Business Week e.biz -- Intellectual Property
In the new Net world, it's not who owns information who wins. It's who can exploit it first--and most profitably
Ian Clarke is out to set information free from the shackles of corporate control. The 23-year-old Irish programmer's weapon is Freenet, software that lets people anonymously share any digital information--music, software, text, or video. Don't tell Clarke he's helping steal intellectual property. "This is the point in history at which technology forces people to recognize that information cannot be treated as property," says Clarke.
"Media companies have to adapt. If they don't, that's not my problem."
Pretty brutal position. Now, consider the one Scott Wills is in. His online promotions company, BrightStreet.com, has patents pending for software to manage Web coupon offers while preventing fraud. He already has fought off a patent lawsuit by one competitor, and he's intervening with the U.S. Patent & Trademark Office to try to stop CoolSavings.com Inc. from patenting technology Wills says he had first. "I want to spend my time talking about my business model," says Wills. "Instead, I spend my time talking about lawsuits."
Intellectual property is the Web's war zone. From music files to patented online coupon schemes, hardly a day goes by without a skirmish. Since 1995, federal lawsuits over patents, copyrights, and other intellectual property have risen 10 times faster than other cases brought under federal law, topping 8,200 cases last year. Whole industries, from entertainment to travel, have their futures riding on the outcomes of these intellectual property battles. "It's just a giant mess," says Jake Winebaum, founder of the Santa Monica-based Web incubator eCompanies.
MP3.com Inc. learned the hard way the dangers of stepping into the crossfire. On Apr. 28 the music-sharing site lost a copyright infringement case brought by a record-industry trade group. Now MP3.com is facing a request for damages that could exceed $6 billion. Napster, a maker of music-sharing software, is also seeing its very existence threatened by lawsuits from the music industry and individual recording artists. Such do-or-die legal battles have even the largest Net companies watching their backs. "One thing you have to do in this environment is have a strong patent portfolio, even if it's only for defensive purposes," says Amazon.com Inc. founder Jeffrey P. Bezos. "It's entirely possible to find yourself shut out of key technology."
Forget the romance of the wide-open Internet; the frontier is rapidly getting fenced off. That has many experts worrying that intellectual property battles are compromising the innovation at the heart of the New Economy. After all, a major reason for the Net's explosive popularity is that early inventions like Web browsers and one-click links were never patented. "The Web was built on open technology," says Tim O'Reilly, a publisher of technical books. He has tangled with Amazon's Bezos over his patent on 1-click ordering that allows customers to make a purchase online with one mouseclick.
The fiery debate raises fundamental questions for regulators, academics, and corporate leaders. What kind of protection does the New Economy really need to nurture the innovation that made the Web one of the fastest-growing mediums--and marketplaces--of all time? Some argue the Web threatens creativity by letting people steal the work of innovators or artists such as priceline.com Inc.'s Jay Walker and the rock group Metallica. That's why patents have gotten longer. Now they last 20 years instead of 17. Copyrights also have gotten longer and tougher. They last 70 years after an artist dies, up from 50, and make more kinds of copyright infringements criminal offenses.
Tighter laws may not be the answer. A study by Carnegie Mellon economist Wes Cohen shows that patenting is only the fifth-most-important factor necessary for companies to make money from their innovations. Secrecy, lead time, sales skills, and manufacturing capabilities all ranked higher. Surprised? Economists aren't. Cohen's research confirmed work done in the 1980s by Yale University's Richard C. Levin. He found that patents were the most important protection for investment in only a few industries, notably drugs.
Technology moves so fast that long patents are useless even for startups in highly capital-intensive Web-driven businesses. Venture capital firms led by Kleiner Perkins Caufield & Byers poured $54 million of research and development money into optical networking start-up Corvis Corp. But Corvis has orders for $400 million before its machine has finished testing. And its gear will be obsolete in more like 17 months than 17 years. "The pace of business is too fast, and the range of innovation is too fast, to have 17-year patents," Kleiner partner Vinod Khosla says.
The limits of copyright law also are being tested. On the Net, digital information is easy to copy with no loss in quality, and the marginal costs of distribution are virtually nothing. The proliferation of digital information and new ways to share it means that information is going to flow like water. Trying to restrict this flow is like trying to dam a river. That's the point Clarke is trying to make with Freenet.
No one knows for sure if tighter intellectual property controls will slow the Web's world-changing pace to a crawl. But many economists suspect it will. The National Academy of Sciences is sponsoring a series of studies over the next 18 months to examine patent policy. The reason: persistent, if anecdotal, evidence that patents and copyright laws are used more often to bully small players or rivals than to protect real innovation. Amazon.com, for example, chose to enforce its one-click patent against Barnesandnoble.com and a handful of other companies--but not all the other Web sites that use a similar technique.
The solution isn't a world without patents and copyrights. Critics of the strengthening of intellectual-property rights simply want to reverse some recent changes. They say shorter patents, granted less often, will promote more innovation by forcing technology sharing. They also say traditional industries, such as music, would be better off making the Internet their partner rather than their enemy. Some entrepreneurs already are showing the way. Online exchanges, for example, are emerging to help companies trade intellectual property rather than fight over it (page EB116). In the music world, companies such as EMusic.com Inc. are developing new business models to distribute music cheaply over the Web. Although it only offers music from indie record labels willing to cut licensing deals, EMusic took in $2.1 million in the first quarter, selling downloadable MP3 music.
Industries have adapted before. Robert Merges, a law professor at the University of California at Berkeley, points out that within a few decades the music industry went from trying to stop the radio industry from stealing its music to bribing deejays for airplay. And the VCR, first seen as a threat, gave movies powerful new distribution. "The key is not to shut down the experimentation," Merges says.
What can be done to keep innovation alive in the New Economy? Advocates argue the government needs to slow down. In some of the most important areas of e-commerce--taxation, online privacy, and broadband open-access requirements--the government wisely waited before regulating. "All these issues need more discussion," says Joseph Farrell, an economist at Berkeley and the former chief economist at the Federal Communications Commission.
Critics also point to business-process patents as one area in need of reform. The patent office took in 2,600 applications for business-method patents in fiscal 1999--up from 700 in 1996. And the number of business methods patented could easily quadruple if the patent office doesn't crack down. The problem, critics say, is that many of these patents represent simply a set of software-coded instructions to automate business processes already common in the physical world. For example, priceline's name-your-own-price system is a lot like the way car buyers and dealers haggle. That may not be novel, as the patent law requires.
For owners of copyrighted material, the reality is stark: In the Digital Age, advocates say, companies must develop models that make money even in a world where the product is easily copied and distributed either cheaply or free. "The challenge for copyright holders is to see the opportunities of the New Economy as well as the risks," says Pamela Samuelson, a Berkeley law professor who has written extensively on copyright.
There are examples to follow. Seattle's iCopyright.com is helping newspaper publishers make money off its free-content model. The company has developed an online clearinghouse that makes it easier for corporations to buy reprints or reuse licenses from newspapers and magazines. In the old pre-Web days, a library or a business would call a publisher with a request to reprint something, and it could take weeks before a license or reprint would show up--if it showed up at all. Or, the material would simply be photocopied without permission. Now, after signing up for iCopyright's service and linking the publisher's content into the system, it takes a matter of moments. Publishers and users don't pay to use the service, but do give the company 30% of any copyright transaction. The Los Angeles Times has tripled licensing revenue since signing up, says Michael O'Donnell, iCopyright's president.
Or consider Intertrust Technologies Corp., a start-up in Santa Clara, Calif., that's a leader in the emerging field of so-called digital rights management technologies. The music industry is making a big bet that this technology will allow them to remain in control of music they sell online. Intertrust does this by wrapping the digital information in a secure box that comes with certain rules attached. Those rules are designed to control the use of and access to the files. "So long as the provider's rules are enforced, then it's not piracy," argues Ed Fish, executive vice-president of Intertrust. "It's a business model."
Even some companies that are using copyright law or patents against competitors are having a change of heart. Bezos eventually wrote an open letter on the Amazon.com site, stating that while he still believed the company's patents were innovative and necessary as defensive moves, he was now convinced the patent period should be shortened to three to five years. Shorter patents would also let new industries act faster on what they learn from patent disclosures, accelerating high-tech developments for a new era. That, rather than protecting specific players, is what patents and copyrights are supposed to be for.e.biz online
For a full transcript of interviews with Metallica's Lars Ulrich and rap activist Chuck D, visit ebiz.businessweek.com.By Timothy J. Mullaney and Spencer E. AnteReturn to top