Tuesday 28 December 2010

Studios, Theatres and Premium VOD Contents

The relationship between the movie studios and the channels for the distribution of their contents has been a leitmotif of the film business from the inception of movies as a commercial activity. There was a time, a half of a century ago, when the matter was primarily framed (at least in the US) as a question of antitrust law. Thus, in the seminal Supreme Court case of United States v Paramount Pictures, Inc., 334 US 131 (1948), the Court required the studios the divest themselves both of ownership of theatres and of maintaining exclusivity rights regarding which theatres would be allowed to show their films to the consuming public. In so doing, the decision hastened the demise of the old studio system as well as giving rise to new arrangements for the production, distribution and exhibition of movies.

Much of the antitrust doctrine underlying this decision has been either called into question or outright overturned by later Supreme Court jurisprudence. What remains is the continuing love/hate relationship between the providers of celluloid content and the various platforms by which these contents are made available to the public. An excellent summary of the current state of this tension appeared in the Los Angeles Times article of 23 December, under the byline of Richard Verrire and Chaudia Eller and entitled "Theatre Operators Fight Studios' Plan to Release Movies in Homes Earlier", here.

The gist of the revenue share between studios and theatres is that threatres keep about 50% of revenue from ticket sales, while the studios keep the remaining portion. With each development in distribution technology, the studios seek to leverage their contents to earn additional revenues, following a multiple distribution trajectory from theatre to DVD sales, to video on demand (VOD), to cable broadcasts.

The genesis of the current tensions between studios and theatres derives from the declining sales of DVDs for home viewing. For studios, DVDs have been the main driver of non-threatre exhibition income, but DVD sales are declining. The challenge is how to maintain a home viewing market as the consumer slows his purchasing of DVDs, especially when the size and quality of home screens continue to develop. One strategy, and the immediate bone of contention, is for the studios to shorten dramatically the period of time in which a theatre enjoys a monopoly in the exhibition of a movie before it is made available for home viewing (the so-called "theatrical window"). In the DVD world, the theatrical window has been 130 days from the time that the movie is exhibited in the theatre to the time that the movie is first available in DVD form.

The suggestion is reduce the theatrical window to 30-60 days for premium priced VOD, with the price ranging from $30-$60, depending on how soon the movie is made available. The pros and cons of such a move are not unexpected. Movie theatre groups see such a step as a direct threat to their revenue potential by shortening the waiting period for home viewing and thus giving consumers less of an incentive to rush to their local movie house. Even a producer or two shares this view, most notably James Cameron of Avatar fame: "We don't make movies for the small screen, we make movies for the big screen. Television is a great art form, but it's an oxymoron to say that we're giving you a premium experience on TV."

In response, the studios point to the challenge of the changing economic climate. Notable in this regard are the words of the Chairman of Universal Pictures, Adam Fogelson, who observed that '[w]e are exploring every conceivable additional revenue stream there. The facts are irrefutable that our business models are under an extraordinary amount of pressure. In order for the studios to remain healthy, we need to find ways to recapture that revenue." Some analysts see the issue from another angle, namely that risk is overstated. It is observed that fewer than one-half of US consumers view movies via VOD and only a small proportion of those consumers can be expected to fork over $30-$60 to watch a movie at home, no matter how fancy the screen.

The long-term future of movie theatres has been the focus of media eulogies more than once in the past, with this or that claim that technological developments for content delivery and display will render theatres decreasingly important for the distribution of movies. While there has been a small decline in movie attendance this year, revenues have held up due to increased ticket prices. More importantly, only a commercial manichean would see theatre owners and the studios as being engaged in a zero-sum game. As the article itself points out, there is and has always been a symbiotic relationship between the two. The mix may change at the margin, but the demise of the theatre seems premature.

Tuesday 21 December 2010

EU Commission on FRAND

Connoisseurs of European Union legislation will be delighted with the latest Commission tome which is imaginatively entitled "Guidelines on the Applicability of Art 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements". This magnificent 94-page opus replaces the 2001 version of the guidelines and will no doubt be welcome Christmas reading to aficionados of EU competition law. The work is dedicated to providing guidelines on "horizontal cooperation agreements", which are defined as being those between agreements entered between actual and potential competitors. The EU appreciates that such horizontal agreements can lead to substantial economic benefits, in particular if the participants in the agreements combine complementary activities, skills or assets. The guidelines are intended to provide indications of safe harbors in which such agreements are or would be valid and would not lead to problems in competition law.#alttext#

Readers of the IP Finance blog may well find the discussion on FRAND commitments in standardization agreements to be highly relevant, since the EU has given some insights into its thinking on how a FRAND definition might operate. The guidelines note that FRAND commitments are designed to ensure that technology protected by intellectual property rights (IPR) are accessible to users on Fair, Reasonable And Non-Discriminatory terms (hence the FRAND acronym). FRAND commitments can prevent IPR holders from making implementation of a standard difficult by refusing to license or requesting unfair or unreasonable fees.

The Guidelines notes that the assessment of fees should be based on the economic value of the IPR - which seems highly reasonable and certainly not revolutionary - and several methods are available to make this assessment. The cost-based methods are not well-adapted. The Guidelines states that this is because of the difficulty in assessing costs attributable to the development of the patents or group of patents. In this author's view, the major downside with the cost-based method is the fact that any figures about historic costs obtained bear little or no relevance to the commercial implementation of the IPR.

The Guidelines suggest that one way of assessing FRAND terms would be to compare the licensing fees charged by the IPR holder for the relevant patents in a competitive environment before the industry has been locked into the standard with those charged after the industry has been locked in. This, of course, makes the assumption that the relevant data is available. It's also possible that the relevant patents have, prior to the adoption of the standard, not been licensed. Indeed in some sectors, many IPRs have been developed and filed with the aim of being incorporated into the standard - and those rights may well be dropped if they are not incorporated.

#alttext#Finally the Guidelines suggest that an independent expert assessment be obtained about the centrality and essentiality to the standard of the relevant IPR portfolio. This is the author's knowledge, the most common way of assessing FRAND terms at present. An examination is made about the portfolio in question and its relation to other relevant IPR portfolios. It still fails to address the question of the level of fees. And for this the Guidelines suggest two alternatives: public disclosures made by IPR holders in the context of the standard setting process and/or comparison with the rates levied in other comparable standards. Both methods are currently used in practice and it is good to see the EU Commission giving its "badge of approval" even if it does wand that "nothing in these Guidelines prejudices the possibility for parties to resolve their disputes about the level of FRAND royalty rates by having recourse to the ... courts".

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Monday 20 December 2010

Auctions and the Trademark Troll: A Coda

On 8 November ("Meet the Trademark Troll") here, we reported on the contemplated auction by Brands USA Holdings of various trademarks and corporate names that are no longer in use. Exactly one month later, the auction went ahead as scheduled at the Waldorf-Astoria hotel in New York. As reported by Stuart Elliott of the New York Times ("From Retired Brands, Dollars and Memories" here), 170 properties were put up for sale in front of a room of 50 people (additional bidders participated online).

The result: over a one-hour period, approximately 12 bidders purchased around two dozen marks and names. Viewed otherwise, the total take was $132,000, whereby the highest bid went for the Shearson mark (a financial company), followed by $32,500 for Meister Brau (not surprisingly a beer) and $30,000 for Handi-Wrap plastic wrap (I was surprised that this mark is no longer in use; I remember as a child the daily challenge of separating the plastic wrap from the sandwich that was trapped inside.) At the low end, marks such as General Cinema and Allied Signal were each sold for approximately $1,000 each. I do not know the details of the expense side of this auction, but one can assume that advertising, rental of the room, the cut owned to the auctioneer entity (Racebook Marketing Concepts), and the cost of filing and maintaining the various intent-to-use U.S. applications must certainly have eaten a healthy percentage of the take from the auction.

The motivations for the purchase of these marks were for the most part opaque. For example, when asked by the purchaser of the Collier's mark (a respected magazine that once published the likes of J.D. Salinger, but ceased operations in the 1950s) what he planned to do with it replied: "You'll have to ask my father [who] owns a publishing firm in Philadelphia".

On the face of it, there may be concrete plans in store for the purchasers of the
Meister Brau mark, namely, as reported by Matt Creamer in Advertising Age ("Meister Brau, Handi-Wrap, Braniff ...Going, Going, Gone"). There, the thinking seems to have been that the acquirer of the brand would "sign an manufacturing agreement with a contract brewer, put together an advertising plan, and then market it to younger (legal) drinkers." At least there is some semblance of precedent here, namely Pabst Blue Ribbon beer, a blue-collar brew of the past, which seems to have made a modest return from the grave based on nostalgia, effective advertising maintained on a shoe string, and a low price.

It seems to me that, despite the media hype, this planned auction of defunct brands, no matter what the presumed nostalgia value, was a dud. We more or less anticipated this result in our earlier blog. What troubles me more is the question of whether the media, including the blogosphere, was guilty of being part of the over-hyping what turned out to be a non-event, at least from the commercial vantage-point (the legal questions about what rights exactly are being sold under such circumstances remain interesting at the conceptual level).

Part of me says "yes", we were victims (yes "victims") as well as aiders and abetters of this hype. On the other hand, in a world where the identification of trends (and micro-trends) has become a widespread phenomenon, it is difficult to dismiss out of hand such a promotional initiative. Confronted with hesitatingly embracing the next big idea (especially when it resonates with existing cognates--here, the auction of patents and reference to an IP troll) and summarily rejecting it, there is certainly a strong tendency to adopt the former. After all, each of us wants to be seen as riding the crest of that next big wave, as opposed to being a stodgy, unimaginative naysayer. Perhaps this is the most important cautionary point that can be taken away from the auction.

Wednesday 15 December 2010

Security interests in IP: a new article

Available online, though not yet in print, is an article "Security interests over intellectual property", by up-and-coming IP expert Andrea Tosato.   Recently appointed as Lecturer in Law at Bournemouth University, he holds a PhD from the University of Pavia, an LLM from the University of Cambridge and -- more significantly from the point of view of this weblog -- is a member of the Italian Delegation to UNCITRAL Working Group VI.

This article is to be published in the Journal of Intellectual Property Law & Practice (JIPLP), published by Oxford University Press.  While it has been online since 13 December the printed version comes out next year.  The abstract reads as follows:
"The development of new technologies and the viral spread of communication networks have both rendered possible the rise of businesses that own very few tangible assets and owe their success almost exclusively to their intellectual property. Within this new socio-economic environment, often described as the ‘information society’, the ability to use intellectual property rights (IPRs) as the object of security interests is gradually being recognised as an attractive prospect, rather than a mere eccentricity.

This article does not aspire to paint a comprehensive picture of this topic, but rather focuses on certain specific legal issues arising from the interaction between intellectual property and security interest law. First it looks at the different real consensual security devices known to English law, and evaluates their compatibility and efficiency when used in conjunction with IPRs. Secondly, it focuses on the difficulties associated with the conveyance necessary for a mortgage, and the manners in which they have been addressed by the case law. Thirdly, it examines matters of registration and priority for security interests created over trade marks and patents, paying particular attention to the provisions regulating the specialist registers and their interaction with ss. 860, 861 and 869 of the Companies Act 2006. Fourthly, this article considers the specific difficulties that copyright raises due to its unregistered nature, analysing possible solutions within the existing legal framework. Finally, it outlines some observations on the existing proposals for legislative reform of English security interest law and, more particularly, on the employment of IPRs as collateral".
Non-subscribers to JIPLP can use the publisher's pay-to purchase short term access facility by clicking here and scrolling down to "Purchase Short-Term Access".

Monday 13 December 2010

Bayh-Dole: framework, straitjacket or something in between?

A little while ago, Chris Torrero kindly sent me this link to this interesting piece from Genome Web News entitled "US Supreme Court to Hear Case on Universities' IP Rights on Federally Funded Research". It touches on the much-admired US Bayh-Dole legislation and reads, in relevant part,
"The US Supreme Court ... agreed to review a case over who owns the rights to discoveries paid for with government funding. The case involves Stanford University, which sued Roche in 2005 alleging it infringed on three patents covering PCR technologies. The technologies were developed by Mark Holodniy and others and are directed at measuring HIV viral loads.

[explanation of the facts and history of the litigation omitted]

In appealing to the Supreme Court, Stanford argued that Bayh-Dole supersedes an individual's rights to grant ownership to an invention. The Obama Administration agrees and is siding with the university. In a brief to the Supreme Court, it said that the appeals court "erred in holding that an individual inventor may contract around the Bayh-Dole Act's framework for allocating ownership of federally funded inventions." The Bayh-Dole Act gives ownership over an invention to a contractor, in this case, the research institution, and an individual inventor may "obtain title in a federally funded invention" only if the contractor declines to claim ownership, which Stanford did not, the administration said in its amicus brief.

... the case has broad implications for federally funded research and the government's role in supporting such research and making them available for the public good.

"The Bayh-Dole Act reflects Congress' considered judgment about the best way to ensure that federally funded inventions are made available to the public and to encourage further science and technology research and development in the United States," the administration said. "The funds at issue are substantial: the federal government spends billions of dollars per year on science and technology research at United States colleges and universities, small businesses, and nonprofit organizations.

"By upending the Bayh-Dole Act's hierarchy of rights, the court of appeals necessarily made the government's rights, like the contractor's rights, depend on the actions of an individual inventor," it said.
The "Policy and objective" provision of Bayh-Dole read as follows:
"§ 200 It is the policy and objective of the Congress to use the patent system to promote the utilization of inventions arising from federally supported research or development; to encourage maximum participation of small business firms in federally supported research and development efforts; to promote collaboration between commercial concerns and nonprofit organizations, including universities; to ensure that inventions made by nonprofit organizations and small business firms are used in a manner to promote free competition and enterprise without unduly encumbering future research and discovery; to promote the commercialization and public availability of inventions made in the United States by United States industry and labor; to ensure that the Government obtains sufficient rights in federally supported inventions to meet the needs of the Government and protect the public against nonuse or unreasonable use of inventions; and to minimize the costs of administering policies in this area".
The Act reflects "the best way to ensure that federally funded inventions are made available to the public and to encourage further science and technology research and development in the United States", but surely what it was intended to do was to free up publicly funded innovations so that they could be turned into wealth-creating assets by the private sector, not to determine the subsequent course that the private sector activity takes? Comments, please.

Saturday 11 December 2010

Nortel's Patent Assets

#alttext#We've reported from time to time on the planned sale of Nortel's patent assets which have attracted the interest of a number of companies, particular the portfolio related to the sale of the assets related to the forthcoming LTE (long term evolution) and SAE standards. Reports indicate that Nortel may have seven patents of the 105 declared relevant patent families.

#alttext#An exclusive report in Reuters indicates that the sale should be completed in the next few weeks. Front runners include both Apple and Google who are probably looking to build up their telecommunications-related patent assets as a bargaining chip to gain access to patent essential to the operation of mobile telecommunications. InterDigital is apparently also interested, whilst Reuters could not elicit a comment from Canadian telecommunications company RIM which had apparently previously a view that the patents were a national asset to Canada.

The value of the patents to newcomers in the telecommunications field, such as Apple and Google, is clear. Apple will be budgeting for licensing fees for access to essential patents to be able to implement telecommunications standards. Any patents they obtain can then be thrown into the pot to reduce the payments. Google are presumably currently relying on HTC for the IP rights - but would no doubt welcome access to a larger telecommunications portfolio in the mid-term to reduce any payments for cross-licence agreements to which they might need to sign up. No doubt a number of patent trolls or NPEs will sniffing around to see whether the portfolio has sufficient value to be able to make a return on the investment, as Joff Wilde has reported here.

Reuter's reports that Nortel's 4000 patents have been split up into different packages covering different technologies, including wireless handset and infrastructure, as well as optical networks, Internet advertising and computers. Given the need for interoperability in the telecoms field and Nortel's possession of seven highly relevant patents, it seems that these seven patents may be highly valuable. However, purchasers may be disappointed if the patents are ever litigated, as there may be potential prior art not considered by the patent office which could severely damage the value of the patents as both IP.COM and InterDigital have had to learn over the years. Both have had to live with patent rights that have been limited after a court action.

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Friday 10 December 2010

Valuation of untested technology: what do European courts say?

This blogger thanks Swiss scholar Jacques de Werra for drawing his attention to a note entitled "North Carolina court validates IP valuation methods" which explains the ruling in Vernon v Cuomo, 06CVS8416 (N.C. Super. Ct., March 15, 2010). According to this note, the case, which concerned a statutory buy-out, demonstrates “the extreme difficulty” in valuing an early-stage company with no other assets than untested technology. One of the issues addressed by the court was how to protect majority shareholders from reaping a windfall if the patented portfolios prove to be highly valuable, without requiring them to overpay should the market fail to adopt the technology. Michael Pellegrino, the court-appointed expert in this case, has written a Guide to Intellectual Property Valuation (details here).  In this case he deployed "statistical models (simulation algorithms and Monte Carlo simulations) to calculate fair value based on discounted future income" and his approach is said to be “appropriate for this type of business and clearly in the mainstream of IP valuation methodologies".

Writing from my little corner of Europe, I envy the United States for the sheer width and variety of IP valuation issues that get an airing in court and then trickle through into the IP community.  Do any of this blog's European readers know of any reported decisions in which judges have passed comment on the acceptability of simulation algorithms, Monte Carlo simulations to calculate fair value based on discounted future income?

Thursday 9 December 2010

The (bad) luck of the Irish: patent tax exemption bites the dust

Back to the dark ages for Irish
patent royalty taxation?
IP Finance has just learned that, in the Summary of 2011 Budget Measures, (See p B7 here), delivered to the Irish Dail yesterday, the provision for tax exemption for patent royalties was removed. Until now, income derived from patents was exempt from taxation (up to a cap of €5 million). The statutory basis for this relief is Section 234 of the Taxes Consolidation Act 1997.

This exemption has been removed with immediate effect (in fact, if the Budget Measures document is to be believed, the exemption vanished two weeks ago, on 24 November). This is an extraordinary measure to introduce out of the blue and it lends no thought to companies (especially start-ups) which may have based some of their cash projections on their (already meagre) royalty incomes.  IP Finance's source, Andrew Waldron, comments:
"Perhaps it seemed like something easy to dispose of, but it is an especially curious measure given that the Irish Government's line over the last number of years has been to champion R+D and the creation of IP in the economy. Plus, I would have imagined that they should have maintained any measure that offered even a glimmer of the possibility of job creation".
Andrew would be curious to know readers' thoughts on this and he asks if we know of other such exemption schemes in other countries? Have they succeeded in fostering innovation/luring large R+D companies? Could the UK benefit from the removal of the Irish exemption?

The feeling of this blogger is that it is indeed extraordinary. I have no direct data, but I had imagined that the tax exemption for royalty income was a useful carrot to dangle in front of small businesses but not one which would often be nibbled, given the arduous task of turning innovations into patent-protected streams of royalty income.  Anyway, responses to Andrew's questions are very much welcome. Please post them below if possible.

Tuesday 7 December 2010

More thoughts on the UK's IP tax reform document

Now back in the UK, and with a functioning computer again, I’ve been digging a little further into the other IP proposals in the HM Treasury Corporate Tax reform document, and looking at the review of the intangibles tax regime published by HMRC – see earlier post for the patent box proposals.

CFC reforms:

Finance Act 2011 will include some interim reforms to the controlled foreign companies* rules and, in particular, a new exemption for CFCs meeting certain conditions. In particular, the conditions include the requirement that the CFC must receive at most an incidental amount of IP income, where “incidental” ≤ 5%.

Secondly, FA 2011 will include a specific exemption from the CFC rules for a CFC with main business of IP exploitation; provided that the IP and CFC have minimal connection with the UK (ie: this is intended to exempt CFCs that do business almost entirely outside the UK). No specific thresholds are given, but when considering whether the IP has a minimal UK connection, the business should review whether the IP was ever held in UK, and whether any R&D was done in the UK. When considering whether the CFC has a minimal UK connection, the company should consider the extent/nature of any UK equity funding, whether there are any receipts from the UK, and what expenses have been incurred in the UK.

*CFC: for the non-tax specialists – a controlled foreign company is a subsidiary of a UK company that is located in a low/no tax jurisdiction. The CFC rules are intended to ensure that UK companies don’t dump profits into these subsidiaries to divert taxable income from the UK – they achieve this by taxing the UK parent on the profits of the CFC, unless an exemption is available. At present, the rules are rather more restrictive than is competitive or compatible with modern multinational business, and so reform is being considered as part of the corporate tax reform package.

IP tax regime review

HMRC commissioned a review of the IP tax regime, introduced in 2002, from Ipsos Mori. The conclusions aren’t wildly startling:

  • The intangibles regime was considered important to decision making, in so far as intangibles were often felt to be vital to business success. However, it was not influential on what decisions were made - it influenced how deals were structured, rather than whether or not they took place at all.
  • The UK regime was therefore typically felt to be of little consequence in acquisitions
  • Ultimately, the UK regime was viewed as neither favourable nor unfavourable – taxation of intangibles was seen as part of doing business, rather than a direct influence on the decision making process.
  • While the tax regime introduced in 2002 was appreciated by companies for making the law clearer, most did not believe that decision making regarding intangible assets would have been any different before this time.

Thursday 2 December 2010

Saints, sinners and 'disgrace' insurance

Can you guarantee that your celebrity
remains a Saint till the brand endorsement
deal comes to an end?
In "Celebs Behaving Badly? Brands Turn to Disgrace Insurance", posted here last month on Brandchannel, Barry Silverstein reviewed the nightmare scenario faced by a number of businesses that pay large sums for famous people to endorse their goods and services -- the damage done to the brand when the celebrity's fame is for all the wrong reasons.  Silverstein cites the examples of errant golfer Tiger Woods and English soccer star Wayne Rooney and writes about the concept of 'disgrace' insurance:
"... No surprise, brands want their backs covered when their ambassadors don't keep theirs covered. 
"There has been an uptake in interest in this type of insurance," says Mark Symons, an underwriter with Beazley, the Lloyd of London's insurance group, to The Independent. "We have probably seen an increase of about 30% in the last couple of years. Either you lose the money [invested in a celebrity endorsement] or you get a policy that will pay the cost of you restarting a campaign."

Brand marketers taking out such policies generally pay between half and one percent of the sum insured, according to a spokesperson for Lloyds. The premium could be lower for someone who "seems unlikely to cause a scandal." ...

Some branding experts think the damage to the brand is questionable, however. Stephen Cheliotis, CEO of Britain's Centre for Brand Analysis, also tells The Independent, "It's difficult to quantify how much damage a scandal has caused. It would require a robust tracking method of the brand performance before and after the scandal, and proof of a direct causal link." ...".
A premium of between half and one percent seems trivial in relation to the cost of celebrity sponsorship, and a business might consider it worth expecting the celebrity to foot the bill for it too, given that the sort of event insured against lies in the hands of the celebrity rather than the insured.  In the event that no brand-damaging scandal arises, the cost of the premiums might be reimbursed.

Do any readers of this blog have direct knowledge or experience of how the insurance works and what sort of criteria (i) trigger payment and (ii) fix its quantum?  It would be good to know.

IP and Business Growth

In 1999, the London-based Equity Research Unit of investment bank Credit Suisse First Boston issued a report entitled “Technology Licensing – Intellectual Property Rights and Wrongs”. The report considered the prospects for long-term growth of five small IP licensing companies listed on the London Stock Exchange.

A recent working paper from the Engineering Intellectual Property Research Unit at Cranfield University considers the progress of one of the companies, Xaar plc, in the ten years since the report was written. Using information from public annual reports, the paper investigates the extent to which IP has contributed to Xaar's income and the significance of other, non-IP factors (see Neil Wilkof’s recent post in this regard).

A full copy of the paper is available here.