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.

It is joined at the hip with the BetaGroup coworking space in Brussels.

We assisted Leo Exter, founder of westartup, in understanding how IP rights apply to his platform and community, aimed at sharing and spreading ideas. We also assisted him in developing the start of a European network/distribution of westartup-sites.

Leo said the following:

“There’s a very good guy who regularly works with startups – if you
haven’t met him yet, talk to Joren De Wachter.  I’ve worked with him
myself – he is honest, transparent, and gives very good advice on legal and
related matters.  Specializes in business models linking content and
software.“

They design, operate and host websites, and create corporate brandings and designs. They had developed this clever plug-in in an open source web-design evironment. Among other things, we are helping them in finding a structure to bring this plug-in to the market, in a way that allows new revenue, while safeguarding the investment they made in the development of this important Intellectual Property.

Recently, we have helped them to restructure the business by identifying and valuing all IP assets, and sheltering them from operational risks.

Lots of IP issues, from the creative commons licenses used to advising to prevent the site to become a place where people breach other people’s copyright.

In collaboration with US counsel, we advised the founders on how to structure that part of the business. The software enabling the writing of musical scores has been downloaded more than 2 million times.