Monday 14 November 2011

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. 
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.

1 comment:

  1. I wonder how business owners comply with proprietary licenses that prohibit end users from sublicensing or lending their software to their employees. The problem that I'm facing now is I live in Indonesia and would like to work with people who have limited english proficiency, let along understanding legal jargons of proprietary licenses. Proprietary software creators are increasingly gaining respect in third world countries, we wan't them to be able to control their product's distribution. But we also live by sharing our experiences with another, software licenses need to facilitate this lifestyle, its not like we made copies of their software.