

A lot of software suppliers prohibit their customers to maintain or support themselves the software they acquired. Such prohibitions are typically contained in the software license.

But there two important comments to make at this point. First, a lot of customers will negotiate specific terms. When a large customer is waving with a large check on order signature, and asks in return an enterprise license, including the right to support (including using 3rd party support), providers like Oracle may find themselves in a position where they find it hard to refuse. Certainly for older contracts, I would not be surprised to find such clauses – in the older days, a lot less attention was paid to the scope of the license.

Second, there’s legal theory around the fact that a license that is too restrictive, is no longer enforceable. It comes down to the position that a license-holder (in our case Oracle), can not grant a license and expect to be able to restrict pretty much any useful way of using the product – it would make the license useless, and the contract an empty shell.

For consumer products, such as the Apple’s iPhone, the solution to this problem is called “jailbreaking”. It means that the restrictions, imposed by the licensor, are not always enforceable, because otherwise the original license has no longer a real purpose.

Consider this example. When you buy a smartphone, you buy a combination of hardware and software. The hardware is yours, you can do with it what you want. You can reverse engineer it, you can combine it with other hardware, etc. There’s nothing in the world that can stop you from doing so (certainly not patents).

But that’s not true for the software. The software is not sold to you, only licensed. You get a right to use it, which is typically formulated in a very restrictive way. It’s what those famous “click-wrap” licenses state, the ones that nobody reads, but has to accept before they can install a piece of software.

And, for B2C software, it has been stated that when those licenses become absurdly restrictive, the users can actually ignore them without being in copyright infringement. That’s “jailbreaking”.

Coming back to our Oracle – Rimini Street example, Oracle’s customers could  formulate a similar argument. They have paid good money for the software, and should be able to use it, without being forced to stay in a vendor lock-in arrangement where Oracle can sue any other provider out of the market.

For certain markets, you can even smell anti-trust law around the corner – except that that is, of course, a very heavy process.

So, it’s not clear who will win this. First glance, I think, Oracle stands a very good chance. In a recent other case (in Australia), Computer Associates won a similar argument, based on copyright, from ISI, a part of IBM.

But my feeling is that an Oracle victory in court would probably be useless, if not of negative value.

Who would want to buy software from a provider who will sue anyone who can support it better and cheaper?

Third party software support is here to stay, whether called Rimini Street or otherwise.

What that means is that, trying to use IPRs to lock in your customers, may be possible from a legal perspective, but doesn’t seem to make a lot of business sense to me.

But there’s another issue of course.

It’s that elephant in the room called Open Source Software (OSS).

More and more enterprise software is becoming OSS. And providers like Rimini Street look like the perfect OSS support outfit: they will compete on price and quality of support of an existing application – that’s exactly how the OSS products have been outcompeting proprietary products in every market where they have attained critical mass.

My feeling is that Oracle, through its actions against third party support providers, is pushing the market towards OSS. And from what I’ve seen, that is a one-way street.

I’ve recently learned what a Zettabyte is. As Wikipedia explains, it’s a unit of information (data), equal to 1,000,000,000,000,000,000,000 bytes.

EMC has calculated that, in the year 2011, humanity and its machines have created 1.8 zettabytes of information. That’s more data than created in the whole of human history until the end of 2009 included (roughly 150,000 years), and more than three times what was estimated to be in the Internet in 2009.

So, we are drowning in the data we are creating. Massive amounts of it. And every year, the amount of data created grows. By 2020, the amount we create will have gone up by a factor 50, and we’ll have to learn what a Yottabyte is (remember, you read it here first – Wikipedia does not even mention the name of 1,000 Yottabytes). This is a huge challenge for businesses – where will they find the people and the tools to deal with them, and how should they behave?

So how will all those data impact Intellectual Property Rights (IPRs)?

IPRs create an artificial scarcity. They give their holders the right to prevent other people from manufacturing or distributing certain products or services.

Classic IP theory states that the increased pricing resulting from this artificial scarcity is necessary in order to promote innovation and creativity, because the free market, with its inherent right to copy, would not allow for sufficient reward to obtain the required level of innovation and creativity.

However, the scarcity created by IP rights is a scarcity that is created by a legal instrument (the IP right). And in order for such IP right to work, that legal instrument needs to be enforceable in a cost-efficient manner.

One of the things that the Napster and Pirate Bay stories are teaching us, is that enforcement of IP rights does not work very well downwards the value chain. Put simply, it’s not cost-efficient to sue your customers, especially if you have a lot of them, to enforce an IP right; it’s only cost-efficient to sue your competitors, and then only if there aren’t too many of those.

So what happens with business models that are based on charging for legally created artificial scarcity, in a world that generates several Zettabytes of data per year?

Will IPRs spread, and cover more and more of those data, or will IPRs become like little atolls in an ever rising ocean of data?

Let’s look at some practical issues that arise out of Big Data and affect IPRs.

First, there’s the issue with patents, patent quality and prior art.

Between 1985 and 2010, the number of patents granted worldwide has risen from slightly less than 400,000 to more than 900,000.

That’s an increase by more than 125% over one generation (25 years).

Data grows that much in about two (2) years.

So let’s be very clear: even if the USPTO, EPO, JPO, SIPO and tutti quanti would increase their budgets significantly, and start hiring every other engineer, it just doesn’t make sense. There is no way the combined forces of patent offices of this world can avoid the evolution that they will become, in terms of the amount of information they treat, quite insignificant.

But that is not their only problem.

Not only is it impossible for them to keep patenting significant, it is also impossible for them to keep patenting useful.

As we have seen repeatedly over the last 15 years (effectively since the number of patents, particularly in the US, has started to grow much more strongly compared to before), is that the quality of patents has gone down.

Some recent court cases have brought additional evidence in this respect – even in patent trigger-happy Texas, the land of the patent troll, courts are rejecting patents that are obviously non-novel or obvious.

This is important, because you can only get a patent on an invention that is novel, and that is non-obvious to someone who knows the technology.

To me, it is clear that patent offices will be increasingly unable to verify whether something is novel and non-obvious, because the amount of information to check is simply too large.

In patent terms: the chance that there is prior art is likely to grow to above 99%.

As a result, it seems unavoidable that the quality of patents will continue to decline. In the end, this will start to seriously affect society’s tolerance for the enforcement of patents. If they protect “inventions” that are not novel or that are pretty obvious, patents will become even more a roadblock to innovation than they already are, and society will start to refuse the draconian remedies and powers currently granted to patent holders.

So, yes, Big Data stands a good chance of killing patents.

Second, there’s copyright.

Copyright has the advantage of arising without registration, so the capacity bottleneck of a registration office does not, in theory, restrict its application.

But let’s have a look at what happened with MegaUpload recently.

The fileshare website was shut down, because it was used also (allegedly mainly) for “piracy”, which is selling content to which the sellers had no exclusive rights or licenses.

But immediately after the FBI shut the site down, a cry arose from all those people who had used MegaUpload in the same way you use Dropbox or another file-sharing site. Some of them are suing the FBI, and class-action lawyers are happy to comply.

In effect, MegaUpload was part of the Cloud. Remember the Cloud? It’s the future of technology and IT.

With the huge generation of data that is occurring at the moment, the percentage of those data that is covered by copyright AND that a distributor wants to control (think of music distributors or Hollywood) will shrink every year vis-à-vis the amount of data that is either outside copyright, or where no-one is interested in harvesting a royalty or enforcing a distribution monopoly. Or does anyone seriously think that all that User Generated Content will be policed on the basis of copyright?

The moment sites that are also offering peer-to-peer are becoming too important because of their Cloud function, the potential to shut them down because they also effectively commit or allow piracy, will disappear.

It’s economics, really. If the value of unprotected data is significantly larger than the value of protected data, the protection becomes largely unenforceable.

So yes, Big Data will probably kill IPRs. And there’s not much patent holders or content distributors can do about it – their scarcity is simply drowning.

Of course, they can try legislation like SOPA or PIPA – but I don’t think it’s a coincidence that this legislation was killed as a result of two conflicting businesses – and it’s clear which one is growing faster. It’s the one that won this time, and will most likely continue to win.

Finally, a short word on Trade Secrets. While technically not an IPR (although some might contest that), it is hard to see how they can remain relevant, when, in that ocean of data, businesses are making more money by disclosing and sharing data, than by keeping them secret. When 80% of innovation is open innovation (and growing), the idea that it is possible to classify all those data, and make sure that the confidential ones are not disclosed, is rather fanciful.

Trademarks will stay, and probably increase their value – but that’s another story for another day.

Unlike normal property rights, they are not positive rights: it’s not because you have a patent on a technology, that you’re actually allowed to use it – that’s not what a patent is about. A patent is about blocking other people from using the technology described in your patent for producing, manufacturing or distributing a product or service.

However, just like real property rights, people want to trade IPRs. Just like you can trade shares (effectively a bit of property right in a business), plans are made to create IP exchange markets – a platform to buy and sell patents or copyrights.

There are some examples where such IP exchanges are being prepared or set up. To give two examples : there is IPXI, Intellectual Property Exchange International, which calls itself the world’s first financial exchange focused on IP rights.

In the UK, there is the Digital Copyright Exchange feasibility study, undertaken in the UK by Richard Hooper, which was set up on the basis of the Hargreaves report.

There are of course a lot more – as a result of IP getting ever more attention, a number of organizations offer services around trading IP rights. In no particular order of preference, the IP Exchange, IPEXL or Global IP Exchange.

There are many potential benefits to being able to trade IPRs on an exchange platform. It would provide valuable information on the real value of those IPRs, by using the established and potentially efficient market techniques, such as the law of demand and supply. It would allow much easier to put up IPRs as collateral, which would increase their usefulness in the economy at large.

But can they actually work? Today, none of those exchanges seem to work very efficiently.

Here’s why.

IP rights are, as set out above, negative rights. For a potential investor, that is actually a good thing. It means that the holder of the IP right can ask others money before they can to use the technology, innovation or creativity covered by the IP right.

However, there are two key problems with classic IP rights, making them quite unfit for exchange purposes.

The first is that IP rights are random rights. What I mean with that is that the IP owner is free to grant or refuse licenses, but is also free to attach pretty much any kind of condition to the license they want to give. The only restriction on this freedom to license at any condition, is the bazooka of competition law, where a competition authority can claim that a particular use of IP rights is done in an anti-competitive way.

This hardly ever happens, and when it happens, it makes the headlines, like in the Microsoft case.

And the problem with random rights is that they are, well, random. In other words, there is no or very limited predictability about what it is you would exchange on the exchange market.  You don’t actually know what you’re buying on the IP exchange market, unless you’ve done an extensive analysis and due diligence on the terms of the license, and what that means for the market and technology concerned. As we have learned from the real estate boom & bust, complex derivatives are not always a good idea. But, for the real estate boom, at least, those complex derivatives are based on simple basic concepts, like owning a house, taking a mortgage, or owning a share in a company. But IP licenses are much, much more complex as a basic concept, and none of them can be explained as a fixed principle or simple explanation.

After all, you don’t want to buy a license to manufacture a particular semiconductor for $10,000 per unit, when you know that, tomorrow, the licensor may slash that price to $1,000. Unlike real property, which is much more structured than that, there is nothing inherent in an IP right that prevents the licensor from doing things that fundamentally alter the potential value of an IP right in the market overnight. And there are currently no simple structures available on how categorize licenses to IP rights.

In other words: the fact that IP rights and licenses are random, prevents them from being transparent and liquid.  This is because transparency and liquidity require predictability.

And transparency and liquidity are absolutely necessary conditions for any exchange to work.

So what that means is that, for IP exchanges to work, the exchange will have to impose, and the IP owners will have to accept, very strict straightjackets on how they can not only exercise, but also create, exchangeable IP licenses or any other rights related to their IP rights. It very much remains to be seen whether the potential advantages of the exchange outweigh the limitations on exercising IP rights. So far, I think, the balance is negative.

The second problem for IP exchanges is that they are very contextual. What that means is that they depend very strongly on the circumstances of evolutions in technology markets, but also vary from country to country, from market to market. A technology development in one area (e.g. data compression) can have devastating effects on an IP right in another market (e.g. music copyright). Patents are always at the risk of being rendered useless, and without value, because of new technical developments that allow circumvention. And the effect of changes in legislation or jurisprudence in IP rights are much more uncertain than similar changes in other areas of the law such as company law. Look at the amount of digital ink being spilled on issues such as software patenting, patenting business models (Bilski) and the America Invents Act.

Interestingly, the first of the problems (no systematic approach to licensing)  I mention is coming to the foreground right now.

A result of the ridiculous patent warfare on mobile telephony, is that large companies such as Apple and Microsoft are starting to ask questions around what is called “FRAND” licenses. (FRAND stands for fair, reasonable and non-discriminatory licenses.) The questions that arise are pretty fundamental: what is a fair license? What is the calculation basis? etc etc. All of these issues are not settled, and there is even no simple theoretical set of standards we can apply. As Google shows, the effect can be very important.

I think that this discussion is a step in the right direction. We need to standardize licensing conditions on IP rights.

We can leave such standardization to the market (but that has failed so far), or we can impose it, either through the access conditions of the exchange system or through legislation.

As I have explained before, survival of IP rights will depend on them becoming less monopolistic. A good way to do so is to outlaw exclusive monopolies as anti-competitive behaviour. It would hopefully drive IP holders to a more predictable system of licensing, where standard conditions are offered. That, in return, can make them a lot more predictable, and increase their liquidity in the market.

But it is clear that with the current system of random IP rights, exchange systems cannot succeed.

But there’s more: Content is also struggling, because there is simply too much of it.

The combination of a data flood of biblical proportions with exploding possibility of function, will drown any business model based simply on charging for content.

Business and investors should realize this, and adapt accordingly.

A number of recent events have shown that the conflict between Function (Silicon Valley) and Content (Hollywood) is clearly heating up.

The successful actions against the proposed PIPA and SOPA legislation may well have arisen a new political player in the murky field of lobbying: the social Internet. The political implications are in my view much more important than the issue of copyright – but it is no coincidence that this new phenomenon of not just collecting political funding or votes, but actually determining the political agenda through the Internet and social media, has first arisen around the issues where the Internet and social media cause most havoc: the disruptive effect on 20^th century business models. Expect ACTA to be the next battleground.

At the same time, the US government shuts down the Megaupload site, and manages to convince New Zealand to arrest, in New Zealand, a German national for reasons of copyright infringement in the US. Depending on your political view, the alleged actions are massive theft (Hollywood) or exposing the inefficiency of a distribution monopoly (Silicon Valley). Either way, it remains remarkable that criminal law is used to this extent in order to protect a business model.

More interestingly in the long term, of course, is that within hours, useful alternatives to Megaupload were available. In other words, the policing is obviously failing. My personal view is that this is because criminalizing normal human behavior like sharing what you like just does not work.

Finally, we see that more and more economic studies start to look at empirical evidence, to verify if the basic theory of IP rights, which claims that imposing a monopoly in order to rectify the inefficiency of the market to sufficiently reward innovation and creativity, is actually correct.

How to make sense of it all?

As I wrote earlier, I think the main conflict is between Content (music, film, etc – symbolized by Hollywood) and Function (what we can do with our computers – symbolized by Silicon Valley).

I think Function is most likely set to win, because it evolves faster, and adapts better. Darwinian logic tends to be merciless.

Regardless of mine or your preferences, the observation remains that technology is destroying the possibility to efficiently enforce IP rights, whose function it is to restrict the right to copy. The music industry has still not understood that fighting peer-to-peer copying (and hence piracy) is utterly useless. The argument that this causes economic damage because, as the middleman, they stand out to lose quickly falls apart once you take a good look at it. It is no coincidence that, while the revenue and jobs of the music industry fall, the income and distribution potential of the creators (the musicians) rise.

And Hollywood is obviously next on this slippery slope down the abyss of non-revenue just for Content – neatly illustrated by the fact that Amazon sells 20% of its books at a price of 0.01$, while and still making a small profit, on shipping and availability.

But there is more.

The amount of data produced in our world is exploding. In 2009, more data was created in one year, than in the entire history of humanity until 2008.

And most of that data is still created by humans, not by machines. Expect that to change – the era of data creation has just started, and the speed of data creation will continue to go up.

To put that into perspective: humanity exists for about 150,000 years. In the last two of those, we have produced 9 times as much data as in the whole period before.

Now, under the theory of copyright and other IP rights, all of that data, to the extent there is an expression of human creativity in it, is subject to a distribution monopoly of its creator.

That’s just plain ridiculous. It can never work.

All of those data are creating a biblical flood of massive proportion, drowning out all payable content.

And the turning point is user generated content – which is almost always derivative work. Not only will be it be impossible to stop it, it is actively supported and offered pretty much for free by an ever growing number of technology firms (Silicon Valley).

From an IP perspective, user generated content is a new, hybrid animal.

It typically uses partly automated creation (outside copyright), partly genuinely user generated content (those holiday pictures you took, within copyright, but your own), and partly existing works (that song you put in the background – someone elses copyright). Throw in some user generated functionality, and it becomes clear that most what is created will include elements of copyright and other IP rights, but those IP rights will become utterly unenforceable.

So, not only are IP rights losing the race to keep track with the development of technology, they are also drowning in a sea of newly created content.

How should we react?

Certainly not in the way the old content distribution business is reacting. The idea that distribution monopolies based on copyright will continue to provide a superior return to a business, and allow for margin based on the mere action of distributing, is effectively dead.

Legislating against this phenomenon is as useful as legislating to modify the value of the number pi.

In practice, this means that businesses will have to adapt their business models.

If Content is an important part of the value proposition, it needs a lot more than just the distribution ability in order to become a viable business. Such additional features can be services,  analytics, or intelligence, or indeed technological function.

But selling content, by itself, is probably no longer a viable business proposition.

In other words: Hollywood loses, and Silicon Valley wins. But that is not necessarily bad for the economy as a whole.

This has a profound effect on Business Models based on IP rights.

The SOPA discussion is a good example of the fight between Function and Content – which IP right will win?

 What is Content, what is Function?

Content is the stuff you access and use when you deal with media. A book (the writing, not the physical object) is content.

Other examples of content are music, blogs, film, video, etc. You get the picture (pictures are also content).

Function is what you do with it. Playing a video, copying a song, reading a book, modifying or analyzing data, uploading your photos, etc, etc. are all Functions.

Traditionally, Content and Function are clearly separated. A publishing press produces copies of a book, but the relationship to the content of that book is minimal.

When you scroll through a website reading articles, you don’t perform functions on it that modify or manipulate the content other than storing a copy in the cache memory of your computer, and displaying a view.

So, Content and Function are quite different. You don’t need Content to run e.g. Word or Excel on your computer, but you use their Functions to create such Content.

But that is starting to change. Content and Function are starting to merge – their separation wall is slowly disintegrating.

What does that mean?

Look e.g. at Software as a Service providers. The content they store (the data) is typically only accessible through the functions provided on the website.

If you were able to download the data, and apply the functions on your own computer, that wouldn’t matter. But that is often not the case. You can only get access to the data (the content) through the functions made available in the integrated service.

Any change to either content or data modifies the value of that integrated service to you. If the provider gives you a new analytical tool, the value of your data actually changes, without the data themselves having changed.

And if either the function or the content of the integrated service is unavailable, the other is also useless.

So, the Cloud is breaking down the distinction between Content and Function.

But not only the Cloud. Look at e.g. newspaper Apps on a mobile device. These are software programs, but with functions specifically geared towards specific content. You could not use the Washington Post App to apply functions (e.g. view, post, forward, share) to content from the New York Times website or App.

Content and Function are bundled, they are offered together, and they become the same product or service.

With the rise of User Generated Content, this will massively increase. Look e.g. at www.tabletquiz.com, a website that allows you to easily generate your own App with your own content. In other words, it is User Generated Content and Function (UGCF).

Since it is made in HTML5, it is also platform-neutral, and can run on any environment.

This means that it becomes effectively impossible to apply any kind of Content control system from the outside, because the technology is too open, and too accessible, allowing users to generate not only Content, but also the Function to distribute or reproduce the Content.

So why should I care?

From a business perspective, this has the potential to be quite significant.

This is because Content and Function are typically sold in a very different business model, based on different IP rights.

In a digital world, IP rights are an essential part of the go-to-market strategy. Businesses offer licenses, rights to use, and access to service. These are all based on IP rights.

Content is typically protected by copyright. But Function is not. To the extent function is protected by an IP right, it is protected through the secrecy of software source code (in theory enforceable through copyright, but in practice it is the non-disclosure of the source code that does the trick), or through patents on software.

But what will happen when Content and Function are starting to merge? Which IP right will prevail, and, more importantly, which IP right will the right one for businesses to apply?

In essence, this can go two ways. Function IP rights can prevail, or Content IP rights can prevail.

If Function IP rights prevail, then the merger of Function and Content will lead to looser protection on Content. This has already partly happened as a result of e.g. the fact that technology allows much cheaper copying (Napster and the file-sharing revolution, in other words).  In this scenario, the relative freedom of copying a Function will impact the Content interconnected with the Function, making effective protection of Content very difficult, if not impossible.

Under this scenario, any attempt for a DRM (Digital Rights Management) system is effectively doomed.

If Content IP rights prevail, then the merger of Function and Content will lead to stricter protection on Function. In such a scenario, Content will be used to restrict the function applicable to it.

Currently, I see a movement in favor of Function prevailing over Content. But it clear that anti-piracy initiatives are trying to roll back this tide of free Function liberating Content from its copyright protection. The fact that Content-based industries (“Hollywood”) are having a fight over SOPA with technology-based industries (“Silicon Valley”) is a normal consequence of the merger of Content with Function.

In this battle, of course, Function has one advantage that may well be decisive: it is based on evolving technology, and as we have seen from the continued success of Open Source, technology that is based on openness seems to outcompete closed technology. While this seems inconsistent with the paradigm’s of traditional IP theory, it does seem to indicate that Function may well prevail.

What is certain, in any case, is that this evolution confirms my earlier observations about our current IP rights (especially copyright, but also others) being quite out of date, and not fit for purpose in a digital, connected world, based on collaboration, open innovation and sharing of Content.

No more people dying on the roads, no more traffic jams, important reduction of CO2 exhaust, but also massive job losses for car insurance people, taxi drivers, etc.

I concluded by saying I didn’t see a lot of IPR issues there. How wrong I was.

Only last week it emerged that Google is patenting some core technologies – you can read about it here.

Goes to show : understanding IP means understanding technology, and where it leads us.

So I stand corrected: self driving cars have important IPR aspects.

Open Source hardware is starting to be mentioned from time to time.

Unlike Open Source software, which is now well established, it is still relatively unknown.

One of the best-known examples of Open Source hardware is the Arduino board. The Arduino board is a single board microcontroller. It was once described to me as “the hardware core of a robot-brain”, which explains it well enough.

With an Arduino board, you can direct hardware. It can work e.g. as the on-board computer of a toy car, or it can connect your fridge to the Internet, or it can be the core of a private security system in your house. And you can very easily access it, program it, connect it to other machines, engines, etc, and make it do pretty much anything you want it to do.

That flexibility shows the way towards an important development, where a growing part of our hardware will convert into a combination of computer hardware and software. Hardware becomes “programmable”, if you want.

Expect Arduino boards to be found in a product or application near you soon. Since they are Open Source, it is very easy to integrate them into other technology, and the cost of technology (as with most Open Source) is relatively low. As an example, the new “desktop” open source 3D printers use Arduino boards.

So how enforceable is such Open Source hardware? Does it – legally – work?

For software, the question has been answered a number of times. In most countries, Open Source software and Creative Commons licenses have been held to be valid and enforceable.

To my knowledge, no similar decisions exist regarding Open Source hardware. (If you know of one, please comment below and provide a link).

But we can have a look at how current Open Source hardware is put together, and take that as a basis on how enforceable it would be.

When we look at Open Source hardware, a lot of it is actually not very “open source”. Not because it’s not Open, but because it’s not Source. Hardware is – still – not software. If you copy source code of software, you can reproduce it, theoretically, at zero variable cost. For hardware, you still need the actual material to assemble, 3D-print or otherwise manufacture it.

Moreover, the Open Source software system works, because the concept of sharing back changes you make to a software product under the same license is relatively easy, both technically and legally.

So how are Open Source hardware licenses structured, and would they work as well as Open Source software?

Open Source licenses work at three levels.

The first is the design of the hardware. Design documents on Open Source hardware are distributed, either under a Creative Commons license or an Open Source hardware license that has the same effect. That means that the design information is freely available, and that changes to that information must be distributed under the same license. We know that Creative Commons licenses are enforceable. That means that Open Source hardware, at the level of the design knowledge necessary to manufacture the hardware, is probably enforceable Open Source (with the interesting side effect that Creative Commons works more efficiently at protecting content or ideas by ensuring they stay within the Creative Commons, than actual Copyright is in shielding ideas from the public domain).

The second level is software. For Arduino, e.g., the software you need to make it actually work, is licensed under GPLv2.

Again, this is enforceable. So, to the extent software is necessary to operate the hardware (as will become more and more the case), the Open Source character of the hardware is, at least partly, ensured through the software necessary to operate the hardware.

The third level is the hardware itself.

To my knowledge, there are two main licenses known: the TAPR open hardware license and the CERN open hardware license.

The TAPR license specifically states that it is not a copyright license, but an agreement. It covers distribution of the documentation of the hardware, as well as the way in which hardware is built and distributed.

However, it excludes software from its field of application.

The TAPR license works, again, at several levels.

It gives a license to documentation, and obliges the licensee to copy the documentation and share changes under the same principle. This effectively repeats the creative commons approach to design.

It incorporates a duty to attach documentation to any product manufactured using the documentation, and imposes a covenant not to sue for patent infringement against licensees or licensors.

It is the last bit that seems truly new.

What the Open Source Hardware license does, is effectively prohibiting downstream users from enforcing any patents they would have on their improvements of the design or the product.

Is such condition enforceable?

First, we need to see if such license is actually necessary to copy the product itself. In my view, this is not the case. This has to do with the fact that ideas and design information are free to be copied, unless protected by registered design or patents.

What that means is that, anyone who sees a design or a product, is in principle free to reverse engineer or copy it. The fundamental freedom to copy applies.

This fundamental freedom does not apply to software – where any copy of the code is prohibited by the general and automatic copyright monopoly. However, no such automatic monopoly exists for designs or products.

So, therefore, the Open Source hardware license would limit its application to the extent there are patent or design rights in the product or a derivative thereof (as opposed against the Open Source software license, which applies for every copy of the software).

The question then arises whether a contractual undertaking as described in the Open Source hardware license (“covenant not to sue”) would be enforceable against someone obtaining a patent on an inventive step in developing a future version of Open Source hardware. This question is still open.

A second question arises whether the remedy set out in the license (“you lose the right to produce the product if you enforce a patent based on it”) actually makes sense. It may well not.

In a nutshell, the TAPR license seems less obviously enforceable than an Open Source software license, precisely because hardware is in general free to be copied, except if covered by patent or design rights (which are the exception), whereas for most software, the opposite is true (it is automatically covered by copyright). Only certain kinds of software (e.g. software where the expression merges with function, or software code that is not original, or created by a machine, and, in the EU, the code of interfaces) fall outside copyright.

The TAPR license also has a rather interesting reference to “emailing” information. I would have expected an innovative organization to recognize that email is not necessarily the obvious communication tool of the future.

The other Open Source hardware license is the CERN license.

The CERN license differs somewhat from the TAPR license, in two important aspects.

There are also clear similarities. There is a “creative commons” kind of license on the documentation, and a covenant not to sue for patents on new developments.

The most important differences are in the fact that the CERN license acknowledges more clearly the copyright nature of the documentation license, and also clearly mentions design rights (and not just patents).

Again, the question as to how enforceable the covenant not to sue is, remains open.

The essential question is this: if I use the documentation in order to manufacture and distribute the “Product”, and subsequently then modify or innovate, and register my innovation (either as patent or design), and then try to enforce such patent or design – what happens to the products I sold, and what happens to the products (with the new, registered modification)? Can I still manufacture and sell them?

And which remedies are available to the original licensor? Because that could well determine the success of Open Source hardware licenses.

Interesting questions ahead. But first, let’s wait and see if Open Source hardware really can become as successful as Open Source software.

Any science fiction fan will recognize the concept of uploading your personality into a computer or a network.

Indeed, this is supposed to be one of the ways in which we may attain immortality.

But, as is often the case with SF, reality is stranger than fiction.

The uploading of our personalities into the digital world has already started.

Anyone who has a Facebook, LinkedIn, Twitter or Google+ account knows what I mean.

Part of you, of your identity, is online. Uploaded & digital.

Part of you exists only in Facebook, or any other social media. You now have different layers of existence, and some of those only exist on the Internet, through Facebook or some other social media system.

And, no matter what the social media tell you, it’s not free. And neither is your digital you free.

The social media business model is based on acquiring all of the digital, web 2.0 version of you, and then commercially exploiting it.

In a sense, by signing up a social media account, you become their digital slave. Voluntarily.

Because they can do with your digital person whatever they want. They can sell you, or your data, or your pictures, or whatever you post, to whoever they want. And you can’t stop them, you have no rights in this layer of existence.

Have a look at the terms of Facebook, LinkedIn, and other social media. Not only do they have effectively unlimited rights over whatever you post, they have much stronger rights than you, the user, have over your own digital existence. They use the “license”, which is effectively Intellectual Property Rights in the copyright of their code, and potentially some patents in their functionality, combined with what they call a contract, to impose their “rights” to use your digital you.

When Google+ started, Facebook very quickly disabled an application that allowed any user to export their data and other account information (the layer of their existence on Facebook) into Google+. That would have amounted to users effectively switching provider of their digital existence. But Facebook quickly closed that back door of the slave pen.

What that means is that Facebook blocks its users from doing with their digital life what they want. Only Facebook gets to decide what happens with your digital you, with your “Facebook you”. That’s why I call this digital slavery.

And they don’t have to respect any of your rights, because “you agreed to the terms”.

The fact that you didn’t have a choice makes no difference – they own your digital you.

They will say some things like “we value your privacy”, but that is mainly because they understand how to make money on the back of it. Maybe that is the true meaning of their expression “we value”.

Is this surprising? Not really. Most SF fans will recognize the story line how colonists of new worlds often go through a period of slavery.

The online digital planet Earth (v2.0) seems to be no different.

Is it sustainable? Probably not in the mid- to long term. But short term, since we have no digital human rights, corporations will be able to develop this new feudal online system, where you and I have no rights, outside the scope of our poor world v1.0 court system.

It is no coincidence that so few court cases are filed against Facebook. Normally, you would expect hundreds or even thousands of them. But you can’t even access the evidence, and Facebook cleverly moves the goalposts about every two months (“We’ve updated our privacy policy – have a look, we’ll think you’ll agree – because we really value your privacy”).

In the end, I think, two things will happen.

The first is that the new, digital, generation will revolt, and demand and obtain digital human rights.

We will have to formulate that “we hold the extension of dignity, equality and self-determination into the digital world to be self-evident”, so that only the digital person will decide on who owns him/her, and their data.

The second is that market forces, when allowed to wreak their creative destruction, might push new entrants to compete on quality of rights granted on their platform. Google+ is a small step in that direction.

Will others follow? It remains to be seen.

What could stop those market forces? Intellectual Property Rights in their current shape and form are probably a prime candidate, since they allow to project monopolistic rights deeply into the value chain. I would not be surprised to find that, certainly at the moment, governments will prefer Facebook’s monopoly on its platform, and hence the functionality therein, over the rights and freedom of its digital slaves.

My prediction is that this will be one of the political fault lines of the 21st century, as the rise of the Pirate Party in countries like Sweden and Germany forebodes.

Funny how Facebook, less than 10 years after its creation, is already deeply reactionary. Guess that’s what happens when you become a slave-trader.

The key point I made was that Open Innovation benefits greatly from properly functioning Intellectual Property Rights.

My particular focus was on copyright, which I believe is broken up to the point that it currently prevents or hinders Open Innovation, and is becoming an impediment to creativity and innovation.

The first observation is that the copyright system is quite broken. We have established a system of “thought crime” reminiscent of George Orwell’s “1984” in our failed efforts to prevent copyright infringement.

When I reproduce a copyright-protected picture (say, a drawing of Tintin) with the intent to develop my own business, I’m liable to imprisonment of between 3 months and 3 years, and a fine of up to € 100,000. And if I repeat that thought crime, those numbers can double.

So why are we doing this? Why are we locking away the product of our collective innovation and creativity behind the bars of a thought crime system? Why is it illegal to use someone else’s content, depending on the purpose for which you use it?

The answer is actually quite absurd, specifically when applied to 95% of all copyrighted material (which includes my earlier example of a Tintin drawing): the reason is to promote the creativity of authors. Now, Hergé, the creator of Tintin, unfortunately passed away in 1983. So how does threatening me with a jail sentence of up to six years in 2011 promote Hergé’s creativity?

And it gets more absurd after that, because, while it is clear that the copyright infringement criminalization has no moral or logical justification, it also simply does not work.

The music industry provides a good example: its revenues have dropped of a cliff, and there is no prospect of recovery. The same forces are at work for film, video games and e-books.

So, we have a draconian system of thought crime, that is illogical and unjustified, and does not work in practice.

And that is not a good situation, at many levels, including the principle of respect for the rule of law.

But most importantly for this blog, we need a properly functioning copyright system. It would be of great benefit to systems like Open Innovation – any collaborative system greatly benefits from clear rules about who owns what, who can do what, as well as the general acceptance of such rules. That is currently, patently, not the case for copyright.

So, copyright is broke, and needs fixing.

In order to know how we can fix it, we first need to understand why it is broken.

Is it broken because of piracy? I don’t think so. The “pirates” are the messengers, showing by their behavior that copyright is broken. They didn’t break it, they just show us it’s broken.

Moreover, pointing the finger at other people’s “bad behavior” has very little credibility when it comes to analyzing why something doesn’t work. It’s an intellectually lazy attitude, and almost always misses the key points.

“If only other people would change their behavior…” No, it’s just not sufficient as an explanation.

I think the key elements in understanding why copyright is broken, can be found in its origin.

Copyright, as we still know it today, was created by the Berne Convention on the protection of literary and artistic work. The first signed version of that Convention dates from 1886. That’s 125 years ago.

To give an idea, that’s the year in which a Mr. Benz in Germany was granted his first patent on an automobile car, when the Spanish Empire abolished slavery in its Cuban colony, when Coca-Cola first came onto the market, and when the first linotype printing press was invented, paving the way for cheap mass publication of newspapers.

And that far away origin is, in my view, still responsible for the major flaws we see in today’s copyright system. I will highlight what I think are the five most important ones.

First, copyright assumes that innovation and creativity are individual, singular activities. It’s what the lawyers call “a clean room environment” in which innovation takes place. Unaffected by any other information or influence. Except, of course, it doesn’t exist.

No-one works in a vacuum, no-one invents or creates from scratch. The Beatles, among the greatest song-writers of the 20^th century, always clearly acknowledged they were “stealing”, as they themselves called it. It wasn’t really stealing of course; it was sharing, and acknowledging the truth.

Certainly in an Open Innovation environment, the concept that the default system are single individuals coming up with these brilliant ideas that need individualized protection, is quite simply inappropriate, and unfit for purpose. We need to recognize the inherent multi-layered and composite character of any innovation or creativity. “Standing on the shoulders of giants”, what we see all around us, should be our guiding principle, rather than the lone (mad?) genius, a figment of our collective imagination.

The second flaw is that copyright focuses on the author, and not on the work itself. It’s one of the reasons why its duration is measured in years after the death of the author, rather by reference to the work itself. That simply does not make sense in today’s world. Moreover, it is one of the key reasons why most of the 20^th century’s creative production is locked away behind the bars of what is called “orphan works”. Works we know or suspect are under copyright, but not quite sure for how long, or who could release them. All of this to “promote creativity”, indeed.

The third flaw is that copyright assumes that technology is static and more or less irrelevant. While already challengeable in 1886, when mass media were invented, it is definitely an absurd assumption today.

Without that assumption, Napster would never have had the impact it actually had, and we would not be plagued by the ridiculous situation that, whenever technology changes, content “owners” expect consumers to pay again for something they already purchased. Anyone who still has a collection of vinyl records, or who saw a Blue Ray version of a DVD they already own, knows exactly what I’m talking about.

Not only peer-to-peer networks, but also developments like machine-generated content (e.g. sports articles) or software written by other software, which fall outside copyright, are clearly challenging the static nature of copyright. Technology does affect copyright, and the way it is created. The Berne Convention does not state explicitly that copyright is the result of “human” creativity – but it clearly implies it. At the time, no non-human creativity was envisaged, though.

The fourth and fifth flaws are connected. The Berne convention assumes that copying is expensive and that distribution channels can be controlled. This is clearly no longer the case, as any person working in Digital Rights Management will confirm, and we should abandon these illusionary concepts.

So, what does this all mean? Is there a solution?

The analysis above is not complete, of course, and there are other issues that play.

Moreover, it is unlikely that any solution would be complete, or enable us to have a system that answers to the needs of all involved.

Copyright is at the crossroads of different, sometimes competing and conflicting interests.

As a society, we should try to and choose the option that benefits the most and damages the least, taken as a whole, and without undue consideration of private interests over and above those of society as a whole.

I think there’s one beginning of a solution that would tackle most of the flaws exposed. Moreover, it would also clearly be of benefit to any system of Open Innovation, or any other collaborative activity that involves copyright.

Every solution must be based on the principle that registration becomes a necessary condition for copyright to exist.

Registration is key.

It clearly identifies the work, and the author. It avoids discussions on who owns what. It creates clarity. It allows for unclaimed work to fall in the public domain, where it can be re-used for the benefit of society as a whole.

In today’s world, where we upload all of our virtual personalities into social media, it must be possible to organize a free or very cheap system of registration for any work that claims copyright.

If you don’t register, it means it’s not important enough to attract copyright. But the current system, which automatically confers a worldwide exclusive monopolistic right on anything anyone creates, until 70 years or more after the author’s dead, is clearly passed its sell-by date.

The registration solution addresses each of the flaws mentioned above. Not necessarily comprehensively or completely, but it does provide for a start of a solution to all of them.

Because, if we want IPRs, and copyrights, to support and enable Open Innovation, we should not only ensure that we can trust each other, but also that we can verify who owns what.

“Trust, but verify” – never thought I would quote Ronald Reagan in a blog on IPRs. But I do agree with him on this.