Filling the YouTube Gap: Ongoing Financial Support for Small Creators Through Crowdfunding

This blog has discussed crowdfunding in many different contexts, including for basic research and large scale video game development.  A relatively new crowdfunding platform brings together the very best of crowdfunding: the ability of people to choose to support what they love through essentially a gift (with benefits); a source of funding for interesting projects, particularly ones that may not get accomplished because of a lack of funding; and bringing people together to support a common venture—with a sense of community.  Crowdfunding and the technology that enables it lowers the barriers that exist for people to join together to support one another financially for what they believe are worthy projects—and now for a potentially long term relationship. 

Enter Patreon (A clever trademark as well.).  In a recent article published March 28, 2015 by CNBC titled, “Starving Artists No More: Meet the Kickstarter for Music, Arts,” Trent Gillies discusses Patreon, a San Francisco startup crowdfunding platform for supporting dance and theater to animation to music to comedy.  The article notes that revenue from a source such as YouTube is insufficient to support “small” creators and Patreon moves in to fill the gap.  How does it do that?  It allows people to pledge ongoing monetary support for creators—another revenue source.  People are able to become “patrons” of specific artists.  Patreon appears to also allow the donation of funds for one-time projects as well, but the promise of funding on a long term basis could allow creators to actually quit that daytime job waiting tables (or at least cut down on some shifts) and spend the majority of their time and energy on their creative work (including promoting it).  A nice silver lining is that the ongoing patronage will not only lead to the works being created, but also to better quality works.  The artist has a nice incentive to keep up the good work and to improve it.  Of course, creators who use other sites such as Kickstarter have a similar incentive even if they are seeking funding project to project.  But, I imagine that the stress may be lower for the beneficiaries of, at least, the pledge of ongoing support and because of the good feelings behind the supporters commitment to their work inure to the benefit of the creator. 

So, how well is Patreon working so far?

Patreon says 250 thousand patrons are donating small amounts of money to 14 thousand active creators. According to the website, it is sending $2 million dollars a month to artists, and the average payment creators are receiving is $9 a month.

And, as the article notes, this is despite the fact that much of the creator’s existing work is already available “for free.”

I think Patreon is a worthwhile endeavor for sure.  I do wonder if ongoing support will create a greater expectation of “control” over a creator’s future work by funders.  What do you think?

Is IP the Answer for Kodak’s Comeback?

In a March 20, 2015 New York Times article titled, “At Kodak, Clinging to a Future Beyond Film,” Quentin Hardy authors a fascinating account of Kodak’s past and attempt to rebound from bankruptcy through leveraging its research and intellectual property.  This blog previously has discussed the deal involving the sale of a large amount of Kodak patents, here.  Interestingly, the article notes that:

Spend much time around Kodak, and the company’s faded glory is apparent. Mr. Clarke[, the new CEO,] emphasizes the power that history still gives the Kodak brand. But the odds are stacked against his salvage job.

“The question isn’t tech-related, it’s competition,” said Amer Tiwana, an analyst at CRT Capital Group. “Kodak’s intellectual property seems to be slightly better, but the hazard is that their competitors, eight or 10 strong ones in each market, kill them on pricing. They might never get to profitability on the new stuff.”

In 2013, Kodak sold 1,100 patents related to digital image capture to a group of 12 companies, including Apple, Samsung and Facebook, for $527 million. Kodak retained the same access to the patents as the bidders, should it wish to compete in, say, photography once again. And it kept about 7,000 other patents, largely connected to the chemistry and physics of creating images, which the market sees as having relatively little value.

I wonder about the brand and the nimbleness of Kodak.  As we know, Kodak was slow to change its business model to adapt to digital photography.  Has it emerged as a company able to react to the market quickly?  That is not so clear from the article.

Are coding boot camps the answer? President Obama announces the TechHire inititiave

Can software coding boot camps solve the twin problems in the United States of the alleged shortage of IT personnel as well as how to create a new kind of middle class employee, especially among minorities and other underserved populations in the high tech world, thereby creating the 21st century version of the 20th century auto worker? The Obama administration apparently believes that the answer is “yes” to both questions. At least that is the message being delivered by the administration in conjunction with its March 9th announcement of its TechHire initiative. In a speech given that day, President Obama noted that there are more than five million job openings, of which more than one-half million are described as openings in the IT field. TechHire is intended to address this shortage as well as to address the problem of stagnant wage growth for the folk in the middle. In the words of the President,

"What's more, these tech jobs pay 50 percent more than the average private sector wage, which means they're a ticket into the middle class."

A report on March 16th on techrepublic.com characterized the program as follows:

"There's not one fix to get people moving in this direction professionally. The initiative includes getting employers to change the ways they recruit and place applicants based on skills; $100 million in federal investments toward "innovative approaches to training and successfully employing low-skill individuals with barriers to training and employment"; efforts on the part of "private sector leaders" to aid with free training online, and the expansion of coding boot camps, to name a few.”

The most interesting, and most controversial aspect of this initiative, is the focus on coding camps. The initiative currently involves partnering with various bodies in 21 communities, with the emphasis on reaching out to locales removed from the likes of Silicon Valley and New York City. An example brought is the TechHire Initiative is Louisville, Kentucky, which techrepublic.com described as follows:

“In 2013, a free, 12-week course called Code Louisville launched, fueled by volunteer mentors, partnerships with local companies, and help from the KentuckianaWorks department. The program aims to help students develop coding skills through a mix of in-person mentorship and self-driven learning, done through a learning platform called Treehouse, available through the Louisville Free Public Library system….. Next year, Code Louisville will expand as part of the Workforce Innovation Fund grant from the Department of Labor, as well as grow relationships with local businesses.”

The debate over the program focuses on four related issues: first, is there really such a mismatch between skills and available IT positions. Skeptics question this, including no less an expert than Professor Alan Blinder of Princeton, the Vice-Chairman of the US Federal Reserve, who expressed doubts in a recent radio interview on Bloomberg. Secondly, can a coding camp provide sufficient training to enable a graduate to function at an entry-level position? Thirdly, does the training provide a sufficient skill set to enable one to advance from that entry-level position, i.e., will it enable a graduate of the program to enjoy a bona-fide career in the field? Fourthly, will it complement or supplant at some graduates of degree programs in computer science?

President Obama apparently thinks the answer to each of these questions is “yes”, having observed in his speech that "[i]t turns out, it doesn't matter where you learned code, it just matters how good you are in writing code." President Obama’s statement was particularly well received by Dave Hoover, co-founder of Dev Bootcamp, who stated that , “it's true that not every employer is comfortable with hiring someone without a four-year computer science degree, but they're limiting their talent pool.” Also, it provides an alternative for persons who cannot afford a four-year degree program for whatever reason.

Despite the Obama administration’s support and the upbeat position of people such as Hoover (who admittedly may not be strictly neutral), this blogger still wonders how the Obama administration and will go about evaluating the effectiveness of these various local programs in light of the four questions raised above. As well, one can ask whether it is appropriate to view the skill set that is meant to be developed in such boot camps in strictly local terms. In a world where coding skills are international, why will an employer in Louisville necessarily engage a newly minted graduate of a boot camp when it obtain coding work product from equally or even more highly trained IT personal from places such as Bangalore and Estonia? Maybe yes, maybe no. The golden age of the Detroit autoworker in the 1950s was characterized in part by the absence of any credible substitutes. That is not the case for today’s IT world. The TechHire initiative definitely warrants close attention as it continues to be rolled out.

"IP Protection: Under Attack": Hyperbole or On Point

In Adam Jaffe and Josh Lerner's excellent 2004 book, Innovation and Its Discontents: How Our Broken Patent System is Endangering Innovation and Progress, and What to Do About It, the authors describe the historical ebb and flow of the availability and scope of patent rights.  The authors point to the 1980s to 2004 as a time when patents rights were strong and appeared to be getting stronger.  Indeed, those rights were becoming so strong that they were endangering innovation, according to the authors.  The rights were certainly flowing during that time.  And, for sure, there has been a backlash against patent rights.  The authors caution, however, that we tend to push either too far in one direction toward weak rights or too strong rights.  Are we moving too far against patent rights already? 

On March 27, 2015, from 1:00 to 2:00 pm Eastern Time in the U.S., the Federal Circuit Bar Association's Corporate Counsel Committee is sponsoring a webinar titled, "IP Protection: Under Attack."  The panelists are Fernand A. Lavallee, Partner, Jones Day, Nicole J. Owren-Wiest, Partner, Wiley Rein LLP, and Andrew E. Shipley, Partner, Perkins Coie.  The moderator is Mary M. Calkins, Senior IP Counsel, SAP.  The description of the panel states:

Please join us for a panel discussion about current threats to intellectual property protections that rights owners and businesses have long relied upon. The panel will cover areas such as limitations on software and data rights, procurement concerns, developments in 28 U.S.C. § 1498 actions in the Court of Federal Claims, and recent decisions of the Supreme Court and Federal Circuit affecting the scope of IP protection.

Does this panel title accurately describe the current situation concerning patent rights, and IP more broadly?  Is IP protection under attack?  Is it hyperbole?  Is it a bad thing for IP protection to be under attack?  Have we already gone too far against IP rights?  How do we know when we have gone too far—in either direction?  Do we continue to “reform” so long as a so-called "patent troll" exists?  Where are we headed?

If you think that crowdfunding is only for small fry games, think again

For those of you who think of crowdfunding for artistic endeavours in terms of modest amounts, a million or so dollars at the most, the report in the February 14th issue of The Economist, “The stars are the limit”, is certainly an eye-opener. The article describes the fundraising that has accompanied the development of a new video game by Cloud Imperium Games (CIG), entitled “Star Citizen”, set for release in 2016. According to the report, this game has attracted aggregate investment of more than $72 million dollars, which amount puts it on a par with several of the most expensive game development budgets ever, such as the iconic series “Grand Theft Auto”. The magnitude of this amount can be seen by comparing it with the second largest amount invested via crowdfunding, $18 million dollars for a Bitcoin-related publishing platform called Ethereum. This makes the current aggregate investment in Star Citizen four times larger than the next largest crowdsourced amount ever invested.

It is not merely the amount that has been invested in Star Citizen which is remarkable, but the number of investors who have participated in the funding of the game’s development. The article reports that over 750,000 people have pledged to invest in the game, with the amount of the investments ranging from $36.00 to $18,000. What do these investors expect to receive in return? If you think that the answer is equity, or a share of any profits, you would be wrong. Instead, the investment in the Star Citizen project is perhaps the leading example of what is called “reward crowdsourcing.” In this context, it means, in the words of the article, that the investors receive “virtual spacecraft to use in the game, early access to unfinished versions, T-shirts and so on.” As such, the motivation derives more from a certain commitment to the game itself and the collective desire to see the game successfully published.

The article suggests that this type of investment, as opposed to seeking more conventional sources of funding, enables the developer to connect with the population most likely to become users of the game once it is launched. As such it represents the use of social media in the dual role of product development and product marketing. Thus CIG is releasing the game in stages, in part to reassure investors about the viability of the project, as well as to elicit their feedback regarding the game itself. The ultimate goal is to instill “rabid devotion in fans” long before the actual launch. It is crowdfunding that makes possible this integration of funding with pre-launch marketing. That said, the question remains whether this form of engagement of small investor-cum-user can be generalized to other video games and the like, or if the Star Citizen project is a one-off success.

IP tax and the Budget

A quick overview of the UK Budget today, from an IP tax perspective:

R&D relief - from 1 April 2015, the rates are going up (again) to:

• R&D expenditure credit: 11%
• SME relief: 230%
• repayment credit rate stays at 14.5%

(all as announced at Autumn Statement, confirmed to be in next week's Finance Bill)

And also:
HMRC are planning to provide (on request!) advance assurances (valid for three years) on whether R&D activities qualifies, for smaller companies, giving certainty for those new to the regime - it's just a pity we have to wait until Autumn 2015 for the assurances to be available. The planned new guidance for smaller companies also welcome, as is the plan for publicity campaign to raise awareness of the relief.

HMRC are proposing to reduce the time taken to process claims from 2016 (but no detail on this provided). There's also a 'roadmap' for “further improvements over the next two years” to come, which could be interesting.

HMRC have confirmed that the restriction on prototypes and first in class etc announced in the Autumn Statement will be in the Finance Bill next week. The change will mean that the cost of consumables incorporated in products of R&D activity which are sold (not scrapped or given away) will be excluded from R&D tax credits. It's interesting that this change appears to be estimated to save half of the cost of increasing the rates.

Creatives reliefs extensions:
Film relief: extended to be 25% of surrendered losses for all, removing the distinction between limited budget films and others (subject to State aid clearance). This simplifies the relief and makes it easier for films with budgets on the borderline of £20m to determine the amount of relief available to them; it effectively extends the FA2014 change which softened the cliff edge element of the relief for large budget films.

High-end tv relief: the minimum UK expenditure reduced from 25% of filming activities to 10%, and the cultural test is to be modernised (all subject to State aid clearance). Broadens the range of productions that will qualify.

Children’s tv relief: confirmed from 1 April 2015 (includes game shows and competitions, which are excluded from the ‘Downton Abbey’ high-end tv relief).

The proposed orchestra relief is confirmed to be introduced from April 2016 (subject to the views of the government in power in April next year!)

Paintings as plant and machinery
This could re-named HMRC’s belated revenge on the Howard estate: assets which have been lent to a business will not be able to be treated as plant and therefore a wasting asset unless the vendor has used it in their own business. This follows, unsurprisingly, from the case brought against HMRC by the estate of the late Lord Howard, which succeeded in having a 200 year old painting, previously displayed at Castle Howard, treated as a wasting asset and exempt from CGT on sale.

Investment reliefs - changes to Enterprise Investment Scheme(EIS), Venture Capital Trust, and Seed EIS reliefs

The employee threshold (500) to qualify for these investment reliefs is being doubled for “knowledge-intensive” company (whatever that might mean; no detail yet!). This is in line with R&D relief, although financial thresholds not apparently being increased.

The total investment cap for VCT is expanded £15m, or £20m for “knowledge-intensive” company but the company must now  be less than 12 years old to qualify for all these reliefs unless investment for substantial change in activity. It seems odd to restrict investment relief in companies that are trying to continue to grow; there's no magic about passing your first decade in business that means suddenly that investment is only needed for substantial changes.

Perhaps unsurprisingly, patents are mentioned nowhere … we'll have to wait for the BEPS reports to see what happens there.

Academic-Industry Patent Licensing

The US-based Biotechnology Industry Organisation has just released a fascinating study on the impact that academic technology transfer makes to the US economy. The study is limited to US universities, but is probably equally indicative of the impact that technology transfer makes in other countries. The study (available here) estimated that in the 18 years from 1996 to 2013 academic licensing boosted industry output by USD 1.18 trillion and US GDP by USD 518 billion, creating 3,824,000 US jobs.

The study concludes that the Bayh-Dole Act passed in 1980 which allowed universities to maintain the rights to US government sponsored research has contributed to this success. Prior to the passage of the act, no drugs had apparently been commercialised based on the results of the government R&D spending. Subsequently over 183 drugs have been developed, as was report by the New England Journal of Medicine in 2011 in this article. Unsurprisingly a number of countries have adopted similar laws.

The survey submits that absence the incentives of patent ownership and exclusive licences, companies and investors could not justify the effort in bringing these drugs to market. The results seem to be in contradiction to the study by Robin Feldman and Mark Lemley available here, which argued that licensing did not contribute to innovation. Gene Quinn of IP Watchdog argued very succinctly that that study was seriously flawed since it relied on a subjective survey of practitioners.

The argument about whether research funded by governments should be patented and licenced by private companies for their own benefit is one that has been running ever since this author carried out his own Ph.D. research. The latest study seems to demonstrate the value of allowing universities to patent and licence their own IP, even if the public has paid for the research through their tax dollars/euros. It’s probably a question of finding the balance - there may be some research that really should not be patented.

Security interests over IP rights: here comes a seminar

For those who are interested in security interests in IP, here's a not-to-be-missed seminar, put together by our friend, scholar and one-time member of the IP Finance blog team Andrea Tosato. There is no fee for attending but, if you'd like to attend, please confirm your attendance by sending an email to Christina Burdis-Smith.  Details of this event are as follows:

SECURITY INTERESTS OVER INTELLECTUAL PROPERTY RIGHTS

A one-day conference to be held on 27 March 2015

Venue: Olswang LLP, 90 High Holborn, Greater London WC1V 6XX

Programme

Chairman:  the Rt. Hon. Lord Saville of Newdigate

8.30am             Registration and Coffee

9.15am             Welcome by Chairman

9.30am            First Session

                       Introduction to the Secured Transactions Law Reform Project

Prof Louise Gullifer, University of Oxford

            Security interests over IP rights under English law

Dr Andrea Tosato, University of Nottingham

                        A practitioner’s perspective on security interests over IP rights in the UK

Charles Kerrigan, Olswang

                        A lender’s perspective on security interests over IP rights in the UK

Benedict Smith, Banco Santander

                        Q&A

11.15am          Coffee

11.30an           Second Session

Security interests over IP rights: the view of the UKIPO

Tony Clayton, UKIPO

Challenges related to security interests over IP rights under the Canadian PPSA system

Prof Norman Siebrasse, University of New Brunswick

Security interests over IP rights in the USA: the UCC 9 approach

Steve Weise, Proskauer Rose

Q&A

Intangible Assets and Company Value

Over the years Chicago-based Ocean Tomo have calculated the value of intangible assets held by S&P 500 companies. Their latest report has been published today and it shows that on 1 January 2015 the percentage of the value of a company’s intangible assets grew to a massive 84% of the company’s value. That’s a rise of 4% since 2005, but more interestingly up from 17% in 1975.Ocean Tomo’s CEO Jim Malackowski is sceptical that there is going to be any more rise. He suggests that the America Invents Act combined with economic change suggests that there may be a re-balancing back towards tangible assets in the coming decade. He’s probably right - outsourcing to China is reducing and some American companies are reopening or building new production facities. That will add to the value of the tangible assets. However, it’s not clear that those will actually appear on the books of manufacturing companies, since many facilities are built and leased by other companies.

On the other hand, there is probably a limit to „virtualization“ of assets. All companies have some tangible assets - for manufacturing companies this will often be items of stock. In other companies it may be some of the IT assets. Jim is probably right. We may have reached the feasible limit. Nonetheless the figures show the dramatic impact that intangibles have had on the US economy (and probably in most of the world). 

Anecdotal evidence suggests that many boards have failed to appreciate this point and will still spend a great deal of time discussing their physical assets and too little their intangible assets, such as personnel, innovation and intellectual property. 

CJEU rules on variable VAT rates for e-books and paper books

The Court of Justice of the European Union gave a ruling today in Cases C-479/13 and C-502/13 Commission v France and Commission v Luxembourg on the taxation of e-books.  According to the Curia website's media release:

France and Luxembourg cannot apply a reduced rate of VAT to the supply of electronic books, in contrast with paper books

In France and in Luxembourg, the supply of electronic books is subject to a reduced rate of VAT. Accordingly, since 1 January 2012, France has applied a VAT rate of 5.5% and Luxembourg a rate of 3% to the supply of electronic books.

The digital or electronic books at issue include books supplied, for consideration, by download or web streaming (‘streaming’), from a website so that they can be viewed on a computer, a smartphone, electronic book readers or other reading system.

The Commission has asked the Court to declare that, by applying a reduced rate of VAT to the supply of electronic books, France and Luxembourg have failed to fulfil their obligations under the VAT Directive [that's Council Directive 2006/112 on the common system of value added tax].

In today’s judgments, the Court upholds the Commission’s action for failure to fulfil obligations.

The Court points out, first of all, that a reduced rate of VAT can apply only to supplies of goods and services covered by Annex III to the VAT Directive. That annex refers in particular to the ‘supply of books ... on all physical means of support’. The Court concludes that the reduced rate of VAT is applicable to a transaction consisting of the supply of a book found on a physical medium. While admittedly, in order to be able to read an electronic book, physical support (such as a computer) is required, such support is not included in the supply of electronic books, meaning that Annex III does not include the supply of such books within its scope.

Moreover, the Court finds that the VAT Directive excludes any possibility of a reduced VAT rate being applied to ‘electronically supplied services’. The Court holds that the supply of electronic books is such a service. The Court rejects the argument that the supply of electronic books constitutes a supply of goods (and not a supply of services). Only the physical support enabling an electronic book to be read could qualify as ‘tangible property’ but such support is not part of the supply of electronic books.

The Commission also criticises Luxembourg for applying a super-reduced VAT rate of 3%, even though the VAT Directive prohibits, in principle, VAT rates lower than 5 %. The Court recalls that, according to the VAT Directive, a Member State may apply reduced VAT rates lower than 5%, provided that, among other things, the reduced rates are in accordance with EU legislation. Since the Court held earlier that the application of a reduced rate of VAT to the supply of electronic books does not comply with the VAT Directive, the requirement that it comply with EU legislation is not met with the result that Luxembourg cannot apply a super-reduced VAT rate of 3% to the supply of electronic books.

The judgments delivered by the Court today do not prevent Member States from introducing a reduced rate of VAT for books on physical support, such as paper books.

This blogger is somewhat confused as to where the court is heading. It seems that computer programs sold online, which are analogous in many respects to e-books, are treated like real books when it comes to exhaustion of rights, as in Case C‑128/11 UsedSoft, but that real books and e-books are treated quite differently when it comes to VAT.  Comments, anyone?

IP Finance Toolkit: a good first step?

The UK Intellectual Property Office's IP Finance Toolkit is now out. For reasons that baffle this blogger, it has not yet been placed online by the IPO, though the Office has given permission to our friends at Coller IP (who participated in this project) to host the 44 page document here.  According to its summary:

“Banking on IP? The role of intellectual property and intangible assets in facilitating business finance” report was published [in] October 2013. The report sought to examine how effectively SMEs are able to use their intellectual property assets to secure the finance they need for company growth. It highlighted barriers faced by IP rich businesses seeking debt finance.

In March 2014 the Intellectual Property Office (IPO) published “Banking on IP, An Active Response” . This summarised the IPO’s conclusions and set out the actions it intended to take to address some of the barriers highlighted in the original report.

One of those actions was the development of tools or a framework to support a better dialogue between businesses and financial services professionals. The tools will help businesses articulate the IP they have, how it is secured and how it supports the future cash flow of the business. This toolkit has been developed with that aim. It is geared to:

• Help lenders and businesses talk the same language;

• Encourage and guide businesses to document their IP assets ahead of any application for finance;

• Help businesses to develop more effective IP management and commercialisation strategies; and

• Raise awareness of the wide variety of finance options available for IP-rich businesses.

We hope you find this guidance useful and would encourage you to work through it in advance of any discussions with potential lenders. We would also encourage potential lenders to use this guidance to understand potential value that intellectual property assets may have to a business seeking debt finance

This blogger appreciates that a document as short as this one cannot hope to be a panacea for all the ailments associated with IP finance. He hopes, though, that it will help to improve the efficacy of communication between those who need IP finance and those who offer it -- even if there remains an even bigger bridge to cross when seeking to balance the deep-roote caution of lenders with the inherent optimism of would-be borrowers.

Patent ownership survey: please participate if you can

"Patents are generally regarded as the world’s most valuable intellectual property rights. It is, however, accepted that information available from public registers (maintained by over 100 patent offices around the world) is inaccurate". This statement heads a Patent Ownership Data Survey being run by this blogger's friends at Aistemos, whose CEO Nigel Swycher explains:

There is wide-ranging support for the view that patents are valuable assets, and that there should be greater levels of engagement from the banks, insurers and the financial markets more generally. The starting point in the evolution of all asset classes is however the need for markets to be establish who owns what. You would think that this is a no-brainer for patents -- a registered right with professionally managed registries, tasked with the responsibility for maintaining records of patent owners. 

Patent records can be
so frustrating ...

The actual position is very different. The information on patent registers is inaccurate. There are many reasons for this, ranging from data quality issues (there are 28 patents recorded in the name of _!) to the fact that it is not mandatory to record assignments, and many companies do not. In between, there is legal ambiguity ('CSR' is recorded on many patents in the world, and it is for the searcher to decide whether this is a Bluetooth company in Cambridge, a railway company in China or a mining company in Australia). Plans are underway to improve this position and Aistemos is conducting a survey to test awareness of the issue and the appetite for a solution. Please take five minutes to complete the survey and to circulate it to your network. The aggregated and anonymised responses will be published a part of a report next month.

Do participate in this survey and/or forward it to others if you can -- ideally by 14 March 2015. IP Finance looks forward to seeing conclusions drawn from the responses and will bring them to you.

To access the survey, click here.