Micro-Payments for On-Line Contents: Is the The Long Tail No More ?

I almost let pass the recent announcement that the Wall Street Journal (read News Corp) plans to introduce micro-payments for individual articles. What I read is that the micro-payments will apply for readers who choose not to pay a $100 annual subscription fee. Reports have noted that Financial Times is also considering a form of micro-payments for its contents.

These announcements are the latest salvo in the Armageddon drama in which the print media seeks to find a business model that can offer some type of economic viability in an age of promiscuously available free on-line content. The old mainstays for supporting contents in the print era--subscriptions, want-ads and other forms of advertising--appear to be inadequate by themselves in the on-line environment (e.g., Craig's List makes the want ads service a virtual online non-starter for such news organizations).

I recognize full-well that the drama that is unfolding for a business model for online news contents still has a number of scenes, if not full acts, to go. In particular, I recognize that cultural mores are such that there is an aversion to paying for heretofore free contents. Don't get me wrong, I am as an avid a user of free online contents as anyone. Still, there is a deep-rooted residue of the Old Media within me that rationalizes that subscription support for online content is part and parcel of a vibrant press. But when I tell this to my kids, I tend to get a bit of a glazed reaction. Acculturated to wholesale access of free contents, the learning curve towards an alternative conception of content availability is a daunting, uphill, battle.

Against this backdrop, I still hold out a lingering hope that a business model for online news contents will take root based on something other than nostalgia for the print media. I see this hope as based on a marriage of copyright and trademarks, where the latter is the driver to monetize value in the former.

By this I mean that a smallish number of strong news brands will succeed in being able to charge for their contents primarily due to the fact that such contents are made available under the brand. In a rough analogy to brands in the bricks and mortar world, just as a strong brand succeeds in extracting monetary benefit for goods that would otherwise not enjoy this pricing advantage, so to will the strong news brands succeed in monetizing contents that would otherwise be sought for free. Stated otherwise, a strong brand will always be able to monetize value, even in the exaggerated case where the value of the non-brand (content) product will approach zero.

If that be correct, then one wonders how Chris Anderson's "long tail" will fit in. As readers will recall, Anderson posits that the on-line world frees up both supply and demand at the speciality tails of a product category in comparison with the limited offerings that are inherent in a bricks and mortar world of distribution. Instead of a small number of mega-winners, the "long tail" promises a potentially large number of niche winners.

That view may be correct for the sale of widgets in an online environment, but it would seem to have less currency in the micro-payment world for online contents, as I have suggested. The reason is clear: If the model succeeds, there will be a few winners, able to monetize their contents, and a large number of other content providers that will struggle or simply be unable to monetize their products. How such a bi-bifurcated world, bereft of the long tail and with only a few winners will impact on the nature and quality of the contents themselves, is worthy of a separate posting.

Spotify mobile app -- will it spread from Android to Apple?

Readers of this blog might not yet have seen this -- but Spotify (see previous IP Finance posts here, here and here) have demo'd a hotly anticipated mobile application at Google IO 2009 on Google's Android mobile operating system. Video on YouTube here.

The market penetration won't be particularly high as long as it remains on one device, but there has been some indication that it is coming to other mobile devices. Spofity apparently posted an advert for a developer for Nokia's s60 platform, so there is a good chance a similar application will be on its way for high-end Nokia phones. It remains to be seen whether they will manage to get an iPhone application through Apple's fortress. I can imagine Apple coming up with any excuse to block it from the app store.

In any event, it certainly represents a threat to iTunes. It will probably also help Spotify sell more Premium subscriptions, but there has not been any information yet about what the pricing will be for the mobile app. It will almost certainly be data-intensive, so if its being used on the move the mobile operators will want a piece of the action.

Also interesting it the 'offline sync' feature which raises copyright and licensing issues. Details are few and far between, but it seems like something of a download/streaming hybrid, being neither download-to-own nor streaming in the conventional sense.

Written by Andrew Logie, to whom IP Finance offers its thanks.

A Call for Your Favorite (Or Least Favorite) IP Clauses

The real "plumbing" of any commercial IP practice is the nitty-gritty of contracts terms. I, for one, as I approach almost 25 years in the practice, still find IP-based agreements, especially licensing agreements, to be a continuing challenge to both my analytical and drafting skills. That said, something that I heard in preparing for the bar exam of the State of Ohio about the time that Ronald Reagan was getting elected president: "When it comes to knowledge, you collectively is always smarter than you individually."

And so--I am reaching out to all of you. I would like to devote periodic posts to issues of IP contract drafting and construction. To do so, I would be most grateful if the readership (whether lawyer or otherwise) would share his/her thoughts. What kinds of IP clauses do you most like, what clauses are most problematic, what kinds of IP contract issues are most troubling, and so on? I will then fashion your comments into posts for the readership. The benefit will hopefully redound to all of us.

Russian roulette as 2% of Facebook stock goes for $200m

The Chicago Tribune reported a couple of hours ago that Facebook is to receive a US$200 million investment that values the social networking company at US$10 billion -- even though it has yet to turn a profit. The investment, by Russian company Digital Sky Technologies, is in return for a stake of just under 2 percent of Facebook's preferred stock. This is in addition to the US$400 million or thereabouts in equity investments which Facebook has received from Microsoft Corp., Peter Thiel's Founders Fund and venture capital firms Accel Partners and Greylock Partners.

To IP Finance this looks like a risky punt. While Facebook is admittedly hugely popular, its portfolio of IP rights doesn't appear to pose particularly high barriers to market entry; the more highly the brand is valued, the greater is the incentive to competitors to emulate it and to throw money into close competition. Further, while Facebook has 200 million users, around 70% of these are from outside the US. This means that the market reached by advertisers is relative diverse in cultural and geographical terms -- and many of its users are children whose financial spend and nagging power is relatively limited. There seem to be so many advertising-driven websites and online services these days and, with tough market conditions ahead, the seemingly endless rise in internet advertising spend is bound to come to an end, possibly causing the equivalent of the dotcom crash.

Content Industry v SABC

South of the equator almost an entire content industry is taking on a national television channel by staging a mass protest on 4 June 2009 over alleged unpaid fees and unfair business practices and terms, some relating to IP ownership. The South African Broadcasting Corporation (SABC) finds itself portrayed as a dysfunctional non paying bully by the Television Industry Emergency Coalition (TVIEC) a coalition of content providers who have banded together to address a problem they say threatens their very existence. Depending on which news source you read (egs here, here and here) the total amount allegedly unpaid ranges from $5 million to $7 million. The TVIEC and SABC have asked the government to intervene. Afro-IP's comments on the IP aspects of the TVIEC's open letter to government may be found here.  Since then news of the mass protest has surfaced. It seems that government has little choice but to intervene because a defunct SABC (SA's equivalent of the BBC) has significant implications for the South African public. One hopes that a bail out does not come at the expense of an independence the SABC has done well to achieve to date.   

Smelling like roses

Call a rose by any other name and it may not smell as sweet; but manage the transfer and sale of a company name in liquidation properly and you could come up smelling like roses.

According to The Insolvency Service, in Q1 2008 there were 3,210 liquidations in England and Wales, an increase of 4% from Q1 2007. By comparison in Q1 2009 there were 4,941 liquidations which, by the Insolvency Service’s calculations, is an increase of a massive 56% on the same period in 2008 (although according to my calculation it’s marginally lower at 53.9%).

As almost every commercial entity owns intellectual property of some description it does not take a rocket scientist (or the lawyer protecting his patents) to realise that legal practitioners dealing with valuable assets such as IP rights are much more likely to come into contact with insolvency practitioners than in previous years. And, in order for insolvency practitioners to maximise the potential assets from insolvent companies they should pay heed to fully exploiting such assets.

Once a company has been wound up it is commonplace that the official receiver gives notice of the bankruptcy order to courts, sheriffs, bailiffs, HM Revenue and Customs, the Land Registry and other professional bodies; which should include IP rights’ registries. One of the most common IP rights any company is likely to hold is that of its name, and registered names can be found in the registrar’s index of company names at Companies House. This name may or may not also be a registered trade mark, but we will save trade marks for another day. Even if the company name does not have significant goodwill in the market place remember, it may have significant financial value to other persons involved with the company and should never be overlooked as a potentially valuable asset.

The insolvent company must adopt a new name if its old one is to be sold

Importantly for the practitioner dealing with the sale of a company name to a third party, it will be necessary to change the name of the company in liquidation with Companies House so that the name can actually be used by the party purchasing it. This is because by virtue of s.26(1)(c) of the Companies Act 1985 (“CA 1985”) a limited company may not have a name which is the same as another registered companies’ name.

How do you change a company’s name?

For a name change to be made possible, a company requires a special resolution of shareholders (s.28 (1) CA 1985). If the purchasers are also the shareholders of the company in liquidation, then there should be no problem in obtaining a special resolution. However for reasons discussed below, issues may arise if directors or shadow-directors of the company in liquidation plan to be involved in the management of the new company.

If purchasers are not shareholders in the company in liquidation it may be possible for them to buy shares so they can pass the necessary special resolution. But beware of s.127 Insolvency Act 1986, which states that any transfer of shares after the commencement of winding-up is void unless otherwise ordered by the court.

If the shareholders cannot be found, do not agree to a resolution, or the court does not agree to a post winding-up transfer of shares, the purchaser may be satisfied if they can simply call their company by a similar name; in fact a little re-branding signifying a change in ownership may be beneficial to the value of the brand. Again, there may be certain restrictions if the directors of the insolvent company are involved and these are discussed below. The Registrar of Companies does have the power to direct a company to change its name if it is too similar to another company name on the register, so before adopting the new name a purchaser should gain permission from the Registrar. The official receiver should be aware of any attempts to register a name which is similar to that of the company in liquidation and inform the Registrar should they become aware that such an attempt is being made. The official receiver may not actually want to block such a move, but simply to ensure that adequate payment is made for the use of that name.

Restrictions on transfer and s.216 of the Insolvency Act 1986 (“IA 1986”)

When transferring the registered or trading name of a company, the consequences of s.216 IA 1986 should be considered. S.216 deals with restrictions on re-use of company names. It applies to directors or shadow directors of a company who were practicing as such any time in the year preceding the liquidation of that company. A person who is, or has been in the 12 months prior to the date of liquidation, a director or shadow director of the company in liquidation is prohibited from using, for a period of five years, a name which is the same or similar to the registered or trading name of the company in liquidation.

If the company name embodies the whole of the company in liquidation, or if the name is being sold as part of the entire business, then the purchaser must adhere to the procedure outlined in r.4.228 of the Insolvency (Amendment) Rules 2007 (“I(A)R 2007”). If the name does not represent wholly or substantially the business then r.4288 will not apply and leave of the court will be required. In this instance prospective purchasers should then provide the official receiver with evidence that such application has been made and there should be no sale of the name until leave has been granted.

The rule itself states that prior to the sale of the business and before the purchaser is likely to contravene the prohibition, they must give notice to every creditor whose name and address is known, or potentially available through reasonable enquiries, and then publish the notice in the Gazette. The purchaser may give and publish such notice prior to the sale of the business, but must do so no later than 28 days after that sale is completed. Such a notice cannot be retrospective and must specify

* the name and registered number of the insolvent company;

* the name of the person subject to the prohibition;

* that it is their intention to act in ways which would otherwise be subject to prohibition in connection with, or for the purposes of, the carrying on of the whole or substantially the whole of the business of the insolvent company; and

* the prohibited name.

As long as this procedure is correctly followed then leave of court as required under s.216(3) is not required. This is a very important provision to adhere to and if there are plans to sell a company name a conditional provision should be entered into the contract for sale to reflect this.

Unauthorised changes and problems an official receiver may encounter

Unauthorised change of a company name can happen and when it does it often causes problems. Members of a company have been known to attempt to bypass the official receiver when transferring the registered name of a company in return for payment. This is achieved by passing a resolution to change the name of the company in liquidation without the knowledge of the official receiver and then using the vacated name for another company. In such circumstances s.208 IA 1986, which deals with misconduct in the course of a winding-up, might be relevant if an officer of the company, having knowledge of the passing of a resolution, conceals the information from the official receiver. Those making unauthorised changes should also watch out for s.207 IA 1986, which deals with transactions in fraud of creditors and is particularly relevant if the company name is valuable and the shareholders who effect the change of name are also officers of the company.

Although the directors’ powers to act in the company’s affairs cease upon the making of the winding-up order, shareholders in a company acting unanimously have common law powers to waive irregularities to achieve informally a result which would otherwise require the observance of a specified procedure. To effect the change of name without the official receiver’s knowledge the members of the company will have met, passed the appropriate resolution and had the company’s name changed by Companies House. In this instance there might be nothing the official receiver can do to halt the process as the name of the company may have already been lawfully changed. Before the application is registered, Companies House do have a procedure whereby, in compulsory liquidations, they may contact the liquidator to establish whether such a name change has indeed been proved; but they are under no obligation to do so.

In circumstances where the official receiver becomes aware that such a change has occurred, it is important that they make an application (which can be made without notice) to change the title of the proceedings and a direction that this form of title be used in the future winding up of the company. A short report explaining how the change of name occurred should be annexed to such an application and the resolution and change of name certificate should also be attached as exhibits. If this is not done the official receiver may be vulnerable to defamation claims, as from that point on they will be referring to a certain company name as being in liquidation when it is not.

If the official receiver is asked to consent to change of the company name for consideration of a sum, they should avoid entering into a contract which binds the company in liquidation to change its name because, as discussed, that can only be done by special resolution and the official receiver has no control over that process.

If the official receiver, or purchaser of a company name, adheres to the provisions and is aware of the potential pitfalls, then the sale of a company name can be a lucrative and beneficial sale for all parties concerned. And besides, everybody likes to see a familiar high street name survive liquidation!

The war on counterfeits: how much would you spend?

Quoted in a press release today, the UK's Minister of State for Intellectual Property David Lammy has emphasised the Government’s commitment to fighting counterfeiting and piracy with the launch of guidance designed to highlight the Proceeds of Crime Act 2002.

Right: at present the sums lost annually to counterfeits dwarf the sums spent in reducing or recouping that loss.

The guidance leaflet

" ... seeks to raise consumer and market trader awareness of IP crime as well as warning would-be buyers and traders of counterfeit goods of the real cost – not only in terms of economic damage but also the risks to health and safety".

Says David Lammy:

"Counterfeiting and piracy rob our economy of millions of pounds every year - intellectual property crime is worth £1.3 billion in the UK with £900 million of this flowing to organised crime. It affects people in their day-to-day lives presenting not just bad value for money but also posing a real risk to public safety.

"Legislation alone will not combat counterfeiting and piracy. Laws must be fit for purpose but effective enforcement is key. The Proceeds of Crime leaflet sends a clear message that we are all serious about tackling this problem."

The press release adds that developments in technology and communications have led to increases in intellectual property crime over the past decade, with estimates that the international trade in fake goods is worth around $200 billion - higher than the GDP of more than 150 countries.

These figures - an annual loss of £1.3 billion to the UK, and $200 billion worldwide - may be right or wrong, but it is impossible to determine them with any accuracy. Figures that can be determined with some accuracy, however, are the sums of money that are spent by the public sector specifically for the purpose of reducing or recouping this loss. Does anyone have such figures, or at least an estimate of them? Given the loss to the revenue of vast sums in value-added tax , corporation tax and income tax which results from trade in counterfeits and pirate product, it might be expected that the UK government, nationally and locally, would get a decent return on its investment if it spent something like £130 million a year on tackling it -- rather than leaving IP owners to struggle on their own initiative and at their own expense.

(Brand) Paradise Lost

Permit me to recount a personal tale of brand lost, brand gained, unexpected consequences and the interweaving of products in our daily lives. The story starts with a present, the gift of a well-known brand of MP3 player from my family on the occasion of a birthday milestone that I would rather forget. The problem (for me) from the beginning were the earphones that came with the unit, those ear buds that always seem to slip out of my ears and provide only adequate sound reproduction.

OK, I said to myself, the MP3 manufacturer doesn't really specialize in earphones, so let me trade them in for an up-scale set made by someone who specializes in earphones. So I trundled to a local outlet of a leading U.S. retailer of consumer electronics. Surely I must be able to rely on the service brand goodwill of this chain to rely on its ability to stock earphones of good quality and reasonable price. I found the section displaying earphones, and I took a fancy to a set bearing a leading international brand for consumer electronic products. Surely I must be able to rely on this double dose of strong service mark and strong trademark to safely purchase a quality set of earphones. And so I did.

The earphones were fine, obviously the reliance of strong service mark and strong trademark had proven itself. Still, there was one odd feature: the ear-phone cord was in fact divided into two parts. I guess the idea is that if you want to put the MP3 device in a shirt pocket or to purchase an add-on that enables on to carry it on your shoulder, you can simply detach the two parts to the cord and use only one of them. But I liked to use the entire length of the double cord, so I could put the MP3 device in my jogging pants front pocket as I listened to podcasts while gamboling through the back-ways of my neighborhood. That worked fine, until one day I separated the cord into two so I could listen to the podcasts in the train. The problem was that I then left the detached cord on the train. How was I to solve the problem?

Ideally, I would have liked to have been able to buy a replacement cord under the brand of the ear phones, after all, it was the ear phone manufacturer that had sold the unusual double cord with the ear phones themselves. That did not work however; it seems that the manufacture did not sell a replacement for the long-gone detached cord. "A flaw in product design or product execution," I said to myself, the goodwill armour of this world-known brand having been pierced.

I then visited a series of speciality stores, big and small, to look for a replacement cord of appropriate length and configuration, but to no ultimate avail. At least in my part of town, all that the stores carried was a standard 3-foot cord, each bearing an unknown mark, and none short enough to meet my needs. Equally disappointing, the well-known chain on which I had relied had apparently not considered what happens to a customer that wanted to buy a replacement cord. More goodwill armour pierced.

Now I really face a series of unpalatable solutions. I can simply put the MP3 device in the front pocket of my jogging shirt. The only problem is that only one of my shirts has a front pocket, and that means that I have to stock up on new shirts, each replete with a pocket. To do so however will mean expending more than the cost of the earphones themselves. I could also buy the arm accessory from the MP3 manufacturer, but I reminded myself that they are are not really in the accessory business, and besides, this arrangement is simply uncomfortable. I could also buy a new set of ear phones, properly branded (but certainly not the brand of my current ear phones).

Thinking about this tale from the trademark point of view, what is the scorecard? The MP3 manufacturer gets a passing mark, the device is excellent but the ear-phone add-on was the ultimate reason for trading up to another brand, for whom ear phones are closer to their core business. The retail chain gets a barely passing mark, selling a product for which replacement parts appear to not have been considered. The ear phone manufacturer gets a failing grade, the reasonable quality of its sound outweighed by the frustration and bother of its inaccessible replacement part. The only winner, and a potential one at that, is the manufacturer of the new set of earphones, if and when I chose to buy them.

Brands are delicate creatures--lest we forget. All it took was one misplaced cord to remind me of this fact.

Brand paradise -- over yonder

PETA Takes on the Colonel: KFC and Potholes Redux

It turns out the KFC campaign to repair potholes has yet another twist. While not mentioned in the Business Week article (one wonders why), a reader alerted me to the fact that PETA (People for the Ethical Treatment of Animals) reportedly offered to cover potholes in selected cities and to contribute twice as a much ($6,000) as that contributed by KFC. In exchange, PETA would include the following chalk message--"KFC Tortures Animals" (that instead of the message--"Re-Freshed by KFC.").

PETA has been waging a vigorous campaign for several years against what PETA describes as abuse by KFC of chickens in the process of providing its poultry products to consumers. No city, it seems, has taken PETA up on its offer. That position was well-stated by the Media Relations Director of Chattanooga, Tennessee as follows:

"The City of Chattanooga receives donations from a variety of sources and is grateful for all of them, including that of KFC. While we appreciate PETA's dedication and passion towards their mission, it would be inappropriate to accept their offer with the awkward requirement that would effectively use the City of Chattanooga to malign a particular corporation."

And so the question: What exactly was the motivation of the KFC campaign to repair potholes? Was it primarily intended as a means to counter PETA's attacks on KFC, or was the message of good citizenry less concerned with PETA and more intended to burnish KFC's image with the ultimate purpose of reaping commercial benefit?

If the former, then KFC could have expected PETA to try and mount a counterattack. If so, one wonders how great a risk KFC viewed the likelihood of such a counterattack actually being carried out. Recall the words of the Chattanooga Media Director, which emphasized the negative aspect of the proposed PETA message as a major reason for rejecting PETA's offer (despite the fact that it was apparently more attractive financially). When weighing the positive message of KFC and the negative message of PETA, the advantage would seem to like with KFC. If so, the risk that KFC could be bested by PETA in this battle for the hearts and minds of the local citizenry seems moderate at best.

If the latter motivation was paramount for KFC, the risk that PETA would prevail seems even more remote. This is because, in such a situation, it appears even more unlikely that a city would accept PETA's offer. Under the KFC offer, the city is able to add to its coffers (albeit in a modest amount) while KFC ultimately benefits financially from the positive image that it fosters. Under such a view, the PETA counter-offer seems fundamentally out of place, and to accept it would involve the city in an unnecessary public controversy.

If the foregoing analysis is correct, then it suggests one more conclusion. PETA did not ab initio consider its likelihood of successfully convincing a city to accept its counter-offer to be high. From the beginning, PETA viewed its ultimate platform as the press, especially the on-line press, which would cover the proposed PETA counter-offer and thereby provide PETA with free media coverage. Such coverage would be welcomed by PETA supporters and might even succeed in adding new converts to the PETA clause.

See in this way, the KFC-PETA point/counter-point was win-win situation, each winning in a different arena and each directed towards a different audience.

Win-win: a view from the pasture

New web service for sale of registered trade marks

According to information received last week, a new website, USTrademarkExchange.com, has been launched in order to connect United States trade mark buyers and sellers. The idea is this:

"Owners can list and promote their registered trademarks, while potential buyers including investors can search through a variety of available trademarks in one location. ...

Service marks, a specific type of trademark, are also represented. For example, one service mark currently being offered for sale on the portal is IF NOT NOW, WHEN?® which was granted registration by the US. Patent and Trademark Office on February 10, 2009, Reg. No. 3,573,658 in Class 35 (U.S. Cls, 100, 101, and 102) for advertising, marketing and promotion services. “We currently offer a free two-month basic listing,” says the website. “After that time there is a charge for continuing a basic listing or upgrading to a premium listing.” USTrademarkExchange.com does not get involved as a mediator or broker in any transaction, and therefore receives no commission in the event of a sale. However, ... the service cannot guarantee the accuracy of the information provided by the seller. “It is the responsibility of the buyer to do their own due diligence,” they note".

As usual, we'd love to hear of any interesting experiences which readers of this blog have had, or may have in the future, in relation to the use of this service.

Introducing the Tuesday Articles on IP and Insolvency

The aim of the Tuesday Articles on IP and Insolvency is to bridge the gap between what is generally regarded as two separate legal disciplines. Legal practitioners tend to specialise in one area only, whether it be Intellectual Property or Insolvency Law and each of these areas is covered by its own distinct legal literature. The division of specialisations tends to mean that difficulties can arise at the stage when the two areas meet. This series of articles plans to concentrate on corporate insolvency and its impact on IP rights and owners users of those rights. The Tuesday Articles on IP and Insolvency will take a primarily UK standpoint; although reference to other jurisdictions will be made.

Insolvency

The statutory insolvency regime in the UK was largely consolidated in the Insolvency Act 1986. There are also a number of accompanying statutory instruments, in particular: the Insolvency Rules 1986 as amended; the Law of Property Act 1925 (which includes various provisions relating to receiverships); and the Companies Act 1985 (which has particular importance with regard to the registration (s.395) and priority (s.196) of charges).

The regime provides for a number of outcomes for a company that is facing financial difficulty, these include; liquidation (termination of a company); enforcement of security by a creditor; an attempt to rescue the company by way of administrators and voluntary arrangements; and equitable division of a company’s assets.

The outcome that best suits the company may then shape the possible ways that IP assets are disposed of. When a company is facing insolvency there are a number of parties who may be involved in the process, each of whom will have a different objectives and aims. These include, but are not limited to: the company; the insolvency practitioner; creditors; licensees; and other third parties, including those who may have an interest in buying IP assets at reduced prices.

IP

There are a number of IP rights to which parties should pay attention when a company is facing liquidation. These include registered rights (such as patents and trade marks); pending registrations; unregistered rights (such as copyright, unregistered design rights and employee know-how); and goodwill.

Over the coming weeks I will attempt to analyse the effect of insolvency on a company which is IP asset rich. The ‘hot-topic’ in terms of disposing of IP assets seems to be their valuation and the difficulties associated with getting it right. However, I will seek to address a number of other issues including protection of IP assets, whether from the viewpoint of a liquidator, who may want to disclaim onerous property, or from the standpoint of a licensee whose licence has been breached, with no more of a remedy than an unsecured creditor. I will analyse what can be done to protect IP assets, from negotiating a contract at the outset of a relationship, to registration of securities and charges over IP assets and assignment and transfer of rights. I will also consider how the role of shared ownership of IP rights, co-operation agreements and separate companies (such as Joint Ventures), can further assist in the protection of rights in the liquidation process.

Third parties should also be aware of the pitfalls of purchasing IP assets from liquidators. There are very few protective measure in place to ensure that IP rights are disposed of correctly and, as liquidators often do not provide warranties regarding assets sold, due diligence becomes an important step in the process for any buyer.

Throughout the series I will provide regular updates and items of interest from the world of IP and Insolvency and if you, the reader, come across any interesting tit-bits, or have any questions, you can contact me by email at louise.ocallaghan@hardwicke.co.uk.

New team member

IP Finance is pleased to welcome a new member to its blogging team: Louise O'Callaghan.  Louise is currently a pupil in Hardwicke Building. Louise studied Law with Politics (and Geology) (LLB) at Keele University and was called to the bar at Gray’s Inn in 2006. Prior to starting at Hardwicke Building she worked for Shell International Petroleum Company, assisting in the management of large value international tenders and participating in the development of a number of safeguards for the protection of IP software assets in the retail sector of the business. Louise has also been involved in Arts pro bono work for a number of years. In her capacity as a pupil Louise has worked on IP, insolvency, contract, general commercial and other matters and has published on Intellectual Property Law issues.

When Finger Licking Good Meets the Urban Pothole

An oft-stated observation made in connection with the economic crisis is that companies, when confronted with cuts in R&D, marketing, and advertising, have chosen first to cut their advertising budget as a means to bring expenses more in line with projected income. I would tend to believe that the reason for this lies less in the fact that advertising is less significant to the economic well-being of the company than is R&D or marketing, but rather that advertising is more akin to a current expense. As such, the absolute amount expended in a given short-term period can be calibrated to the general level of economic activity that is taking place, more or less, at the moment.

That said, the economic exigencies of the moment do seem to generate create ways to seek maximum advertising bang for the corporate buck. A real curiosity in this direction was noted in a short item that appeared in the April 20th issue of Business Week. Entitled "A Chicken in Every Pot(hole)", the item described how the corporate parent of Kentucky Fried Chicken, Yum!, expended $3,000 to fund the repair of 350 potholes in Louisville, Kentucky (if my memory serves me, Louisville is the corporate headquarters of Yum!). On each pothole, there appeared a message--"Re-furbished by KFC." Keeping with the low cost nature of this advertising campaign, the chalk-based advertising fades within a month or so. The item went on to note that the campaign has been extended to other towns, including Warren, Ohio and Chattanooga, Tennessee (for all of you non-Americans, an atlas might be in order to locate these two smallish towns, both of which are interestingly located in states that are contiguous with Kentucky).

Said the KFC spokesperson: "We thought we could refresh the streets and try a new form of advertising." Retorting with a degree of skepticism, brand consultant Laura Ries queried as follows: "What does deep-fried chicken have to do with potholes." Unfortunately, the Business Week item fails to consider the question further, and one can ask whether the item was brought simply as a short curiosity intended merely to entertain the reader rather than to consider how companies can successfully advertise despite the challenging economic times.

Okay, even if Business Week declined to engage in a serious consideration of the underlying issue involved, I feel compelled, if for no other reason that professional and intellectual curiosity, to offer several comments.

First, while the pothole cum civic message is characterized as advertising in the news item, it seems to me that it is more of a hybrid of sponsorship and advertising. By this mean I mean that the use of the KFC mark is connected with an activity which Yum! presumably wants to be connected, rather than merely an ad directed towards creating custom at the nearest KFC eatery. The comment by Laura Ries not to the contrary, it would appear that Yum! finds the connection between the KFC mark and good citizenry to be an attractive combination.

A SPONSORSHIP OPPORTUNITY IN THE MAKING

Second, the economic downturn does not mean that all forms of sponsorship have been put on hold. True, the trend has been to cut sponsorship of events at the mega level (especially in sports). Here, to the contrary, a modest amount of advertising expense was committed to funding a specific type of short-term sponsorship with presumed benefit to the overall perception of the brand.

Third, the ad/sponsorship campaign (if it can be called that) is local in character. Louisville is a mid-sized town best known for the Kentucky Derby; Warren and Chattanooga are even smaller. Perhaps the message of good corporate citizenry is more easily delivered in these secondary or tertiary urban settings. (Don't get me wrong, I was born and raised in another such town only 30 miles from Warren and there is a lot going for this kind of environment).

Thus, precisely because a major brand might choose to forgo a nationwide sponsorship campaign invites local experimentation. I suspect that there are large urban centers in the U.S. that would have been delighted to have had their potholes repaired. Assuming that this is impracticable from a budget point of view as a form of sponsorship, one wonders what a large company might to in very large urban center to achieve the same effect as the KFC-sponsored pothole covers in Kentucky, Ohio and Tennessee.

THE NEWEST LAB FOR ADVERTISING EXPERIMENTATION?

Branding, Innovation and Premium Pricing: The P&G Challenge

Procter & Gamble is the Harvard and Yale, or the Oxford and Cambridge, of the world of consumer brands and marketing. It is the ultimate proving ground for those with aspirations in the field. For that reason, I read with particular interest an edited version of an interview with the CEO of P&G, A.G. Lafley, as published in the April 13, 2009 issue of Business Week "("How P&G Plans to Clean Up").

In the article, Lafley shared his thoughts on how P&G is confronting the economic slowdown. Of particular interest are Lafley's observations about the centrality of innovation to the success of P&G (claiming a greater than 50% success rate for new products against the industry average of 15% to 20%). And what is innovation for Lafley? It is connecting creativity and innovation "to the customer in the form of service that meaningfully changes their lives." An example of this process was taking the innovation of a highly water absorbent material and recasting it into a diaper product--"Pampers", which "created this entirely new product category and that created an industry." In so doing, P&G can create the kind of brand that supports the premium pricing that lies at the heart of the P&G business model.

Now here comes, in my view, the really interesting observation. Lafley characterizes "Pampers" as an example as a "discontinuous innovation", and further declares that P&G wants "discontinuous innovations" to constitute up to 25% of the P&G product mix. Maddeningly, the article does not elaborate on this comment. So let my make my own observations. Especially since Clayton Christensen's pathbreaking book of 1997, "The Innovator's Dilemma", changes of products must take into consideration whether the product innovation is "disruptive" or not.

As a first approximation, relying with some trepidation on the Wikipedia entry on "disruptive technology", three categories of innovation can be identified:

"Revolutionary or discontinuous--An innovation that creates a new market by allowing customers to solve a problem in a radically new way. (E.g., the automobile)

Evolutionary--An innovation that improves a product in an existing market in ways that customers are expecting. (E.g., fuel injection)

Disruptive--An innovation that creates a new (and unexpected) market by applying a different set of values. (E.g., the lower priced Ford Model-T)"

Christensen focused on "disruptive technologies", whereby a new product based on a combination of innovation and/or technology displaces the market leader. The key here is the process. A disruptive technology usually comes from an niche player that blindsides the market leader by parlaying its product into a lower-priced alternative, which ultimately creates a new market category.

This is not the P&G paradigm. In particular, P&G does not have the interest in relying on product innovation to drive down price in the process of creating a new product category. The opposite is true. As Lafley states, the P&G goal is innovate in the service of creating brands that can support "premium pricing." Indeed, Lafley is dismissive of private label competitors, describing them as being concentrated in the food industry, where commodification is the name of the game. "Private labels are imitators. P&G brands and products are innovators," according to Lafely.

So here are my questions:

1. Is the Lafley goal of 20%-25% of all P&G innovation being "discontinuous"
itself a departure from the way that P&G has carried out product innovation in the past?

2. Is there a difference between "private label" and "generic products"?

3. Are "generic products" bereft of innovative contribution?

4. What will be the role of patents and trade secrets in the P&G discontinuous innovation process?

5. To what extent is this focus on "discontinuous innovation" a response to the broadening challenge of "generic products" across a wider array of product classes?

6. Can P&G continue to rely on the nexus between innovation, branding and premium pricing to carry them through this recession and the possible tepid recovery that will follow?

7. If the answer to (6) is less than a resounding "yes", are we at the cusp of a reconceptualization of branding and the pricing that goes with it?

Any thoughts?

Where exactly is that medium-priced product?

Spotify will not launch an unlimited download option

Regular readers may recall an earlier post from Andrew Logie about ‘free’ music service Spotify, which allows users to listen to a huge and expanding library of music to rival other major music services. Rather than downloading tracks, music is streamed from the Spotify servers (although some caching does go on in users’ computers). 

Right: 'download' can mean different things in different business contexts

Writes Andrew:

The business model might be described as ‘Freemium’ in that the free service is backed up by a premium subscription model. Although the ‘free’ option is supported by adverts, this on its own would not generate enough revenue to support the service. Users can go Premium for £9.99 a month and listening will not be interrupted by adverts. The biggest problem facing the service is how to convert users who listen for free into users who pay a monthly fee. At the moment, the Premium offering just doesn’t offer enough to tempt users away from the free service.

Revolution magazine has now announced that Spotify is planning to launch an unlimited download option – a sort of ‘all you can eat’ for a fixed monthly fee. What they seem to suggest is that users would be able to download a file to their computer, much like they do when they download using iTunes. This came as some something of a surprise. I have been expecting Spotify to try to improve their Premium offering, but I didn’t expect unlimited downloads, and not for so little as £9.99 per month. Indeed, according to an article by Pocket-lint, a spokesperson from Spotify denied that they were planning such a service:

"Spotify's core aim is to provide a user-friendly music streaming service with the added flexibility of offering paid-for downloads in partnership with our external partners. That is not set to change”.

What appears has to have happened here is that Revolution magazine has misinterpreted, deliberately or otherwise, comments by Spotify’s chief executive Daniel Ek in relation to a hotly anticipated mobile application and its threat to iTunes.

Ek had indicated that they were in talks with mobile phone operators in relation to the rollout of a streaming mobile service, presumably so that the quality of service over the mobile networks is garunteed. If succesful, this would allow users to use the Spotify service on their mobile or network enabled music player. Up to now, Spotify has only been available on a PC or Mac connected to the Internet. With the mobile application, users will be able to stream anything from the Spotify library from anywhere with network coverage. This is undoubtedly a threat to the iTunes model of paying for downloads then loading them on a device. That doesn’t mean however, that they will be launching an unlimited download service. Yes, Spotify may cache files on a device to make it run smoothly, but it’s a long stretch to say that’s a download service!

Technology and IP: Is There a Next Big Thing?

An issue that has occupied (some say "preoccupied") me for some time is whether we are entering into a period of technological stagnation. The concern has been expressed, as I recall, by no less an icon than Andrew Grove. While cast in various forms, the claim can be distilled to the following: the growth of the hardware/software revolution from roughly the 1950s to the begin of this decade was accompanied by the rise of new industries worthy of their name--e.g. Intel, Microsoft, IBM and HP. These companies can all be characterized by their success in monetizing technology and the IP rights therein, whereby IP protection is a basic component of commercial success.

By comparison, this decade can be best characterized by Web 2.0, networking, and online social communities. Whether My Space, Facebook, Wikipedia, or You Tube, their success in accumulating the eyeballs of their tens, if not hundreds of millions of user, has not been translated into the kind of monetization that we witnessed in the earlier period. Even the flagship company of this decade--Google-- is still more notable for its stock price than the absolute size of the gross revenue that it is generating. As soon as one leaves Google, the profitability of even the most notable Web 2.0 companies remains clouded. Moreover, from the IP perspective, Web 2.0 is not IP driven-- witness the internal struggle within You Tube, where the increasing adoption of professional contents (protected by copyright) will likely enhance You Tube's profitability, but may well diminish the social (and largely non-IP) experience of its users.

But can it be monetized like a Pentium chip?

Interestingly, when I raised these issues with a prominent Silicon Valley colleague who recently visited our offices, his eyebrows furrowed, and a certain unease was observed in his defense of the technological and commercial future of the Valley. Indeed, a week later my colleague sent me a thoughtful email in which he particularly pointed to biotech as the next new development that will push forward technological development in Silicon Valley and beyond. Maybe yes, maybe no--but even if "yes", somehow I don't see how this industry, with its long R&D and regulatory gestation, and the centrality, almost too much so, of patent protection, as taking the place of the computer and telecon industries, with its dynamic mix of copyright, trade secrets, and patents, as the new beacon of technology.

By "almost too much so, of patent protection", I mean that it appears that biotech, more than other tech industries, tends to rely on patent protection as a sine qua non of competitive advantage. Patent protection is exclusionary by nature, so it is not difficult to imagine a scenario where, if there is notable biotech profitability, and the public comes to view the industry as earning "excessive" profits, there could be a backlash against IP protection, in general, and patents, in particular. If that comes to pass, then the industry and the patent protection on which is relies might well find itself between the proverbial "rock and hard place". The more successful the industry, the greater the pressure to weaken patent protection; the weaker patent protection becomes, the less robust the industry will become.

Pushing the thought a bit further, let's assume nevertheless that the technological future will be a bi-polar world of biotech and Web. 2.0, alongside the commodification of more and more hardware and the increasing reliance on "software as a service" in place of fully integrated software products. How will IP fit into this new world? In my view, one possible answer is that IP will do so in an inverse way. That is to say, industries with a greater reliance on IP protection will likely enjoy greater profits than those industries for which IP is secondary, or the drift of opinion is in favor of weakened IP protection. There will be industries in both camps. If so, the next generation of technological development will be much more patchy from the point of view of commercial success and the level of IP protection.

However, I am not certain that issue has yet become a front and center agenda item. Fareed Zakaria is a leading fashioner of ideas, editor of the International Edition of Newsweek, prominent television commentator, and author of a world-wide best seller, "The Post American World". He was recently interviewed on Bloomberg radio, and a phrase at the end of the interview grabbed my attention. In conclusion, Zakaria expressed the belief that a renewed America will continue to maintain its technological leadership and generate a new era of world-beating developments such as "Google and the iPod."

Don't get me wrong. No one is a bigger fan of the information revolution spawned by Google than I am. As well, the iPod that my family gave me as a birthday present has literally changed my knowledge base, as I obsessively download and listen to podcasts on various topics on a daily basis (including the Zakaria interview itself). So what is it in Zakaria's comment that bothered me? Ironically, it is precisely his choice of examples. Somehow I don't see Google and the iPod as the future functional equivalents to Microsoft and Intel. Indeed, I don't recall any discussion in his interview about biotech and the like or intellectual property (in "The Post American World") more generally. Zakaria is not alone. We still seem far from that day.

Nokia and iPhone; Strong, Famous and Hip?

I usually keep my tweeting separate from my blogs, but this time I will make an exception. In 137 carefully chosen characters, I noted a report that appeared in Business Week, "A Bid to Reconnect with America" (April 13th), which discussed the efforts by Nokia to increase its market share for mobile phones in the U.S. from (as described) "its meager 8% share". Globally, Nokia enjoys a 37% market share. Fellow blogger and tweeter Jeremy Phillips quickly tweeted in reply that, in his view, " I'd settle for just half of that. For a foreign brand it's doing fine." Now I must admit-I was surprised by Nokia's relatively modest degree of U.S. market penetration. I had become so used to reading a 30% plus figure for Nokia's market share world-wide that I had no idea that this number masked a decidedly smaller share for the U.S. market.

The article recited a number of reasons for the single-digit market share in the U.S., including an alleged ambivalence to the U.S. market, due to "the heavy control wireless carriers exert and because wireless technology has not been as advanced as in Europe." As well, Nokia reportedly garnered more substantial returns in emerging markets, most notably China. More generally, the article concluded that, contrary to mobile users in most of the rest of the world, Americans don't think of Nokia as the cool, go-to company for advanced cell phones." I assume that the prize for image in the U.S. goes to Apple and the iPhone, with RIM and the Blackberry carving out cache of its own in the professional market. Nokia products lag far behind.

But what is hip in the U.S. is not hip in the Asian subcontinent. In a small item 10 pages away from the report on Nokia in the U.S., under the title ""iPhone's Asian Disconnect", the same Business Week issue discussed the dismal success of iPhone versus Nokia in India. There, Nokia is dominant in the smart-phone market, while the iPhone is reported to have sold less than 20,000 units. The item goes on to recite a number of reasons for the lack of iPhone's success, including price, download speeds and resistence to arrangements for multi-year service agreements. Whatever the reasons, it seems clear that in India, Nokia is at least for now the preeminent brand in the field. The item went on to speculate that unless Apple figures out a way to get local carriers to subsidize the phone, "Asia is just not going to work."

The stark difference in the strength of the Nokia and iPhone in brands in the U.S. and India, respectively, got me to ask a series of questions regarding brand strength and the fame of marks. Is Nokia a famous brand: if so, where? Does an 8% market share in the U.S. affect the strength of the Nokia mark and its status as a famous mark? To what extent are strength and fame national, regional, or international in scope?

The iPhone has been around for only a short period of time, but it has benefitted from unparalleled media coverage and a certain degree of commercial success. But, as the Business Week item suggests, commercial success may be geographically limited, both in the present and in the future. If so, does the media preoccupation with the iPhone brand trump commercial realities, whereby the strength and fame of the iPhone mark and brand transcend the commercial success of the device, at least in Asia?

Not so hip in Asia?

Maybe the iPhone is the product of a particular set of cultural values coming out a particular mileu: what resonates in Palo Alto may not resonate in Mumbai. If so, perhaps perceived brand strength and fame are as much a function of media coverage as actual commercial penetration. What happens to the strength of the the iPhone brand if it never takes off in Asia, even if it remains a dominant player in North America? I'll think about these questions the next time I make a call from own modest cell phone (being a Nokia and far from being a smart phone).

Google and the value of brand advertising

Jim Spanfeller, president and CEO of Forbes.com, has some interesting thoughts on Google and the relative value that is generated in Redmond: he wonders whether Google is being disproportionally compensated “for what is fundamentally other people’s work”.

In his article, available on paidContent, he writes:

“At Forbes.com, we have estimated that Google makes roughly $60 million a year directing folks to our site. And by the way, 40 percent of those dollars are derived from the search terms of Forbes, Forbes.com or Forbes Magazine—simple navigation. Seems like a very nice chunk of change for simply being there.”

More about Eric Schmidt (Google CEO) calling the Internet a "cesspool" and on branding and relevance here.

Will There Be an Indian Form of IP Practice?

We often read how the 21st century will be the "Century of Asia". In truth, it is more than I am capable of to imagine how this tectonic shift will ultimately play out. That said, I do often wonder how the face of technology will change with the rise of Asia. One glimmer was suggested in a recent article that appeared in The Economist entitled "Health Care in India: Lessons From a Frugal Innovator" (April 18, 2009). The focus of the article is a description of various ways in which Indian innovators are coming up with novel ways to compete successfully in the medical arena. The impetus for these developments is driven by a combination of poverty, geography, an underfunded public health system, and poor infrastructure, on the one hand, and world-class technology, nascent health insurance, liberalized terms for foreign investment, and entrepreneurial spirit, on the other.

For example, the article described how "beating heart" surgery has proved so successful as an alternative to conventional surgical practices in the West that the purveyor of the method, Wockhardt, an Indian hospital chain, has seen rising medical tourism to its site in Bangalore. Another example are chains of "no-frill" hospitals that appear to succeed in squeezing out of the hospital facilities "nice to have" but ultimately non-essential elements without compromising the provision of core health services. Somewhat ironically, the increasing access to health procedures by more and more Indians enable local doctors to actually hone their skills beyond those of their Western counterparts simply because of the absolute number of surgical procedures performed.

Even if one controls for rhetorical flourish, it cannot be gainsaid that the Indian experiment in carving a distinctive path to 21st century medical innovation is noteworthy. When one considers as well the great anticipation surrounding the Tata Nano car, one gets the sense that the Indian experiment is seeking various ways to reach out to the rising middle class with goods and services that cannot be provided by the more affluent West.

The question that comes to mind is whether the Indian experience in innovation will also result in a distinctive IP practice to support this innovation. In theory, technology should more or less be culturally neutral, and in a sense, that is probably true. It is for that reason that the exploitation of technology can leapfrog countries and continents. On the other hand, I wonder whether the ways that we do IP in the West are so tied up with the manner in which we do innovation and technology that we IP practitioners become captive of the very system that we are supposed to be serving. If so, it is not only Western technology that faces a significant challenge by the rise of Asia, but the legal and quasi-legal constructs that ballast Western innovation.

There is at least one whiff in the article that supports my rumination. Reference is made to Paul Yock, head of the bio-design laboratory at Stanford University. Yock expresses the concern that medical technology innovation has focused solely on need, while effectively turning a blind eye to cost. Hence the gaze towards India. As the article observes, Dr. Yock "believes that India's combination of poverty and outstanding medical and engineering talents will produce a world-class medical devices industry." If so, what is there to say that this Indian type of innovation will not spill over into the way that patents and other IP are conceived and drafted, and the manner in which the technology is diffused and protected. It is certainly food for thought.

Is this the portent of a distinctive Indian IP?