Here we'll explore the nexus of legal rulings, Capitol Hill
policy-making, technical standards development, and technological
innovation that creates -- and will recreate -- the networked world as we
know it. Among the topics we'll touch on: intellectual property
conflicts, technical architecture and innovation, the evolution of
copyright, private vs. public interests in Net policy-making, lobbying
and the law, and more.
Disclaimer: the opinions expressed in this weblog are those of the authors and not of their respective institutions.
This isn't a core Copyfight story but I continue to be interested in business models.
Start with the classic economic understanding that most tickets to most live events are underpriced. Those of you, like me, who balk at paying 100 dollars and up for a concert probably think I've lost my mind, but bear with me. Theories of supply, demand, and markets say that if something is sold too cheaply someone will realize that and take advantage by buying at the lower price then turning around and re-selling the item at the higher price. In the live music business these people are called "scalpers". Depending on the jurisdiction and even the venue/concert rules scalping may be more or less legal. Sites like Stubhub don't make a big deal about this, but buried in their ToS is this language:
You agree to comply with all applicable local, state, federal and international laws, statutes and regulations regarding use of the Site and Services and the listing, selling, buying, and use of tickets and related passes. This includes, but is not limited to, laws pertaining to pricing your tickets.
That said, the trend nationally has been toward loosening laws on ticket reselling, even as scalpers have developed sophisticated strategies including automated bots and banks of humans to sweep up desirable tickets as soon as they appear. In economic terms, acts that price their tickets below "market" or below the most they could get, are leaving money on the table and the scalpers are picking that money up.
The problem with this isn't just economic, it's also cultural. Musical acts in particular thrive on having a wide and varied fan base, often grown by word of mouth and the connections that develop at live shows. If your friend tells you there's this great singer you have got to see, but your only way of getting in to hear her is to drop $250 for some scalped ticket you may be reluctant to do that. The artist loses out twice - once in that they aren't getting the extra money for that ticket and again when they lose the chance to attract a new fan.
NPR's Planet Money team spent some time with Kid Rock over his war on the scalpers. Kid Rock sings music designed to appeal to a blue-collar audience - exactly the kind of fan that would be shut out by tickets priced at whatever the market could bear. Yes, there are fans who will pay lots more for a Kid Rock show, but Kid Rock can't afford to cater just to them. Doing that would contradict the messages of his music, and frankly it offends his artistic sensibilities. As he says, he's in this business to make a lot of money but not to squeeze every possible dime out of every fan. So what to do?
In response to this situation, Kid Rock has deployed a variety of strategies. One is simply economic: he's flooding the supply side of the market. He'll do more shows and do shows in bigger venues in order to ensure that the supply of tickets is larger. That itself ought to drive down some prices but even then there are more and less desirable seats. The front seats always sell for more. Well, OK, if you pay for it, you ought to be the one picking it up. Using electronic ticketing, artists like Kid Rock (*) and their host venues can require people to show picture IDs and produce the credit cards used to secure the tickets. This effectively removes many of the routes ticket resellers use.
They can also deploy the same electronic tools that scalpers are using, but in reverse. Tickets for concerts can be priced more dynamically, somewhat like the way airline seats are priced. If certain nights aren't selling, the prices can be dropped. Shows in places or on nights that are likely to sell out can be pre-priced higher, but if sales are lagging the prices can be adjusted downward.
I think there are valuable lessons here. Live performance is a key part of many creative artists' business plans. Those performances need to bring in money AND grow the fan bases. They need to be sustainable AND meet the artists' aesthetics. Somewhere in the intersection of economics and culture lie answers and maybe Kid Rock has found one.
(*) I recently went to a show headlined by How To Destroy Angels, Trent Reznor's project/band with his wife. They offered seats to the NiN fan club using very similar terms. Our group had to enter together, show ID's, and couldn't use the "Will Call" facility at the club, in exchange for which we got the tickets at a discount off the general price.
This isn't particularly new - Lowery has been after Pandora for a while. The commenters on his blog have already taken him to task for a couple obfuscations - one being that he's obscuring the role of BMI in these low rates and another being that he's complaining about low rates paid to songwriters, while failing to mention that Pandora is also paying other royalties such as to the music's publishers. Lowery gets some of those revenues, and he doesn't appear to be angry at BMI for its role in setting up the royalty structures.
Unfortunately, this ranting back and forth is that Lowery has a valid challenge in his post: why isn't Pandora evolving its business model? (I asked a similar question last November.) Lowery compares Pandora's subscription-focused revenue model with few advertisements with the funding Sirius XM is trying to raise by selling much more advertising time as well as having mandatory subscription fees. Lowery doesn't note (but should have) that Sirius has taken significant steps to start business partnerships with companies like auto makers.
Regardless of the details, it's still a significant and fair critique that Pandora is choosing to work on trying to get rate structure changes while it does not appear to be evolving its business model or branching out its revenue sources. Regardless of how much money you think ought to go to Lowery and others, it's crucial for the survival of online streaming services that we see innovative and diligent work on creating profitable new business models.
Joseph G. Hadzima has an interesting advice column up on Forbes' site this week advising business leaders on how to value patents. Hadzima is a professory at MIT and among his jobs has been working with various start-ups spun out of MIT to determine just what valuation they should be placing on their intellectual property. These valuations matter when start-ups seek rounds of funding, or when companies are considering partnership or buy-out offers. For example, Google has been in the news several times in the past few years buying up patent portfolios to protect its businesses in areas such as mobile computing. Patent holders approached to sell or license their holdings want a way to value them, and of course buyers want to know what to pay.
We're seeing more emphasis placed on the patents that remain when companies collapse - some of the worst practices by this year's trolls are based around patents left after companies failed to commercialize on new ideas. Other IP is left over when an established company such as Polariod goes out of business.
Hadzima's idea is to evaluate both individual patents, and the total portfolio, particularly relative to the portfolios of likely competitors. He also touches on one of my favorite whipping topics, stating directly:
Frequent citations of prior art are an indicator that it is a good patent.
Yes, quite. Hadzima also has some advice that I wish more established patent-holders would follow: license generously, and wisely. He gives the example of Stanford University's handling of a basic gene-splicing patent: use of the patent required only a small up-front fee and further money only if a product based on the patent was successfully brought to market. By keeping entry costs low, Stanford was able to encourage widespread use. Rather than penalizing attempts to innovate, or people who incorporated ideas into standard practice, the license terms focused on sharing profits from new inventions.
My informal impression is that most patent-holders behave sensibly; it's just that some have become so egregiously trollish that they're blackening the entire idea. It's nice to read about a sensible success story for once.
(Readers should keep in mind that Samuels is an actual lawyer, whereas I am not. I happen to think I'm right but arguing against authority is always opening oneself to the "you're an idiot" response.)
To begin with, the areas of agreement: we agree that the Supreme Court wanted CAFC to reconsider Ultramercial's patent in light of the ruling in Mayo. We agree that patents ought not to apply to mere abstractions. We agree that patents should cover specific implementations, not general classes of procedures. And we agree that in light of all the above, the '545 patent was improperly issued.
But there the agreement ends. I, for example, would have rejected the '545 patent on the grounds that it cites zero non-patent prior art. This shows that the authors and the examiner did not review the relevant and extensive technical literature. Failing to do adequate prior art review should be a priori sufficient for total rejection. Samuels would have the patent invalidated on 101 abstractness grounds.
The problem with using 101 invalidation on any computer-related patent is that we don't have a good definition of "abstract." In computers, I can simulate any machine in software and likewise I can reduce any software to hardware. Take for example the latest cool machine announced by adafruit: a Bitcoin Miner device. Bitcoins have always been described as (and by) mathematical abstractions. They're numbers, one of the most abstract things we know. Creating (mining) them is done by running complex equations, which we also think of as abstract. But wait, what's that picture (copied above)? It's a piece of hardware - a machine - the least abstract thing in the patent world.
For Samuels to say that the Ultramercial patent is too abstract requires her to explain how it would still be abstract if I could buy a machine from adafruit that did what the patent describes. Sorry, it's not that easy.
Second, Samuels seems to think that the Supreme Court's rulings in Mayo and Myriad should make it obvious that CAFC got it wrong this time. Well, no. It's not that easy. As I wrote over a year ago, it appears that SCOTUS mixed up 101 and 103 reasoning in its Mayo decision. Perhaps Samuels can address the question of how Breyer's opinion successfully separates the two sections of the law, or how the opinion provides clear guidance on application of the "natural law" unpatentability principles. But she hasn't done so as far as i can tell. It's not that easy.
And I'm really sorry she mentions Myriad at all. As I blogged at the time, the commentary consensus is that SCOTUS got some basic science in that decision wrong. If they got the science wrong then what do we make of the opinions on which that flawed reasoning rests? Furthermore, the opinion is nominally unanimous, but in fact the raft of concurrences makes it clear that no more than two Justices could agree on any of the major principles.
Therefore, for Samuels to say that it was in any way obvious how CAFC should rule in Ultramercial is just grossly oversimplifying matters. I'm quite sure that the Federal Circuit judges could clearly articulate how they thought they were following the SCOTUS rulings which, so far as this non-lawyer/engineer/scientist/blogger can tell are not providing anything at all like clear and obvious guidance.
Oh, and one more thing Samuels and I agree on: SCOTUS is going to have to rule on Ultramercial directly. Whether they can manage to make things better by doing so is another area where we probably disagree.
About a week after its bizarre attempt to make the Xbox One as gamer-hostile as possible and in the face of a slew of criticism from all sides Microsoft has publicly climbed down from the ledge and said it now sees reason. In a news post on the Xbox.com site, the company announced a reversal of its previous policies requiring always-on Internet and doing away with its obstacles to used games - at least, used games with discs. Since gaming discs are going the way of the dodo that's not a huge change. The status of region-locking is less clear - the posting says you can "take your Xbox One anywhere you want" but the region lock was based on the company's hosted service Xbox Live not offering certain titles in certain countries. That appears still to be in place, in which case EU regulators may want to have a word with Redmond. Again.
Now comes SiDi, a technology that claims to be fighting copying but in fact is creating illegal works. Here's the deal: an e-book with SiDi (and please help me resist making jokes about inSiDious here) has been subtly changed. Words are replaced with equivalents, creating a kind of "watermark" for the e-book that renders it different from the original. If that watermarked version later finds its way out into the wild you know what the original source was. So far so good - in fact, Margaret Thatcher once used a similar technique to figure out who in her cabinet was leaking memos to the press.
However, unlike Ms. Thatcher, SiDi doesn't own the works it's distorting. In fact, what it is doing is creating a derivative work, and passing that derivative off as the original. Now it may not make a huge difference if you read a work where the author's word "unhealthy" is replaced by SiDi's "not healthy" but the law clearly gives the copyright holder the power to determine what changes are and are not permissible. Changes, even minor ones, can create a derivative work. And if you create an unauthorized derivative work, then you've committed a copyright violation.
Worse, if you create a derivative work and pass it off as the work of the original author, you've committed a fraud. What may seem to you or me to be a trivial change may in fact upset an author who has gone to significant trouble to shape the wording of, say, a particular character's dialog. That dialog helps the reader build a mental picture of the character, and the wording of the story sets the pace and flow - all of which we expect the author to control. If you've never watched an author and a copyeditor fight over seemingly trivial wording changes then this may not strike you as a big deal but I have, and trust me it matters. Authors care about the fine details of their craft and having some piece of software go in and arbitrarily change those fine details is a violation of both the spirit and the letter of almost every publishing contract I've seen.
In her column, Susan Lulgjuraj asks the question of whether we've gotten to the point where e-book copying is so widespread that we need yet another form of DRM to combat it. That presumes that this form of DRM will be any more effective than all the other forms, which is to say not at all. And it misses the most crucial question, which is why are we even contemplating something this stupid?
(Image above of Bến Tre - bonus points to anyone who can guess the relationship of that image to this story, without searching first.)
Pitched as a piece about income inequality, it takes off from a talk by Princeton economist Alan Krueger in which he argues that “The music industry is a microcosm of what is happening in the U.S. economy at large." More depressingly, it appears that the technology that ought to be democratizing and spreading wealth is instead contributing to this distortion. That, and simple luck.
Technology plays its part by spreading the most popular (and most produced and most solidly funded) material the most widely. You're simply more likely to be exposed to the already popular stuff because money buys the tech that gets it out there. As it always has, I think.
Luck comes in because of network effects. People will (despite their protestations to the contrary) tend to gravitate to things that appear popular. If you have the good fortune to get early downloads, early thumbs-up, and appear to break from the pack first you are going to gather more attention, more downloads, more likes and the spiral is going to build. Technology factors into that by making the entire system of downloading and rating more visible, which drives more herd behavior and so on.
Like in fashion there's no IP protection for comedy. You can't copyright a joke, and it's certainly true that many performers use each others' material. Sometimes that's conscious, sometimes it's accidental. The public may even hear about or know people who make a living writing comedy material for well-known humorists like David Letterman or Jon Stewart. However, this has led to what Oswalt identifies as a massive public misperception - that all comedians "steal" and that "nobody" writes their own material.
In fact, the majority of working comedians write, or try to write, their own humor. A comedian's value is a combination of the material and the delivery. Some people are good writers but lousy performers; some people can really hold an audience, but produce poor original material. But as in any other career the people who are bad at one thing either get better at it or they get out of the business. Maybe they hire writers, or pay for stage coaching, but either way the goal is for them to produce more and better original acts.
Along the way, though, they have to deal with the people Oswalt identifies as the thieves. People who scoop up another comedian's jokes wholesale, sometimes even to the point of copying entire segments of someone else's act and then passing it off as their own. Without the ability (or money) to protect their work, comedians often have no choice but to wait until the thieves flame out. If you're stealing someone else's material to help you move up eventually you're going to reach a level where you're expected to produce. If you don't have original material then you can't produce, and you flame out, much like any other person who has cheated their way through life.
It's an interesting way to think about illegal (or at least unwanted) copying: can we create situations in other areas where unwanted copying isn't policed by restrictive technologies (DRM) or by restrictive laws (CISPA/TPP), but contains within itself the seeds of its own demise?
Microsoft seems to be all about the DRM with its latest entry into the consumer market. It is now confirmed (here reddit dissects the official Xbox Twitter feed) that only 21 countries will be able to use the console on launch. Notably this "region coding" splits up the EU - most countries are in but some are out - and it also excludes Poland, the development home of The Witcher game series, a title Microsoft touted in its E3 launch presentation. Yes, that's right, the developers of this Xbox launch title will not be able to play the game they developed. I generally find it wise to assume that Microsoft are not stupid, but whatever their plan is, it's eluding me here. Sony was quick to announce that its competitive product, the PS4, would not be region-locked.
Probably the most surprising thing to me was that SCOTUS managed to craft a single unified opinion in Association for Molecular Pathology v. Myriad Genetics, Inc. Given the complexities at issue and the previous rulings from the Court, I expected another split decision. It's even odder that they issued a unanimous ruling that both sides see as a victory (though that may be lemonade-from-lemons for Myriad). My sense is that they did so by a combination of punting the hard issues - no method claims were adjudicated - and unfortunately through a lack of understanding of the science.
By "right" I refer to the idea that the decision could reflect a legal and social sense of what is the right thing to do with patents in biology. For example, Art Caplan has a short opinion piece up stating bluntly that "natural DNA" never should have been judged patentable. Allowing Myriad to hold patents on these specific genes led to a tight monopoly market where no one could bring out a competitive (and one hopes lower-priced) testing product. This exemplified the monopolistic and constricted outcome feared by people who argued that natural biology should not be patent-protected.
This sounds to me like the Court has finally come around to Breyer's view in which the validity of an intellectual property protection law or interpretation has to be done in light of its outcomes. When you make a regime that allows one company to monopolize all possible methods of testing you've done something wrong. When you create a way for multiple companies each to protect their competitive ways of testing you've done something right.
Now if they could only manage to ground that in good science.
Ball looks at the cost of Netflix producing original content, and in particular what do those costs pay back in terms of building Netflix's subscriber base. This is a natural follow-up to Netflix's recent restart of Arrested Development. The show built up a following while it was on Fox but those who still want more now go to Netflix to get it. Ball goes deep dive, calculating things like Netflix's cost-per-minute and then comparing the value of paying Netflix solely for a specific piece of content you want (like Arrested Development) versus paying for other kinds of specific desired content such as a first-run movie.
These are great numbers, but I think they fundamentally miss what's going on, as Felix Salmon analyzes in his blog post today. I don't think anyone calculates the cost-per-minute of an entertainment offer, even subconsciously. The question is really can I get what I want there, and how much am I paying for what I want? Sure, some of the ongoing wave of cord-cutting is due to people not wanting to pay for big packages in order to get the specific content they're interested in. But that's big-view stuff, not the numbers that Ball is analyzing.
Salmon makes three points I think are worth keeping in mind. One is that original content is not just there to draw new subscribers - it's also a way to keep current subscribers. Netflix suffers from tremendous subscriber churn and the cost of acquiring subscribers has to be high.
Two is that Netflix is essentially bent over a barrel by the Cartel right now. If they appear to be making more money, then the broadcasters just hike the license fees to siphon off that revenue. Ball notes that Netflix had to pay fees of over USD 1.3 billion (yes, billion-with-a-b) in just the first quarter of this year. And I'm sure those fees are going to go up. No matter how expensive it may be to produce original content Netflix can be sure that it alone has control over that expense and isn't going to turn around and find its costs have doubled next quarter because of someone's external decision.
Third and finally, Salmon argues that Netflix isn't playing a quarter-to-quarter or even year-long game. Here's the money quote:
[Netflix wants] to become HBO faster than HBO can become Netflix
Exactly. HBO, with its disastrous response to demand for Game of Thrones, showed how badly it misunderstands new media models. Netflix isn't exactly an agile start-up, but they have the potential to beat HBO at this game if the cable giant sits back and continues to do nothing. With a library of high-quality original (again, licensing-free) content on hand, Netflix will be in a much stronger position to keep customers engaged and paying those all-important subscription fees.
Of course, Apple claims that it was not in collusion and is calling various publishers' representatives to testify about that. Unfortunately for DOJ it sounds like their own witnesses - also from the publishing houses - are making Apple's case by agreeing that there was contention between Apple and the publishers over how e-books would be priced. It seems clear that everyone was out to destroy Amazon's 9.99 price barrier, but I'm not enough of a lawyer to know if that agreement alone will be sufficient to sustain the government's contention.
As Shara Tibken noted, the publishers are going to argue that they went to Apple more or less out of necessity. Amazon, in its turn, is going to claim that it was forced to do this or that by the big bad publishers and you know what? The whole lot of them remind me entirely too much of misbehaving kindergartners. I have absolutely no sympathy for any of the parties in this mess.
This isn't really a core Copyfight story but it's too good to pass up: Fuzz Hogan for Zocalo explaining why CNN can't tell good stories, yet has rising profits year over year. We've been hammering at the idea that old business models are disintegrating and media giants need to evolve to survive and guess what? CNN has done just that. It's set up a system that gets it a nice chunk of change by producing crap, but crap that gets used and reused and paid for. Good stories are nice but if they don't bring in the money they won't happen.
There's a great big glob of information officially released by MSFT about its next-gen console, dubbed Xbox One. The nanny features are extensive, particularly for gaming. Your console has to be able to verify legitimacy with home base at least daily or you get locked out of all your games. If you sign into your Xbox Live account from any other console it checks once per hour. So no rooting, no hacked games, and no games that aren't MSFT-approved. The definition of what's "approved" changes whenever MSFT decides it should and if it doesn't like what you're doing, it'll remotely brick your hardware for gaming. And gods help you if Microsoft's authentication servers happen to hiccup when your box phones home to authenticate.
Wu suggests the use of consumer-protection laws, specifically targeting unfair or deceptive practices. The definition of "unfair" varies wildly since all states and the Feds have such laws. Wu notes also that some NPEs have misrepresented "...the strength of their patents, the extent of other settlements, and their actual willingness to litigate." I'm not sure what it means to misrepresent the "strength" of a patent - presumably Wu is referring to the scope of valid claims or the applicability of the claims to the supposed infringement. Certainly deliberate misrepresentation should be treated as fraud, but I'm not sure how hard it would be to prove deliberate misrepresentation.
Settlements and willingness to litigate, though, are clearly outside the bounds of these laws. I recommend the Planet Money podcast from last week on the patent being asserted against podcasting in which Zoe Chase gives a good view of the "game" played around all civil legal actions. Knowing whether or not someone else will carry through on a threat to sue is a standard feature of this sort of brinksmanship everywhere, not just patents.
Wu then suggests using unfair-competition laws against NPEs who aggregate patents. The idea that assembling a patent portfolio might be a Sherman Act violation when that portfolio is used to stop people from operating a business is certainly a novel theory. I know even less about antitrust law than I do about IP law, but I'm inherently dubious. On the other hand, the RICO laws have been used in ways far beyond their original targets so perhaps the courts will see fit to extend the scope of the Sherman or Clayton Acts in this way.
Wu also suggests that the FTC get into the act, through its power to manage competition and prevent monopolies. Section 5, which Wu points to, seems to target unfair or deceptive practices. This is interesting in that it might be a way to rule out an entire style of business practices. As we've discussed in the past, the use of patents for offensive versus defensive purposes is a matter of the owner's choice; however, the FTC has the power to rule that certain offensive uses of patents are sufficiently anticompetitive as to be illegal. I would be very interested to see the FTC hold hearings on this and air some expert opinions. Right now they're gathering comments and who knows what will follow. That said, any move by the Feds to change how patents are able to be used would almost certainly be challenged in the courts in cases that would drag on for years.
Unfortunately, although Wu notes that patents have been issued with "extreme leniency" (which is quite some understatement) he doesn't advocate for the kinds of changes necessary to prevent patent offal in the first place. Whether or not you like Wu's suggested remedies they are just that - remedies. Far better to fix the problem than clean up the mess afterward.
The place where I agree with Wu most strongly is where he argues that the reasons arrayed against these arguments are not reasons for inaction. Instead they call for proceeding with caution. Patent practices - both issuance and use - are in severe need of reform to keep up with new business practices and changing technology.