Paper to be presented at the DRUID Summer Conference on "Industrial Dynamics of the New and Old Economy - who is embracing whom?" Copenhagen/Elsinore 6-8 June 2002 Theme E: New Competition Policies and Intellectual Property Rights
THE PERFORMANCE OF THE IPR SYSTEM IN THE NEW ECONOMY: IMPLICATIONS FOR DIGITAL INVENTIONS AND BUSINESS METHODS1 Birgitte Andersen2 Department of Management - Birkbeck - University of London Malet Street - Bloomsbury - LONDON, WC1E 7HX Tel: +44 (0) 207 631 6848 / Fax: +44 (0) 207 631 6769 / EMAIL:
[email protected]
8th May 2002 Abstract: The aim of this paper is to evaluate the relationship between property rights on business methods and computer implemented inventions on the one hand, and the social and economic effects of such on the other hand. Although the rationales for IPR regimes (i.e. why we have them) have been greatly discussed, the existing socio-legal or economic literature on IPRs has largely ignored the dynamic effects (economic or social) of the exploitation of IPRs on the general profile of corporate power, or the accountability of that power. First when we understand this relationship, we will be able to design the most appropriate intellectual property right regime in relation to such ideas. The European Union (EU)’s hearing on IPR protection of business methods and computer implemented inventions has been overshadowed by defining alternative classifications of business methods for patent protection. This paper argues we should instead focus on the nature and form of such legislation. It is here the challenge for IPR policy resides, and such discussion has been largely ignored. It is argued in the paper how policy must use IPR legislation very cautiously in the new economy of ‘increasing returns to scale and adaptation’. Also, a weaker IPR protection is suggested, including an IPR system enforcing (by law) collaboration around an open source architecture on digital inventions and business methods. Key words: Intellectual property rights (IPRs) and IPR policy, Business methods and computer implemented inventions, Forms of competition, IPR strategy, New economy. JEL: Will be provided
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A report version of this paper was prepared for “Round Table on the Patentability of Computer Implemented Inventions” organized by The Standing Committee of Research and Industrial Development of the Danish Parliament, Christiansborg, Copenhagen, February 20th 2002. The research in this paper also draws upon interviews for the EU fifth framework ‘Patents and Services’ project in which I participate. 2 Dr Birgitte Andersen is Senior Lecturer in the Department of Management at Birkbeck – University of London, and she is Director for the E-commerce Programme that runs across School of Management and Organizational Psychology, School of Economics, Mathematics and Statistics, and School of Computer Science and Information Systems.
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1. AIM OF PAPER The Commission of the European Union (EU) has recently made a hearing across the Member States, to get their opinions regarding policy on intellectual property protection of business methods and computer implemented inventions (EU 2002). The problem formulation is essentially about if the EU should be confined to harmonising the relevant laws of the Member States on the patentability of business methods on the basis of the status quo as defined by the jurisprudence (i.e. as it is now in most member states of the EU) or if the EU should extent the scope of application of the Directive as in the US or beyond. The specific formulation of the different options are listed in Section 2. However, I would argue that before we can design any appropriate policy on such matters we need to know the institutional issues regarding how IPRs on business methods and computer implemented inventions change the ‘rules of the game’ for, especially, many knowledge based service sectors. Here, I refer in particular to how IPRs change the nature of competition to which corporate strategy and royalty management have to respond. There are many important issues to address in this respect. Also, we cannot just assume that an IPR system is the best way of organising inventive activity at the macro economic level. Hence, the rationale of the IPR system and its’ relationship with corporate strategy is a central area which requires illumination. The existing socio-legal or economic literature on IPRs has largely ignored the dynamic (e.g. social and economic) effects of the exploitation of IPRs on the general profile of corporate power, or the accountability of that power, nationally or internationally (Andersen and Macmillan, forthcoming). The industry concentration around IPR based industries is notable (see e.g. pharmaceuticals, software and music), but it is not entirely understood to what extent the IPRs are responsible for such concentration. More information is needed for policy makers regarding an understanding of the dynamics and the performance of IPR systems. What are the socio-economic effects of such IPR power-bases? The aim of this paper is to discuss the relationship between property rights on business methods and computer implemented inventions on the one hand, and the social and economic effects of such on the other hand. First when we understand this relationship, we will be able to design the most appropriate intellectual property right regime in relation to such ideas. I believe that in order to understand the relationship between IPR legislation and the social and economic effects of such, we need to understand how IPRs on business methods and digital ideas interact with forms of competition as well as corporate incentives and strategies surrounding such intangible ideas when protected by IPRs. Also, as IPR systems are not neutral but set ‘the rules of the game’ in which players interact, it is essential to address the economic and social effects of IPRs on business methods and digital ideas in relation to the rationales of IPR systems.
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1.1. Outline and contribution of paper Section 2 sketches the problem in a historical context. It provides some background information regarding the increasing importance of intellectual capital as well as outlines the problems regarding IPR policy on business methods and computer implemented inventions. In Section 3, the paper sets out to explain how IPR regimes are extremely complex systems, with strong moral and ethical rationales (including human rights, business and consumer ethics) and strong economic rationales (including incentives to creativity, increased competition and more formal organisation of science and technology at the national level). The problem of the rationales of the IPR system is also discussed in the context of the performance of the IPR system in real life, including the social and economic effects of such. In the subsequent sections it is illustrated how IPR systems are not neutral but set ‘the rules of the game’ in which individuals and organisations interact, and in which corporate leaders and stakeholders are shaped and technological trajectories selected or reinforced. The paper therefore argues and concludes in Section 5 that the rationales of the IPR system become very vital and should be addressed at the political level. With respect to the un-neutral nature of IPR systems, we need to gain a better understanding of the dynamics of such an innovation system and its interaction with the competitive forces in its socio-economic surroundings. What difference does it make? In Section 4, the paper illustrates how the new form of competition in the new intangible knowledge based service economy is faced by increasing returns to scale and adaptation and lock-in, due to (i) the intangible nature of knowledge, digital ideas and business methods, (ii) large set-up of fixed costs, (iii) learning effects, (iv) network externalities, (v) technological webs and (vi) adaptive expectations imprisoning informational increasing returns. Thus, the paper stresses that it is the creation of institutions and infrastructures from social interaction that is central to why some technologies win the competitive game and why some corporations become leading. (Such characteristics are very different from the nature of dynamics in the old manufacturing and agricultural economy faced by decreasing return to scale.). Thus, the new economy of increasing returns to scale and adaptation has found a new source of profitability or value in IPRs. Section 4 also illustrates how the IPRs regime can encourage corporate strategies to create fast log-in into technological and institutional frameworks in order to control or protect market advantages in stead of searching for optimal solutions and thereby increase overall welfare. That is, IPR in ‘increasing return’-induced lock-in situations can (i) enforce creation of sub-optical technological and economic solutions, (ii) provide a platform for unfair exploitation of individuals and sectors of the economy, that subsequently have to adapt to established technological trajectories or paradigms, and (iii) create major corporate concentration in industries rather than competition with many players. In this context, the paper concludes in Section 5 that that since the ‘increasing return to scale and adaptation’-nature of the new economy is very different from the
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‘diminishing return to scale’ of the old economy, a ‘weaker IPR protection policy’ might be essential. Section 4 also discusses the practical aspects of enforcing intellectual property rights on computer implemented inventions and business methods. A basic argument is that although a rationale or an objective of IPRs might be to (i) strengthen the sectoral innovation system, (ii) improve financial corporate performance, (iii) enhance competition and corporate competitiveness, (iv) protect market advantages; the ownership of an IPR portfolio is only worth something if it is ‘managed properly’ at both the firm, sectoral and national level. The problem is not merely that unused IPRs are not worth anything or that we need to develop IPRs in ‘promising’ fast growing technological areas (which was constantly stressed in the old economy), - but that, - as IPRs have become important as an income generator through licensing, we need to understand and be able to manage the complex mechanism regarding the way rent is generated and captured from value-driven intellectual capital. It must be recognized that while the IPR regime may underpin an industry, the enforcement of the system of royalty flows between IPR providers, users and right-holders is by no means automatic, but needs to be monitored and administered through a complex institutional machinery. Such practical considerations are even more complex with IPRs on business methods and digital inventions where it has become almost impossible to control copying and flow. The paper also concludes in Section 5 that the IPR regime, for all its flaws, is vital to modern IPR-based industries specialising in value driven intellectual capital, especially as new information technology is associated with radically reduced costs of reproduction and distribution. However, unless firms or society develop institutions to match and manage the new technological and business opportunities, we may be unable to fully realise the benefits from the creativity and talents of people.
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2. BACKGROUND 2.1 The increasing importance of Intellectual Capital (IC) as a competitive asset With the emergence of the knowledge based intangible service economy a new form of competition has emerged in which intellectual assets rather than physical assets are the principal sources for wealth creation and competitive advantages. The battles are not for control of raw materials but for property rights to new ideas and innovations. Even the asset-bases of the manufacturing firms have also shifted dramatically during the last 20 years. 20 years ago physical assets-bases constituted about 60% of companies’ market value. Today, they constitute about 30%. About 70% of companies’ biggest assets today are intangibles such as Intellectual Capital (IC) like patents, copyrights and trademarks. Using the ‘market to book value’ of intellectual capital in which everything left in the market value after accounting for fixed assets is regarded as Intellectual Capital [IC = Market value – Book Value], we see how Microsoft is worth 85.5 bill£ on the market but has a book value on 6.9bill£: Hence, IC for Microsoft = 85.5 – 6.9 = 78.6£. (Stewart 1998).3 Patents have been used by companies to communicate their asset picture and earnings potential to investors and the financial community. Even Wall Street is slowly waking up to the asset value of patents. It has been identified how companies whose patents were more frequently cited in the patents of other companies saw their stock prices rise far more rapidly than those of companies with less frequently cited patents. Stock analysts have begun looking at companies’ IP capabilities when evaluating earnings potential and competitive prospects. Furthermore, patent infringement suits can even change the stock value prices of firms overnight. (Rivette and Kline, 2000) Whereas IPRs in the old manufacturing paradigm were used to protect or monopolise innovations embodied in products and production lines (machines and process innovations), they are in the new service paradigm mainly used as an aggressive mean for revenue generation through licensing. This way of doing business has become extremely topical for digital ideas such as software, music, some and business methods etc., which are easily digitally produced, exchanged and consumed. However, this new way of capturing rent is also adapted by established knowledge driven or science based manufacturing firms that are currently diffusing their production lines in order to specialise in value driven intellectual capital, which is where the money is to be made in the future. Also, in the new knowledge based service economy the true source of a company’s competitive advantage lies not merely in its products or services, but in its innovative way of doing business (which is a typical scope of a dot.com firm). Hence, the patentability of business methods patents has become a central area of attention for e3
Although very useful, it should be mentioned that the ‘market to book value’ is a very rough and not perfect measure: MARKET VALUE PROBLEM: Stock market is volatile and responds to factors entirely outside control of management: E.g. macro-economic instability is reflected in the market value of the firm, and hence also the IC value. BOOK VALUE PROBLEM: Assets are deliberate ‘depreciated’ faster than the ‘true depreciation’: Reason is tax advantages and in order to encourage investment. An under-evaluation of book value will over evaluate the IC value given, IC = Market value – Book Value
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business sectors. In this context, it is important to stress that although the operation of business methods sometimes might be software based, the idea of the method itself may not be software based. Hence, in a conceptual context we have to distinguish between a software patent and a patent on a business method in the narrow sense. In this respect, a very central subject of debate when it comes to the patentability of business methods emerges. That is, the opportunities for obtaining business method patents are greater in the US than in either Europe and Japan. This is due to (i) different classifications / definitions of business methods and (ii) different requirements of degree of novelty (EU and Japan: has to be novel and non-obvious vs. US apparently allows patents on trivial inventions as long as they are ‘useful’.). In this connection, the European Commission is currently assessing their policy on IPR protection of ‘business methods’ which is currently in most member states protected in the same way as computer programmes / software. That is, a business method in most European countries can (as software / computer programming) only obtain patent protection if it involves a technical progress idea. Otherwise, the software or the computer programme codes are protected via copyright law. For illustration of this I first list how computer programmes are protected and then list the different options the European Commission (EC) faces regarding protection of business methods ideas. 2.1.1 Protection of computer programmes To give an example of when computer programmes are protected via patent or copyright law, let us focus on a software programme developed to operate a machine painting cars. Let us first imagine that a programme was developed from analysing the movements of a real person painting a car, and that the software programme now can operate a machine doing the same job. As the programme idea was regarded a technical progress it could obtain a patent, and the written source codes in the programme could be protected by copyright law. Then someone invented a new programme which from analysing the surface of the car could calculate an optimal way of painting it (which was more optimal than the programme developed from simulated human movements as humans do not calculate as computers). Subsequently a more optimal software programme operating the machine painting the car was developed. Also here the idea was of technical progress and could obtain a patent, and the written source codes could be protected by copyright law. Now let us imagine that someone could write a programme that is different from the one just invented but that it can do the same job. However, unless the new programme is more efficient (e.g. in terms of speed and quality) it will not be able to be protected by patent law, as the technical progress idea is the same (i.e. not novel and non-obvious). Yet, the new programme can still obtain a copyright on the written source codes as they are different from the other computer implemented ideas. Hence, a software patent protects the technical progress idea, whereas the source codes within the programme are protected by copyright law. However, this way of protecting computer programmes has not always been like the current legislation. At first, in the 1960s-1980s, software programmes were mainly protected via copyright law. However, as reverse engineering is easy for digital
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products, and as copyright law has a very weak or no criteria for novelty on an idea in comparison to patent law (see Andersen and Howells 2000), information technology (IT) firms like IBM experienced that copyright law was not enough to protect their inventions or ideas. E.g. if IBM invested 300 human-years to develop an idea in the form of a digital product it could be ‘reversed engineered’ by the Japanese in 10 minutes and such type of behaviour happened (IBM 2002). Therefore the patent protection on the idea was considered as essential for both large and small IT firms who are willing to invest in ideas. 2.1.2 Protection of business methods As we are well aware, companies must focus on protecting the technologies (e.g. software) that give their products and services an advantage over their competitors. But what if the true source of a company’s competitive advantage lies not in its products or services but in its innovative way of doing business (i.e. its businessmethod)? This is the particular problem faced by e-commerce and many firms going on-line. Examples (Rivette and Kline, 2000): • Dell’s computer’s advantages lie not in its computers, but in its system for selling (“build to order”-direct sales business model), distributing and providing after sale support. Dell has secured 42 issued and pending patents on its innovative business model. The patents cover not only the customer online ordering system, but also the way the ordering system is integrated with Dell’s manufacturing, inventory, distribution and customer service operation. • Amazon.com received a patent for their “one-click” system for processing customer orders. (Competition against Barnes and Noble) • Priceline.com got the “name your own price” auction patent Patents on business methods are not only a source for royalty generation, but also a way of protecting online market advantages. Business methods are becoming important for service firms, especially in e-commerce, and we have to understand their role in the new form for competition in the new economy. However, although the operation of business methods may be software based, the idea of the method itself is not software based. Hence, conceptually, we have to distinguish between a software patent and a patent on a business method. The EU has made a hearing across the Member States, to get their opinions regarding policy on intellectual property protection of business methods and computer implemented inventions. The problem formulation is essentially about if the EU should be confined to harmonising the relevant laws of the Member States on the patentability of business methods on the basis of the status quo as defined by the jurisprudence (as it is now in most member states of the EU) or if the EU should extent the scope of application of the Directive as in the US or beyond. That is, we got three way in which business methods can patented: •
Option 1: As currently in most European countries and Japan: A business process can be patented if it reflects a technical advancement. In this sense, it is protected as software and computer programs (Criteria: The digital idea 7
•
•
embedded in the business method has to be new and inventive; - i.e. novel and non-obvious) Option 2: As currently in the US: Business methods can be patented as long as they are in ‘the technological arts’; - that is, the business methods may not necessarily be of technical character, but it needs to be implemented via computers/software to get the protection. (This meets UN’s definition of technology: ‘a combination of equipment and knowledge’ and so to be in line with the basic patent law principle (EU 2002). (Criteria: The business method idea has to be useful, concrete and tangible results has to be provided) Option 3: There should be no technical or technological restrictions on the patentability of business methods: Any new idea of doing business (i.e. business method) should be able to be patented (Criteria: The business method idea has to be useful and concrete).
It follows that Amazon.com could not have obtained their patent for their ‘one-click system’ in Europe under current legislation in most member states, as this invention based upon a new way of doing business does not involve technical progress, although it is implemented via computers and software. Which definition is best for harmonization of intellectual property protection is difficult to say. The European Commission is clearly concerned with the legal matters. Most experts would say that Option 3 goes beyond the basic principles of patent law, which is based upon a science based principle of technical or technological character. However, when discussing the different options there is ‘no conceptual reason’ for that a business methods need to be technical or technological implemented. Why should there? The technical or technological criteria are very manufacturing and tangible economy based and do not match the new intangible economy. Also, - should the IPR system only protect science based technical or technological knowledge? Isn’t that ancient in the new knowledge based service economy embracing a variety of new types of knowledge? However, many independent experts as well as the software industry (IBM 2002) are totally against a broad definition of business methods (i.e. Option 3). That is, a too broad definition will not be operational in practice. Without any technical criteria it is very difficult to judge an eligible criteria for granting a patents (that it, when is it novel and un-obvious). These are indeed also the problems often raised against Option 2. That is; - even, if in principle we would support the US definition – is it practical possible? – What are the novelty criteria, and would we end up patenting too many trivial inventions – so the system becomes inefficient? These are the concerns often raised over the US system. However, many knowledge based firms (from finance, insurance, other business services, etc.) operating in the EU would certainly argue for implementing the US system in the EU. As argued by Navision (Navision 2002), many of their inventions regarding new ways of doing business are very resource demanding and therefore need protection. Also, the competitive advantages from many of their inventions is in the form the way they do their business (their business methods), and there is no reason way such ideas should result in a technical progress, although they are 8
implemented via technology. A different matter is that with the technical progress constraint on the legal protection of business methods, this place many knowledge based business services in unfair competition against software firms. Finally, in reality, there is not a clear line between, (i) when a business method is a technical advancement in itself, and when (ii) the method is of non-technical character but still an invention in technological art as it uses computers/software to be implemented. Hence, many computer-implemented business methods inventions implemented via computers and software and patented in the US can be argued to be of a sufficient technical character to be patented in Europe and in Japan. (EU 2002). What is evident is that we are dealing with many complex issues. However, I believe that the European Commission (EC) is too focused on the definitions of the business process with respect to when it is eligible for a patent. As mentioned in the introduction, it is difficult to discuss or design any appropriate policy on such matters with out understanding how IPRs change the nature of competition to which corporate strategy and royalty management have to respond. Also, we cannot just assume that an IPR system is the best way of organising inventive activity at the macro economic level, and the socio-legal literature have not really dealt with the social and economic effects of such. In this respect, the rationales of an IPR system are central and should be revisited. Why do we an IPR regime (see Section 3)? Does it make the difference to which it has been designed (Questioned / listed reservations about in Section 3). Or, does other economic and technological effects and social constraints come into play (see Sections 4 and 5)?
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3. THE IPR CONTEXT 3.1. Definitions of IPRs IPRs came about as a natural evolution from property rights on land, capital and labour. Intellectual property rights are extremely important because they present the legal mechanism for protecting (or enhancing monopoly over) many corporate assets. Intellectual property is intangible as opposed to tangible property (property of land, labour, capital etc.). It includes a protection of exploitation of knowledge embodied in • new ideas (mainly patents, trade secrets and copyrights) • product and process innovations (mainly patents, trade secrets and copyrights) or related to • symbolic material (mainly copyrights and trademarks) • creative effort (mainly copyrights) That is, the exploitation of knowledge embodied in product and process innovations, new ideas, or related to intangible assets and symbolic material, is in most mature economies protected through the use of IPRs. IPR instruments differ considerably in history and precise intent, and in mode of operation. The main IPR measures used, in studies of innovation for example, are patents designed to protect the inventor from exploitation of his or her knowledge embodied in, mainly industrial, product and process inventions. In the new economy patents are also obtained in order for firms to control and capture rent from the way in which their intellectual ideas may be exploited through licensing and other agreements (see Section 2.1). Another IPR instrument is copyright, which provides rights to the creators of certain kinds of mainly symbolic material, enabling them to control the various ways in which their symbolic ideas may be exploited. At an early stage of intellectual property protection of software and computer programmes, copyrights were the preferred form for protection. However, as we discussed in the above Section ? this way of protection was not sufficient due to the weak novelty criteria of copyrights on ideas (compared to patents) combined with the easy reversed engineering on digital ideas. Among the several other instruments that are in use, I should mention in particular trademarks, which relate to any word, name, symbol or device that is used in trade with goods to indicate the source or origin of the goods and to distinguish them from the goods of others. The use of brands has experienced new break-through with the emergence of the Internet. For newly established artists, the Internet represents the opportunity to ‘speak’ directly to consumers through personal branding. Finally, Internet domain names have become a matter for concern. “A variation of the use of trademarks that has arisen specifically with the Internet is the Domain Name System, which enables users at different addresses to connect with each other. Internet domain names are today registered by a number of organizations certified by ICANN (Internet Corporation for Assigned Names and Numbers). Only one name can be registered under each top-level domain (.com, .org, .net, and so forth)” (Davis 2002). In interview with Carlton PLC in London (the largest English language movie producer outside Hollywood and owner to ITV) they highlighted that one of the 10
largest current problems in the IPR business is that in the UK and US, domains can be registered by anybody whether they are 'right-holder' or not. This causes disputes, which can be resolved in courts or, in the US through an ICANN arbitration (see www.icann.org). Both are expensive remedies. However, in some territories you cannot register that territories Internet domain names unless you have a legitimate ‘right’ or claim to that domain - i.e. a company name or trademark holder. It is understood that France operates on this basis. Carlton PLC supports the French system as it is more fair (e.g. you cannot just call your domain name 'Harrods Department Store' if you are not the trademark holder of Harrods Department Store, or 'free jeans' if you are not associated with that, or a name of a pop group or movie if you are not associated with that etc.), and also, the French system is cheaper. (The interview I conducted formed part of the Patent and Services EU project) Davis (2002) argues that “… since it is so easy and inexpensive to register domain names, with no requirement for use [in the US and UK system, - ed.], many firms and individuals initially bought up the domain names of larger firms (or simply potentially attractive names) and offered to sell them to the highest bidder, a practice known as “domain name grabbing.” This practice was encouraged by the appearance of auction sites on the Internet to facilitate the process”. The central issue is that “Under trademark law, firms register their names or sign for a particular class of goods. Other firms may use the same mark for a different class of goods, without infringing the original mark. Under the Domain Name System, only one rights holder can possess the name to a particular domain (irregardless of how many firms may be entitled to use the same trademark in their respective classes)” (Davis 2002).
3.2 The rationales of IPRs: Why we have IPRs. IPR regimes are extremely complex systems, with strong moral and ethical rationales (including human rights, business and consumer ethics) and strong economic rationales (including incentives to creativity, increased competition and more formal organisation of science and technology at the national level); see Figure 1 for an overview. 3.2.1 The rationales of IPRs in national contexts The institutional, legal and technical framework may affect the formation and operation of sectoral systems of innovation, and these differ significantly across countries. E.g. it could be argued that patents and trademark systems in the US, as well as the entire IPR system in the UK, illustrate an overall economic rationale being allocated under the Department of Commerce and Department of Trade and Industry, respectively. However, the US copyright system is administered by the Library of Congress, and the entire IPR system of France by the Department of Culture, reflect more of a historical moral and ethical rationale for protection of intellectual creativity. Moreover, that Germany’s Department of Justice administers its IPR system, suggests a moral and ethical rationale based on ‘rights’, - and so forth. These major differences between countries demonstrate the complicated lineage of IPR systems, their varying relations to national culture, and, perhaps, cast light on variations in the national systems of innovation.
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Figure 1. Why do we have IPRs?: The Rationale for IPR Systems Moral rationales
Economic investment rationale
Economic rationale of organising science, technology and creativity
Human rights:
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Business ethics:
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Incentives to creativity:
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Market creation: Increased competition:
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Order:
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Increased information and spillover:
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Increased information and better advice:
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Uniformity:
•
•
The law should provide remedies against those who appropriate ideas of others, and a person who has devoted time and effort to create something has a right to claim the thing as his or her own, and also has a right to obtain some reward to all his work. IPRs function as a safeguard for consumers against confusion of products and quality as well as deception in the marketplace (this indeed applies mostly to trademarks). IPRs provide the prospect of reward, which in turn encourages creative and technological advance by providing increased incentives to invent, and invest in and further develop new ideas. Efficient IPR protection allows profit oriented firms to enter (or develop) an industry or market. IPR helps to cover the fixed costs of inventing and producing a new product as well as protecting against new marked entry. This may stimulate a creative dynamic environment as well as strengthen and broaden continuous innovators. It has been commonly been argued that the prizes of industrial and commercial leadership will fall to the nation which organises its scientific forces most effectively. Although this view was mainly raised with respect to establishing scientific laboratories, but it is here suggested that it also applies to an adequate science and technology system organised at the nation level. IPRs facilitate the world-wide development and sharing of new technologies and creative efforts. Patents and copyrights, when filed, provide immediate information to rivals who can incorporate such into their own knowledge bases even though they cannot make direct commercial use of it. This might create a more coherent technological and industrial development, faster spill-over in knowledge and creative efforts and technological progress which strengthens the national or global economy. An intellectual property system also offers information concerning structural changes in technological development as well as technological capabilities of industry and sectors, allowing governments’ to be more effectively advised on science and technology policy matters. A national system brings in national uniformity (as opposed to regional differences in IPR legislation). This makes it possible to (or seeks to) promote cross-country trade in IPRs and international integration of science, technology and creative efforts, stimulating prosperity world-wide.
Source: Revised from Andersen (2001)
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The situation is more complex than this, since all systems or regimes are dynamic and undergoing differential rates of change and direction. However, within the context of patenting (as opposed to copyrights) there has been a strong shift towards international harmonisation of patenting systems, although full global harmonisation of patenting systems is still a long way off (Carey 1994) 3.3. The rationales of IPRs as ‘visions’ versus understanding the social and economic effects of such power bases: Understanding the complexity of the IPRcontext Hence, with respect to the rationales of IPRs (see Figure 1) most mature economies have great incentives to protect their great ideas or intellectual capital via an IPR regime. We have some ‘visions’ about why issuing IPRs is the best way in which we can develop or improve the economy and our society morally, economic and technological wise. However, visions are not enough! It is important to highlight that we do not really know the social and economic effects of IPRs, and also we cannot take the effectiveness of any IPR regime for granted. The IPR legal regimes are socially constructed and there is currently not demonstrated any direct link between IPR and welfare. On the contrary, in a very captivating paper Aboites and Cimoli (2001) document how the Trade Related Aspects of Intellectual Property Rights (TRIPS) framework does not promote and diffuse innovation in the Mexican innovation system, but rather have the adverse effect. The lessons from Mexico illustrate how imperfect competition underpin IPR based industries, and in particular how major Trans-National Corporations (TNCs) use patents to block competition. Although these lessons are different from what is addressed in this paper, they do confirm complexity surrounding IPR systems. In a similar context; - a session [Music Industry Workshop] I participated in at the 2001 UN LDC-III Conference discussed to what extent the original emergence of the so-called big five - Warner Music, Sony Music, Universal, BMG and EMI – were the outcome of the ‘natural’ market forces in the IPR based music industry, or to what extent they were a reflection of market failure shaped from the interactive outcome of all the economic, social and political factors involved in the innovation and economic system. As illustrated in Figure 2, IPRs actively enter the market economy, corporate strategy is formed around IPRs, and the value of them also depends on quality of royalty management. Thus, what is really happening in the machine of the economy and its firms is very complex and there are many uninformed economic, political and social issues to address:
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Figure 2: The IPR machinery
IPR VISIO N S: •M oralrationales •Econom ic investm ent rationales •Econom ic rationales of organising science and technology
IPR LEG AL R EG IM ES: IR P legislation Property law C ontractlaw C om petition / m onopoly law Etc..
EC O N O M IC , PO LITIC AL & SO C IAL ISSU ES
TH E M AR KET EC O N O M Y •C om petition, •Trade, •Innovation system s •Accountability
O ptim al technologicalsolutions?
C O R PO R ATE IPR STR ATEG Y
‘Perfect’com petition w ith m any players?
R O YALTY M AN AG EM EN T •atthe firm , •sectoraland •nationallevel
O ptim aleconom ic grow th? O ptim alw elfare?
In its socially constructed element, the study of IPRs covers a diverse range of subjects, disciplines and legal regimes (Torremans, 1998; Cornish, 1999). As such it includes a range of legal areas, such as property, contract and competition law, as well as involving a wide spectrum of economic, political and social issues relating to, for example, trade, monopoly, competition and accountability. Also, patents, trademarks and copyrights are not just legal matters best left for corporate attorneys, - but it is the truly strategic elements CEOs (chief executive officers) need to concentrate on in their competitive warfare. Hence, in order to make the IPR system work as the basis of domestic capacity building in relation to industrial development and competitiveness, it must be understood in the context of a range of factors that involve complementary knowledge sources regarding legal regulation, economic issues, matters of business management and strategy, as well as a broad range of political, social and development issues. The IPR regime also involves other institutions beyond the legal norms, such as royalty collecting societies that help to police, enforce, monitor and administer IPRs. Such bodies collecting and distributing royalties are often central agents standing halfway between the legal and financial systems, and cover both the national institutional and sectoral aspects of the IPR-based industries. Such collecting societies are not just the public bodies enforcing the audio-visual copy-right industry (from which they are most well known), but firms and corporate networks have also organised their own private societies. This is especially around digital technologies and applications. (See e.g. www.mpegla.com regarding digital video systems) The policing aspect of collecting societies are important due to the low cost of (re)producing a digital idea (even if attached to an IPR) which means that its market 14
can be uncertain and fragile, quickly undermined by copying. This makes any investments in activities that rely heavily on ideas and other intangible assets inherently risky (Landes and Posner, 1989). The threat is particularly apparent with software and cultural products (such as a sound recording or a film), where the investments made in establishing and promoting the product are very specific, and where short product cycles means profitablity relies on explosive but ephemeral market growth. Most analyses of software and digital as well as cultural industries have focussed attention on the threat to their profitability from free-riding, or the difficulties in managing transaction costs, which can be particularly high when intangible resources are used extensively in the production process. Hence, although software or a business method idea in itself is to a great extent based upon specialised knowledge and talent that needs protection, you need a whole range of interdisciplinary knowledge sources of specialised skills when transferring it into commercial use for adaptation and appropriation for economic growth and prosperity. In order to shed light on the economic and social effects of IPR we will now look more closely at the nature of competition and corporate strategies surrounding IPRs.
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4. COMPETITION IN THE NEW ECONOMY 4.1. IPR for innovation (to protect / monopolise production processes) vs. IPR for appropriation (to diffuse production process ideas for royalty generation) With the emergence of the new economy we have seen a paradigm change in which firms have discovered new value in patents. A corporate challenge in the new economy is about figuring out how to unlock the hidden power of patents; not only as a legal instrument to protect innovations embodied in production processes (as in the old paradigm), but also as powerful financial assets and competitive weapons that can enhance commercial success and increase shareholder wealth. Rivette and Kline, (2000) argued how IBM’s ‘aggressive intellectual property effort’ boosted annual patent licensing royalties 3300% between 1990-2000 (from $30 mill to $1bill). Based upon my interviews funded by EU project “Patents and Services”, it is evident how more money today is to be made from (i) patent royalties from new ideas (i.e. inventions or technologies) rather than from (ii) monopolizing the production processes or products in which those inventions or technologies are embodied, so it makes sense to specialise less in (or entirely sell off) the production lines and use the effort on the value driven intellectual capital. This is what some successful and wellknown science- and knowledge-based manufacturing and ‘services-manufacturing mixed’ firms are doing today or consider to. Hence, the production and management of IPRs must become a core competence of the successful enterprise. Rivette and Kline (2000) argue how management of intellectual property is how value added is going to be created in the future. Increasingly those companies that are good at managing IP will win. 4.1.1 Different economic laws The reason for this change in the role and scope of IPRs can be understood from the different economic laws which rules in different periods and in different sectors. In this context we have moved from decreasing returns to scale towards an economy of increasing returns to scale. Very briefly explained, the problem within the traditional manufacturing economy was decreasing return to scale. Land, building, raw-material and energy sat the limits regarding how many physical products a manufacturing firm could produce. The only way such capacity problems could be overcome was by new technology for more efficient production, more efficient use of energy and labour. Hence patents on manufacturing production-technology were essential. However, in the new information and digital economy there are not the same capacity constraints, and the problem is about increasing returns to scale. As soon as you have invested in research and development and developed your information or digital product (or even a business method) you can copy it infinitely and almost for free. (This is in contrast to traditional manufacturing where marginal costs of production are high and even increasing when you increase your scale of production.) Hence, as soon as you have paid for your invention in the information economy, it is almost pure profit and there are no capacity constraints.
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However, there are also another type of increasing returns which is more related to the scope of your technology with respect to the use and adaptation of it. Knowledge based products increases simply in role the more people adapt to them, which stimulates even more to use them, and so forth. The socio-economic and technological effects of the IPR system in the ‘casino of an increasing return to scale and adaptation’ are addressed in Section 2.2 below. 4.2. Does IPR-protection enhance competition and ensure optimal technological solutions or are other forces in operation? If the government-induced IPR rationale is an economic one, we have to ask the question if IPR protection enhance and ensure perfect competition and optimal technological solutions, or if other forces are in operation? Liberal mainstream economists tend to support the view that the market by its own working selects the optimal technologies for diffusion. However, much economic historical evidence (David 1985, Arthur 1988) as well as current evidence from the strategic management literature (Rivette and Kline, 2000) suggest that this is not necessarily the case. The reason that this is not necessarily the case is (i) due to the increasing returns to scale nature of the new economy as well as (ii) due to strategic collaboration on the market, partly as result of (i). I will now outline the arguments systematically. 4.2.1 The increasing returns argument The historical evidence by Paul David (1985) and Brian Arthur (1988) offers a list of circumstances that make a technology prone to increasing returns and lock-in. I would like to argue that such dynamic effects are reinforced in the intangible economy where wealth is often generated through intangibles such as IPRs, software and business methods. This in its turn have implications on the value of IPRs. The arising issues are addressed in the sections (i)-(vi) below. (i) Knowledge and intangibles underpinning increasing returns to scale We have to keep in mind that in the new economy IPRs can both be considered as a final product that can be exchanged directly on the market, as well as considered as an input into (or embodied into) intangible and tangible products that are also exchanged on the market. Obviously IPR as a final product, IPR embodied in intangibles, as well as intangibles in their own right (such as software, digital products, business methods) are all the critical technologies or ideas that in particular are faced by increasing return to scale. I would like to argue here that knowledge or an idea is not a new feature of capitalist production. However, ideas and other intangible assets are taking on a greater and different weight in underpinning competitive processes in today’s globalizing world. Assessing this trend is complicated by the economic nature of knowledge or ideas themselves. The fact that knowledge or an idea can be consumed jointly, and can be reproduced very cheaply means that it has some of the qualities of a public good (This
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characteristic is usually referred to as the “expansible” or “non-rival” aspect of a public good). But, unlike a public good, it is possible for the creator of an idea to exclude others from using it by use of IPRs, opening the possibility for wider commercial exploitation. Establishing property rights for ideas means a market price higher than its marginal cost -- which tends to zero -- giving rise to rents. This in turn implies an incessant drive to expand the market for ideas so as to generate greater rents (see also ii below). In this context, IPRs are able to create a market for an intangible idea (which is also one of the rationales of IPR as listed in Figure 1), and as ideas face increasing return to scale by nature, this give rise to increasing rent or profit as markets expands. (ii) Large set-up of fixed costs: Increasing returns to scale and adaptation Regarding knowledge embodies in production processes or products, by moving to larger production runs, fixed costs can be spread over more output, leading to lower unit costs of production which in its turn spill over to lower prices. This makes the technology more attractive and more will adopt, leading to even lower unit costs and lower prices, and so fort. The point here is that, when set-up of fixed costs are high, individuals and organizations have a strong incentive to identify and stick with a single option. Hence, high fixed set-up costs create a high pay-off for further investments in a given technology, especially if the marginal costs of reproduction is very small as in digital products. As Davis (2002) noted in a quote from Bill Gates: “With intellectual property, the upfront costs are what it’s all about”. Microsoft Chairman Bill Gates explained “Say a piece of software costs $10 million to create and the marginal costs, because it’s going to be distributed electronically, are basically zero.” Once the costs of development have been recouped, “every single additional unit is pure profit.” (Wall Street Journal, August 23, 2001) Further more, this behaviour of the economic system of increasing return to scale will make it difficult for other firms to enter the market, even if their technologies are superior, as they start at smaller scale and higher unit costs of production. In this context, although IPRs may initially cover your fixed costs of investment in new ideas and their application in production lines, they might subsequently provide a platform for unfair exploitation (by marking price unfairly higher than marginal costs) as well as lock-in to sub-optimal solutions. A real case investigation of this was the Monopolies and Mergers Commission (MMC) of the UK who had an enquiry into the music record companies regarding the high price of CDs. On a very controversial conclusion by the MMC the record companies got away with their high price (MMC 1994).
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(iii) Learning effects and increasing returns to adaptation However, in this world of increasing return within high technology sectors, it is often the learning effects (learning by doing, learning by using, etc.), as opposed to the high fixed set-up costs argument, that is referred to when explaining the behaviour of the economic system. A key point here is the quasi-irreversibility of investments in which the cost of software conversion ↑ over time due to increased learning of the specific skills and habituation, while the costs of hardware conversion ↓ in the sense that it is more easy to make hardware types become compatible with other and new systems (than to retrain people to use new software). The well-known example is our steady use of 125 old QWERTY key-board system as opposed to the more optimal Dvorak Specific Keyboard – which in principle allow you type 20-40% faster (David 1985). A more recent example comes from IBM who at a meeting regarding the harmonisation of EU’s policy on computer implemented inventions explained how (against their initial anticipation) their software patents last longer than hardware patents. (IBM 2002) Also, in order to increase customer bonding firms differentiate in user-interfaces in order to transfer specific skills to end-user. This strategy is both adapted in on-line supermarket shopping, on-line banking and also with respect to mobile phones. (For an overview, see Andersen 2002 on the economic principles behind customer relationship management). Another aspect of the learning effects is that knowledge gained in the operation of complex systems or complex technologies also leads to higher returns from continuing use. With repetition, individuals learn how to use products more effectively, and (i) if interactive learning is taken serious or (ii) due to the lock-in of customers’ learning paths, their experiences are likely to spur further innovations in the same product or in related activities. In that sense our knowledge gets locking into trajectories; - we develop or use what we know about, and we know about what we develop and use. It is impossible to change path / advance in areas in which we have no invested pre-knowledge unless we accept backtracking in history – which will not happen. The bottom line here is that technological trajectories in software and software implemented business methods are enviable even without IPR due to learning effects. Indeed, this kind of ‘pure learning’ effect of the firms’ intellectual capital is interesting as it is protected even without the legal framework. Hence, in this context IPRs serve mostly as a mean by which knowledge embodied in software can be exploited for rent creation. Therefore, one should reconsider how legitimate the rationale of the IPR system is in relation to the performance of such learning based innovation systems.
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(iv) Coordination effects / network externalities Network externalities occur when the benefits of an individual receives from a particular activity increase as other adopt the same option. This enhanced appeal attracts more users, reinforcing the existing advantage, and so forth. In this respect, network externalities are especially significant when a technology is compatible with a linked infrastructure (e.g. (i) Software with hardware and software with ICT systems and organisational structures of business and social relationships as well as other standards), (ii) Automobiles with an infrastructure of repair facilities and gas stations; (iii) Also the video technology VHS is an example: the more users there are, the more likely it is that the VHS adopter benefits from a greater availability and variety of VHS recorded products. This is a well-know example of why VHS video recorder system won over its technological superior rival, the Betamax video recorder system) Hence technological trajectories do not merely survive because of their technological properties, - but because they are embedded in the entire institutional set-up of the economic or social system. Benefits are enhanced if they are coordinated or ‘fit’ with an infrastructure. Also, in this context IPRs can serve as a mean by which knowledge embodied in software can be exploited after lock-in. Hence, before designing any IPR policy, one should really investigate if the existence of IPRs are doing their job in relation to their rationale (see Figure 1), in the circumstances of the existence of network externalities. (v) Technological interrelatedness As a technology becomes more adopted, a number of other sub-technologies and application products often become part of its technological paradigm. For example, the gasoline technology has a huge infrastructure of refineries, and many other technologies that depends on it. In the same way, - we are all locked into using the same technological compatible hardware and software systems including browsers and other standards etc. Technologies generally do not exist in isolation but in an entire complex network of different technologies – e.g. railway systems have wagons compatible with the size of rail- tracks and all technologies in an airliner have to be compatible. In this respect, lock-in to certain technological trajectories is enhanced if they are coordinated or ‘fit’ with activities of other technologies and their development. Hence, the message here is to build technological webs. This is what IBM did in the 1980s when their technological trajectory of the DOS’s based system won over Apple’s Macintosh based computer systems. IBM allowed technological clones, as it found it difficult to create log-in on its own. In this context, collaboration around IPRs can serve as a means by which standards in software can be set, appropriated and exploited. The creation of ‘Patent pools’ in which firms share knowledge, and thereby trajectory of development, is an example on how firms collaborate around setting technological standards and jointly lock-in. Rivitte and Kline (2000) would argue that
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key here is a careful choice of partners. However, other would argue for more open source code system (see section 4.2.2 (ii) below). Also, in this context IPRs could serve as a means by which knowledge embodied in software can be exploited, and one should reconsider if IPRs really services their rationale in relation to the existence of lock-in to technological webs. (vi) Adaptive expectations / Informational increasing returns to adaptation Individuals may feel a need to ‘pick the right horse’ because options that fail to win broad acceptance will have drawbacks later on. The dynamics here could be related to coordination effects: You don’t want to miss the economic and social effects of your choice - - i.e. you don’t want to be locked out. In that sense it derives from the selffulfilling character of expectations. More generally, often a technology that is more adopted enjoys the advantage of being better known and better understood. For the risk adverse, - adopting it becomes attractive if it is more widespread. Thus, projections about future aggregate use patterns lead individuals to adapt their actions in ways that help to make those expectations come true. In this context, we adapt our actions in the light of our expectations about the actions of others. (Arthur 1988) In this context IPRs could serve a means by which knowledge embodied in tangibles and intangibles can be exploited e.g. through marketing or the behaviour on the stockexchange, and one should reconsider if IPRs really serve their rationale in relation to the characteristics of such social behaviour. ---The bottom line in the ‘increasing returns to scale and adaptation’ argument is that, although the technological change is central for the technological and industrial development and progress, it is the creation of organizations, institutions and infrastructures from social interaction which is central to why some technologies win the competitive game and why some become to dominate industries and business environments. The behaviour of the socio-economic system does not automatically ensure optimal solutions and perfect competition. In this context, we need to understand the role and scope of IPR in relation to the performance of the socio-economic system. Policy makers and industrialists need to shed light on the advantages and disadvantages of strong and weak IPR protection respectively in the new economy of ‘increasing return to scale and adaptation’. Do we have IPRs to create markets and give incentives to creativity, or do they basically provide a platform for unfair exploitation? What is the general profile of corporate power bases and the accountability of that power, nationally and internationally? We don’t know.
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4.2.2 The strategic management argument: Unlocking the hidden power of IPRs As mentioned previously, the economic, technological and social effects of IPRs shall not only be seen in relation to the new forms of competition in the new economy. We need to understand how IPRs and the new form of competition sets the rules of the game, in which firms or organisations are the players (North 1990). Therefore, we need to understand how the strategy of firms of course play a key role in performance of the IPR system and the effects of it. (i) Control of markets via IPR does not necessarily mean supporting ‘best’ technologies When understanding how IPR protection does not automatically lead to most optimal technological trajectories, we have to consider how it is custom within corporate strategic management that R&D and branding is only pursued in those areas in which patents can help to establish a market share. These are not necessarily the ‘best’ product or process inventions. The strength of the potential patent position is a leading factor in deciding what research to pursue. Examples (Rivette and Kline, 2000): • The bio-tech firm Genetics Institute decides which versions of a drug to develop partly (i) on the best results in clinical trials but also (ii) in accordance to which version can command the strongest patent protection. • Gillettee’s sensor shaver was developed from mapping out the patent landscape for seven variations of the shaver. Examining the strengths and weaknesses of the patent positions for each design compared with the potential rivals, the shaver that the competitors would have the most difficulty getting around was chosen. 22 patents were formed as part of ‘the patent wall (see below for definition)’. We have to increase our understanding of the role of value driven intellectual capital in the strategic decisions of firms. (ii) Protecting your market advantages: Setting territories When argued as above, how the strength of the potential patent position is an important factor in deciding what research to pursue, it is important to address how patent positions are strategically established. As I will demonstrate below, patent positioning bear a resemblance to Brian Arthur’ perception of the importance of coordination effects / network externalities and technological webs’ for lock-in. Patent walls and infringement threats: Building a wall of patents – ‘clustering’, as it is sometimes called - around categoryleading products can help companies defend against imitators and can secure market share. An example of the importance of patent walls around technological webs is in the strategies of firms. Firms are afraid of specialising too narrowly. Many firms adopt the policy of always being at 'all platforms'. It is important to be (i) a part of setting 22
standards in controlling ways of delivering and receiving and consuming software or digital based content (here hardware in relation to broadcast and electronic technologies are central), just as it is important to be (ii) good in its main activity of software or digital content development. That is, IPR on content (software) and IPR on the ways of exchange the content are equally important. Firms wish to control IPR on software as well as the pipes (broadcasting, internet, intranet etc.) in which the software flow. This type of emphasis is most well known within media services in which ‘content’ and ‘broadcasting’ mergers take place on such grounds. (Several successful firms interviewed for the EU project Patents and Services expressed this view, including media service provider British Broadcast Corporation (BBC) and manufacturing Dutch Phillips Electronics). Thus, we have to recognise that in a world in which value is created via royalties from the ‘flow’ of software and or digital based content, it is very important for firms to be able to control this flow and not be dependent on other such service providers. Therefore, you see many manufacturing firms as well as services firms patenting in hardware technologies as a mean to protect the way in which they can rip off profit from their software or digital technologies. Again, it is important to be on all platforms of both software or digital content creation as well as forms of exchanging and consuming this content. Patent walls can be used to impose threats to competitors of patent infringement suits in order to block potential rivals. This is very common practice and increasingly over time. The money involved and the amount of money paid to IPR lawyers is unprecedented, as IPRs protect the key competitive strategic asset of many firms. However, many smaller firms will not have such money to stand up in court, - so when major firms come after them, they withdraw or make other special arrangements with the company claiming infringement. Especially in my interviews for the EU’s Patent and Services Project this behaviour became very clear. Bracketing: Building a patent wall around the product or process is not the only a way to hamper competitors. If your competitor has patented an invention, but has not patented many of the surrounding application innovations, a corporate strategy can be to patent all the application inventions (i.e. everything else) and your competitor is locked out of the market or at least totally dependent on you. This is the essence of bracketing. And this reinforces the argument in a different section above on ‘technological webs’ where it is argued how important it is to be on all technological platforms. The variety of IPR combinations: Obviously, IPR strategies are not independent of each other. Although the nature of three types of intellectual property rights (patents, copyrights and trademarks) seems very different, a combination of them is often used. E.g. once a patent has been granted with respect to an invention, other rights might be appropriate, such as a trademark if a name is applied to a product. Furthermore, in telecommunications some aspects of some software may be protected by the patent law, while other aspects can only be protected by the copyright law.
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Also, in the first stage of an invention copyright may be the only means of protection. This is because, for example, under the UK Copyright, Design and Patent Act 1988, documents submitted in a patent application are open to public inspection and may be copied if not protected by the copyright law. However, even before this, until the patent application is published, the idea of the invention is protected by the law of confidence. Thus, each invention often goes through different stages of protection. (Andersen and Howells 2000) It is important to recognise that an individual or organisation’s ‘intellectual capital’ may be protected by other means than through IPR instruments; – e.g. through commercial secrecy and contractual agreements for example (see Andersen and Howells 2000 for an overview). Secrecy combined with short innovation cycles may also offer substantial protection to a service firm and may be a preferred strategy over more formal IPR methods. Sometimes the product cycles are so short so no other protection is relevant at all. However, often a mix of IPR protection is used as in the software case (See Section 3.1). Cross licensing to gain markets by lower costs: Owning intellectual property rights lets companies develop very favourable partnerships and licensing relationships. E.g. collateral licensing agreements between parties provide firms with lower cost components. E.g. Dell is freed to pay IBM millions of dollars in royalties, which makes Dell more price competitive. (Rivette and Kline, 2000) Cross-licensing via patent pools to enhance common standards and participation: Within complex products and technologies (e.g. DVD, digital TV etc., MPEG-2 (digital video)) there are many contributions from many companies. This means licensing and cross-licensing is a fact of life for electronics. Especially with many competitors cross-licensing is possible (especially within consumer electronics, medical, domestic appliances, semiconductors). Also, as not one firm is strong enough to set standards alone and to avoid the existence of mandatory standards in telecom, TV, audio, video etc. cross licensing is the solution. MPEG-LA is a good example of collaboration (17 firms involved) around setting the standard for MPEC-2 Video and Systems jointly and collaborative (see www.mpegla.com). Such collaboration is around common patent pools to which they all file their relevant patents. In that way they share ideas, set common standards, and royalties are shared on the basis of the contribution from the firms involved. (Information is based on interviews in the EU [Patents and Services]-project on which I am involved) Patent pools can be based upon strategic choice of partners, or it can be based upon an open architecture as is the case of mobile phones’ operating systems technologies (they way applications are implemented technologically). In an open source architecture anyone who can contribute to the pool can join and use or license the intellectual capital in the IPR pool. However, if you do not wish to contribute, you do no even have an option in licensing at any fee. Nokia expressed at a presentation I
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attended in Finland that this deal is not only made with respect to creating common standards, but it is also avoid Bill Gate and Microsoft situations. (Nokia 2002) However, when it comes to sharing the royalties in more closed architecture strategic patent pools accountability and bargaining power does play a role. A good example is the music industry (Andersen and Kozul-Wright and Kozul-Wright 20004). Licensing markets are still in its infancy, but waiting for the big boom. ---An underpinning point here is, when understanding the role of IPRs in the new techno-economic paradigm we have to understand (i) how strategic decisions regarding technological evolution have a somewhat closer relationship with IPR law than technological optimality, (ii) how the form in which innovation processes are distributed within networks and how the single entrepreneur is a phenomenon the past, and (iii) how standards are shaped within networks and patent poles. The two latter points also raises the questions regarding the rules of the game? Is it collaboration or competition or both?
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Andersen, Kozul-Wright and Kozul-Wright (2000) argued how the structure (i.e. division of labour in managing music rights) of collective societies differ significantly across countries, in terms of their size [i.e. numbers of members and affiliates (e.g. publishers), total revenue, number of employees]; their internal organisation, including whether they are public or private bodies, eligibility criteria, the structure of the board and members’ influence, their methods of monitoring copyright use and their basis for revenue distribution; and in their external organisation, including methods of licensing, structure of tariff agreements, international collaboration. Exactly the same phenomenon applies for private collecting societies managing and processing corporate networks engaged in developing patent pools for technological development and appropriation. Collaboration and bargaining power is a very central issue here.
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5 CONCLUSION: HOW IPR SYSTEMS ARE NOT NEUTRAL I will conclude by again reflecting on how the existing economic and socio-legal literature on IPRs has not largely concerned itself with the dynamic effects of the exploitation of IPRs on the general profile of corporate power, or the accountability of that power, nationally or internationally. As discussed in this paper, visions are not enough regarding the rationale of IPR systems and what difference they make to the socio-economy and welfare. Already by introducing IPR law and government imposed standards that are part of setting the rules of the game, we have already abolished the notion of perfect competition. Realizing that IPR systems are not neutral, the rationales of the systems must be addressed at the political level. I argue that the current situation of ‘increasing returns to scale and adaptation’ creating lock-in situations in the new economy, in which stakeholders and dominating powerful firms are produced and technological trajectories selected, might be reinforced by the IPR system. That is, for exploitation purposes IPRs can (i) enforce the lock-in strategies which might result in sub-optical technological and economic solutions, (ii) provide a platform for unfair exploitation of individuals and sectors of the economy, that subsequently have to adapt to the new technological paradigm, (iii) create major stake-holders and powerful firms in industries rather than competition with many players. Therefore policy must use the IPR regime very cautiously. I would like to argue that a weaker IPR protection is essential to avoid strategies towards strong technological lock-in situations as well as skewness within industries. By weaker IPR protection I refer to the number of years of protection as well as the degree of exclusive rights and the degree to which exploitation can take place in the IPR system. A weaker IPR protection can also be in the form of an IPR system forcing (by law) collaboration around an open source architecture on digital technologies and computer implemented inventions (as in the mobile phone case, -see Section 4.2.2(ii)). In this context, I believe that the EU’s hearing on IPR protection of business methods and computer implemented inventions have been overshadowed by defining alternative classifications of business methods for patent protection (Problem listed in Section 2). Instead, we instead should focus on the nature and form of such legal protection. It is here the challenge for IPR policy resides, and such discussion has been largely ignored. Despite the critical light in which I have put IPRs role and scope in the new economy, I do believe that the IPR regime, for all its flaws, is vital to modern IPR-based industries specialising in value driven intellectual capital, especially as new information technology is associated with radically reduced costs of reproduction and distribution. Yet, unless society and its firms develop institutions to match and manage the new technological and business opportunities, we may be unable to fully realise the benefits from the creativity and talents of people. The socio-economic effects of IPR power-bases are impossible to address in a single paper, but I have here highlighted some of the concerns. An extensive research agenda on gaining an understanding of the dynamics (i.e. social and economic effects) of the performance of IPR systems in the new intangible economy is essential for current and future IPR policy design in the new knowledge based economy.
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BIBLIOGRAPHY Aboites, J. and Cimoli, M. (2001): ‘Intellectual Property Rights and National Innovation Systems: Some Lessons from the Mexican Experience’. Paper presented at the Nelson and Winter Conference, Allborg – Denmark, June Andersen, B. (2001): Technological Change and The Evolution of Corporate Innovation: The Structure of Patenting 1890-1990. Edward Elgar: Cheltenham. Andersen, B. (2002): ‘The Performance Of The IPR System In The New Economy: Implications For Digital Inventions and Business Methods’. Report prepared for “Round Table on the Patentability of Computer Implemented Inventions” organized by The Standing Committee of Research and Industrial Development of the Danish Parliament, Christiansborg, Copenhagen, February 20th 2002. Andersen, B (2002) ‘ICT and the evolution of customer relationship management: an institutional economics perspective’. Paper prepared for conference on ICT and Customer Relationship Management, Espoo Mariquisto, March 2002. Andersen, B and Howells, J (2000) “Intellectual Property Rights Shaping Innovation Dynamics in Services ", in Andersen, B. et al (2000). Knowledge and Innovation in the New Service Economy. Cheltenham: Edward Elgar Andersen, B., Kozul-Wright, Z. and Kozul-Wright, R. (2000): ‘Copyrights, Competition and Development: The Case of the Music Industry’ United Nations Discussion Paper, no 143, UNCTAD Geneva. Forthcoming in International Journal of Business and Society. Andersen, B and Macmillan, F (Forthcoming): Music and intellectual property rights for business and society: A New Agenda on Interactive Learning for Capacity Building in LDCs. Presented at the UN LDC-III Conference - Music Industry Workshop - Youth Forum - 19 May 2001. Forthcoming as chapter in book in the UN LDC-III Conference proceedings. Arthur, B. (1988) “Competing technologies: an overview”. In Dosi, Giovanni; Freeman, Christopher; Nelson, Richard; Silverberg, Gerald and Soete, Luc (ed). Technical change and economic theory. London: Pinter Publishers. Pp.590-607 Arthur, B (1996). “Increasing Returns and the New World of Business”, Harvard Business Review, July-August Carey, J. (1994), ‘Inching towards a borderless patent’, Business Week, 3373–703, 31. Cornish, W.R.C. (1999), Intellectual Property: Patents, Copyright, Trade Marks and Allied Rights (London: Sweet & Maxwell, 4th ed) David, P. (1985): ‘CLIO and the Economics of QWERTY’, American Economic Review, 75 (2), 332-37. Davis, L (2002): Is appropriability a “problem” for innovations in digital information goods? In Gunnar Eliasson and Claus Wihlborg, eds., The Law, Economics and Technology of the Internet, Publisher ??
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EU (2002) EU’s hearing on “Industrial Property” and "The Economic Impact of Patentability of Computer Programs", see http://europa.eu.int/comm/internal_market/en/indprop/studyintro.htm EU (2002) .. need to include many other relevant reports and documents … IBM (2002) Briefing paper by IBM (presented by Kim Oestrup) prepared for “Round Table on the Patentability of Computer Implemented Inventions” organized by The Standing Committee of Research and Industrial Development of the Danish Parliament, Christiansborg, Copenhagen, February 20th 2002. Landes, W.M. and Posner, R., (1989), “An Economic Analysis of Copyright Law”, Journal of Legal Studies, vol XVIII, June. Monopolies and Mergers Commission (1994): The Supply of Recorded Music: A report on the supply in the UK of pre-recorded compact discs, vinyl discs and tapes containing music, London: HMSO Navision (2002) Briefing paper by Navision (presented by Niels Bo Theilgaard) prepared for “Round Table on the Patentability of Computer Implemented Inventions” organized by The Standing Committee of Research and Industrial Development of the Danish Parliament, Christiansborg, Copenhagen, February 20th 2002. Nokia (2002).“Digital Convergence in Mobile Communication”. Talk by Vice President Pproduct Management, Seppo Laukkanen. Conference on ICT and Customer Relationship Management, Espoo Mariquisto, March 2002. North, D. (1990) Institutions, Institutional Change and Economic Performance, New York: Cambridge University Press. Stewart, T. (1998), “Appendix: Tools for Measuring and Managing Intellectual Capital” in Intellectual Capital, Nicholas Brealey. Pp.222-246 Torremans, P. (1998), Holyoak and Torremans on Intellectual Property Law (London: Butterworths, 2nd ed) Rivette, Kevin and Kline, David (2000). Discovering New Value in Intellectual Property. Harvard Business Review, January-February.
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