‘Different Sectoral Contexts’ approach is vital for IAM

… noted Jeremy in the last post to IP Finance. SMEs in the automotive sector may be interested in a recently completed study which maps the IP business models behind ten cases of US patent, trade secret and trade mark litigation brought by the most prolific US patent applicants in the field of braking technology. The study’s author runs the Engineering Intellectual Property Research Unit at Cranfield University’s School of Engineering.

The study shows that the predominant IP monetisation mechanism in the field of braking is that of “monopoly provision”, i.e. using IP to exclude competing suppliers. There is only one instance of a patent licensing relationship, that being with a company already related to the patentee, suggesting that SME developers of braking technology may struggle to license into prolific US patent applicant companies.

As regards the IP mix that such SME developers might employ, the study confirms that trade secret protection is not used above raw material / component-level manufacture. It also illustrates the risk of third party patent infringement associated with trade secret protection.

The greatest threat of infringement litigation appears to come from competitors at a similar level on the value chain, the study also showing that neither the small size of an SME nor the large size of a company’s patent portfolio can guarantee immunity from suit.

Intellectual assets and innovation: a sector-by-sector study on SMEs

The IP Finance weblog is grateful to Chris Torrero for drawing its attention to a recent study, Intellectual Assets and Innovation: the SME Dimension, which has been published by OECD Publishing in its OECD Studies on SMEs and Entrepreneurship series.

"Intellectual Property Rights can be instrumental for SMEs to protect and build on their innovations; position themselves competitively vis-à-vis larger enterprises in global markets; gain access to revenues; signal current and prospective value to investors, competitors and partners; access knowledge markets and networks; open up new commercial pathways; or segment existing markets ['can be' -- but the same rights 'can be' a means by which SMEs bankrupt themselves though over-expenditure in acquiring them and over-extending themselves when seeking to enforce them. That's why it's a shame that ...] ....  while there is increasing recognition of their significance, as well as the need for appropriate intellectual asset management for SMEs across OECD countries, there are few regulatory frameworks or specific instruments directed to SMEs. This is in part due the pace of technological innovation, which often exceeds the time it takes for policy makers to create appropriate responses to the changing landscape of intellectual property. 

This study explores the relations between SME intellectual asset management, innovation and competitiveness in different national and sectoral contexts [the 'different sectoral contexts' approach is vital, since IPRs behave so differently in their respective contexts and we have suffered too long from 'one size fits all' prescriptive analyses of the IP needs of SMEs]. It provides insights on the ability of SMEs to access and utilise the protection systems available to them and identifies key challenges for SMEs in appropriating full value from IPRs. It also investigates effectiveness of regulatory frameworks and policy measures to support SME access to IPRs, identifying best practices and proposing policy recommendations".

The study is available in print and pdf formats. Full details are available from the OECD's bookshop website here.

The New York Times and Diminishing Derivative Works

Most of the readers of this blog are surely familiar with the struggle, some say existential, of print newspapers to find a viable business model in today's increasingly online world. The issue, as framed, is simple: having given away substantial content for free online access without a revenue stream parallel to the want-ads cum advertisments of print newspapers, can such newspapers now find a long-term model based on charging for online contents? This, while at the same time the newspapers continue to try to salvage something from its print product.

Against this print v online morality play, a little-mentioned event occurred late last week that highlights another aspect of the search for commercially viable platforms to deliver copyright content. The event in question was the announcement by the New York Times that it is discontinuing its broadcast of podcasts. First a confession: I am podcast freak. For over two hours each day, starting with my one-hour constitutional in the morning and extending to the 45-minute bus commmute to and from work, I combine either walking or bus travel with listening to a series of informative podcasts by the newspaper on business, politics, science and music.

Without a doubt the New York Times is well ahead of the class in the contents of the podcasts in these (and probably in all areas subject to a podcast broadcast by the company). It is not an exageration to say that these podcasts have helped frame the terms of my thinking in recent years. In effect, these New York Times podcasts are a unique form of derivative work, whereby journalists are called upon to adapt their print contents to the quite different medium of the spoken world. Unlike the mere reproduction of audio content broadcast on radio and then reworked for further podcast broadcast in MP3 format (such as Bloomberg, the BBC or National Public Radio), the New York Times had succceeded in creating a distinct content form elegantly adapted for an aural, non-visual platform. And yet this same newspaper, owner of one of the most august names in the journalistic world, has decided to shut down one (albeit small) aspect of its journalistic excellence.

While no specific reason was given in the announcement of the discontinuance of the podcasts, a strong hint was found near the end. There, the presenter urged listeners to either take up an offer to subscribe to the online version at an introductory low price or continue with the print edition. This suggests that either the podcasts were an expense that the newspaper was no longer interested in bearing, and/or that the podcasts had not succeeded in driving listeners to subscribe to either the online or print edition, and/or the podcast broadcasts were merely cannabilizing potential revenue-generating customers. In shutting down its podcast service, the newspaper is apparently prepared to risk the loss of the goodwill accruing to its name by virtue of the podcasts or, even more, engendering a certain feeling of betrayal -- contents available via the iPod over a number of years have been suddenly yanked from the listening public.

Whatever the reason, the result of the decision is to impoverish the content available for a medium (MP3 iPod players) that is uniquely placed to facilitate the optimalization of the multi-tasking experience, something neither the online or print experience can offer. After all, one can equally engage in various forms of physical activity while also listening to his favourite podcast content. Nothing of the like can be achieved by online or print content, which demands the complete attention of the reader.

It has been noted more than once that the burgeoning of derivative works and the success of their commercial exploitation has been one of the main drivers in the expansion of copyright over the last several decades. Both commercially and artistically, therefore, the creation and exploitation of derivative works is one of the success stories of modern copyright. When it comes to MP3 content, however, that is no longer the case, at least for the New York Times. In so doing, at least one najor copyright owner has apparently decided to cut back on the production of quality derivative works. That is a result that should be lamented.

Economics and IP: the Katonomics posts

After posting this item on the IPKat weblog, it occurred to me that there are probably a good many readers of the IP Finance weblog who are interested in the point at which economics intersects with IP but who do not read the IPKat. Accordingly I've listed the titles of a series of six posts on economics and IP, written by economist Dr Nicola Searle and published together under the term "Katonomics". A further series by the same author will follow in the New Year.

• No.1: The social contract theory of IP
• No.2: The economics of trade marks
• No.3: Evidence-based policy: the challenge of data
• No.4: Where to look for an IP-oriented economist
• No.5: The paradox of fashion
• No.6: The economics of IP in pharmaceuticals.

Can Policy Right the Science Ship? The Case of Argentina

With another Nobel Prize season behind us after the winners picked up their prizes last weekend, it is worthwhile to consider the state of research and development in developing countries (or the "low end" of developed countries). Once again, and for the fourth time in less than a decade, an Israeli was awarded the Nobel prize for Chemistry, this time Professor Dan Schechtman of the Technion--Israel Institute of Technology, here. However, except for the oversized success of Israelis, especially in Chemistry, the track record of similarly placed countries regarding Nobel Prize awards has become more and more sparse out the years.

Against that backdrop, The Economist published an interesting article in its November 5th issue. Entitled "Cristina the Alchemist: Science in Argentina", the article discusses the multi-faceted attempts of the Argentine government under successive presidents, first the late Nestor Krichner and more recently his widow, Cristina Fernandez, to upgrade the state of science and technological research in the country.

Argentina is hardly without a respectable past in this regard. Using Nobel Prize awards as a rough proxy, the country has seen three winners in science. However, the last of these winners received the award in 1984 and the country has been witness to a precipitous decline since then. In response, the government has adopted a series of measures designed to right the sinking ship of Argentine science. Based on the article, the leading aspects of this push can be summarized as follows:

1. R&D expenditures has risen from 0.41% to 0.64% of GDP (although this is still far less than that expended for R&D in Brazil in 2009--1.18% of GDP).

2. Under President Kirchner, researchers' salaries were increased, an organized scheme has been put into place to repatriate Argentine scientists abroad, and tax breaks were given for the software industry. Under President Fernandez, a new science ministry was created and grants of money for new product development has been increased.

3. The state is financially supporting the cost of registering patents in jurisdictions outside of Argentina and lawyers' fees in connection with defending these patents. It is also supporting the placement of PhDs with employers in the IT area, including partial support of their salaries in this area.

4. Perhaps the most interesting result of the foregoing is that 854 scientists have returned to Argentina, lured by new labs and increased compensation. In turn, researchers have increased their presence in the leading scientific journals to 179 published articles during the past decade, compared to only 30 articles published in the 1990s. As well, there seem to be particularly noteworthy developments in agriculture and horticulture.

5. That said, reservations have been raised about the extent to which these scientists are engaged in industry-oriented enterprises. Moreover, the article is stone-silent on the extent of patent activity as a result of these efforts. At the macro level, it remains to be seen whether the Argentine government will stay the political course and maintain these policies over an extended period of time, much less whether these efforts will bear fruit at the level of Nobel prizes and similar achievements 15-30 years down the line.

The example of Israel should provide Argentina with an example of how a mix of public and private activities can enable a marginally developed country to reach world-class accomplishments in science. The Israeli situation should also serve as a caution that continued vigilance is essential. While the country basked last week in the Nobel Prize granted to Professor Schechtman, the professor himself sent a pointed and clear message to the country's leaders: Unless you adopt a wide-reaching set of changes in the approach and support of science, starting from primary education, there will not be another generation of Nobel prize recipients. The implications for Argentina are clear.

Patents and standards again: a valuable study

This weblog has focused a good deal in recent weeks on standards and patents. In this context, the Study on the Interplay between Standards and Intellectual Property Rights (IPRs), April 2011, is highly relevant. Commissioned and financed by the Directorate General for Enterprise and Industry of the European Commission, this study was produced by the Fraunhofer Institute for Communication System and Dialogic in collaboration with the School of Innovation Sciences at Eindhoven University of Technology, and enjoyed the support of two legal consultants.

Ruben Schellingerhout, who kindly drew the attention of the IP Finance weblog to this study, explains a bit about it:

"The study shows that distribution of patents in standards is very skewed, both in terms of standards and in terms of owners. A few standards cover a large number of patents while most standards include only a few patents, or no patents at all [I had no idea that this was the case]. And a relatively small group of companies own a large number of essential patents in standards, while most companies own only a few or none of these patents. 

In the telecommunications and the consumer electronics market, implementers ensure access to essential IPRs most often via cross-licensing and - to a lesser extent - via general licensing-in and patent pools.

Legal uncertainty can still arise on the obligation to disclose, the irrevocability and the geographic scope of the licensing commitment and in cases of transfer of IPRs if they are still subject to a FRAND licensing commitment. Companies expect standard setting organisations to improve transparency on essential IPRs".

Thanks, Ruben, for your kind assistance.  Readers can access the report in full here.

Consumable IP

Some OEMs derive a significant proportion of their profits from the sale of consumables (a recent article in The Times recalled the 2002 assertion by the Consumers Association that the ink in Hewlett-Packard’s printers “was more expensive, per millilitre, than Dom Perignon champagne”). Others make no attempt to prevent aftermarket suppliers, instead making their profit on the sale of original equipment.

Now there would appear to be a third way: in the field of aircraft brakes, Nasco has announced an “innovative alternative” approach to providing [corporate] customers with new brake designs involving a fixed-price design, development and production contract that includes re-procurement data rights. Such data are believed to include manufacturing drawings and material specifications.

According to Nasco’s website, “customers pay the development costs up front but reap the long-term benefits of lower cost spare parts through competitive sourcing.” Contrast this with the use of trade secrets in manufacturing drawings and material specifications to exclude competitors as previously reported here.

The Missing IP Narrative

It remains my most vexing professional challenge. The "it" is how to integrate IP/IC into management education. The vexation comes from the seeming paradox tha, while intellectual property and intellectual capital are routinely described as cornerstones of innovation, if not modern business itself, their systematic presence in MBA curricula remains sporadic at best. I was reminded of this in connection with two quite different experiences that I had during the week.

In the first, I had occasion to spend some time with the dean of a local business school. Recently appointed, he was taking bold action to modify the schools's MBA program to make it more appropriate for today's student body. In that connection, he wanted to hear more about my class on IP and Management that I teach elsewhere. His question, half  "devil's advocate", half an expression of curricular skepticism, was simply this: "I have space for 20 or so courses in the program. Why should a course such as yours be part of the curriculum?"

The case in favour of inclusion is not simple. In the face of multiple courses in strategy, finance, marketing, and operations, the role of a course focusing on IP is dfficult to explain. The uneven diffusion of IP subject matter throughout an organization, the origin of IP as a branch of legal practice and its intangible character all give IP a bit of orphan status within the school's curriculum.

The Dean pushed me for examples of how the course works in practice. A pregnant pause ensued, finally punctuated by several examples of IP and management that seemed to pique his interest. All the while I stressed that one can look at MBA education as a platform for imparting relevant narratives to the students. Taken from this perspective, the ultimate justification for the course is that it highlights the IP narrative in a manner that is front and centre: "Can you imagine a manager who does not have the ability to apply the IP narrative to his daily businsess?", I asked. I am not sure that I convinced him that the answer is "yes". If I failed, cohort after cohort of young managers will be trained at his school without receiving any systematic tranining in this field. The managerial narrative for these students will simply lack a meaningful consideration of IP.

This absence of a narrative for IP was reinforced in listening to a podcast that featured a well-known venture capitalist describing the foundations of the VC world. The speaker did not disappoint. He described the flow of foundation money from university and similar endowments as the turning point for VCs to attract substantial investment capital. He emphasized the importance of the human dimension in any investment, and observed that any prospective company that puts special emphasis on an exit strategy for the company lacks the necessary patience. He distinguished between great innovative ideas and market potential. There are a lot more of the former than the latter.

These multiple narratives about the VC enterprise were interesting and instructive. Except for one thing: the speaker mentioned IP only in passing. Based on his words, IP was not a central part of the VC narrative. In follow-up correspondence with the speaker, he replied briefly that the company "of course" takes an interest in the company's IP, ie., "FTO and patentability." In his view, IP is largely limited to patents, and the work required is the purview of patent technocrats, far removed from most of the company's managers.


This podcast and email correspondence reinforced the sense of frustation that I had felt in my meeting with the dean, namely that IP is not part of the mainstream MBA narrative for most students. The upshot is that most MBA students will continue to go through their programs with scant or simply no attention being paid to IP. Is there a price to be paid for this? Perhaps. It is frequently observed that innovation has materially declined over the last few years. There are no doubt a number of reasons for this troubling state of affairs. Against that backdrop, one wonders whether the absence of a meaningful narrative regarding IP within the context of most MBA programs is another source of the innovative malaise. This is at least narrative food for thought.

FRAND terms from a competition authority's approach: a new essay

The issue of FRAND licensing terms is critical for all IT companies involved in a standardization process but it is also a headache for competition authorities. As Mario Mariniello, Chief Competition Economist team member of EC's Directorate General for Competition, recently highlighted in an article published in OUP's Journal of Competition Law and Economics (JCLE) entitled "Fair, Reasonable and Non-discriminatory (FRAND) Terms: A Challenge for Competition Authorities", the adoption of a technology standard can raise competition concerns when the owner of the chosen technology abuses of the additional market power gained through standardization. FRAND terms can therefore be seen as a corrective device seeking a balance of interests between the licensor, who is entitled to the incremental rent "that arises from standardization with respect to the next best alternative", and the licensees, who can be considered as "locked-in" (that is forced to adopt the chosen standard).

In this article, Mario Mariniello highlights the fact that "FRAND commitments involve an incomplete contract between licensors and licensees", their implementation will therefore be necessarily controversial. From an antitrust perspective FRAND commitments are very ambiguous because there is no commonly accepted method to assess their violation. The author therefore proposes a four-pronged screening-test to assess if such a violation has occured:

If the four following conditions criteria are met:

(1) ex-ante, a credible alternative to the adopted technology exists;
(2) ex-ante, prospective licensees cannot reasonably anticipate the licensor’s ex-post requests;
(3) ex-post, the licensor requests worse licensing conditions than ex-ante; and
(4) ex-post, the licensee is locked into the technology,

then a FRAND violation could have occurred and a competition authority needs to investigate and decide whether the terms and conditions of the defendant are fair, reasonable and non-discriminatory, which involves "an objective valuation of the royalty rate that patent holder would have been to charge if the standard did not increase its market power, subject to the broader context of the license contract."

An access to this very interesting analysis can be found here.

While on the subject of INTIPSA ...

Finding a new CIPO
is the nearest thing
many people get to
big game hunting ...

Yesterday's IP Finance post mentioned INTIPSA, the International IP Strategists Association. By sheer coincidence, the blog has received news that the organisation has a webinar coming up next week on the topic "Where Will Your Next CIPO Come From?"  According to the synopsis:

"Peter Spours from Tom Tom and Andrew Sant from Crown Holdings will be reflecting on their experiences and career paths in IP and discussing the future of the Chief Intellectual Property Officer role".

This webinar takes place next Wednesday, 30 November, at 15:00 GMT. Further details and registration are available via the INTIPSA website at www.intipsa.com

INTIPSA: one year on

IP Finance is seeing an increasing degree of interest in INTIPSA -- the International IP Strategists Association. Indeed, in the past few weeks I have received a number of emails asking whether this weblog will be mentioning the organisation's existence.

To put the record straight, IP Finance has written about INTIPSA. Almost exactly one year ago we published this post which alerted to readers to the intended formation of INTIPSA and to the LinkedIn group which preceded it.

INTIPSA now has a busy website, a handsome logo and great prospects for the future. This weblog wishes it the best of luck and looks forward to its contributions to the well-being of IP business strategy.

Facts, figures and fun with FRAND: the seminar

When GSM stood for
"grandma's sewing machine" ...

Yesterday's seminar, “Facts and figures on FRAND licensing for standards-essential IP”, turned out to be a most enjoyable and interesting experience.  Keith Mallinson (WiseHarbor) gave a presentation which covered a wide range of issues concerning the way we understand and view FRAND licences, patent pools and the measurement of their impact on profit, competition and the uptake of new technologies in the mobile telecoms sector. Other topics which made brief appearances included sewing machine cartels, regression analysis and the sinister-sounding Herfindahl-Hirschman Index.

Panellists Enrico Bonadio (City Law School), Dan Hermele (Qualcomm) and Richard Vary (Nokia) threw in a number of further ingredients and we had a chance to debate the question whether the Dutch courts' approach to the resolution of infringement/refusal to license issues, as illustrated by the recent spat between Samsung and Apple, was the best way of encouraging the litigants to negotiate their own settlement.

IP Finance's expectations were dashed when the number of chairs laid out for those attending proved insufficient since -- quite remarkably -- virtually every one of the statistically-likely "no-shows" actually turned up, even though there were other exciting events in town on the same day.

IP Finance thanks Olswang LLP for once again providing a venue and refreshments. IP Finance also thanks Keith for all his hard work in preparing and delivering a most entertaining and informative paper: you can access his slides as a pdf file here.

IP Strategist testifies in Leveson Inquiry today

Yesterday famous actor Hugh Grant gave evidence in the Leveson Inquiry. Today it is the turn of IP Strategist Mary-Ellen Field. If you ever wondered how IP licensing attracted the attention of News Of World then her evidence should be enlightening. But it is more than that - it is the story of how the reputation and health of professional business person and consultant is ruined by over zealous press seeking a story about her famous client. It could happen to you.

For a previous post and some background please click here.

Latest tax news from Malta

The Fenech Farrugia Fiott Legal newsletter, Malta 2012 Budget -- Tax Highlights", contains some good news for IP owners:

"Copyright & IP royalty exemption

The tax exemption on royalties from qualifying patents introduced in 2010 has been extended to cover royalty income from works protected by copyright and other IP including books, film scripts, music and art".

Anne Fairpo covered Malta's tax exemption for patent royalties on IP Finance in April 2010, here.

LES offers cash awards in IP business plan competition for grad students

IP Finance doesn't know whether anything will come of the entries, but the 2012 International Graduate Student Business Plan Competition looks like a worthwhile cause. According to the information available:

"... the Licensing Executives Society Foundation, in cooperation with the Licensing Executives Society (U.S.A. and Canada) and the Licensing Executives Society International, officially kicked off registration for its 2012 International Graduate Student Business Plan Competition http://les2012.istart.org.

Again this year, LES registration is being kicked off during Global Entrepreneurship Week (GEW), an annual initiative of the Ewing Marion Kauffman Foundation designed to help people explore their potential as self-starters and innovators. ...

In response to the world’s growing reliance on innovation, the LES Foundation is working to ready the next generation of IP and licensing professionals through mentorship and educational programs, like the Competition, that build intellectual property (IP) and licensing know-how. ...

Starting today, graduate students, including MS/MBA/MD/JD/PhD and postdoctoral scholars, from across the globe are invited to register to participate in the 2012 LES Foundation Graduate Student Business Plan Competition, which uniquely focuses on business plans that include an overview of IP assets and describe how those assets will be managed and commercialized to achieve business goals.

This year, student teams will compete to win expenses-paid trips to the Final Round of Competition at the LES (USA & Canada) Spring Meeting in Boston, MA, May 15-17, where they will attend educational sessions, mingle with global IP leaders and compete for the $10,000 Grand Prize and valuable in-kind prizes or the $5,000 Global Award. Runner-up teams receive $1,000. Students receive comprehensive feedback throughout the process from IP business leaders who share valuable expertise earned in the trenches of businesses ranging from start-ups to Fortune 500 companies.

For more information on the 2012 Competition and the LES Foundation, click here".

IP Finance hopes that there will be a good response from Europe to this call for innovative creativity. If you know anyone who might be able to take advantage of this initiative, please forward this post to them as soon as possible.

Investec to fund civil litigation: what does this mean for IP?

A media release today informs IP Finance that Investec Specialist Private Bank has become the first UK bank to offer litigation funding to clients requiring specialist finance to pursue a civil claim in court. This is said to be "in response to increasing demand for innovative funding solutions from law firms and their clients". According to the media release:

"... Investec has no pre-defined lending criteria [well that's good, since most IP players have no pre-defined litigation criteria -- unless perhaps they are trolls], which means that it can provide fast decisions and competitively priced funding for commercial litigation. Each case is evaluated on its own merits and structured accordingly. The minimum funding is £250,000 [This doesn't necessarily bar loans to fund litigation in courts where costs awards are capped, though such a high minimum may tempt a potential claimant in England and Wales to opt for the more expensive Patents Court than the Patents County Court on order to justify the high minimum].

Jonathan Harvey, Specialised Lending, Investec Specialist Private Bank said, “The cost of litigation in the UK can be prohibitive [For many businesses the cost of borrowing is also prohibitive ...]. Many clients have strong cases but in such uncertain times are not prepared to take on the cash flow risk associated with pursuing their case. This can represent a significant opportunity cost in terms of lost revenue for the law firm and damages for the client.

“Over recent months we’ve been approached by a growing number of law firms [not IP owners or prospective defendants?] looking for alternative ways to fund litigation in the commercial sector. This is partly driven by changes in the way law firms fund their own working capital and partly by claimants’ growing need for flexible finance. Based on the success of our pilot transactions mid-year, we anticipate significant demand.”

Investec’s specialist finance team works with law firms and their clients to find innovative and flexible ways to finance their cases. The availability of litigation funding can itself be a powerful asset in bringing about a negotiated settlement, rather than going to court [but can't the same be said about the lack of availability of litigation funding?].

... The Investec professional services team was set up in response to increased demand from managing partners at law firms who are considering financial support to make structural changes to their businesses as a result of the impending introduction of the Legal Services Act 2011".

It would be good to receive readers' comments.

Scaremongers, IP Rights, Standardised ICT and Public Policy

In this, the ninth in a series of articles by Keith Mallinson (WiseHarbor) on issues concerning technical standards and IP in the ICT sector, the author cautions against the making of unfounded assertions concerning the anticompetitive nature of intellectual property rights, particularly at that sensitive point at which private rights intersect with public policy:

Scaremongers Falsely Claim IP Rights Impede Adoption of Standardised ICT and Public Policy 

It is a grave mistake for governments to manage competition in favour of particular business models by manipulating their procurement policies. Mandating royalty free standards will deter technological development, limit choice and increase customer costs elsewhere in the software lifecycle with implementation, operations and maintenance. 

According to the European Commission’s Enterprise and Industry division, in its announcement for an upcoming conference to be held in conjunction with the European Patent Office, “[t]hroughout the world, public policies increasingly rely on innovative and interoperable ICT solutions to implement major projects for the benefit of society in domains such as eHealth, efficient energy use, cloud computing, integrated transport systems and smart grids.” Quite so, but the Commission troublingly frames the debate by presupposing, without identifying or attributing, “legitimate concerns when technologies covered by Intellectual Property rights (IPR) are included in the standards.” It falsely asserts that “the exclusive potential provided by those rights poses the danger that they could become an impediment to the implementation of the technologies and the realisation of the policy objectives”. 

This blurb illustrates a continuing attack on IP rights and business models, including demands for royalty free licensing by the open source lobby. European Interoperability Framework version 2.0, published December 2010, ought to have settled the matter once and for all. It recommends that

Intellectual property rights related to the specification are licensed on [Fair, Reasonable and Non-Discriminatory] terms or on a royalty-free basis in a way that allows implementation in both proprietary and open source software.

I have purposely avoided use of the term “open standards” in this article. There are significant differences among standard-setting organisations on this most widely adopted term with respect to membership limitations, transparency, decision making and whether or not any royalties may be charged. 

Software products represent a small proportion of ICT expenditures 

Whereas there is a lot of fuss about the cost of proprietary software versus open source and “royalty free” alternatives, software products represent a very small proportion of total business and government IT spending. Exhibit 1, a chart from a leading industry analyst firm’s research report on “cloud” computing, shows that ICT market segments where open source software competes or combines with proprietary software products represent just 12.4% of $2.5 trillion total ICT expenditures including operating system software (1.0%), non-custom-built applications (6.7%) and middleware (4.7%). In comparison, IT services (11.6%) and outsourcing (9.8%) combined represent 21.5% of spending. Computer equipment represents 13.9%. The $2.5 trillion total appears to exclude very significant costs for internal staffing.

Exhibit 1 Source: Forrester Research 

IP protection prevails in the most widely-implemented standards 

IP rights provide the investment incentives required for innovation in numerous standards. Technologies used for mobile communications, audio and video encoding have flourished while employing thousands of standards-essential patents owned by hundreds of different patentees. These include the ETSI, 3GPP and 3GPP2 standards covering the world’s trillion dollar mobile communications sector with thousands of network operators and 5 billion mobile phones. The AVC/H.264 video standard has 29 essential patent owners licensing to more than 1,000 licensees, voluntarily through a patent pool, with devices, video programming and network services used extensively by virtually everybody. The essential IP for these technologies is beneficially accessed by product manufacturers on the basis of FRAND licensing. With the rapid developments in smartphones, DVD players, HD-camcorders, digital TV distribution and widescreen TVs in recent years, and with a plethora of suppliers, there is irrefutable evidence that the IP development and licensing conditions for essential and other IP is working well. 

Whereas government and enterprise ICT systems have some different characteristics to the public communications networks, personal ICT products and services described above, the FRAND-based essential IP licensing is universally applicable and beneficial to licensors, licensees and end users. In addition to the above, standards bodies that allow the collection of reasonable royalties include ISO/IEC, IETF, ITU and CEN/CENELEC.  Examples of successful ICT standards with widespread adoption from these organisations include standards for data and document exchange, web technologies and services, and virtually every telecommunications standard.  In fact, FRAND-based licensing, with the option of charging royalties for essential IP, is the norm rather than the exception in standards-based ICT. 

As society becomes increasingly digital at home, work and in government organisations, standardised ICT is pervading with extensive innovation through a variety of business models and without “impediment” from IP rights.  Financial returns in ICT are legitimately made in wide variety of ways including licensing patents and software programs for royalties, hardware manufacture, customisation, systems integration, training, operations and maintenance.  There is no good reason to favour or eliminate any particular business models on the basis of unidentified or unproven harm.

Royalty free does not mean cheaper 

Open source and “royalty free” software is often more expensive than alternatives; with total costs including patent licensing (inside and outside the standards), hardware, integration, and support costs. Recent licensing agreements by Samsung and HTC -- who implement open source Android software on many of their smartphone -- are each reported to cost between $5 and $15 per handset. In addition, standards-essential IP is paid for or cross-licensed in virtually all phones, regardless of whether the operating system is proprietary or opens source.  Government procurement edicts cannot circumvent these charges. 

Open source software notoriously tends to require more integration than proprietary solutions.  The latter tend to be more complete, packaged offerings that are less prone to the code base fragmentation --with forking in development tracks-- that have afflicted the software industry since UNIX in the 1980s as illustrated in Exhibit 2.   Similarly, ongoing software maintenance tends to be more labour intensive for open source software users and their systems integrators.

Exhibit 2 Relationships among and evolution of UNIX-like operating systems Source: Wikipedia on “Unix-like”

There have been few thorough assessments on purported cost savings and other benefits with open source procurement policies by governments. Written here mostly verbatim as reported by the Guardian newspaper , an exception is the Dutch Audit Court which investigated "whether the phasing out of closed standards and the introduction of open source software would improve the operation of market forces and save costs for the government". Its March 2011 report entitled Open Standards and Open Source Software in Government "concluded amongst other things that the potential savings the government could [realise] by making more use of open source software were limited", and that the "switch to open source software...does not necessarily... lead to cost savings" at all. 

The Audit Court reasoned that, although there are no licensing or acquisition fees generally associated with open source software, there are other significant and accumulative fees. These include those relating to software implementation, management updates and maintenance. Moreover, in some other instances the switch to open source may even lead to "destruction of capital because the kingdom has many current licence agreements". No wonder this newspaper article was also very critical of the UK’s lurch toward open source software requirements for public procurement. 

Dutch analyst Victor De Pous has also analysed open source procurement in the context of government ICT procurement in the Netherlands. Among other conclusions, he states that “deciding which application to deploy solely based on cost savings or solely based on one preferred business model, is a too restrictive approach and will lead most likely to ineffective decisions with wide and long-time consequences.” It is rarely all or nothing with open source 

Open source software is rarely just that alone. For example, in smartphones, Android has drifted away from its Linux base and licensees have adapted it with proprietary layers (including Samsung’s Pure Breeze, Motorola’s Motoblur, HTC’s Sense) in their attempts to differentiate themselves. In government and enterprise ICT the additional programming is lucrative custom work for service businesses such as IBM, HP, Accenture, CSC, Redhat and many others. However, this can make it rather more costly to customers than with the update and support fees on packaged software.  This major conclusion was also drawn in a book entitled the Comingled Code. Its key findings are that both types of software are complementary and that total cost of ownership is not primarily software purchase cost.  It bases its findings on extensive research including more than 2,300 companies and nearly 2,000 programmers, spread across 15 countries. 

Damning reviews of UK government ICT projects clearly indicate escalating and excessive costs in customising and supporting systems. Those charges are predominantly derived from man hours of consultancy and custom programming, not from royalties on software products. The bugbears seem to be civil servants’ failings in negotiating and managing contracts, and runaway costs with the coterie of large systems integrators. 

Open source may not be entirely royalty free         

Open source licensing conditions can and often do bind software contributors and licensee users to royalty free conditions, but they cannot legally bind third parties outside of these agreements. If hardware or software implementations infringe the patent rights of others, then the latter are legally entitled to assert their patent rights. If the patent owners are members of a standards organisation and those rights are standards-essential, these owners will typically agree to license on a FRAND basis.  There is generally no conflict between open source licensing and paying patent royalties to third parties. The most stringent open source licenses; such as GNU GPLv3—in which “patents cannot be used to render the program non-free”—is seldom used because of such conflicts. In cases where licensing prohibits patent fees, the only legal solution is for such software to be written to ensure it does not infringe any IP that has not also been specifically declared royalty free by its owner. 

Standards-based patent royalties tend to be a relatively small proportion of total costs in ICT products, systems and services. For example, the aggregate royalties for patented radio technologies in mobile phones account for around 10%. The audio and video coder-decoder IP licensing costs around $4 per unit shipped. These fees are crucial to companies with upsteam licensing business models and can help defray R&D costs for vertically integrated companies. Other companies pay licensing fees in compensation for the innovative efforts of others. 

Head in the clouds thinking on royalty free with service-based usage and charging 

Where public cloud computing is employed, as discussed in the Forrester Research report referred to above, the issue of software licensing models becomes opaque to enterprise and government customers.  The question of open source and royalty free versus proprietary solutions in interoperability standards becomes much less relevant, if at all, when, by definition, public cloud computing substitutes remotely hosted services for hardware and software on the customer premises. When that occurs, every charge including that for use of underlying hardware and software, as well communications and technical support also become a service charge—just like software licensing fees, including up-front charges and running royalties. 

Under these circumstances, the pertinent cost question is how much will governments save by moving their on-premises applications and processing loads (e.g., email and office productivity) to the cloud? Savings can be substantial from a variety of vendors including Google, Microsoft and Amazon. These are achieved through economies of scale that the cloud providers can offer and are nothing specifically to do with open source or open standards. Customers are oblivious to how, where and how much cloud-based services providers pay to build their infrastructure and this should not be their concern so long as the cloud services provide the technical capabilities, reliability, flexibility and costs that are most competitive – which they do. 

Backpedalling 

Royalty-free software proponents are simply trying to re-open an argument that was already settled.  These issues were debated ad nauseam in with the definition of the term “openness” in the European Interoperability Framework version 2.0, which was finalized in December 2010.  The Commission ultimately settled on a definition that embraced FRAND, with or without a royalty, as the right benchmark.  This was in contrast to the EIFv1.0 which included a royalty free requirement.  EIFv1 was just a recommendation by an expert group deep in the Commission. It had no official status; which explains why it was able to take such an extreme and untenable position. In contrast, EIFv2 is an official communication by the Commission. That makes it a binding policy document, rather than something that member states and the EC itself can ignore. 

Impeding competition and choice 

Suppliers and their customers in government and elsewhere should have freedom in software selection including open source, proprietary, premises-based and cloud-based usage. This includes implementations that need to be significantly standards-compliant for interoperability and for any other reasons.Mandating royalty free software in government procurement on the false premise that this is necessary to ensure interoperability or minimise costs is a red herring that will harm competition and choice. Current arrangements allowing FRAND or royalty free licensing for standards-based ICT have served us well in many spheres. Mandating royalty free would severely limit procurement options because countless popular ICT standards are not royalty free. Open source software implementations are in many cases subject to patent royalties for use of essential and other patented IP and such software is commonly comingled with proprietary code. Academic research and an extensive audit in the Netherlands shows that open source software does not necessarily save money and can cost more. 

Even more troubling, is that rather than “levelling the playing field” for open source software developers, mandating royalty free open source software would actually be prejudicial to large and small vendors who would like to protect the IP they have developed and pursue licensing-based business models to generate royalties and cross-license for access to others’ IP. Public procurement policy should not also be the instrument to manipulate industrial policy for innovation, development and making money in the software industry. The adverse unintended consequences of such policies would be severe.

"Open Innovation: the Challenges and Solutions"

Only yesterday this weblog posted information concerning a topic meeting on 24 November at the University of Leuven, Belgium, on "Open Innovation: Barrier or Enabler?" Today we post an announcement concerning "Open Innovation: the Challenges and Solutions", a half-day conference in the British Library's Conference Centre, London, on 29 November, which has been brought to this blogger's attention by Creative Barcode CEO Maxine Horn -- one of the conference participants. You can get full details of this event here.

It would be too early to say that the bandwagon of open innovation is sweeping across Europe, but it is fair to say that business models based on open innovation rather than on self-sufficiency in innovation and the preservation of exclusivity in one's technology are finally gaining ground.  Since they require less financial investment, they are less vulnerable to the availability of credit; and they have the potential to evolve into arrangements which are less formal than FRAND-based standards while at the same time retaining many of their benefits.

"IP in Open Innovation – Barrier or Enabler?"

The Licensing Executives Society (LES) Benelux, together with the Centre for Intellectual Property Rights (CIR), Leuven. Inc and Leuven Research & Development of the K.U.Leuven are organizing a Topic Meeting on “IP in Open Innovation – Barrier or Enabler? The Story so Far” on 24 November 2011 at the Faculty Club in Leuven Belgium. According to the details sent to us by Dr Esther van Zimmeren:

"When LES Benelux hosted the LES Pan European Conference in September 2008 in Amsterdam, the theme was “Open Innovation – The New Paradigm?” In the meantime, this model has become more widespread but has it been a success to the point where the question mark could be removed? This event explores how things have progressed, what is working and what is not with particular reference to IP. 

As you will see from the speaker panel, this promises to be a very interesting day reflecting the views and experiences of different stakeholders. Prof. dr. Wim Vanhaverbeke will give the keynote presentation on “Open Innovation and its implication for IP management”, followed by Dr Esther van Zimmeren (CIR), Andre Clerix (IMEC), Benjamin Docquir (Simont Braun), Laure van Oudheusden (Philips) and Magali Poinot (IMI)".

You can access the invitation here and the registration form here

How Much Is a Sports Sponsorship Really Worth?

The trick in being the sponsor of an event is finding one whose benefits are so overwhelming that the sponsor enjoys oversized benefits in being associated with it. On that basis, surely the sponsorship of the recent Chicago Marathon by the Bank of America would seem to fit this bill perfectly. After all, according to the media packet provided by the Bank of America, 45,000 runners were to take part in the race, with more than one million spectators lining 26 miles of Chicago streets as the runners pass through 29 neighbourhoods (nowhere else in the U.S. is the notion of discrete urban neighbourhoods more hallowed than in Chicago).

As a result, it is claimed, the Marathon will bring $171 million dollars redounding directly to the benefit of the city, with additional ripple effects further enlarging the supposed benefits of the event to the area. The problem is that this assessment may be wide of the mark. An article that appeared on the webez91.5 website ("Chicago marathon--bonanza or blip") here strenuously attempts to dispel these claimed benefits.

So how does one get to the amount of $171 million dollars being added to the coffers of Chicago and its environs? Follow the mathematics with me:

1. Of the 47,000 runners, 7,000 out from abroad, with another 19,000 runners from outside the Chicago area. That adds up to 26,000 runners in need of a hotel room, plus 4,000 additional rooms occupied by locals, with the result that 30,000 runners at an average price of $200 per room. That means $6 million in lodging revenues a night.

2. Direct spending--paraphernalia purchased by the runners and increased restaurant sales are expected to amount to $40 million.

3. Secondary effects, which the sponsors call "a trail of economic activity", adds another $100 million.

Add these amounts together and voila -- we reach the $171 million dollar amount. Such a sum would certainly bring tears of joy to new mayor of Chicago, Rahm Emanuel.

But all of this jock-driven ardour has been dampened by the revisionist estimates offered by University of Chicago professor Allen Sanderson, who studies the economic impact of sports (and who is a three-time runner of marathons). In his view, the true number is closer to $25 million, at most. It's all because of what Sanderson calls "leakage" effects. Here are a few examples:

1. Say a souvenir cap is sold for $20. Most of the value in that cap was captured by the manufacturer, most likely not located in Chicago and probably located in the Far East. The direct value of the cap to Chicago is the mark-up, which amounts to several dollars.

2. Say a visitor pays $200 a night (or more) for a hotel room. Most hotels are headquartered outside of Chicago, which means that a certain portion of that amount is likely forwarded to the headquarters.

3. There is a bit of a set-off effect with respect to the spectators themselves. Assuming that most of them are from the Chicago area, some or even many of them simply exchange expending monies at another local site in favour of the Marathon event. The net gain, therefore, may be minimal.

Should any of these revisionist calculations influence the decision of a sponsor, such as Bank of America, to serve as a sponsor for the event? My instincts tell me that the bank might be less interested, or simply not interested at all, to be connected with the Marathon if the much modest sum of $25 million more accurately reflects the contribution of the event to the local economy. Additionally, the cost to the bank of the sponsorship might be less if a lower valuation is given, negatively impacting on the sponsorship revenues of the City of Chicago for the event. In such a case, while it is not a lose-lose situation, it is certainly a greatly diminished version of the lofty figures being thrown about in the media.

Valuing IP in Smartphones and LTE

Is this where we'd
still be without
FRAND ...?

In "Valuing IP in Smartphones and LTE", the eighth in the series of guest posts authored by Keith Mallinson (WiseHarbor), Keith observes that extensive IP litigation between various smartphone ecosystem participants —- most notably between Apple and Android licensees Samsung and HTC -— reflects the ever-increasing importance of a business strategy based on first developing or acquiring IP, then licensing and defending it. In this diverse, IP-rich and rapidly changing product sector, disputes erupt over standards-essential patents, software and hardware designs.

In this context, attempt to value IP -- including those rights that stem from essential patent ownership “determinations” -- are subject to great uncertainties, inaccuracies and biases. Keith argues that negotiated licensing agreements can overcome these problems while reflecting significantly different positions among licensors and licensees. For example, Keith calculates that there's virtually no correlation between the results of two different studies purporting to determine essential patent ownership in LTE. Keith concludes that the oft-stated belief that smartphone IP litigation and licensing costs are stifling innovation and foreclosing market entry is a "popular and yet unproven and erroneous refrain". Far from supporting this position, such evidence as there is actually points to the opposite effect: licensing costs are modest; smartphone innovation is extensive and shows no signs of slowing with faster connections, more powerful processing and richer applications, mainly on account of FRAND-based licences.

For ease of reading, Keith's contribution (which is a good deal longer than usual and contains many tables and diagrams) can be accessed here as a PDF document.

“Facts and figures on FRAND licensing for standards-essential IP”: seminar update

The IP Finance weblog's seminar, “Facts and figures on FRAND licensing for standards-essential IP”, will be held on Tuesday 22 November 2011, 5.00pm to 6.30pm. The venue is Olswang LLP's London office at 90 High Holborn.

The speaker is Keith Mallinson (WiseHarbor), who is a regular guest contributor to this weblog on FRAND-related issues. His presentation will be thrown open to comments from a panel of commentators: in alphabetical order Enrico Bonadio (City Law School), Dan Hermele (Qualcomm) and Richard Vary (Nokia). There will then be (i) questions and comments from the floor and (ii) refreshments.

The seminar currently has 24 registrants, but we still have room for more. If you'd like to attend, please email Jeremy here and let him know.

You can follow Keith Mallinson on Twitter at @WiseHarbor

Trends and challenges in demand-side innovation: a thematic report

"Trends and challenges in demand-side innovation policies in Europe" is the title of a paper unearthed by Chris Torrero, courtesy of the European Commmission's Enterprise and Industry website here. This is a "Thematic Report 2011 under Specific Contract for the Integration of INNO Policy TrendChart with ERAWATCH (2011-2012)". As the Commission website explains,

"Demand-side innovation policies are important policy instruments aiming to increase the demand for innovations, to improve the conditions for the uptake of innovations or to improve the articulation of demand . Their potential is widely recognised and actively promoted. 

The report aims:
• to identify the trends in the deployment of demand-side innovation policy at national level in the EU Member States during the period mid-2009 to mid-2011;
• to give an overview on recently introduced demand-side innovation policy measures and to ascertain if there are any observable patterns;
• to provide insights into how demand-side measures are being implemented;
• to analyse governance practices for coordinating between demand-side and supply-side measures".

You can read the whole report here.  Curiously, as Chris notes, in this 48-page document the word "patent" appears just once. Even more curiously, the word "invention" does not appear at all and there are just three mentions of "intellectual property".

There's Still Some Life in the DVD Market: Should There Be?

Talk about the future of distribution of movie contents and all you hear these days is about finding workable commercial models for streaming to a variety of computer and hand-held devices. DVD-rentals seem to be "oh so yesterday." Both the sale and rental of DVDs continue their steady decline. U.S DVD sales are repoted to have dropped by 5.8% in 2010 to $16.3 billion dollars. The recent missteps by Netflix, the pioneer in DVD-by-mail rentals, which tried to separately price (and later even separately brand) its streaming and DVD-rental services with the express intention, were apparently driven in part by the strategic goal that, sooner or later, DVDs will be passe. One could be excused from thinking that the industry is largely giving up the DVD battle.

That does not appear, however, to entirely be the case. As reported on Bloomberg.com ("Holllywood Studios Said to Study 60-Day Ban on New DVD Rentals to Aid Sales" here), the studios are still seeking to find ways to increase profits from DVD sales at the possible expense of DVD-rental and VOD. According to the article, "[s]tudios are searching for ways to bolster DVD sales and purchases for online viewing, in part by postponing the availability of newly released DVDs for rent or by subscription.... A 28-day window is simply not long enough to shift consumers fast enough to higher-margin” video-on-demand rentals and purchases," observed Rich Greenfield, a noted media analyst.

Accordingly, rumours are flying that the studios are contemplating increasing the waiting period to 60 days before a DVD may be rented or made available on VOD. Not for the first time, reaching back into the mists of 17th century England, where the fledging author class was in conflict with the Stationers, we find today the owners of movie contents at loggerheads with their distributors.

Mind you, even the current 28-day window is a source of discontent. Paul Davis, the CEO of Coinstar, the operator of the Redbox DVD kiosks, states flatly that "[p]roviding access to rental and for-sale customes on the same day is the best for consumers." And besides, Davis notes, "it has the option of buying DVDs elsewhere. Coinstar is posturing a a bit here. Movie contents are not fungible items for which there are perfect product substitutes. Not surprisingly, therefore, Davis has admitted that "[s]ome studios want a window and we try to work with them,[but] there's a point to where it not make sense." Extending the window to 60 days would make a great test for Davis's comments.

The conflict over the length of the ban before DVDs can be rented suggest a number of points:

1. While the market for DVD sales is declining, the aggregate sales amount of more than $16 billion dollars is still substantial. Moreover, sales margins are much more attractive than margins on rentals and the like. Thus, even if the content market is in a transition period from DVD sales to on-line streaming, the studios still have an interest in maximizing revenues from such sales.

2. That said, there is always the tricky balancing act of seeking to squeeze more income from one's current business, while at the same time trying to meet the challenges of creating a new business model.

3. Moreover, a company such as Coinstar may have nowhere else to turn. While Coinstar may be at loggerheads with the studios about the window period, both would appear to be in the same boat with respect to the commercial exploitation of DVD contents. Netflix is trying to decouple itself from this reliance on DVDs by moving into streaming, but recent events show how difficult it is to make the transition in the face of a disruptive technology. It is equally likely that the studios will face a new set of distribution "partners" once the streaming business takes firmer shape.

4. The implementation of the extension from a 28 to a 60-day window will be an interesting experiment in whether consumer behavior can be materially influenced. As Greenfield notes above, the goal is to "force" the consumer to consider the option of purchase or face the prospect of having to wait for an unacceptedly long period before rental is available.

Stay tuned.
More on the Netflix saga here.