This is a very interesting development in the light of recent decisions on whether Intellectual Property protection applies to computer – user interfaces. In other words, does Intellectual Property apply to how we talk to computers?

Back in 2010, when Microsoft released the Kinect motion sensor, it was hacked very quickly. Already at that time, Microsoft decided to have an open API (technical interface) and SDK (software development kit), allowing other developers and programs to interact freely with the Kinect motion sensor.

Now, even the core code has been opened up, and is available under an Apache 2.0 open source license.

As IP professionals would know, the Court of Justice of the European Union (the supreme court of the EU) has ruled recently that, in the EU, graphical user interfaces are not covered by software copyright (you can find the decision here). It’s important to understand that the decision relates to the functionality of the interface – any design elements or other graphical elements can still be covered by classical copyright (as any artistic design) – but such copyright never covers the underlying functionality, i.e. what the interface does (which is to allow a human user to give instructions to the software program).

The functionality of such interface (and the code expressing such functionality) is free from software copyright.

Without going into too much detail or analysis, there is a very interesting question to be asked here. If the EU says that there is no software copyright in graphical user interfaces, would the same reasoning apply to motion user interfaces? My feeling is that the answer would be positive, since the CJEU also says that technical interfaces (API’s) are not covered by software copyright (the analogy is not perfect – API’s connect different bits of software, not the software and the user).

In other words, we now interact with our computers through the graphical screen of the machine, typically by pointing or clicking. If that is not protected by software copyright, does that mean that the software that allows human-computer interaction by motor sensing is also free from software copyright in the EU?

To my knowledge, the question has never been asked in a court in the EU. But Microsoft may, for this one, have been really ahead of the game.

But as technology is creating new kinds of currencies and new ways to pay, the question of Intellectual Property Rights in money becomes relevant.

1. New money

Amazon has recently started issuing its own currency, called Amazon Coins. Amazon creates and spends its Amazon Coins to pay developers, and will accept payment in Amazon Coins for Kindle purchases.

Amazon is not the first technology business to create its own currency. Microsoft created Microsoft Points, as did Nintendo.

Facebook also created its own currency, Facebook Credits in 2008, but closed down the system again in 201.

Moreover, there is of course Paypal, the now almost ubiquitous online payment system. This is sometimes even seen as an existential threat to some core aspects of banking, such as organizing payment transactions.

And there is BitCoin, the virtual currency created on the basis of an algorithm and computing time, which has recently collaborated with a bank to carry out certain real-world banking operations, such as payments. BitCoin uses an open source peer-to-peer internet protocol, that allows the creation of bitcoin nodes or bitcoin miners based on investments in computing time and solving hashes (e.g. subroutines for database mapping).

So what’s going on?

2. Technology and money

Money has many functions – it allows people to buy and sell (a medium of exchange), it is a unit of account, a store of value, and a measure of debt.

However, a key aspect in all of those functions is that money carries information with it. And Information Technology works on exactly that – information.

So it should not come as a surprise that private operators start to issue their own currency – after all, the monopoly of central banks to issue money is a relatively recent development (19th and 20th century), which never really managed to exclude all private issue of money. A tradeable coupon is, in essence, privately issued money. By that token, an essential part of Groupon’s business model (something which seems in flux) is also the creation of privately issued money.

3. Intellectual Property and Money

As technology companies start to create new currencies, a number of questions arise.

What is the value of such currency? How can it be converted into traditional money such as Euros or dollars? Who controls the currency? And what about Intellectual Property?

In this blog I will only focus on the Intellectual Property aspect of these new, virtual currencies, trying to address the question “can you “own” [the IP rights in] a virtual currency?”.

a) Patents.

Is it possible to patent the process of issuing a currency?

Certainly in the US, the answer seems to be “yes” – for the moment. Facebook has obtained a patent on a method to issue and manage a virtual currency, published in August 2012. You can access it here.

This is a typical “business method” patent, and I’m not really sure it would withstand the “Bilski” Machine or Transformation test that is currently in force.

This then leads to the question whether a process that is in essence fairly simple, straightforward and well-known, such as issuing and managing credit and converting it, becomes patentable when you describe it as done on a computer or through Information Technology, or add the word “virtual” to it.

Also, I’m not sure the Federal Reserve Bank (the US central bank) would be very convinced by the argument that the concepts of issuing and managing money and credit online or virtually were not known as “prior art” in 2010, the date on which the patent application was submitted.

But there is of course a wider issue here. Issuing money is subject to monopolistic rules in many countries – hence the expression “legal tender”. The issuing of generally convertible money (enforced through the legal obligation to economic actors to accept state money as payment) is typically a state monopoly – regardless of the technological way in which such money is issued.

However, it seems like Facebook may now have obtained its own monopoly on issuing a certain kind of money, as long as the particular steps as described in the patent are followed.

Which monopoly will win? The Fed’s monopoly on issuing money or Facebook’s patent monopoly on a virtual way of doing the same? My (virtual) money is on the Fed, but it will be interesting to see if Facebook ever tries to enforce its patent, and, when it does, whether it will stand up to the scrutiny in court.  Since Facebook recently abandoned its Facebook Credit system, this may be unlikely to happen, though. (This whole story also underscores the woefully inadequate operations of the USPTO. Issuing a patent on the method of issuing virtual money is, quite frankly, a sad joke, and clearly shows that the USPTO is not doing its job properly.)

Facebook Credits could only be used within the Facebook environment though, they were not set up as a universal internet-credit.

That’s different from “real” virtual currencies like BitCoin, which are intended to operate outside their own platform, and want to obtain the status of a really convertible virtual currency.

From the Facebook patent, it appears that BitCoin could probably also potentially patent some or more of its functionality; again, the patent system could then be used to monopolize basic economic functions when operated online.

While this obviously makes no sense from a general economic point of view, it could point into the direction of future discussions on who can “own” money, and whether the fact that money-related transactions become more and more technical, makes them more and more vulnerable to patent monopolies.

The conclusion seems to be that technical development on the one hand has a liberating potential effect, through the creation of new kinds of currency by technical means, and on the other hand may suffer from the typical stifling, anti-innovative effect from patent monopolies. However, the latter comment is subject to two important caveats: the Facebook patent (and similar patents that only describe a theoretical process, exactly as in the Bilski case) may not stand up to serious scrutiny in court, and the government monopoly on issuing money may intervene at some point.

b) Copyright.

It seems unlikely that copyright could apply to the functionality of a virtual currency. Copyright typically only applies to expressions, not to functionality.

Of course, the visual and design aspects of a currency, to the extent they can be separated from its functional aspects, can be protected by copyright.

These are unlikely to have an important impact on the value or functioning of such virtual money though, other than as a factor to identify the virtual currency.

c) Trademarks.

Which brings us to the next IP right: is it possible to trademark money? Here, the answer should be much simpler: to the extent the trademark is really distinctive, there’s no reason the service provided by a virtual currency could not be covered by trademark.

Of course, the meaning of the word “counterfeit” becomes quite different when we talk about virtual money.

In this respect, virtual money is probably subject to the same risks  and limitations as online banking – phishing is not exactly a new phenomenon; although it is unlikely to be covered by Intellectual Property any time soon.

d) Fraud and counterfeit.

One key aspect of any currency is that, for such currency to work, it needs to be trusted.

Here, BitCoin has struggled to a certain extent: it has not been free of hackers and problems with security.

However, counterfeiting virtual money is a very different thing from counterfeiting physical bills or coins. It is probably much more difficult, but if it works, it will be much more difficult to trace.

e) Trade secrets & algorithms.

A key aspect of e.g. the BitCoin system is the underlying algorithm. Even though the source code of system is available, some of the algorithm that creates the bitcoins is secret.

This should not be a surprise: a lot of the core intellectual property related to financial transactions is in complex algorithms developed by sophisticated mathematicians working for financial institutions and traders – often called “quants”.

Most of this IP is not protectable through patents or copyrights, and tends to be kept secret by its users.

As a result, it may be that trade secrets are a more efficient protection for the innovative aspects of virtual currencies.

3. Who can own money?

Based on the existence of the Facebook patent, it could be assumed that certain parts of the technological aspect of issuing new currencies could be subject to Intellectual Property.

That would mean that certain private operators could lay claim to monopolistic positions in creating such currencies.

It is, however, not surprising for the issuer of a currency to have a monopoly on their specific currency, so in this respect, it is not certain if IPRs actually add a lot of value.

The analysis becomes different when IP rights start to apply to generic aspects of a virtual currency – as shown by the Facebook patent.

But it is my feeling that it may not be safe to assume the Facebook patent is either valid or enforceable, and if it were, there is some likelihood that regulatory or political powers would actually intervene.

After all, the value of a currency depends on it being accepted by as many economic actors as possible; and building IP shutters may not be the most efficient way to go about it.

In other words: it is quite possible that an open-source approach such as the BitCoin one is, from an IP perspective, the more clever approach.

What seems certain is that this space will continue to evolve, and we are likely to see other new developments.

After all, to the extent banking is dependent upon information inefficiencies, further development of Information Technology could well chip away at the very reason of existence of banking; which could be described as the middle man, hoarding information on efficient use of money.

In this blog I will expand a little bit on why that is the case, and whether something can be done about it.

1. Personalized manufacturing

Remember the ringtone industry?

First started as a bit of a joke, and in order to get rid of that ubiquitous Nokia ringtone, it became possible to personalize the sound of the ringtone of your mobile phone. You could now have your personal choice on how the phone rings.

And people loved it.

Within months, a multi-million dollar economic activity was born, and everyone was creating, offering and downloading personalized ringtones.

Now, 3D printing has started to offer the possibility to print personalized shell cases for mobile phones.

Such personalized mobile phone shell cases are probably unlikely to become a similar run away success right now, but that is only due to the limited number of 3D printers that are around (in other words, for purely logistical reasons). Once capacity catches up, there is no reason why people would not personalize the case of their phone, in a similar way as they personalize their ringtone.

Especially if the cost is similarly low, which it will be.

This points to a key characteristic of 3D printing.

3D printing is “personalized manufacturing”.

And “personalized” is the key to understanding how 3D printing will affect and transform our society, and why Intellectual Property does not fit well with 3D printing.

2. Value of personalized

All major recent developments in consumer software and the Internet are based on the concept of “personalized”.

Facebook, Instagram, Pinterest, Google+, Google maps, Twitter, pretty much most of the App phenomenon, all those new developments and businesses are based on the concept of “personalized”.

Your personalized network, your personalized map, your personalized photos, your personalized life online.

And now the physical world will join in. Products will become personalized.

Your personalized shoes. Your personalized sunglasses. Your personalized teacup.

Everything will become personalized – because we all want the same thing: to be unique.

And we will be able to show how unique we are. The possibilities are endless.

This is a profound change. Since the start of the industrial revolution, we have moved away from personalized products (slowly and expensively made by craftsmen until then), to replace them by mass-produced, standardized products.

While no-one really likes standardized products, we all buy them, mainly because they are too cheap not to.

But 3D printing has a profound impact on that model. No longer will we have to settle for the designs imposed upon us by corporate designers employed by standardized manufacturers. We will be able to design ourselves, or buy, at a fraction of the price, the personalized designs made available online.

In other words, we will leave the manufacturing processes of the Industrial Revolution behind us, we will move beyond the industrial way, and return to the personal way; but this time available to all, at the same, or even lower, prices as the standardized product.

3. And Intellectual Property?

A key characteristic of the Intellectual Property system, as it currently exists, is that it is very closely linked to the manufacturing processes of the Industrial Revolution.

A patent (the right to exclude others to manufacture or distribute a product or use a production process) only makes sense if you make the same product over and over again, in the same or similar way.

In a world where manufacturing becomes personalized, patents effectively become completely useless – because patents need standardized manufacturing in order to have any meaning (let alone value).

The same is true for other IP rights. What could possibly be the point of registering a design, if it takes any person on their PC with some basic training an hour or so to modify it enough to steer clear of possible infringement, and then they can manufacture that design in their own home? The return on investment in filing a design becomes pretty horrendous.

Copyright, as I have stated many times, is a complete misfit for the digital age. It is based on assumptions that were true in the 19^th century, such as high cost of copying, control of distribution chain etc.

Those are simply not true anymore. But copyright is also particularly badly designed (pun intended) for personalized manufacturing based on digital files.

Copyright, in theory, applies to the design itself (to the extent it is not merged to the function), and to the digital file carrying the information necessary to print the product. But copyright does not apply to the function of the print, or the function of what is being printed.

And again, how can you possibly enforce copyright in a standardized product, when the value of 3D printing is in the personalization – i.e. that bit which would fall outside copyright protection in the first place?

I think it is a key aspect that is not well understood by IP professionals. 3D printing will personalize manufacturing.

And personalized things fall outside IP, because IP is based on principles of standardized manufacturing/copying.

After all, when was the last time you heard about the estate of Jimi Hendrix sue someone because they have as a ringtone the intro to “Hey Joe”? In theory, every ringtone is a breach of copyright.

But copyright can’t handle personalized things – so, for ring tones, it has become irrelevant.

Is that the way forward for all IP?

Since my last blog post (two years ago) a lot has changed.

The technology of 3D-printing has made great progress.

And the world of Intellectual Property has started to react to the challenge posed by 3D-printing.

Which, in turn, has caused a surprise reaction by the 3D-printing community.

1. What is 3D-printing?

Although 3D-printing has become much more widely known, not everyone knows about it, and still less people have actually seen it happen.

A 3D-printer is a machine that builds objects, by adding very tiny layers of material on top of each other. It “prints” in three dimensions.

The cheapest 3D-printers are now available at less than $1,000, and they can print you objects such as coathangers, teacups, decorative elements like cufflinks, toy cars, Christmas decorations at a negligible cost, but also prototype models of new product designs; something which typically costs many hundreds or thousands euros to have made.

And the technology is booming and evolving fast.

The potential impact of the 3D-printer on society at large has been compared to that of the PC – arguably, it may be bigger.

Imagine most of your products no longer manufactured in China, but around the corner in a “print-shop”? We could scrap half the world’s fleet, and reduce the ecological impact of any such production significantly. Because 3D-printing is what is called “additive” manufacturing, it produces significantly less waste than traditional manufacturing, which still uses the “carving out and throwing the waste away”.

3D-printing already uses many materials such as plastics, metals, ceramics, bio-materials (including both foodstuffs and elements of human tissue such as cartilage, or a lower jaw, or the carrying structure of organs such as kidneys), with drugs (DNA-based 3D-printing and guns just around the corner).

Since I first wrote about 3D-printing and their impact on IP rights, back in March 2011, things have evolved, both in terms of technology and in terms of Intellectual Property.

2. Technological and market evolution

3D-printing evolves quite fast, particularly at the low-end, customer facing side of the technology. While companies like Materialise and 3Dsystems have grown significantly by providing better and cheaper products at the high-end (allowing much cheaper and complex prototype development), there has been a boom in businesses offering DIY (indeed) 3D-printers, from Ultimaker to Makerbot to RepRap to PP3DP, and I’m forgetting many.

Printers become faster and more reliable, layers of construction become smaller, allowing for more sophisticated products, the scope of prime materials continues to grow.

But, as I said earlier, the real fast growth is, as always, in software. Designs of printable objects increases spectacularly, also thanks to websites like Fabber, Shapeways, Thingiverse and, again, I’m forgetting many.

But the really coolest thing I’ve seen recently is this: 3D-printing of vinyl records – with the music on it! It’s really “replicating music”; while the technology is not quite yet at the desired level, it gives an idea of things to come. Does that mean I will be able to physically copy over my old vinyl record collection soon?

3. Intellectual Property developments.

The world of Intellectual Property took notice, and a number of trends are starting to emerge.

First, the patent trolls wanted to see if they could chip in and make a quick buck out of this. In true patent troll spirit, former Microsoft CTO Nathan Myhrvold’s Intellectual Ventures, filed a patent on a system of Digital Rights Management (DRM)-control of 3D-printing.

Such a system would mean that anyone who wants to 3D-print certain files, would have to pay a license fee; it is not quite clear who to, or why, but it looks like Intellectual Ventures wants to be able to collect lots of money on the back of the innovation and creativity of others (a sad, but typical, use of Intellectual Property Rights, a system nominally designed to “promote science and the useful arts”).

In a similar vein, 3D systems, an “established” 3D-printing business, has filed a lawsuit against Kickstarter – this is an interesting case, since 3D systems seems to assume that because they own certain rights, they would have a right to stop Kickstarter from allowing fundraising for a potential competitor who might, possibly, be in breach of those rights.

So we see the first signs of IP holders trying to levy their usual tax on innovation into a new field.

Secondly, and more interestingly, though, a push-back has occurred by parts of the 3D-printing community.

Unlike the PC, when no open source was around, a lot of 3D-printing technology, both in the hardware and the software, is open source.

This has spurred the Electronic Frontier Foundation into trying to crowdsource efforts to prevent the potential damage to innovation done by patents such as the ones filed by Intellectual Ventures.

While this points at obvious serious flaws in the patent system, which, certainly in the US, continues to lay monopolistic claims to existing technology, or on the basis of mere ideas, it is interesting that crowdsourcing of information is used to try to remedy this. One could opine that finding out about prior art is really the job of the USPTO, but that is going to deeply into the political debate about Intellectual Property Rights.

Thirdly, the question of DRM-protection of printable files seems awkwardly timed, now that most DRM for either music or ebooks can be so easily circumvented, or is indeed lifted.

4. Foreseeable trends

While it is of course very dangerous to predict the future, there are some trends that can be seen.

On the technology side, it looks like the development of 3D-printing technology is both speeding up and spreading out. More applications, more advancement, more innovation is likely to take place. When people already receive body-implants for a lower jaw printed by 3D-printing in 2012, who knows where the limits are.

Also, since 3D-printing is spreading through communities of “makers”, the innovative advantages of an open source approach will probably lead to ever faster incremental improvements, alongside

On the IP field, the issues will be more problematic.

As I’ve stated before, the problem with patents is that they are very hard to enforce in an open environment – when even at the level of the mobile phone market, patent litigation is clearly not cost-effective, and destroys a lot of shareholder value, how will anyone be able to enforce patents against a myriad community of developers and makers?

Unless of course legislation is changed, and the scope of patents is expanded – but that would risk a serious backlash, as anyone who remembers the SOPA/PIPA story will confirm.

Design rights remain problematic; indeed, it is hard to see how design rights or design patents will be useful in blocking access to the market of competitive designs or products. Again, the issue of cost-effectiveness of litigating someone to keep products that can be manufactured at a much lower price off the market will meet with both practical and political problems.

Finally, there is the impact of copyright on the printable files. If I design a chair, or a tower for my toy castle, and that fits neatly with a “game of thrones” game, I do actually own the copyright in the digital file of such tower I designed myself, even if that resembles or fits well with a design from someone else. It is not clear how DMCA would apply to such a file, unless copyright would be fundamentally changed – right now, the copyright only applies to the code, not what the code does.

BitTorrent sites and other peer-to-peer approaches are already developing rapidly growing forums where people can share their files to be printed. It will be a lot less clear for right holders in a product to claim that they have rights in an .stl file developed by someone else, allowing to print a product that looks like, but not quite is, that original product.

Maybe the near future will bring a mighty new battle between those who want more control over the Internet (the right holders), and those who want to use it for the purpose of sharing and innovating (the 3D-printing communities).

Apple’s use of Intellectual Property is probably a prime cause of the Apple slowdown.

But a novel approach to IP – access to the Creative Commons – could help Apple to turn around and be innovative again.

Apple seems to be in trouble.

Apple is about to launch the mini iPad.

While the launch may still contain some kind of surprise, the consensus seems to be that, for the first time in years, Apple is trying to catch up.

That’s new. From the iPod, over the iPhone to the iPad, Apple was always significantly ahead of the competition, and often created new markets.

But the iPad mini is a follower, not a leader. It will compete with other 7 inch tables, such as the Google Nexus 7, the Galaxy Tab and the Amazon Kindle.

This means that Apple is on the defensive , and may find itself struggling to keep market share or gross margin at the high levels it currently masters.

Of course, Apple is not yet where Nokia is – but things can change fast, and the Apple slowdown over the last two years, consistently under-performing against its own, arguably very high, standards,  is remarkable.

Role of IPR in understanding why Apple is in trouble.

This should not come as a complete surprise, though, and Intellectual Property Rights are actually a good way to explain why Apple looks like it’s in trouble.

First, Apple has the problem of fighting the Android operating system, and Android is Open Source. As I have stated before, when Open Source and proprietary go head to head, Open Source tends to win. This is because Open Source, without the burden of IP rights, is more innovative and creative, and allows for faster and more efficient innovation than proprietary systems.

Now, although some claim that Android is not really Open Source, it is Open Source enough to benefit from the Open Source advantage of having less of the IPR-brakes that slow down innovation and creativity in proprietary systems.

This also goes some way to explain why Apple is actually suing Samsung and others over Android, and tries to block the Android system in courts, because it fails to beat them in the market.

The second clue is very much linked to this. Apple has become a very big IP litigator. It has triggered the great mobile telephony patent war, a mistake I have often compared to the start of the First World War – so far, many futile offensives and useless victories, but mainly a big stalemate, and an enormous amount of energy and money wasted with no result whatsoever.

Why is this important? It is important because successful innovators don’t really care about IP litigation. They focus on the products, services, markets and customers.

When a business turns into an IP litigator, it is a telltale sign that they are over the top, and are shifting focus from innovating to trying to collect monopolistic entry rents into the marketplace. Microsoft is a very good example, as it is morphing into the largest patent troll on the planet, with its license on trivial patents on certain Android functionality a case in point. But also look at other dinosaurs with large patent portfolios, like Nortel, Kodak, Polaroid and Motorola, maybe soon to be joined by Nokia.

In other words: IP is not only a cause of slower innovation, IP litigation is also a telltale sign that a business is no longer innovative.

Apple suffers from both: it is burdened by an IP-strong approach in both its innovation and business model, and gets slowed down by IP-litigation and IP-minded thinking.

How the new IP of Creative Commons can help Apple.

But there is hope.

The key problem that this FT article – correctly I think – identifies is that Google and Amazon are Apple’s most dangerous competitors.

This is because, unlike Apple, they use their hardware to monetize their content. For Amazon content is, of course, their main product; Google’s content is the Internet search data that gets accessed through its algorithms.

As a result, Google and Amazon have decided to sell their hardware at much lower margins, because their real margin is in the content they offer. This is starting to hurt Apple quite a bit.

Apple does not really have any content, other than iTunes. But the iTunes business model is in serious decline. The concept of people paying to download music looks pretty outdated in a world that gets swamped by new initiatives offering music streaming, examples being Spotify, Deezer or Grooveshark, but also other approaches such as Soundcloud or Hitlantis. Add to this the technological developments such as HTML5, allowing anyone offering music or Apps to bypass the Apple tax charged by iTunes or the App Store, and we see how this approach to content does not really offer a good solution.

I have no idea if Apple hopes to use TV content in this respect, but it is hard to see how it could have a distinctive difference, unless Apple gains some kind of exclusive access to important pieces of TV content – which I doubt, failing to see why content providers would have an interest in providing such exclusivity.

So how can Apple fight back?

One original way, I believe, which could upset the others, and certainly Amazon, would be for Apple to start using the Creative Commons to offer access to content. Creative Commons is like Open Source, it uses IP rights to prevent the IP brake on innovation or creativity to apply. And, like Open Source, it is of course a continuous source of innovation and creativity, far superior to any system based on the IP-monopolistic approach.

If Apple were to use its hardware to provide easy access to Creative Commons, it would gain access to an enormous wealth of content. While not chargeable upon download, such content, and a structured, consumer-focused and clever approach to it, would still be very valuable. And we know that consumer focus and ease of use were the main Apple differentiators in their approach to hardware, so there is some serious expertise there.

It would also give Apple an opportunity to start collecting the benefits of community and social networks, an area in which it is virtually absent today. Indeed, when you think about it, it is actually quite surprising how much Apple sticks to the old, 20^th century approach of a top-down relationship with its customers.

It may be because of this approach is too embedded that Apple ultimately may decide not to use the Creative Commons, because their closed ecosystem philosophy is anathema to the open character of the Creative Commons. But I think that that would be a big mistake: the Creative Commons is still largely untapped as a business opportunity. And in most open systems, there is a considerable first mover advantage.

I’m not in the business of giving investment advice, but I wouldn’t hold on to those Apple shares too much longer, if I were you.

Japan has recently issued a new draconian law  criminalizing “illegal” downloads.

A single download can get you 2 years in jail, or fines up to Y2m (more than US$25,000).

This is part of a worrying trend, where IP infringement is more and more heavily penalized, under criminal law.

But, at the same time, we see how most criminal cases against file-sharers either go nowhere, or collapse fast.

The most famous example, Kim Dotcom, the founder of Megaupload, received apologies from the New Zealand prime minister. While one of the founders of the Pirate Bay is now under arrest, (apparently, without being charged) the website itself continues to work, and allow its users to share content.

Imagine Barack Obama or Hillary Clinton apologizing to the poor woman who was recently fined an immoral US$ 220,000 for downloading 24 songs.

While more than 90% of downloads are “illegal”, and enforcement does not really make any difference, we see, time and again, politicians stating that the solution to IP “theft” is more enforcement.

But why is this policy failing so badly? Why is it that “pirated” content continues to flow across the Internet, and any attempt to stop it is either useless, or so obviously unfair, and therefore bereft of popular support?

1. There is no real evidence.

Criminal law is different from civil law. Civil law is about private interests clashing, and typically asks that a case is judged on the balance of evidence. But criminal law demands much higher standards.

US courtroom TV series have made the expressions “guilty until proven innocent” and “beyond reasonable doubt” almost household expressions.

Criminal law has a very profound impact on people – it can take away your property or your liberty. Therefore, the legal system has put in place severe and serious hurdles before anyone can be declared guilty of a crime.

And we observe how IP infringement cases consistently seem to fail to meet those standards.

The FBI wants to prosecute Kim Dotcom without releasing the actual files on Megaupload. That’s like charging someone with a crime, but the prosecution does not say where it took place, what actually happened, or who did it (and will make sure no witnesses are ever allowed in the court room). That’s just simply not good enough for criminal standards.

In the same vein, we consistently see how content right holders (aka the old music and film industry) think they can prosecute, without even having the burden of proof that they actually are who they claim they are (aka have the IP rights they claim they have). This effectively puts the onus on the defendant: proof you’re innocent, because we state you’re guilty.

And we all know instinctively that that is not right.

Sometimes people get charged because a download or upload is connected to an Internet Protocol address – their computer, or, a shared access to the Internet. But that is not evidence that the owner actually used it for that purpose, as was clearly established in a case where employees of Universal, Sony or Fox  were found to be accessing the BitTorrent (for you know what reasons), or a man in France was convicted, although he could establish he was not the person who used the computer to download.

If it wasn’t so serious, you would actually think these prosecutors are trying to whip up support for the pirate party.

2. There is no real victim

The higher thresholds of criminal law were set up in order to protect values such as physical integrity and property, when threatened by classic crime such as assault or theft.

But IP infringement is not “classic” crime.

Consider how, very often, there’s no real victim. Unlike the situation when you steal my car, and I can no longer drive it, an “illegal” copy does not actually diminish the value of what the original owner can use.

Intellectual Property Rights (IPRs) such as patents and copyrights are not really property; they don’t have the characteristics of classic property. There is no natural scarcity, there is no positive right to use in an IPR, and there is no “loss” in case of concurrent use.

Instead, IPRs are, from an economic perspective, monopolistic exclusive rights, mainly on distribution.

And, frankly, taking people’s house away in order to protect a distribution monopolist, doesn’t have that special ring of “justice” to it.

 3. There is no “wrong”

In the end, criminal law is about morality. Society decides to enforce those values it holds dear.

Criminal law aims to prevent and punish acts that we all consider sufficiently wrong, that we are willing to strip the perpetrator, to a certain extent, of their civil or human rights, by imposing a fine or taking away their liberty.

But, protecting the private interests of distribution monopolists falls very much short of values that society puts at the level where they merit criminal protection.

Busting a monopoly is not “wrong”.

Calling IPRs “property”, and calling infringement “theft” does not change the underlying facts that IPRs simply do not have sufficient moral value to be protected by criminal law.

And interestingly, it seems like some public prosecutors and a good part of the public start to agree on that.

Of course, the right holders will contest – they will claim their monopolies merit the heavy handed protection of criminal law.

But what does that say about the balance of power of private monopolists on the one hand, and the republic and its monopoly of enforcing criminal law, which is supposed to be governed “by the people, for the people”, on the other hand?

If we give criminal prosecution rights to one category of monopolists, what will stop others from claiming the same? How do we justify using the state’s monopoly to impose criminal law to grant random monopolistic rights to one economic actor, at the detriment of its competitors, and, most probably competition and innovation as a whole?

4. Conclusion

It seems to me that the more IPR holders try to enforce their monopoly by using criminal law, the more they are weakening their moral, and therefore, political case.

Criminal law is just too heavy an artillery to point at “pirates” in the middle of the battlefield of a society that starting to discover the benefits of file-sharing, and user generated content.

I would not be surprised if the attempt to try to apply criminal law to their distribution monopoly, may well have been a crucial political mistake of content distributors.

After all, why does society need a monopoly on the distribution of content? It’s not like it’s actually promoting the arts or useful sciences, is it?

In the UK, a government appointed independent study has reviewed the same problem. It is called the “Digital Copyright Exchange feasibility study”, and you can find the report here.

Below is my first analysis. I will look at three questions: 1) Does the report stay within the boundaries of current copyright, or can it think outside the box? 2) Does it address the real issues? 3) Does it provide useful answers?

Staying within (part of) the box

The report, unfortunately, refuses to question any of the basic premises of the copyright system. It never asks the question if the copyright system is fit for purpose. Rather, the report clearly states it stays within the current boundaries of copyright.

That is a great pity. We know that the current copyright system fails badly in the digital universe. To assume that this is due to the technicality of the digital system only, as the report seems to do, shows that the report sits completely “within the box” of the current system. Nowhere does it ask serious questions, or addresses the totally out-of-time premises of the 150-year old copyright system.

The authors of the report have worked closely together with the current content-distributing industry – and it shows. All kinds of statements as to why people do things are accepted without the slightest criticism.

As a result, the report stays firmly within the box of the old content-distributors; the record companies, the film distributors, etc. Their business models are never questioned, nor the basic question whether copyright law, and the resources of the state, including criminal law, should be used to protect a particular business model, based on a particular understanding of technology.

At the same time, the report turns a massive blind eye to the most relevant developments in areas that are covered by copyright, and where huge new activities online have sprung up, but outside the classical content distributors’ channels.

The report completely ignores the explosion of new content that has become available on the Internet outside classical channels. Music is no longer distributed by record companies, but by artists. Books are self-published. Etc. But nothing in the report seems to think this emerging group of authors need to be involved in any way in either analysis or solutions proposed.

In doing so, the report makes the classic mistake of thinking that the old content distribution business actually represents the creative industry (or is still a significant part thereof). To give but an example: the music industry is much, much more than the record companies. It involves such people like the actual musicians. But the report completely ignores this dichotomy, which, in the marketplace, is becoming ever more relevant.

Also, there’s pretty much nothing on relevant new developments on the crossroads of technology, content, and intellectual property.

Creative Commons is mentioned once, in a small example.

There is no mention at all of User Generated Content – a key trend that is sweeping away traditional understandings of copyright. To think that parents who film their children’s birthday party and want to mash it up online with other content, are interested in purchasing licenses to “happy birthday to you” song or other content, that right holders can then randomly withhold, is simply foolish in the extreme.

To think that “voluntary industry practices” will affect the explosion of users who will want to use, re-use, imitate, copy and apply all other kinds of functionality to content, is, quite simply, 20^th century thinking.

But it’s worse.

Not a word about other key industries that also depend on copyright.

Not a word about software. Not a word about functionality in the Internet. Nothing on Apps. Nothing on Open Source. Nothing on Big Data. Nothing on the Cloud. Nothing on hacking, open standards, the public domain. Where’s the analysis of Pinterest? Where’s the analysis on machine-generated content?

The report is, from this perspective, breathtakingly shortsighted.

It deals with a subset of a subset of issues, and extrapolates those into “digital copyright exchange”.

So, from the beginning, the issue of scope of this report presents a very serious problem to its usefulness or credibility.

What are the real issues of copyright in the digital age?

The report never seriously analyses any of the relevant questions as to why copyright is struggling so much in the digital world. There are some fleeting references as to why people might be “pirating” or why they might want to use peer-to-peer services, but there is no attempt at serious analysis.

Reasons or explanations advanced by the old content distribution industry such as the record companies or film distributors are accepted without even the appearance of critical thought.

The simple observation that business models based on creating artificial scarcity in a world where technical reproduction has become ubiquitous are untenable appears nowhere.

The report blandly accepts that copyright holders must be able to refuse to license their content. Then it goes on to validate the statement from the content industry that the lack of content cannot be a valid reason for piracy.

The consequences for the credibility of the report are, of course, disastrous.

If you don’t make a proper analysis of a problem and its causes, how could you possibly come up with a relevant or credible solution?

Are the answers useful?

And yet. There is one observation in the report that is valuable. It is the observation about the enormous importance of data.

This is a good and valid observation. The problem it points to is simple: who owns what, and how can anyone know who owns what?

As I have explained earlier, a mandatory digital registration system is the only workable solution to this problem.

The report recognizes the question, and does suggest, maybe, some kind of voluntary registration, but does not want to go very far in its solution. It calls effectively upon the old industry to voluntary put its systems on a comparable footing and start swapping data or make them inter-usable between systems.

Unfortunately, here, the report suffers from the same extreme short-sightedness.

Setting up a common database of copyright-held content is actually not difficult or expensive anymore. Technically, it has been possible for more than 15 years – in fact, pretty much since the invention of the Internet itself.

The problem is, of course, the old content industry. They wouldn’t be seen dead doing this – and they have consistently refused to use the technology available, in order to create simple and transparent data about who owns what.

Don’t forget that all new developments in both technology and business models in content (music, films, books,…) over the last twenty years have come from outside the traditional industry. This is true both for the negative impact, where the old business models are being destroyed, as for the positive impact, where new business models arise or new technology develops quickly.

For the report now to call upon that same old, failed, industry to do what they have consistently refused to do over the last two decades, is, it must be said, a very sad result indeed.

Conclusion

The report limits itself to an ever decreasing part of the market. It does not perform any meaningfull analysis of the causes of the problem it wants to resolve. Its solutions are re-hashed statements of intent that  the old content distribution industry has consistently failed to live up to, by that same old content distribution industry.

It is a missed opportunity, and a waste of effort and money.

The follow-up will fail, and its recommendations will not be implemented.

Marc Andreessen, co-founder of Netscape and currently co-founder and general partner of the venture capital firm Andreessen-Horowitz, wrote in August 2011 in the Wall Street Journal about how “Software is eating the world”.

While Mr Andreessen was building on earlier observations, such as the author of this article, that software is the “viral” industry, as it infects all other industries, he did provide some focus onto a very important phenomenon.

This phenomenon is the fast growing importance of software in pretty much any industry or human activity. This reflects is the practical side of the fact that we are converting (updating?) into a digital world.

This is a profound change, with many consequences.

One consequence is that the software invasion is not limited to the way products function or are sold. While it is true that a phone is no longer a phone, but a very powerful small computer with a basic personal conversation application, just like a car is turning into a very powerful large computer with a basic personal transportation application (an App that will automate soon), the presence and impact of software is much more pervasive than that. All other aspects of business, and society, tend to become computerized. From supply chain management to enterprise resource planning, from marketing to HR, from legal to sales(force.com), all aspects of activity become computerized, and the relative importance of software in all of those aspects is growing.

A second consequence is that the growth of the digital part of an activity inevitably outpaces the growth of the non-software part. This is caused partly by Moore’s law, but also by the fact that software is not called “information technology” for nothing. Information tends to multiply, and increase its productivity, much faster than hardware.

The graph gives a pretty good illustration of what happens when software enters into an activity or product. The red line represents growth in software added value, the blue line in hardware added value. The relative importance of software tends to grow at exponential or semi-exponential rates, while the non-software parts grow at a more linear rate.

Inevitably, the software becomes the most valuable and important part of the product, service or activity.

And this has some profound consequences on the way businesses define their IP strategy.

Why is this relevant to IP strategies?

There are two reasons why the viral effect of software is very relevant to all IP strategies.

The first reason is related to the business models that apply to software.

Software is brought to market through business models that are different from those used for hardware or services.

One of the important differences is that software is not sold, but licensed. While the license can be bundled with other aspects of business, such as services (maintenance, support, implementation, etc), and those services will often play an essential part in building the business, the license is always a core part of any software business model.

And the great advantage of licenses is their flexibility and versatility.

Software licenses range from extremely closed to extremely open. Rights of licensees can be very wide, or very limited. There are relatively few legal limitations on how you can license software.

And this, in turn, offers great potential to structure, adapt and modify business models in new and different ways.

In practice, it means that, as the relative importance of software in a business offering is growing, such a business acquires more flexibility to modify and fine-tune its business model and strategy.

The second reason is that software is one of the few technologies where both patents and copyrights apply.

Copyright applies to the code in which software is written. But copyright only protects against copying the particular code of a piece of software, it offers no protection to the functionality expressed through that code.

On the other hand, it is possible to patent certain functionalities of software. Even though the conditions of patentability vary between the major jurisdictions, the principle remains the same: patents will apply to a function of the software, regardless of the code that expresses that function.

This means that the viral effect of software, once it has “contaminated” a business, and software becomes an important part of the value proposition of such business, has as a practical effect that it will add complexity and variability to IP strategies, because more IP rights will apply to a much wider range of possible business models.

IP rights actually don’t fit very well with software

But there’s more.

When we look at how software businesses deal with IP rights, we notice that, until relatively recently, “technical” IP rights, by which I mean patents and copyrights (but not trademarks) did not have a very strong influence on either technological development or business models around software.

There is in reality very little software that gets patented, and, while copyright is a key element in determining the licenses under which software is sold, there is actually very little use of copyright in its “classical” way, which is to prevent competitors from using your copyright.

It is only since software has invaded the market of mobile telephony that we start to see a lot of patent litigation and enforcement around this technology – and this raised awareness of IP is related to the technical interaction between the software and the hardware, rather than the software itself.

The reason why IP rights are in general weak in software is related to the specific characteristics of software, which operates at three levels – and IP rights don’t deal with those levels in the same way.

The three levels at which software operates are technology, functionality and content.

Technology is the level where we may find patents: technology is the underlying core of software, and the level at which software interacts with hardware. But, as said, while some aspects of this level are patentable, and do get patented, a lot of innovation of software at this level does not benefit from a strong protection IP strategy. This relates e.g. to software languages, middleware, operating systems and similar technologies.

The reason why IP rights don’t work very well at this level is because their success is dependent on their open character. Think of the original story of Microsoft, who beat Apple back in the 80s and 90s, because Microsoft’s technical standards were open, and anyone could (and did) program for Windows, whereas Apple kept everything closed, and was almost pushed into irrelevance.

This story is repeated in the success of the Apple App store in the beginning of the 21^st century: only because the development kit is effectively completely open, was Apple able to get developers to bring out those millions of Apps with their billions of downloads.

In other words, the more you close the system (for which you could potentially use patents), the less success you will have in the market.

At the level of functionality, the story is worse. Not only is it much harder to patent “pure” software functionality, it is also much more useless. This is caused by the relative flexibility and ease with which such functionality can be created – the arms race is heavily tilted against patenting functionality. And copyright, as we know, does not protect functionality.

Finally, as far as content is concerned, while copyright applies, it will not come as a great shock to hear that Information Technology enables free copying, from a technical perspective, much easier than its opposite, the rather ineffectual DRM or digital rights management.

This is, in turn, re-inforced by the advent of user generated content, a tendency that blurs the line between function and content, and that turns every consumer of content into a producer of more, derivative content. This is a phenomenon that current IP rights have no valid answer to – and so they risk being ignored, which is exactly what we start to see with phenomena like Pinterest, but even Twitter and Facebook.

Moreover, the speed of innovation in software is staggering. 50% of all software used today is less than three years old. That means that the turnover rate of technology is so fast, that the classical approach of IP rights, aimed at recovering over longer periods of time the initial investment in technology, has not sufficient time to take root.

So we see how “classical” IP rights are significantly weaker and less relevant in the software world, because of the characteristics of software.

And that’s not all.

The shock of Open Source

Open Source uses IP rights, for a purpose that aims specifically at preventing IP rights to apply.

The copyleft, viral, licenses such as the GPL (the GNU General Public License http://www.gnu.org/licenses/gpl.html) , effectively prevent the normal operation of IP rights, where an exclusive right holder will be enabled to enforce the protections offered by IP rights to demand a premium or rent for the right to use the technology developed.

This is done through enforcement of the copyright license, which obliges the licensee to respect the four freedoms of Open Source, which include the freedom to run on any technology, and modify the software – approaches that are anathema to classic IP strategies.

And Open Source is no longer a marginal phenomenon, it is quickly becoming mainstream.

Current estimates are that more than one third of all code written in 2011 was written in Open Source code. Open Source proponents claim that 75% of all enterprise software contains Open Source elements, and predict that this number will rise to 99% by 2016.

In most markets where Open Source enters and acquires critical mass, proprietary software providers tend to get pushed out of the market, or become marginal players  themselves, surviving only through a focus on niche markets or niche functionality.

This is caused by the fact that most users, and certainly B2B users, find that Open Source software tends to be better, more innovative, more secure and more stable than their rival proprietary products. Time-to-market is significantly faster for Open Source software, step-in costs are lower, and vendor lock-in issues are much easier to handle.

Moreover, any industry dealing with open standards will have a tendency to go to Open Source. It is no coincidence e.g. that, as the car manufacturing industry wants to continue to cut costs and ensure interoperability between its different providers, OEM or otherwise, up the value chain, it is moving into the Open Source direction.

This will have an important impact on how IP rights are used.

To put it as a caricature: if everything becomes software, and all software becomes Open Source, are IP rights doomed?

The increased relevance of IP strategies

I don’t think IP rights are doomed.

What will have to change, though is how we use IP rights, and how we define what an IP strategy is.

Historically, an IP strategy is about protecting investment in innovation and technology.

With the advent of software, and the rising importance of Open Source, that will have to change in a number of ways.

The first change is that the question on use of IP rights in the business model will become more complex and more sophisticated, both in terms of more IP rights that apply, and a much wider variety of business models available.

The second, and most fundamental, change is how IP rights will be used.

IP rights will no longer be used to simply “protect” innovation, they will become an essential tool that determines how innovation is brought to the market.

Just like Open Source uses copyright (an IP right) to enforce its anti-IP philosophy, so will any business and IP strategy have to look at the way it can use IP rights as an essential part of the structure of the business model, supporting the ultimate goals of the business.

Another important consequence will be the relative decline of the importance of “technical” IP rights, such as patents and copyrights, versus the growing importance of trademarks, designs and logos. These are IP rights that are not based on technical or creative innovation, but on identifying and distinguishing a product or service from its competitors.  As the protective aspect of technical IP rights becomes less relevant, the importance of identity IP rights, and branding in general, will increase.

This is because businesses will coalesce their technical skills around the value of their brand and trademarks, rather than through the possibility to block technical copying by competitors. A good example of this trend is Red Hat, the first $1bn Open Source provider. Their license to Linux or other Open Source products is based on a combination of services, specific customization, technical support and the use of the Red Hat logo and brand. For a lot of Red Hat products, the source code is available but you have to invest time and money to get it, and potentially approve it.  Why not spend that money on the reassurance of a skilled provider who will help you solve your problems? After all, for a lot of products, customers find that the question “does it work”  matters a lot more than “who owns the IP”?

Other IP rights may struggle. It seems difficult to see how Trade Secrets can remain very relevant when the amount of data produced by humanity (including its computers) continues to explode at a rate of a 100% increase every 18 months, and where every second year can claim to have produced more data than in the entire history of mankind until the end of the previous year. The problem is not so much that we will forget how important Trade Secrets are, it is just that the relative cost of keeping something secret will become prohibitive when all the other information drops 50% in cost every 18 months. It is another example of the immense creative destruction power of the combined exponential increases in computing power, communication capability and data storage.

What that means is that IP strategies will no longer be able to focus simply on the “protection” side of IP rights, but will have to work with the structural, constructive side of IP rights, enabling businesses to better understand what their unique value-add is, and then structure IP rights around that value-add, and bringing it to the market in the most efficient way for that business.

And the balance between those different IP rights will become, even more than today, a key consideration in any business strategy.

In other words, IP strategies become, much more than today, a key part of the heart of the business model itself.

But innovation can happen at any level. It can be inventing a new technology, it can be process or method based, it can be through applying existing ideas in a novel way, or in many other ways.

A key element to all innovation is Intellectual Property Rights (IPRs), and the way they affect the business model.

Why?  Because IPRs are an essential tool to bring innovation to the market.

The key to understanding this is that IPRs are about much more than filing a patent or understanding your freedom to operate (understanding if other businesses have IPRs, such as patents, that could block your access to market).

There are three aspects to this:

1. IPRs are about technology and market

IPRs are about much more than a technological development. They always have to be understood, and used, in the context of the actual product and service, and in relation to the market in which they are used.

If you develop a new technique, but the market has twenty possible alternatives, then filing a patent is probably quite useless, and a waste of energy, focus and money. On the other hand, if your competitors are opening up their technology and creating an open source community, it may become much harder for you to break into their network, and you may find yourself left behind by the market.

Market conditions, and the way technology is evolving, are key to understanding which IPRs can be good for your business, and which may be less efficient.

So make sure that whatever you do with IPRs is based on how you see the market develop, and how technology can give you an edge in that market.

2. IPRs are about business models and strategy.

One of the essential elements of any business model is understanding the specific, unique value you bring to the market, and what that market is willing to pay for it, either directly or indirectly (e.g. Google innovated by offering more efficient search, but their business model is based on selling the ability to be found).

For any product or service that has an innovative aspect to it, understanding how IPRs affect such product or service, is always an essential part of establishing the business model.

Should you protect, or rather open up and share? If you do, how much and to what extent? What are the different options? When your customers buy your product or service, which rights are they actually acquiring? Which rights do you obtain upstream, and how can you sell them on downstream?

These are not “legal” or “copyright” issues, they are key components of any business model, and need to be addressed when that business model is being constructed, not as an afterthought.

And they are also key to any strategy.

Look at the example of Lego. When all of its “hard” IP was expired, and it only had its brand value left, was losing money, and cheap copycats of its building blocks were swamping the market, one of the key components of Lego’s turnaround story was its innovation in creating a new form of Intellectual Capital. It converted those millions of young, and not so young, Lego engineers, into an online community, that shares its designs, uses online tools, and always buys Lego to express its creativity. In a way, Lego has integrated the Intellectual Capital of the combined, aggregated creativity of its customers into its business model and its strategy.

3. IPRs are about risk and opportunity.

While it is true that IPRs are, in essence, negative rights (they provide the exclusive right to block others from bringing something on the market, not the actual right to use what is protected), it is important to think of them in terms of both risk and opportunity.

The risk factor is typically reasonably well known: what risk is there someone will block my access to a market on the basis of their patent, design etc.?

But don’t forget that the risk goes two ways: if you own certain IPRs, and use them in the right way in your business model, you may have a bargaining chip, or be able to influence other people’s behavior.

And what’s more, and more important, is that IPRs are also about creating opportunity.

They create the opportunity to shape the rights you grant your customers in exactly the right way that allows you to get the most benefit out of a happy customer. An important part of the win-win is shaped by the rights that are granted by each side – understanding those rights and modeling them in the right way will be essential to business success.

When a license to use software is written in the right way (be it open source,  proprietary or a hybrid), that comes down to using IPRs to create opportunity, and to choose the most appropriate way to use IPRs to grow the business.

The challenge, but also the opportunity, is that there is a lot of flexibility in this area, and, indeed, a lot of creativity and innovation in the way IPRs are used today to support business opportunity and strategy.

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.