Monday 31 October 2016

The decline of an industry pioneer: the myth of the icon

Is there such a thing as an icon in an industry? Consider the current tale of Twitter. The recent lack of success by Twitter to attract a buyer has put into bas relief the woes of the company in establishing a viable, stand-alone business model. Shortly before this most recent search for a corporates suitor took place, The Economist magazine had
published an article (September 17th, “Twitter in retweet: A tech icon’s future"), which discussed reasons for the company’s current difficulties.

In that regard, it was instructive to read how rivals have encroached onto the areas of Twitter’s functionality. Companies such as Facebook, Snapchat, Instagram, WhatsApp and Facebook Messenger have all pushed forward with features that, in the words of the article, Twitter “…once might have owned.”

What is most interesting, however, is the article’s views on the future of the company. First is the observation that—
“Twitter will survive, but it has lost its chance to be the sort of internet giant it might have become under better management.“
Given that various substantial competitors have been encroaching onto Twitter’s functionality, the questions arise: Why will Twitter necessarily survive, and in what framework?
As for the latter question, the article seems confident that sooner or later--“… Twitter itself will eventually be bought.” The common wisdom is that the sale of Twitter is all about price. Maybe yes, maybe no. This blogger recalls Myspace, which was once viewed as the all-conquering future of social media. Purchased by News Corporation (i.e., Rupert Murdoch) in 2005 for $580 million dollars, it lost the battle to Facebook and it was ultimately sold for around $35 million. Myspace was discarded in favor of another social media experience that was deemed preferable by the public. Effectively, it had become undesirable at virtually any price.

As such, the ultimate rationale given by the article why Twitter should continue to be around, despite its current challenges, seems to be that it is that it enjoys a special status. Namely, as the tagline to the article says, Twitter is an icon and, it would seem, icons are meant to be preserved. As the Oxford online dictionary defines, an "icon" is "a person or thing regarded as a representative symbol or as worthy of veneration." Thus, the article writes--
“Whether people use Twitter regularly or not, most would say they want it to thrive, whether on its own or under the wing of another company. The firm has helped raise awareness of conflicts and injustices, for example, in Egypt, Iran and Tunisia that would otherwise have attracted less attention. Much of the world will keep watching Mr Dorsey’s attempts to pound Twitter into shape, even if people increasingly do so on Facebook and Snapchat.”
With all due respect, this assertion is baffling. Commercial entities are not, as a rule, preserved simply because they are to be venerated for the role that they have
played in an industry, or their contribution to social causes. Without wishing to sound heartless, this blogger could care less whether Twitter survives or not; other means can be found within the social media space to provide the kind of on-site information and images provided by Twitter. No iconic status here. Something similar might have said about Life magazine nearly a half a century ago, when it discontinued its weekly publication. Once considered a publishing icon, it is now a publishing also-ran, at best.

As the piece itself points out, Twitter has a “loyal base of users” of only between 20 million and 40 million people, a small number in comparison with social media rivals. If Twitter finds a way out of its current predicament, either on its own or via acquisition, more power to it. But please don’t appeal to Twitter as an “icon”. After all, not so long ago, Myspace was an icon too.

Sunday 16 October 2016

Brand-building online: when shelf space is replaced by ...?

While brand building needs to take into account a large number of factors, at the end of the day, a brand is ultimately only as good as its last
sale. This certainly holds true for shoes and clothing. For sure, the producers of these products strive to promote their brands with the goal that the brand will continue to resonate with customers. However, unless producers can get their products into the hands of customers in an effective way, the goal of establishing a brand is doomed to failure. Successful execution of distribution and sale of these fashion products in the name of brand development may be even more challenging in the face of the rise of online sales.

An interesting aspect of this online challenge emerges from an article that appeared in the September 3rd issue of The Economist, entitled “Fashion Forward.” The piece describes the commercial success of Zalando, described as “Europe’s biggest online vendor of clothing and footwear”. Zalando is reported to have relationships with approximately 5,000 brands, most of which are described as “well-known labels”, and it supplies over 150,000 items.

What is in this for the brand owners themselves? We start with the premise that the brand owner recognizes the increasing importance of online sales. This is so, even if purchaser choice of clothing and footwear is a matter of individual taste and so, for generations, the visual/tactile experience of actually selecting an item in a store has been central to the purchasing experience. Zalando provides a partial solution by offering an extraordinarily generous return policy, good for 100 days following purchase. Almost 50% of purchased products (based on value) are returned, usually because of issues of fit or style. This arrangement may not be the functional equivalent of the on-site dressing room, but the ease of the terms of return seem to be sufficiently accommodating to establish the online purchasing experience as a viable alternative to the brick-and-mortar store.

But what is of even more interest is the observation in the article that—
“[a] lure for retailers and brands is that Zalando saves them from having to invest in e-commerce themselves.”
There is a sense that this position is analogous to the motivation for an enterprise opting for cloud-based services rather than maintaining the necessary computer hardware of their own. But such an observation only goes so far. In the pre-online world, a brand holder (unless it maintained a brick-and-mortar site) did not have to invest in distribution and sale infrastructure, which was the responsibility of third party retailers and the like. True, one had to fight for shelf space, but if your product could be successfully placed, it was the retailer that bore the rest of the sales burden.

On its face, the same approach is being adopted in the arrangements with online sellers, such as Zalando; the brand holder is freed from maintain its own online platform. But query whether the brand holder may be giving away too much control in the name of sparing itself from the need to invest in the infrastructure itself. The retort will likely be— “But we have no choice. Even a behemoth such as Walmart is struggling to successfully operate its online business. Whom am I, a mere minnow in the clothing space?” That may be so, or it may not. What does seem clear is that a brand holder tying itself to the likes of Zalando in this manner may be even more shackled to the distribution whims of a third party than it was with respect to its brick-and-mortar retailers.

And Zalando itself is itself potentially vulnerable from a challenge from the likes of the 800-pound gorilla in the e-marketing world, For the moment, Zalando has a market-leading position, which may be difficult for Amazon to copy. But as noted--
“Eventually, though, Amazon will build a strong offering, and consumers will be called upon to decide: do they want a one-stop-shop for everything, from electric toothbrushes to Jimmy Choo shoes? Zalando’s hope is that there is still something special about shopping for fashion, even if it’s done while waiting for the bus.”
Should that come to pass, the position of the clothing and footwear brand holder within the online sales environment might be even more challenging. This is so, because the brand holder has merely exchanged a battle for shelf space for a struggle to obtain favorable terms with the likes of Amazon, with no apparent viable plan B.

Friday 14 October 2016

California Legislative Analyst Office Reviews Film Tax Credit Impact

I have previously written about California’s film tax credit system and interstate competition, here and here.  The California Legislative Analyst Office has recently published a report concerning the impact of California’s film tax credit.  While noting that the film tax credit likely prevented some jobs and production from leaving the state, it asserts that around 30% of projects receiving the credit may have occurred without the credit.  How does the report reach that conclusion: 

Some of the motion picture projects under the first film tax credit program probably would have filmed in California even if they had not received a tax credit. We explain below how we were able to estimate these windfall benefits arising from the first film tax credit.
Tax Credit Lottery Allows for Natural Experiment. It is impossible to identify with certainty which projects would have been made in California, which elsewhere, and which not at all, had they not received a film tax credit. Because of the way the first film tax credit was administered, however, we are able to roughly estimate the probability that any given film or television project might have been made in California without a tax credit. Beginning in 2011, the program was over-subscribed on the first day applications were accepted—with the demand for film tax credits far outstripping the available amount—and tax credits were mostly allocated to projects through a random process. This allowed for an imperfect natural experiment, as some projects were allocated a credit and other similarly situated projects were not. The California Film Commission (CFC) collected some information about projects that applied for and did not receive a tax credit from the program—whether they were made and, if so, where. (As noted elsewhere in this report, many projects were never allocated a tax credit because there was an insufficient amount of tax credits available. In other cases, some applicants received an allocation but withdrew from the program for various reasons—some of these were made eventually, but without a tax credit from California. When that happened, those tax credits became available for other projects that had been placed onto a waitlist. However, many of these began filming—in California or elsewhere—prior to being offered an allocation.) We supplemented this CFC data with publicly available data sources, such as information from the Internet Movie Database and Variety. Looking just at the film tax credit applicants in 2011, 2012, and 2013—the three years for which we have the best data—we see that 199 projects applied for and did not receive a film tax credit but were eventually made. Of these, as we show in the figure, one-third—66 projects—filmed in California without receiving a tax credit. Dozens of other project applicants that did not receive a film tax credit from California were filmed in British Columbia, Georgia, Louisiana, New York, and elsewhere.
The report notes that public subsidies such as the tax credit should be avoided [but are understandable given interstate competition].  However, it also notes that the economic impact is relatively substantial—although difficult to measure well:

It is important that we emphasize that it is impossible to precisely measure the net change in an economy caused by a tax credit or any other policy change because many other economic changes are occurring simultaneously. It is not possible to know what the economy would have done had the policy not been adopted in the first place. We note that there is some uncertainty in the underlying data we use in this evaluation and, as we discussed in the nearby box, limitations to the methods that are used to estimate indirect and induced economic effects. Finally, any assessment of the full economic value of the opportunity costs is inherently subjective, as we cannot know how foregone revenue might have otherwise been used.
Overall, we think that the first film tax credit program probably increased the economic output of California by between $6 billion and $10 billion on net. This is a total amount over a period of more than a decade. The annual increase in likely economic activity—typically under $1 billion per year—boosts California’s economic output by no more than a few hundredths of a percentage point.

[Hat Tip to Professor Paul Caron’s Tax Prof Blog.] 

Friday 7 October 2016

En Banc Federal Circuit Upholds Apple's Jury Verdict of $120 Million

On October 7, the en banc U.S. Court of Appeals for the Federal Circuit reversed a panel of the Federal Circuit and upheld a jury verdict for patent infringement (slide to unlock, auto-correction patents) of almost $120 million in favor of Apple against Samsung.  Apple's counsel argued that the three-judge panel of the Federal Circuit improperly rejected almost every finding of the jury and relied on "extra-record" evidence obtained through "independent research."  The en banc Federal Circuit in an opinion by Judge Moore reaffirmed the role of the appellate court does not include reweighing facts or even finding new ones.  The en banc court stated: 
We granted Apple’s en banc petition to affirm our understanding of the appellate function as limited to deciding the issues raised on appeal by the parties, deciding these issues only on the basis of the record made below, and as requiring appropriate deference be applied to the review of fact findings. There was no need to solicit additional briefing or argument on the question of whether an appellate panel can look to extra-record extrinsic evidence to construe a patent claim term. “The Supreme Court made clear that the factual components [of claim construction] include ‘the background science or the meaning of a term in the relevant art during the relevant time period.’” Teva Pharms., Inc. v. Sandoz, Inc., 789 F.3d 1335, 1342 (Fed. Cir. 2015) (quoting Teva Pharms., Inc. v. Sandoz, Inc., 135 S. Ct. 831, 841 (2015)). After Teva, such fact findings are indisputably the province of the district court. We did not need to solicit additional briefing or argument to conclude that the appellate court cannot rely on extra-record extrinsic evidence in the first instance or make factual findings about what such extrinsic evidence suggests about the plain meaning of a claim term in the art at the relevant time or how such extra record evidence may inform our understanding of how the accused device operates. We likewise did not need additional briefing or argument to determine that the appellate court is not permitted to reverse fact findings that were not appealed or that the appellate court is required to review jury fact findings when they are appealed for substantial evidence. The panel reversed nearly a dozen jury fact findings including infringement, motivation to combine, the teachings of prior art references, commercial success, industry praise, copying, and long-felt need across three different patents. It did so despite the fact that some of these findings were not appealed and without ever mentioning the applicable substantial evidence standard of review. And with regard to objective indicia, it did so in ways that departed from existing law.
The en banc court noted that Judge Dyk raised thought-provoking points about obviousness law (the role of secondary considerations, and the motivation to combine) in his dissent, but the issues were not raised on appeal.  Judge Dyk nicely tees up the case for the U.S. Supreme Court on the proper application of obviousness.  (LOL, Get ready for another U.S. Supreme Court case on obviousness!) Importantly, the en banc court remands for the district court to consider willfulness post-Halo.  

Is this opinion really about judicial correction of (in hindsight) strategic decisions made to protect intellectual property (a game-changing piece of technology)? Or, this is just the best that could have been done.   

U.S. Federal Trade Commission Releases Report on Patent Assertion Entities

On October 6, 2016, the Federal Trade Commission [FTC] released a 269 page report titled, "Patent Assertion Entity Activity: An FTC Study" [Study].  The Study reviews PAE activity from 2009 to 2014.  The press release from the study excerpts some highlights: 

The report found two types of PAEs that use distinctly different business models. One type, referred to in the report as Portfolio PAEs, were strongly capitalized and purchased patents outright. They negotiated broad licenses, covering large patent portfolios, frequently worth more than $1 million. The second, more common, type, referred to in the report as Litigation PAEs, frequently relied on revenue sharing agreements to acquire patents. They overwhelmingly filed infringement lawsuits before securing licenses, which covered a small number of patents and were generally less valuable. 
The report found that, among the PAEs in the study, Litigation PAEs accounted for 96 percent of all patent infringement lawsuits, but generated only about 20 percent of all reported PAE revenues. The report also found that 93 percent of the patent licensing agreements held by Litigation PAEs resulted from litigation, while for Portfolio PAEs that figure was 29 percent. 
The study found that the royalties typically yielded by Litigation PAE licenses were less than the lower bounds of early stage litigation costs. This data is consistent with nuisance litigation, in which defendant companies decide to settle based on the cost of litigation rather than the likelihood of their infringement.
Interestingly, the report relies on the AIPLA economic survey on patent litigation costs to conclude that the majority of Litigation PAE litigation is nuisance litigation.  That merits additional scrutiny, I think.  The Study also includes reforms to address nuisance infringement litigation: 
“The FTC recognizes that infringement litigation plays an important role in protecting patent rights, and that a robust judicial system promotes respect for the patent laws. Nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior,” the report states. With this balance in mind, the FTC proposes reforms to: 
  • Address the imbalances between the cost of litigation discovery for PAE plaintiffs and defendants;
  • provide the courts and defendants with more information about the plaintiffs that have filed infringement lawsuits;
  • streamline multiple cases brought against defendants on the same theories of infringement; and
  • provide sufficient notice of these infringement theories as courts continue to develop heightened pleading requirements for patent cases.
Notably, the Study also reviewed " types of patents held by PAEs, and found that 88 percent were in the information and communications technology sectors; more than 75 percent of those patents were software-related patents." Interestingly, some Study PAEs frequently targeted a small number of firms in the "Computer and Electronic Manufacturing" sectors.  Further, the Study "also looked at whether PAEs were able to make money by mass-mailing so-called “demand letters”; however, the FTC observed an “absence of large demand letter campaigns for low-revenue licenses among the Study PAEs.”  This results in the Study stating that reforms concerning demand letters "on its own" would make little difference. 

Notably, the Study includes an review of the wireless chipset sector in particular: 

[T]he report also looked at the wireless chipset sector, examining how reported PAE assertion behavior compared to certain manufacturers and non-practicing entities (NPEs) (who primarily seek to develop and transfer technology ). For this study, the FTC obtained non-public data from eight manufacturers and five NPEs, for the same timeframe using its 6(b) authority. 
The wireless case study found that Litigation PAEs and manufacturers behaved differently. Within the study, Litigation PAEs brought far more infringement lawsuits involving wireless patents—nearly two-and-a-half times as many as manufacturers, NPEs, and Portfolio PAEs combined. Litigation PAE licenses involved simple lump-sum payments with few restrictions, if any, whereas the reported manufacturer licenses frequently included field-of-use restrictions, cross-licenses, and complicated payment terms.
Importantly, the Study does not draw conclusions concerning the merits of PAE activity in monetizing inventions for inventors and innovators: 

Study PAEs had diverse and heterogeneous data-keeping practices. As a result, the FTC does not report how much revenue PAEs shared with others, including independent inventors, or the costs of assertion activity. The FTC sought to evaluate the role of PAE activity in promoting patent monetization for inventors and innovation as part of its study. Towards that end, the FTC requested that Responding PAEs provide detailed data describing how they shared licensing revenue with outside parties and their costs of patent assertion. Responding PAEs used different methods to maintain information describing their revenue sharing and costs, however, which prevented any meaningful comparison of the degree of revenue sharing by PAEs or their assertion costs. For example, some Responding PAEs viewed payments to outside counsel as a cost of patent assertion, but others viewed such payments as revenue sharing (counsel often received a fixed proportion of licensing royalties). Moreover, the majority of Responding PAEs did not maintain information on assertion costs, and only a few Responding PAEs provided such data at either the Affiliate level or assertion campaign level. For these reasons, we did not analyze either the proportion of licensing revenue that they shared with outside parties, or the costs of patent assertion. Due to this limited data, this report does not address the efficiency of PAE business models. [emphasis added].

And, what impact will Alice have?  The Study notes that "it did not collect enough information regarding patent assertion after the Alice decision" to "directly measure" Alice's impact, but: 

In addition, because more than 75% of the patents in the FTC’s sample likely include software-related claims, and because the FTC estimates that Study PAEs held more than 75% of all U.S. patents held by PAEs at the end of 2013, any change in PAE behavior with respect to software patents that results from Alice will likely have a significant impact on both the overall volume of PAE assertion and the types of technologies that PAEs assert.
Study PAEs generated about $4 billion in licensing revenue.  And, the Study noted, "Fewer Than 1% of Study Patents Were Identified as Encumbered by a FRAND Commitment to a SSO."  [Hat tip to Professor Dennis Crouch's Patently Obvious Blog.]