Monday 29 August 2016

Twitter: will live sports come to the rescue?

The saga of whether Twitter can make a commercial go of it may be reaching a critical juncture. At least, that is the view of Dan Weil of
Institutional Investor, in his recent piece (August 23, 2016), “Pro Sports Contracts Not a Winning Strategy for Twitter”. The issue is this—the number of active Twitter users is stuck at slightly more than 300 million (313 million for the last quarter), only a 3% gain from last year and a fraction of Facebook’s user numbers. Profits remain elusive (a loss of $107 million, on revenues of $602 million, for the most recent quarter) and the stock has tumbled from a high of $69 to $19 (as of the date of the article).

The generic problem of Twitter is described by Weil as—
“It’s too complicated. Casual users often complain that it’s difficult to find what they want, and filter out what they don’t want….”
Faced with these challenges, Twitter’s response in an effort to remain commercially relevant appears to be an attempt to capitalize on sports contents. Thus, Twitter is reported to have signed deals with four major U.S. sports leagues—football (NFL), baseball (MLB), basketball (NBA) and hockey (NHL), to stream some of the live sports contents. In addition, Twitter has deals with Wimbledon and college sports Pac-12 Networks and there are reports of negotiations regarding golf (PGA) and soccer (MLS). The attraction of sports is clear—unlike other contents, it is most valuable when viewed in real time. Taping and the like is a pale second best, if at all (although this blogger continues to watch the rebroadcast of the 2015 playoff game between Ohio State and Alabama, just to be reassured about Ohio State’s victory).

Against that backdrop, what is Twitter getting in these deals? Most notably, it is not getting exclusivity in broadcasting rights in any of them. Indeed, it is not getting any right of live broadcast at all regarding the NBA. For the other sports, it is receiving the right to broadcast a fixed (and small) number of games. Still, this is better than competing platforms, such as Facebook and YouTube, neither of which has, as of yet, received the right to commercialize live sports events. Still, how far will all of this lead to a viewership that will attract meaningful ad revenues for Twitter?

Add to this the very practical question raised by Weil—
“…. [M]any fans won’t watch a game on its mobile platform if they can’t use Wi-Fi, because of the heavy data usage involved [says equity analyst Peter Stabler]. Many who would be using Wi-Fi would be doing so from their homes, where they can just as easily watch the game on TV. “
So what is one to make of this move by Twitter. Well-known media analyst Richard Greenfield sees it perhaps as a way of making the company more attractive for sale to a legacy media company, for which sports is presumably crucial. Media analyst Victor Anthony is of a different view, seeing these deals as a whole-hearted attempt by Twitter to right the company’s financial ship. Under his scenario—
“If they are successful in doing that, there’s no need for it to be sold. If not, they seek out an acquirer.”
That is well and good, this blogger supposes, but he still wonders what will be its value of Twitter if this gambit fails? Exactly where is the value in the service in such a circumstance? No matter what happens, these developments certainly are far-removed from the often naive 140-character messages that this blogger remembers sending when Twitter first became a popular platform. Whether they are any more likely to lead to commercial success, in light of the generic problems in using the Twitter platform, remains the crucial question.

Friday 26 August 2016

US Treasury Department Issues White Paper Critiquing EU State Aid Investigations of Transfer Pricing Rulings

On August 24, 2016, the U.S. Department of Treasury issued a White Paper titled, “The European Union’s Recent State Aid Investigations of Transfer Pricing Rulings,” explaining United States transfer pricing concerns with the EU Commission.  The state aid investigations of note, include Apple, Starbucks, Fiat/Chrysler and Amazon.  There are indications that there may be more investigations launched.  Notably, the EU Commission’s positions, apparently, mostly involve transfer pricing concerning intellectual property. 

In February of 2016, Treasury Secretary Lew authored an open letter to the President of the Commission, Jean-Claude Juncker, stating:

that the Commission’s “sweeping interpretation” of State aid doctrine “threatens to undermine” the progress made by the international community “to curtail the erosion of our respective corporate tax bases” and described four principal concerns.  First, the Commission has “sought to impose penalties retroactively based on a new and expansive interpretation of state aid rules.”  Second, the investigations appear “to be targeting U.S. companies disproportionately.”  Third, the new enforcement theory “appears to target, in at least several of its investigations, income that Member States have no right to tax under well established international tax standards.”  Fourth, the Commission’s investigations “could undermine U.S. tax treaties with EU Member States."

The White Paper further explains the concerns and in the Executive Summary states:

The Commission’s Approach Is New and Departs from Prior EU Case Law and Commission Decisions.  The Commission has advanced several previously unarticulated theories as to why its Member States’ generally available tax rulings may constitute impermissible State aid in particular cases.  Such a change in course, which has required the Commission to second-guess Member State income tax determinations, was an unforeseeable departure from the status quo.

The Commission Should Not Seek Retroactive Recoveries Under Its New Approach.  The Commission is seeking to recover amounts related to tax years prior to the announcement of this new approach—in effect seeking retroactive recoveries.  Because the Commission’s approach departs from prior practice, it should not be applied retroactively.  Indeed, it would be inconsistent with EU legal principles to do so.  Moreover, imposing retroactive recoveries would undermine the G20’s efforts to improve tax certainty and set an undesirable precedent for tax authorities in other countries. 

The Commission’s New Approach Is Inconsistent with International Norms and Undermines the International Tax System.  The OECD Transfer Pricing Guidelines (“OECD TP Guidelines”) are widely used by tax authorities to ensure consistent application of the “arm’s length principle,” which generally governs transfer pricing determinations.  Rather than adhere to the OECD TP Guidelines, the Commission asserts it is employing a different arm’s length principle that is derived from EU treaty law.  The Commission’s actions undermine the international consensus on transfer pricing standards, call into question the ability of Member States to honor their bilateral tax treaties, and undermine the progress made under the OECD/G20 Base Erosion and Profit Shifting (“BEPS”) project.
[Hat tip to Pepperdine University School of Law Professor Paul Caron's TaxProfBlog]

Thursday 18 August 2016

Revisiting the fall of Kodak: are we any smarter about the "what" and "why"?

Four or so years ago, perhaps the most poignant story of a technology leader gone bad was the fall of Kodak. The saga played out on several levels: Kodak versus Fuji, traditional film versus digital technologies, the free-standing camera device versus the embedded camera in a smartphone, and the rise and fall of the value of Kodak's patent portfolio. Much was written about these issues at the time, including by this blogger, but as the several years have passed, the Kodak tale has gradually receded from hi-tech discourse.

Scott Anthony, a frequent contributor to Harvard Business Review on-line, has sought to revisit the Kodak tale in a piece published last month, “Kodak’s Downfall Wasn’t About Technology”. The focus: how did Kodak fail the move from film to digital to cellular? He suggests but rejects the following arguments:

1.The company was so much into the traditional film business that it missed seeing the digital revolution—Anthony says this is wrong, because it was Kodak itself that developed the first prototype of a digital camera, back in 1975.

2. Kodak did not invest in the digital camera business—Anthony claims that not only was the company involved early on in the invention of the digital, but it invested billions to develop digital cameras, albeit with little success.

3. Kodak mismanaged its investment in digital cameras—Yes, Anthony says, the company stumbled a bit at the beginning, but it ultimately developed elegant technologies that enabled one to move from the camera to the computer.

4, Kodak’s big miss was not seeing the move to the smartphone and the role of picture-sharing in social media—Not exactly, says Anthony. In fact, Kodak acquired a photo sharing site—Ofoto—in 2001, but it sought to leverage Ofoto to encourage customers to print more digital images, rather than to focus on file-sharing.

Having raised and shot down all these explanations, how does Anthony explain why Kodak stumbled so badly? He writes:
“The right lessons from Kodak are subtle. Companies often see the disruptive forces affecting their industry. They frequently divert sufficient resources to participate in emerging markets. Their failure is usually an inability to truly embrace the new business models the disruptive change opens up. Kodak created a digital camera, invested in the technology, and even understood that photos would be shared online. Where they failed was in realizing that online photo sharing was the new business, not just a way to expand the printing business.”
This blogger finds Anthony's use of the term “subtle” a bit odd. If Kodak's management failed to perceive that its accumulated technology was pointing towards a new business, not an extension of the current one, such a miscalculation was anything but subtle. Be that as it may-- how did IP fit into this web of corporate myopia? Not for the first time in the corporate world, there was a disconnect between a company's patent prowess, at the technological level, and the utilization of this IP to advance the company’s long-term product goals, at the management level. Add to this the wildly overstated estimates of the company’s patent portfolio in 2011 and early 2012 (amounts up to $2.5 billion or more were earnestly suggested, only to witness the actual sale of the portfolio at slightly over $500 million dollars).

As such, internal management alone was not to blame; the penumbra of supposed expertise brought to bear on understanding the IP value of the company was also heavily flawed. All of this suggests, yet again, that management training still has not figured out how to prepare its students to understand how IP functions within an organization and what is its value and valuation. The fall of Kodak is merely a symptom of the problem, but not the problem itself.

Tuesday 16 August 2016

"Patent holdup" allegations encourage SEP free-riders

Despite many years of speculation and recently adjusted claims, there is no empirical support for the theory of “patent holdup.” Various eminent experts refute allegations of systemic “patent holdup.” It is likely that “patent holdup” has not occurred in the context of standards and licensing of standards essential patents (SEPs) because of the fair, reasonable and non-discriminatory (FRAND) licensing contracts and available recourse to the courts have ensured that licensees cannot be forced to pay “excessive” licensing fees. 

Free Riders Abound
“Patent holdout,” which is also sometimes referred to as “reverse holdup,“ rather than “patent holdup” may instead be a prevalent problem; although calls for remedies have largely been in response to “patent holdup” allegations. Beguiled courts, antitrust authorities, government policy makers and even a standards development organisation (SDO) are tipping the scales in favour of “patent holdout” by infringing implementers of SEPs. This is destabilising the equilibrium between the interests of the licensors and licensees forged by consensus over decades in the IPR policies of SDOs such as ETSI with Fair, Reasonable and Non-Discriminatory licensing.  As leading academics note, “FRAND Implies Balance” and “FRAND [is not] a one-way street.”  Whereas alleged “patent holdup” supposedly results in excessive royalties, “patent holdout” is undermining licensors attempts even to achieve FRAND terms or to complete any licensing at all in many cases. Licensors are therefore losing their ability to make a fair return on their investments in SEP technologies. This discourages ongoing investments in standard-essential technologies, participation in SDOs and contribution to the standards.

Free-riders who are not paying for the IP they use are gaining an unfair advantage over other implementers who are paying FRAND royalties as well as stealing property rights from technology developers. There is significant evidence of some infringers flourishing while avoiding paying patent licensing fees on their manufactures and product sales for many years. They can, for example, typically challenge FRAND offers in lengthy litigation before paying any royalties. In some jurisdictions, even the royalties ultimately awarded can be derisorily low.[1] In particular, various Asian OEMs accounting for a substantial proportion of global smartphone sales remain significantly unlicensed for at least some of the many SEPs they implement in the devices they manufacture or sell.

On the other hand, Alcatel-Lucent, Ericsson, Nokia and Qualcomm have exited the mobile phone market over the last 15 years while ramping-up R&D in 3G and 4G technologies. These and other technology-development oriented companies can only sustain these risky R&D investments if they can make direct returns on their patent portfolios through licensing. Former network equipment market leader Ericsson has recently ousted its CEO due to poor growth and weak profits despite cost reductions, including in R&D.

“Patent holdup” is manifestly not a systemic problem. There is no empirical evidence of harm to markets or consumers, and such abundant proof of market success—particularly for innovative smartphones and the extensive 3G and 4G networks to which they are connected—including seven billion cellular connections and modest licensing costs totalling only around five percent of device prices

Unmentionable claims
I came upon a paper entitled “Patent Holdup: Myth or Reality?” by Carl Shapiro, dated 6th October 2015, which was circulated as a hard-copy and presented at an IEEE-SIIT conference at the Intel-sponsored key-note address. In this, the author concedes that there are “few documented instances of actual holdups” and that they are “exceedingly difficult for researchers to detect and reliably quantify.” He has backed off from his previous claims of prevalence of “patent holdup” where he stated “patentees regularly settle with companies in the information technology industries for far more money than their inventions are actually worth. These companies are paying holdup money to avoid the threat of infringement.”  Shapiro has retreated due to lack of empirical support for these original claims which is because portfolio licensing among many licensees on FRAND terms together with the courts ensure that holdup royalties are rarely demanded and are never paid. However, Shapiro takes another position where there is also no supporting evidence. He now claims that the social costs caused by the alleged “patent holdup” problem are in the actions taken to prevent holdup and in the opportunities forgone under the threat of “patent holdup.”

His 2015 paper is labelled a preliminary draft that should not be quoted, yet the verbatim thesis of this most outspoken author is evidently being adopted elsewhere; including in a speech by the US Department of Justice’s Chief Economist, Nancy Rose, at a George Washington University conference on “Patents in Telecoms” in November 2015. In this, she analogises that “patent holdup” is like dark matter in the universe – something that cannot itself be detected but is present. She said that the existence of dark matter can be inferred from effects on visible matter.

With the passing of ten months since Shapiro presented his paper at the IEEE event and with the DoJ’s name endorsing this latest development in “patent holdup” theory, I believe it is high time to shine some light on the flaws in arguments made by Shapiro and Rose by making their writings available and by rebutting them here. I do not see why they should enjoy the privilege of being heard and given the opportunity to persuade, while also indefinitely being able to shield their postulations from scrutiny or criticism.

My full analysis on Shapiro's paper and Rose's presentation can be found in a pdf here.

[1] For example, a Chinese court awarded InterDigital in patent litigation against Huawei a mobile SEP royalty rate of only 0.019 percent of device sales. This is extremely low given that InterDigital’s overall royalty yield (i.e. its total royalty income divided by total device market sales revenues) including licensed and unlicensed sales globally is five times higher at around 0.10 percent.

Friday 12 August 2016

US FTC and DOJ Seek Comments to New Proposed Antitrust Guidelines for Licensing Intellectual Property

The Federal Trade Commission and Department of Justice announced August 12, 2016, that they are seeking comments on the proposed updated antitrust guidelines for licensing intellectual property.  The prior 1995 guidelines are being updated in light of changing law and additional experience gained by the agencies, according to the press release.  Specifically, the press release states:

[T]he agencies have determined that some revisions are in order because the IP Licensing Guidelines should accurately reflect intervening changes in statutory and case law. For example, Congress recently enacted the Defend Trade Secrets Act of 2016, creating for the first time a federal cause of action for misappropriation of trade secrets. Also, the change from a 17-year patent term (from the date of grant) to a 20-year patent term (from the date of filing) effectuated by the Uruguay Round Agreements Act of 1994 was on the verge of taking effect when the IP Licensing Guidelines were issued in 1995. Similarly, copyright terms are longer now than when the IP Licensing Guidelines were issued. The proposed updated IP Licensing Guidelines account for these statutory developments. 

Case law developments include the Supreme Court’s decision in Illinois Tool Works, Inc. v. Independent Ink, Inc., in which the Court subscribed to the agencies’ view in the IP Licensing Guidelines that a patent does not necessarily confer market power on the patentee. Another important development is the Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., which held that resale price maintenance (RPM) agreements should be evaluated under the rule of reason, overturning a nearly century-old view of per se illegality. Although Leegin arose in the context of resale price restrictions on goods sold by retailers, the agencies find that its analysis applies equally to pricing restrictions in intellectual property licensing agreements. The IP Licensing Guidelines therefore have been amended to reflect rule-of-reason treatment of vertical price agreements.

The agencies are also updating the IP Licensing Guidelines’ discussion of general principles to reflect the research in the FTC’s 2011 Evolving IP Marketplace report. The agencies also added language to reinforce their longstanding view that “the antitrust laws generally do not impose liability upon a firm for a unilateral refusal to assist its competitors, in part because doing so may undermine incentives for investment and innovation.”

In addition, the agencies are updating the analysis of markets affected by licensing arrangements to mirror the approach taken in the 2010 Horizontal Merger Guidelines. The IP Licensing Guidelines’ approach to innovation markets has been revised to reflect the agencies’ actual experience with this mode of analysis. The proposed update retains the concept of “innovation markets,” but refers to them as “Research and Development Markets” to more accurately reflect how these markets have been defined in enforcement actions.

The updated guidelines are available, here.  You can submit comments to [Hat tip to Professor Jorge Contreras at University of Utah College of Law]

Friday 5 August 2016

Subsidized IP Litigation Insurance in Japan and Increased Enforcement in China

As reported by Ellie Wilson on the IP Kat blog, the Japanese Patent Office (JPO) has announced a program whereby half of the premiums for IP infringement insurance will be covered.  The program is a partnership between the JPO, the Japan Chamber of Commerce and Industry, The National Federation of Small Business Associations, and three insurance companies.  Specifically, the subsidy is directed at making affordable IP infringement litigation insurance for SMEs that are operating in countries outside of Japan. The announcement appears to cover both the need for the SME to fund IP infringement litigation against alleged infringers and to defend litigation.  Notably, the announcement explicitly mentions China as a market of concern; although my guess is that a concern with so-called patent trolls in the United States is also an issue. 

This announcement comes close in time to reports of increased enforcement of intellectual property rights in China, particularly as China reportedly is attempting to move toward an innovation and services based economy.  Interestingly, the official website for The Supreme People's Court of the People's Republic of China published an article by Ma Si (China Daily) concerning the move of smart phone wars to China titled, "Chances high for more patent cases."  The article discusses the recent stayed injunction against Apple and the prospects for more patent cases given actions in the United States concerning Huawei.  Huawei and Samsung are also embroiled in litigation in China.

Given the importance of SMEs to economic growth and job creation as well as the general high cost of litigation, it will be interesting to see if more countries move to subsidize IP litigation insurance.  Are there any other countries subsidizing IP litigation insurance?  Instead of regulating against so-called patent trolls, is this where government should intervene--helping insurance markets develop and lowering the cost of insurance, particularly for SMEs?  Should government back insurance funds for IP litigation?    

Tuesday 2 August 2016

Pokemon GO: Aistemos sheds light on the state of patents in the area of augmented reality

Following yesterday's post on the potential for unlocking IP value at Nintendo in light of the Pokemon GO craze, this blogger has just seen today's blogpost from Aistemos—"Patents surrounding Pokémon Go – has someone caught them all"? Aistemos was established by Nigel Swycher, a long-time friend of this blog, who had a lengthy and illustrious career in London as a leading lawyer in IP transactions and strategy before deciding to follow his passion for IP analytics as a means of improving IP decision-making for businesses and their professional advisers.

The blogpost provides fascinating information and data about the patent position of Augmented Reality. The post notes in summary that--
"Augmented Reality (AR) technology has seen a surge in innovation since 2010;

AR relies on many technologies and has many applications;

Main technologies are head-mounted displays and image processing;

Siemens were pioneers and hold a large and mature patent portfolio."
In summary, the post proclaims—
"Pokémon Go has proven that AR is here to stay."
As we suggested yesterday, the jury is still out whether Nintendo will ultimately enjoy sustained commercial success from AR technology. In seeking to answer this question, Aistemos has provided useful information and more food for thought. The post is well-worth reading (and reading again).

Monday 1 August 2016

Will Pokemon GO unlock IP value for Nintendo?

One of the more intriguing aspects of the current Pokemon GO craze is how it will affect the company's profitability. Nintendo has stated that it does not expect the game to materially add to the company’s earnings,least for the moment (see link below to, July 25th). This blogger does not wish to get into a discussion whether the company is being disingenuous about the ultimate monetary contribution that it
ultimately may enjoy from Pokemon GO, it apparently being Nintendo's first foray into the mobile phone market. What this blogger does find of interest are several observations that have been made about how the game may usher in a new area of successful exploitation on mobile of its IP more broadly, beyond the specifics of the Pokemon GO game itself.

Consider the following observations that were reported by Reuters on July 17th (“Success of Pokemon GO adds impetus for change at Nintendo”)--
1. “[T]he success of Pokemon GO - unforseen even by its creators - has shown the potential for augmented reality and for Nintendo to capitalize on a line-up of popular characters ranging from Zelda to Super Mario.”

2. ”Seth Fischer, founder and chief investment officer at Oasis Management, is one of Asia's best known hedge fund managers and has long been a small but loud shareholder…’My next focus with Nintendo is for them to focus on monetizing the rest of their 4,000 patents for mobile gaming, multi-player gaming, et cetera. I think they could be making 30 to 60 billion yen ($290 million to $570 million) annually from licensing.' "

3. “A Nintendo spokesman, asked about its mobile strategy, said last week there were three main objectives: ‘To maximize exposure of Nintendo's intellectual properties to consumers, to make profits on mobile devices, and to create synergies with the console business.’ "
Several days later, on July 25th, Reuters reported (“Nintendo shares dive as company plays down Pokemon GO’s earnings impact”) included the following observation—
“Yasuo Sakuma, portfolio manager at Bayview Asset Management, said he still saw the company's shares as cheap given the potential for Nintendo to reap rewards from other strong character franchises as it forays deeper into mobile gaming.

‘Nintendo is well-placed to boost its earnings with its other characters, such as Super Mario and Zelda and their potential is unknown,’ he said.”
With all due respect, this blogger remains skeptical about these several expressions of seemingly limitless optimism for Nintendo’s IP potential on mobile. He can never forget the valuation of nearly $2.5 billion dollars or more that was coming from the investment community in 2011 regarding the Kodak patent portfolio, here. When the dust settled in the court-managed proceedings, the patent portfolio was sold for only approximately $500 million dollars, here. This blogger has not deviated from the sense that the initial estimate was as much (or more) about hope, prayer, and investment house spin as an indication of genuine market value.

For that reason, when Mr. Fischer suggests that the company can unlock IP licensing revenues—of company patents-- ranging from $290 million to $570 million, this blogger needs to ask: What is there in the company’s patent portfolio (separate apart from licensing of the character rights), that supports such an amount? Indeed, how is the value of this estimate range reached?

Second, what is the basis for the confidence that the company will be able to monetize, as suggested, other characters on the mobile platform? At the least, it raises the question of whether the Pokemon GO phenomenon rests mainly on a set of sui generis factors, many of which are not related to the company's IP position, or whether the company's success has also provided a firm foundation for unlocking other IP assets of the company via the mobile platform.

The mantra—"unlocking IP value", is widely used (bordering on overuse), sometimes out of founded belief, sometimes out of serendipity, sometimes out of ignorance, and sometimes out of knowing disregard. This blogger will discount the last possibility, but it still leaves the overarching question—just how much the Pokemon GO portend a golden era of IP exploitation on the mobile platform by Nintendo.