"And with one leap he was Unbound ...": a Jolly perspective on subscription publishing

One of the most interesting items to appear in the Authors' Licensing and Collecting Society (ALCS) newsletter in recent times is "Crowded House: Why I Crowd Funded My Book", this being an informative and (inevitably) well-written account by writer Alice Jolly of her reason for taking the crowd-funding route when seeking to publish her forthcoming memoir Dead Babies and Seaside Towns, through the agency of Unbound.  You can read Alice's piece in full here. Of particular interest to readers of this weblog are the following comments concerning the financial side of the publishing equation:

" ...  I raised £10,000 for the publication of my book. Was it worth it? Would I recommend the experience to other writers? With publication over a month away at the time of writing, the jury is still out. Overall, however, my experience with the crowd-funding publisher Unbound (“a new way to connect authors and readers”) has been positive. Not just positive, actually, but also fun, frightening and exciting.

... Unbound was set up by three writers who were fed up with all the moaning ... Their model is generally hailed as innovative and modern. In reality, what they have done is to use the internet to revive the ancient practice of publishing by subscription. This is the way that Dr Johnson published his Dictionary and it is also the way that many novels were published in the 18th and 19th centuries.

... Unbound has to decide whether they want your book. It guards its gate as carefully as any traditional publishing house. Equally, however, it can afford to take a punt on a risky book in a way that other publishing houses often can’t. This is because, before Unbound publishes, the writer has raised the money in subscriptions (in my case that £10,000) to cover the production costs of the book. Unbound might not always win but it can’t lose. Clever, isn’t it? The financial deal they offer to authors is also attractive: once the book is published, the author gets 50% of royalties.

... I needed approximately 500 people to each pledge £20 in order to raise the £10,000 required. In return, these subscribers will get a beautiful hardback copy of the book with their name in the back. People who contribute more money can get other benefits such as an invitation to the book launch or lunch with the author. To help a writer raise the subscriptions, Unbound makes a video about you and your book, and sets up a web page with an extract from the book and a biography. ...

It can be embarrassing emailing your friends and neighbours again and again. You have to become adept at using social media, and you need to go to any writing-related event to which you are invited and market yourself shamelessly. ...  The whole process is hard work – sometimes frustrating and sometimes bruising. You know exactly who has signed up and who hasn’t. You learn not to take it personally ... 

Once you get the subscriptions you need – in my case, it took six months of hard work – Unbound operates as any traditional publishing house would, dealing with editing, proofreading, cover design and publicity. ... 

... how does Unbound go about selling the book to a wider audience? Unbound has recently signed a deal with Penguin Random House, who will now deal with the distribution of Unbound books. This is a huge coup. For Unbound writers, it means the possibility of a small, personal publishing service with access to big publisher distribution. Isn’t that what most writers would like?  ...

Unbound believes that its subscribers will keep pledging. It is now publishing the second books of some writers, and reports that those authors are finding it easier to raise the subscriptions a second time around. That should be true. After all, you already have an email list of all the people who signed up before.

I would now be loath to return to traditional publishing, even if I could. Unbound was there when I needed it, while the mainstream publishing industry certainly was not; it just didn’t have the nerve for my book. And I won’t forget that fact. Other than the question of raising the subscriptions, I can’t see any downside to the Unbound model at the moment. ...

This blogger recalls the large number of people who have urged authors and publishers to come to terms with the internet and new technologies and to come up with new business models rather than demand reforms of copyright law.  This approach to publishing has the attraction of using the internet and the social media to good effect while adapting a model, based on subscription publishing, that is centuries old.

A light at the end of the tunnel? An artist's view of business models in the internet era

The Pied Piper: happier times, when people
trifled with artists' business models at their peril

While lawyers, economists, policy-makers and others talk comfortably in the abstract about the need to find new business models in the music industry in the internet era, there is no-one closer to the issues raised by the need to make money than the artists themselves. In this context, the following reflections are a sobering antidote:

"The direct financial losses and effects of internet piracy to the individual musician and the record industry has been one debated over since the emergence of the internet and its usage as a medium to copy and distribute such material. In his article discussing an open letter to one student by David Lowery, Paul Resnikoff weighed in on how the industry has been impacted, utilizing David’s letter as an example of both direct and indirect effects.

Paul explains that artists cannot simply tour in order to make up for the shortages resulting from low record sales. Only the top tier of artists, often backed by major labels in the process, will make any profit from this even during dwindling record sales. The sheer costs incurred in traveling around the world, or even round a mere continent, will often not get covered during the tour, let alone generate profit on top of the costs. Touring was seen as secondary and as mere coverage for losses sustained as a result of low record sales. With constantly falling figures in sales today this alone would clearly not be enough. This is a direct result of the fall of the medium in which music is distributed; people are not buying physical media, but rather switching to digital formats, using either legal or illegal means to acquire it. This produces a challenge which the record industry has failed to address, and as pointed out in the article, digital services such as Spotify will not provide an adequate remedy to the situation as things stand in terms of the average musician. Other ways of funding have emerged, such as crowd funding services, like Kickstarter, which provide means for artists to raise funds to record music and distribute it. However such services will only provide funding to a lucky few and would not answer this issue on its own. This might not be in terms of funding alone, but due to the influx of content and the resulting lack of visibility.

Paul attributes this to the attitudes of both consumers and companies. The younger generations born slightly before or during the rise of the internet are used to free access to material and thus buy less music, both in digital and physical formats. One can say the generations with this opportunity see it as a moral right to which they are entitled. One cannot simply pin this on younger people, however, as the sale of media has also dropped among older generations. Both tend to enjoy their media via other means, such as Spotify. Companies like Google and other aggregators do pose problems for individual musicians and the industry at large. A large company is purely interested in profits, not the personal plight of the artist trying to earn his bread through his work – they provide content which is paid for, morals have no place in business.

The sphere in which musicians compete has also changed. TV shows such as X-Factor, which pump out act after act, year after year, under a humongous marketing machine are overtaking the market from the average artist. How can an individual compete with such a Goliath? Odds are they cannot.

Albeit increasingly bleak, and no matter how negatively Paul portrays the prospects of anyone trying to make it in the music industry being, this writer still sees light at the end of the tunnel. Consumers will adapt, and above all, distributers and musicians have to find new ways to benefit from the ease of access and various digital formats in which media can be handled. Once affordable and accessible ways to consume media emerge, consumers will flow towards them and amounts of media pirated should fall, although cannot be fully avoided. Cassettes did not kill the music industry as then was feared, and neither will the internet in the age of the CD".

This note has been prepared by Jani Ihalainen, a Finnish native and recent law graduate of the University of Derby. Jani, who has a keen interest in copyright law, is happy to deal directly with questions. You can email him here.

IP and Business Growth

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

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

A full copy of the paper is available here.

Patent Trolling doesn't pay, or does it.... in the long term?

An explosive tweet posted by compulsive innovator/investor Chris Dixon made the highlights of hip weblog TechCrunch last week and stirred a heated debate in the IP community. The co-founder of decision-making website Hunch found out in a report published by the University of Texas Management Company (PDF here) listing all of its private investments in venture funds and private equity funds and their results, that Intellectual Ventures – known by many as “IV” and considered by most to be the godfather of all patent trolls – has been severely underperforming notably with a negative internal rate of return (IRR) of 73% of their Invention Development Fund I and a negative IRR of their Invention Investment Fund II of 10%. As TechCrunch pointed out, this negative IRR does not necessary reflect the reality of the situation but it might suggest that the activity of patent trolling is not as lucrative as it appears to be. It also contradicts IV founder Nathan Myhrvold’s claim that his company, whose main goal is to build a large patent portfolio rather than developing new systems, is “turbocharging” the innovation process, especially when the performance of the two IV funds are compared with the ones of more traditional venture funds.

Joff Wild of IAM magazine, which has been posting regularly about IV and now certainly has a good understanding of the company’s business model, moderated the significance of Techcrunch’s claim in a recent blog entry:

"Before you can make any definitive statement on such a thing you have to know how old the funds are and what they are setting out to do. Acquired patents are rarely going to give you a quick return - they are slow boilers. So if you spend a lot of cash upfront on buying up portfolios, you may have to wait a few years before they start to pay dividends. Alternatively, if you are buying up "inventions" that have not yet even been patented - which is also something that IV does - then you have an even longer lead-in until potential monetisation can take place"

His point of view concurs with the answer of IV’s VP Finance Larry Froeber, who highlighted in a reply to Wild’s blog post that the method used by the University of Texas Management Company does not capture the true value of their business, as spending is the driving growth of IV.

I tended to agree with this view till I went through the comments of this blog entry (items posted on the IAM blog always generate a handful of insightful comments) and read what Tom Grew of Yu & Partners had to say:

"Interesting that, in current times as businesses focus more on delivering quarterly results and as a consequence reduce IP spend (and increase divestitures), we are allowed to say: It's ok, IV has a long term business model.
Will investors buy this though? Why should IV be special?
It's been running now for what, 10 years? Wouldn't you expect a ROI in that time - plenty of time to get a patent granted, and many of its investments have been already granted patents in any case. And isn't there a statistic that most patents take about 3-5 years to commercialize? This should be prime time."

In my opinion Tom Grew has a point here. A successful business strategy in the short term is a necessity to survive on capital markets and very few are the companies that managed to stand up after taking a heavy blow upfront. However it does not seem that IV lost the confidence of its investors, so does patent trolling pay and if it does when should investors expect a ROI? I guess we will only find out about it in a few years time.

Thinking about open design

This piece, hosted by IP Finance, has been written by IP blogger Nikos Prentoulis. It reads as follows:

“Open” has taken the tech world by storm and Open-“anything” seems to be the synonym to innovation in the” anything “ area. In this context (or trend), an interesting piece about open-design business strategies was published on Bloomberg Businessweek site some while back. Its authors, Roland Harwood and David Simoes-Brown, are enthusiastic proponents of the idea that “organizations that embrace “open” will innovate better, cheaper and faster”. In presenting key issues of open-design, they discuss the implementation of “IP airlocks” to tackle the fact that “too often, IP regimes can be counterproductive, adding time and other costs into the equation and focusing participants on ownership rather than partnership.” The airlock is described as “an open-innovation competition, where companies invite ideas in response to a clearly defined brief. Brokers—whom we call "trusted agents"—represent both the customer (usually a multinational company) and the innovation community. For a specific period of time, innovators respond to the brief, knowing their ideas are safe from being co-opted by the client, with whom ideas are not shared until the end of the process. At this point, developed propositions are presented to the client, which has a fixed time period—typically three months—to decide whether to proceed. If not, innovators are free to take their propositions elsewhere.”

The authors correctly point out the potential business value of the interdependence between organizations and their network of associates and, most notably, clients, stressing the benefits of this relationship for innovation. They also emphasize the social and business advantages in creating and maintaining a spirit of collaboration and community within such networks.

Of course, crowd-sourcing is not without foes. Its drawbacks are said to include added costs, possible failure for lack of monetary motivation, or participation, lack of legal certainty or even difficulties in maintaining “working” relationships. The article leaves am anti-IP aftertaste, based on the (I think erroneous) assumption that the open-“anything” presupposes collaboration while “proprietary-anything” excludes it. Perhaps this debate is somewhat misplaced. I mean that IP airlocks seem to be a useful instrument, but they presuppose IP rights and appear to be (yet another) scheme for protection rather than deviation from the IP regime. Additionally, networking with one’s client’s is self-evidently beneficiary and a crowd-sourcing project may also prove to be a powerful marketing tool, attracting consumers and strengthening business (or even social) ties. But the road from a collaborative project to a business modus operandi appears to be a (very) long one, at least in my mind. The question whether an open or proprietary business strategy is more suited for innovation may be misleading. I would think that it would be the field of the innovation exercise, with its particular bumps and pitfalls, that would point to the appropriate strategy".

Thanks, Nikos!

Funding and Flattr-y: new online business models under review

In "New Business Models Proposed In Debate On EU Culture And Copyright", written earlier this month by David Cronin for Intellectual Property Watch , both levies and microfees were again mooted as means of making internet users pay musicians and other artists for the dissemination of copyright-protected work online. The occasion for these proposals was a discussion, hosted by Green Party Members of the European Parliament on 8 June, on "how easy public access to culture can be guaranteed in a way that ensures artists can make a decent living". According to the author,

"Philippe Aigrain, a founder of the French civil liberties group La Quadrature du Net, argued that the fundamental premise of any approach to charging for listening to music or watching films online should be that sharing files is a basic right. ... Aigrain recommended a new system whereby each internet subscriber would be charged a monthly fee of 5 to 7 euros and that this would generate a fund for paying artists whose work is shared on the internet. According to his calculations, such fees should yield between 1.2 billion and 1.7 billion euros each year in France alone – about one twentieth of the country’s “cultural economy”.

The income would then be distributed among artists based on surveys of a “huge panel” of individuals, who would anonymously give details of which files they had downloaded. For audiovisual work, one-third of the revenue generated would be used for remuneration and the remainder to support new productions. Yet the ratio should be reversed for music, considering that it is usually less expensive to record tunes than to make films".

In contrast Peter Sunde, on behalf of Pirate Bay, described the Flattr micro-payment scheme (for a peek at Flattr click here):

"Under it, an internet user would give between 2 and 100 euros per month and could then nominate works that they wish to reward or “flattr”. The system would be similar to the “I like” button on the social networking website Facebook but “with the added value that you actually care ...”.

The article goes on to record a variety of attitudes concerning copyright and collecting societies that don't make very comfortable reading for what is perceived by many culture consumers as the copyright establishment.

The Costs of Confidentiality

As previously noted by Neil Wilkof on this blog, IP is only one aspect of a company’s competitive advantage, sometimes more crucial, sometimes less crucial to the success of a company’s activities. This was highlighted in Wednesday’s edition of The Times, which reported the measures taken by Air New Zealand (ANZ) to secure a first-to-market advantage for its lie-flat bed for economy passengers. “Such was the secrecy of the programme”, the newspaper notes, “that simulated flight tests were conducted on actors sworn to silence. Aviation seating is a cut-throat business.”

However, a role for IP in ANZ’s activities is also apparent from the comment of ANZ’s long-haul boss that he expects to license the seat design to other airlines. Such a business model was the subject of the 2009 litigation between Virgin Atlantic and Premium Aircraft Interiors, first in the Patents Court for England and Wales and subsequently in the Court of Appeal. According to the Patents Court decision, Virgin were successful in licensing their “Upper Class Suite” flat-bed seat design to Air New Zealand for a “substantial fee”. Air Canada were also interested in taking a licence but found it difficult to justify the Virgin fee, buying instead an alternative “Rock” flat-bed seat design from Virgin’s seat manufacturers, Premium Aircraft Interiors. Virgin then sued Premium for infringement of patent and unregistered design rights.

The Patents Court decision provides an interesting insight into the measures taken by Premium both to maintain the confidential status of information received from third parties (in this case Virgin and its seat designer) and to prevent that confidential information from contaminating its own work for other customers such as Air Canada. Premium initially claimed that they operated a “clean room” approach that employed different teams for different projects, the design data for different projects being kept securely on different parts of Premium’s server. However, as noted by the Patents Court judge, Mr. Justice Lewison:

“The position as it eventually emerged was rather more complex. First, there are at least two kinds of design data. Design data known as CATIA, which are three dimensional modelling data, are stored in a digital file. It can be sent to a manufacturer who can use the file to make a mould or tool in order to manufacture the required component. These data can be kept securely. In addition there are two-dimensional design drawings. These could not be kept securely once UCS had gone into production in the autumn of 2003. Second, once Virgin Atlantic had entered into a licence with Air New Zealand in about June 2004, the UCS had to be modified in order to fit onto Air New Zealand's aircraft. A separate design team was created in order to deal with those modifications. That design team (as well as the original design team) had access to the UCS design data (including CATIA). Third, contrary to the pleaded case there were at least two people at Contour (Simon Allen and Bruce Gentry) who had roles to play both in UCS and Rock/Solar Eclipse. Indeed, since Contour employ a large number of short term contract designers, it has not been possible to identify all the designers and engineers who worked on the UCS project, or whether some of those short term contract staff worked on other projects within Contour. Accordingly, Contour now admit that their relevant employees had the opportunity to copy both UCS itself and also UCS design data.”

For non-IP managers, there is a temptation to view protection by trade secret/confidentiality as a cost-free option. Certainly, there are no patent office fees to pay. However, as illustrated by the cases above, the measures necessary to ensure that confidential information is properly managed are far from being without cost.

The fall of DRM and the rise of digital rights manipulation

This article has been written for IP Finance by Rebecca Chong (Morgan Cole).

In the ongoing battle against piracy, balance sheets in the entertainment industry are still being bruised by a growing force of consumers using digital tools to enjoy and share creative content. The industry's defence against illegal use of digital media; of filtering access to content by recruiting the assistance of Internet Service Providers (ISPs) to stop users from accessing peer-to-peer networks, armouring content such as DVDs and games with copyright protection, has largely proved unsuccessful; the culture of sharing continues to thrive. A 2009 report by the International Federation of the Phonographic Industry (IFPI) states that 95% of music downloaded is obtained illegally. Now, businesses are being slowly led by the wallets of their consumers towards a new age of cooperation, in which access to digital media may no longer come with as heavy a financial, or legal, price.

The increasing availability of compression technology, high-bandwidth, and high-levels of storage space at affordable prices has enabled the sharing of digital media both off and online on a mass and global scale. A study commissioned by Fujitsu Siemens Computers in 2008 revealed that an estimated 1 million UK homes possess one terabyte of digital storage. One terabyte of data according to Fujitsu, is equivalent to shelves of books stretching for 6.5 miles.

To the new generation of consumer, the sharing of content, whether legal or not, has become far more convenient and cost-effective than searching for a CD or DVD on the shelves. Some file-sharers have also attempted to justify their activities as being necessary and helpful to the entertainment industry. In 2007, outraged fans of Japanese cartoons (anime) reported to have received letters threatening legal action from Odex (a Singaporean anime distributor), explained that they chose to download episodes of anime that had been copied and subtitled by fans because the subtitles provided by fans were superior to those of Odex and were available long before Odex offered their videos for purchase; by implication, any sales loss incurred by Odex was self-inflicted. Fan sites which provide subtitles for anime shows, it is argued, help generate fans for series in foreign-speaking markets that may otherwise never have been reached. Nikolai Nolan, who assists with leading Anime-Faith, a group that translates and subtitles Japanese cartoons for downloading, stated in a February 2005 report by CNET that some Japanese companies " really appreciate fan subbing", citing the example of a director of a series called Battle Programmer Shirase who apparently thanked fans including "those outside the broadcast area who took special measures to watch the show on their PC monitors, and to everyone who watched it subtitled overseas without permission" in a final episode of the show.

Until recently the entertainment industry's response had been to scare the average consumer away from illegal file sharing by holding specific individuals to account. That tactic resulted in mixed success. The Recording Industry Association of America (RIAA) filed a succession of lawsuits against alleged users of networks including KaZaA, and Grokster, which led to payments being made in some cases, but also to public relations disasters that included the law suits against 13 year old Brittany Chan, and deceased grandmother Gertrude Walton. As if in a show of defiance to the entertainment industry's heavy handed approach, illegal downloads of music have continued to soar. According to the IFPI, more than 40 billion music files were illegally shared in 2008, compared to 1.4 billion legal single track downloads. The RIAA's new focus this year is to work with ISPs to identify individuals engaged in illegal activity and not target individuals itself (essentially 'passing the buck'), but the value in this strategy is questionable; even as ISP's increase monitoring, it is inevitable that this will not discourage hardened individuals who may simply improve their encryption methods and migrate between ISPs to evade capture.

The industry's attempt to prevent their products from being illegally copied and adapted, by using digital rights management (DRM) and embedding copy protections in music, film and games, has also proved to be relatively ineffectual on the increasingly technologically sophisticated consumer. Fans of the computer game Spore swiftly circumvented the SecuROM program that installed itself with copies of the PC game, and produced cracked versions to be made available on the internet; only last year Antigua-based company SlySoft announced that it had produced new software for cracking the Macrovision copy protection technology in Blu-ray and DVD-High Definition discs. Not long ago, the distribution of the so named 'Messiah' mod chips attracted the attention of Sony which eventually brought a successful action in the UK to prevent the importation of the chips. The chip enables an owner of a Playstation 2 console to play region locked official games produced in other countries like Japan and the US. However, it also enables an owner to by-pass copy protection in all games, and make and play pirated copies of games. Although the Messiah chip can be used for legal purposes, the fact that it can also be used to enable the make and play of pirated copies of games, was held to be enough to make selling, advertising, possessing for commercial purposes, and using the chips, illegal. The decision unusually contrasts with that made in the House of Lords 1980s Amstrad case, which involved twin cassette deck machines that enabled the speedy copying of cassette tapes. In that case, more consideration was given to the fact that the twin deck cassette players could be used for perfectly legal purposes as well as used for illegal copying of cassette tapes. It was decided here that merely supplying the machines was not enough to make a supplier an infringer of copyright. The harsher line taken in the Messiah case may well have been due to the fact that as it is now much easier than it was at the time of Amstrad for the average person at home to copy and distribute pirated goods swiftly and on a larger scale.

So far the 'Big Brother' steps taken by the entertainment industry to manage their intellectual property have been to little avail and seem instead to have bred discontent. Monitoring through ISPs may not only be ineffective because there are ways to evade detection, but also because as digital storage increases in size and speed it has become much easier to take trading offline to trading media by hand. Imposing restrictions in products have also led to expensive battles against a fluid community of underground hackers that appears to relish new obstacles thrown at it. Controlling without meeting needs provides little incentive for consumer loyalty, or for people who copy to mend their ways. There is also a danger both that the ordinary consumer looking for a fair deal will be driven away and that copyright infringers will be pushed out of reach; some recalcitrant infringers even see the measures initiated by the entertainment industry for protecting their intellectual property, as merely proof of big businesses flexing their muscles at the consumers' expense, which galvanises any motivation to infringe.

Having reached an apparent impasse, the entertainment industry has begun to take some interesting steps forward. Just this year, Apple announced the removal of digital rights management from its music library, enabling users to transfer downloaded music freely (previously, a song under music labels other than EMI, downloaded from their music library iTunes, could only be played on an Apple device). It is suspected that in order to secure this deal, Apple had to concede to major record labels to allow for variable pricing of songs. The move comes as no surprise, however, since competitor Amazon's MP3 store has been successfully selling digital rights management-free tracks since 2007, and this was likely taking a bite out of Apple profits.

More significantly, in a drive to find a compromise between managing rights and meeting consumer want for choice, it was revealed last year that a consortium of digital-entertainment companies which includes manufacturers, retailers, and film studios called the Digital Entertainment Content Ecosystem (DECE), will be attempting to standardise digital rights management practices. The intention is to create a DECE standard that will be used for managing digital rights, also letting consumers use digital content that they purchase on a range of devices that comply with the industry standard. Granted, the consumer will only be able to use digital content within boundaries, but the consumer will no longer be restricted by DRM to using just one device. The consortium is an impressive collaboration between big industry names including Alcatel-Lucent, Best Buy, Cisco, Comcast, Fox Entertainment Group, HP, Intel, Microsoft, NBC Universal, Panasonic, Paramount Pictures, Phillips, Samsung, Sony, Toshiba, VeriSign and Warner Brothers Entertainment. Apple is notably absent from the consortium however, and the question has been raised whether it will eventually join ranks with the large consortium, live side-by-side with it, or die trying. Assuming that the competing interests within DECE are able to work together to provide an attractive package for the consumer, it may be difficult for Apple to continue playing lone ranger.

It will probably be a long time before DECE-compliant devices hit the market, and it is not known if the industry's recent concessions will please the consumer in the long run. Jim Killock, Executive Director of The Open Rights Group remains cynical about DECE, commenting for a January 2009 report of the BBC that "Consumers don't like DRM"; implying perhaps that control to any degree will be resented. True that the consumer is unlikely to welcome being dictated to on how they may use their legitimately purchased entertainment, particularly in an age where culture is aplenty for free through platforms like Youtube where global talent is beginning to be born (Justin Timberlake signed popular Youtube singer Esmee Denters to his new record label, and the infamous videoblogger 'Lonelygirl15' succeeded in being cast in a movie). However, taking a different approach to managing their rights in recognition of consumer dissatisfaction has at least for the moment not gone entirely unnoticed; and although the entertainment industry's plans for the future involve clinging to copy protection, consumers may be appeased by an apparent long term strategy of compromise.

Facebook--Is It Commercially More Than a Bunch of Pretty Faces?

So is social networking the next big thing? Ever since Google's triumphant IPO and meteoric growth in online advertising revenues, pundits have been looking for the next big thing (even if we are talking about a time-line of only several years). Skype and YouTube have not quite panned out, but the explosion of MySpace and then Facebook has focused attention on the growth potential in social networking.

There is no doubt that participation in social networking continues to grow (although my memory tells me that there have reports of a slow-down, or at least a deceleration in the rate of growth of U.S. users of social networking sites). Another possibly telling sign was reported in August 18th issue of Business Week. In an article entitled "Has Facebook's Value Taken a Hit?", the author describes unsubstantiated reports that insiders, including at the highest level of management, have been putting up their shares fore sale in the still-private company. The supposed purchasers of the shares are various funds and institutional investors.

If true, it is unusual for this kind of sale of shares by insiders to take place in the context of a start-up, especially one as lauded and applauded as Facebook. More typically, such shareholders hold onto their equity until a public offering or sale of the company takes place. A further downside to the report is that it has alleged led to employee grumbling. To remedy such possible dissension, Facebook apparently has developed a one-time program to allow employees with vested share options to realize a portion (20%) of their holdings.

There is an interesting company valuation issue here. When Microsoft purchased a small equity stake in Facebook in October 2007 ($240 million for 1.6% of preferred stock), the two companies implied a valuation of $15 billion. However, the plan enabling employees to realize a portion of their vested stock options is based on a $4 billion valuation. Indeed, it is reported that departing employees will be subject to certain restrictions should they then seek to sell their shares. One of the conditions is that they will permitted to sell their shares for no more than a $3.75 billion company valuation.

Has Facebook Suffered a Valuation Drought?

What does this all mean? In particular, do such sales reflect merely doubts about the short and middle term prospects for shareholders to cash out, due to the deteriorating status of the capital and equity markets, or does it also reflect doubts about the ultimate long-term prospects for the company in the so-called "real economy"? I.e., how will Facebook make money from its site, whether from ads or elsewhere?

Facebook can perhaps take some solace in the fact that when I tried to elaborate on this question with my 20-something son, he simply shrugged his shoulders and returned to embellish his own Facebook site.

Facebook Facing the Music

Protection for marketing strategies -- is it realistic?

A feature in yesterday's IP Marketing E-News (for details click here) asks whether a marketing strategy can be considered protectable as intellectual property. This is a depressingly familiar question for Europeans, who are terrified that the first to conceive a new business technique might be able to monopolise it with disastrous consequences for competition (consider what might have happened if, in the earliest and mainly passive days of the internet, the strategy of interactive marketing and online sale were patented). Americans are often also depressed by the question but for quite another reason -- they can't see why something that is truly new and innovative should be deprived of protection just because it happens to be a business method. The article, being of American origin, reads in part:

"To clarify, patents can be granted on any of the following:

Utility patents, which may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, or composition of matter, or any new and useful improvement thereof;

Design patents, which may be granted to anyone who invents a new, original, and ornamental design for an article of manufacture; and

Plant patents, which may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.

Assuming your idea falls into any one of these three categories, then it may be patentable. If this is the case, then you should discuss this possibility with your attorney. However, if your idea does not fall into any of these categories, then it may still be protectable by other means.

First of all, it is always a good idea to walk into any such meeting with a well-drafted nondisclosure agreement in hand. An intellectual property attorney should be able to advise you on the terms and conditions that need to be in such an agreement to protect the information you intend to disclose to the other company.

Second of all, since the idea you seek to protect is a marketing strategy, the possibility exists that it may be protectable by copyright law. While ideas themselves are not protectable, certain aspects of your strategy may be protectable by copyright law. An intellectual property attorney in your jurisdiction with expertise in copyright law should be in a position to advise you as to whether or not your strategy is in fact protectable by copyright law and, if so, the steps you should take to protect it".

Copyright provides only limited, formal protection -- and confidentiality (even assuming that it could be initially preserved, would be unlikely to survive many business transactional uses before it became the preserve of the market analyst and the competition authorities). with patent protection being either unavailable or of dubious utility, that leaves the trade mark and marketing itself as the best form of protection. Get on the market first with a new marketing idea and work hard to remain one step ahead -- and you may find the rewards for investing in the market itself are greater than the rewards for trying to fence it in with IP rights.

OPEN SOURCE: WHO IS MAKING MONEY?

The romantic lore about the open source movement sometimes hides the fact that there are business models out there attempting to cash in on the freely available (and modifiable) software programs. The iffy state of the business side of the open source world was discussed in an August 18th article that appeared on the online service of Business Week magazine. Entitled "Open Source: An Open Question for Red Hat and Others," the article discussed a variety of points worth mentioning.

Since Red Hat is widely identified with the business side of the open source world, let's begin with it. The good news is that Red Hat saw a 32% increase in quarterly sales for the most recent period, to $157 million dollars. That translates into a 7% increase in profits. So why the bearish position of Wall Street analysts about Red Hat? According to the article, the bears on the Street continue to express concern about the slowing growth rate of the company.

At least two major reasons are cited for this sluggish growth. First, companies like Red Hat are more tech-support companies rather than purveyors of must-have technology. Second, brand awareness of their products remains low, apparently even so for a company supposedly as well-known as Red Hat.


So is anyone making out like a bandit in the open source space? Surprisingly perhaps, the article suggests that the winners are the traditional high tech goliaths--such as IBM, Hewlett-Packard, Oracle and Intel. Their success is based on taking advantage of the desire of companies to make increasingly lavish (and free) use of open source products by selling these companies complementary hardware, databases and consulting services to the open source products.

For instance, IBM sells billions (yes, billions) of dollars of hardware, middleware and services that are connected with open source programs. Oracle, the database giant, has made Linux a lucrative platform for its products. And the list goes on.

The bottom line here is the painful truism that, for open-source companies, just because their products enjoy large markets does not not mean they are currently enjoying commensurately large commercial success. Linux is free, IBM software is not. Guess who wins commercially, at least for the present. Investors and Wall Street are paying careful notice.

The bears on the Street are taking notice.