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Most innovations are the result of a cumulative R&D process, i.e., their production requires the combination of knowledge contained in previous innovations (for a general presentation, see my previous ‘Dig It!’ post).

Cumulative innovations raise specific problems that put the patent system under stress. We already explained on this blog that holdup strategies or licensing difficulties may make patents counterproductive.

The patent system may also impose an unnecessary drag on innovation by enabling multiple rights owners to ‘tax’ new products or processes. When multiple firms control essential patents for a new product or process, separate licensing results in higher total prices due to multiple marginalization (or ‘royalty-stacking’). As the transaction costs of contracting with each patent holder also pile up, the total costs of the new product or process necessarily increase.

This situation is sometimes referred to as the tragedy of the anticommons to describe the fact that when several individuals own rights of exclusion and exercise those rights, they restrict the access, and therefore the use, of common resources (see here for some illustrations). As Heller and Eisenberg (1998) explain, this can be seen as the mirror image of the well-known tragedy of the commons (which refers to the fact that a resource – like fishing grounds or clean water – can be overused if it is not protected by property rights).

How serious is this problem? In other words, what is the impact of patent rights on cumulative innovation? This is what Galasso and Schankerman (2013) try to estimate empirically. Before stating their results, it is important to stress that this type of estimation raises three empirical difficulties.

• First, one needs to identify comparable technologies with and without patent protection. The author address this issue by exploiting patent invalidation decisions by the US Court of Appeal for the Federal Circuit (which has exclusive jurisdiction in appellate cases involving patents); their sample comprises 1357 decisions from 1983 to 2008, with about 40% of these decisions having led to a loss of patent protection for the technology.
• The second empirical difficulty is that subsequent innovations are difficult to identify. Here, the authors follow the strategy that is commonly used in the literature: they exploit citations by later patents. A patent can only be granted if it is deemed sufficiently novel with respect to the prior art; patent applicants have thus to describe the prior art and for that matter, they have to cite all relevant patents, even those that have been invalidated.
• The last and major challenge is endogeneity: the factors that make invalidated patents differ from those that are upheld may also affect patent citations; for instance, the commercial potential of a patent may be a common explanation for the facts that this patent led to subsequent innovations and that its owner fought hard to avoid invalidation. To circumvent this problem, the authors exploit a couple of institutional facts: judges are randomly assigned to patent cases, and they form panels of three that decide by majority voting. Because judges differ in their propensity to invalidate patents, the author can use these facts to construct an instrumental variable that addresses the potential endogeneity of invalidation decisions.

It is thus possible to estimate the impacts of patent rights on cumulative innovation by examining how invalidation of a patent affects the rate of subsequent citations to that patent. The main result is that the removal of patent protection leads to about a 50% increase in subsequent citations to the focal patent. This lends credence to the idea that patent rights do impede cumulative innovation.

However, the authors stress the facts that the 50% increase is an average estimate, and that large variations are observed across sectors. Actually, the positive impact of patent invalidation on subsequent innovation is significant (and large) only in sectors with complex technology (namely computers and communications, electronics, and medical instruments). This is not a surprise as these sectors are also those where the patent thicket is particularly dense. The authors also observe variations across firms along the size dimension: it is mainly the invalidation of patents held by large firms that triggers subsequent innovation by small firms.

I would like you to investigate how common anticommons are. More generally, can you find other empirical and/or theoretical arguments regarding the effects that patent rights have on cumulative innovations?

One popular way to model the latter link in the economic literature is to assume that firms are engaged in a “patent race”. That is, two (or more) firms pursue the same goal (i.e., come up with a new product or process); to this end, they choose how much R&D resources to invest in view of being the first to reach the objective and so, to file a patent so as to secure a dominant position in the market. Hence the idea of firms racing for a patent.

Starting with the seminal papers of Loury (1979) and Lee and Wilde (1980), a vast literature has studied this strategic interaction among firms vying for a patent. Among the issues that this literature addresses is one question that is of particular interest for public policy: how do patent races affect the firms’ incentives to conduct R&D and to introduce new products or production processes on the market? In other words, compared to what society would find best, do firms engaged in a patent race conduct too much or too little R&D? The answer to this question is important to inform the optimal design of the patent system (should patents be made shorter or longer, narrower or broader?).

Assessing the effects of patent races on innovation is far from simple as two opposite forces are at work:

• Patent races have the potential advantage of spurring innovation: as Scotchmer (2005, p. 112) argues, “patent races can increase the probability of innovation when inventors have different ideas for how to solve a targeted problem”; patent races can also accelerate progress when it is “the case that with enough attempts, any approach can be made to succeed”.
• However, because of their ‘winner-takes-all’ nature, patent races have the potential disadvantage of generating wasteful duplication of efforts: many contenders invest resources to reach the same target but eventually, only one of them will be rewarded, meaning that the others invested in vain.

The balance between these two forces crucially depends on the innovative environment in which the firms operate. Are ideas ‘scarce’ (in the sense that no substitute idea addresses the same economic need) or are they ‘common knowledge’ (in the sense that any good idea is likely to be had and implemented by someone else)? The distinction is of importance, as explained by Nelson et al. (2002, p. 16):

[When] firms are presumed to be focused on a single research alternative (…), the patent race models point to a number of reasons why the increase in total inventive effort induced by the lure of a patent is not necessarily an unambiguous plus. If inventors perceive that other inventors are in the game, the expected returns will depend not simply on whether they achieve an invention, but on whether they achieve it first. Thus, patent protection may result in an outcome where firms invest their resources at a faster rate than the social optimum, and too many firms will race towards the same inventive goal (or fish in a still limited “pool” of invention prospects).

Of course, this outcome will be less likely in industries where there is a wider menu of potential non-infringing ideas, such that different firms will pursue different approaches. For this reason, some have suggested that an optimal patent policy ought to be industry-specific, allowing, for example, broad patent protection for industries such as the computer industry or telecommunications with many fertile, non-competing ideas, but limiting patent breadth in certain other industry categories.

The literature on patent races is mainly theoretical and relies heavily on game theory. Some scholars have criticized it as being “highly stylized and counterfactual”. It is hard to disagree with the first part of this claim: models in industrial organization are stylized by nature (and it is precisely what makes them useful!); it is even truer for patent race models as they have to incorporate strategic interaction, multiple stages of decisions and uncertainty.

Whether patent race models lead to counterfactual results is actually hard to establish, simply because of the scarcity of empirical work in this field. The lack of empirical analysis may be explained by the fact that identifying patent races in practice is far from easy as firms may file patents for many other reasons than just trying to outperform their rivals.

It must, however, be possible to identify situations that resemble patent races, i.e., industries or technological fields where a number of firms are pursuing a similar goal and are filing patents in the hope of seizing a new market niche. This is what I ask you to do. As examples may not be so easy to find, you’d better race to be among the first commentators!

(You can read previous comments here.)

Patents and contracted research

The two mechanisms for securing innovation that immediately come to mind are patents and contracted research. As we have already explained on this blog (e.g., here), the main drawback of patents is that they impose a monopoly deadweight loss. We have also argued here and here that patents can be diverted from their economic rationale and that such abuses may hinder innovation instead of fostering it. A third potential problem, as we explain here, is that the race to obtain a patent may generate a wasteful duplication of research efforts.

Instead of relying on market forces, governments can choose to fund R&D activities, especially basic research, directly. R&D is either conducted in government laboratories and research centers, or is outsourced to universities or private institutions. The main difficulty with contracted research comes from the moral hazard problems that it raises. As Clancy and Moschini (2013, p. 207) writes:

(…) ultimately the research work is the responsibility of scientists and engineers working either individually or as part of teams. Because research work relies on very specialized knowledge and skills that are heterogeneously distributed, and typically unobservable, and because the production of knowledge is inherently risky, asymmetric information distribution and moral hazard are common in this setting.

Innovation inducement prizes

A third way to secure innovation may be to set up innovation inducement prizes, i.e., ex post rewards for innovations meeting certain prerequisites. As described in a 2009 report by McKinsey and Company, this innovation policy measure is one of the oldest:

Prizes have a long history that includes many examples of award-driven change. For centuries, they were a core instrument of sovereigns, royal societies, and private benefactors alike who sought to solve pressing societal problems and idiosyncratic technical challenges. Famous examples (in addition to the Longitude Prize [established in 1714 by the British Parliament to solve the problem of measuring longitude at sea]) include the Food Preservation Prize—one of several prizes established in Revolutionary and Napoleonic France—designed to help supply the army. The winner established the basic method still in use today for canned foods. Similar awards have been sponsored privately, for instance the Orteig Prize for the first nonstop flight between New York and Paris (claimed by Charles Lindbergh). (…) But in the modern era, as patents and grants have continued to mature, prizes became to some extent peripheral instruments for encouraging innovation.

Yet, the same report shows that today, “prizes are booming once again. Both their value and their absolute numbers have risen sharply.” One well-known example is the H-Prize,which was passed in May 2006 by the US House of Representatives with the objective of overcoming technical challenges related to hydrogen. Modelled after the successful X Prize (which spurred the first privately funded suborbital human spaceflight in 2005), the H-prize offers prizes in three categories: (i) technological advancements (four prizes of up to $1 million awarded biennially in the categories of hydrogen production, storage, distribution and utilization); (ii) prototypes (one prize of up to $4 million awarded biennially that forces working hydrogen vehicle prototypes to meet ambitious performance goals); and (iii) transformational technologies (one grand prize consisting of a $10 million cash award). Another recent example is the £10m Longitude Prize 2014, which focuses on antibiotic resistance.

How do innovation inducement prizes compare to patents and contracted research as an incentive mechanism for innovation? A priori, prizes seem to overcome the main limitations of the other two mechanisms: contrary to patents, prizes do not entail any deadweight loss as no exclusive rights are granted and the innovation is therefore immediately in free access; contrary to government-funded research, prizes do not raise any moral hazard issues as the initiative and the decisions remain with the innovator themselves.

Yet, prizes also have difficulties of their own, or they may not be appropriate for every type of research. This is what I would like you to investigate.

In particular, the CJEU was asked to balance several fundamental rights in actions against online intermediaries for copyright infringements committed by third parties. In SABAM v. Scarlet (case C-70/10; see also SABAM v. Netlog, case C-360/10), the CJEU defined the outer limits for “injunctions against intermediaries whose services are used by a third party to infringe a copyright or related right” (Art. 8(3) of the 2001/29 Copyright Directive). On 27 March 2014, the Court of Justice in UPC Telekabel (case C- 314/12) went further in delineating the requirements for copyright injunctions against online access providers and the implementation of filtering measures.

In the last years, the ECtHR ruled three times on the proportionality of some interferences with the freedom of expression online resulting from the protection and enforcement of copyright. One case (Fredrik Neij and Peter Sunde Kolmisoppi v. Sweden, 18 Febr. 2013) involves the operators of the infringing website The Pirate Bay. In Ashby Donald v. France (10 Jan. 2013), the question was whether the sanctions imposed by the French courts on the managers of a website containing photographs of fashion shows were passing the test of proportionality for restricting freedom of expression. In a March 11, 2014 decision (Yaman Akdeniz v. Turkey), the ECtHR considers as inadmissible the request made by the user of musical websites to which access has been blocked.

Here are a list of questions for you to consider at the light of (at least) the two decisions UPC Telekabel and Fredrik Neij and Peter Sunde Kolmisoppi v. Sweden:

• What are the fundamental rights that are most often referred to by the Court in Luxembourg and by the Court in Strasbourg?
• Is Article 10 of the ECHR applicable to the Internet in the same way as it is applicable to other means of communication?
• Does the protection of property as a fundamental right play a role in the balancing made by the CJEU and the ECtHR?
• Is it possible to rely on other fundamental rights to support the view that copyright is a fundamental/human right?
• Do you see a difference in the way the balancing is done by the CJEU and the ECtHR?
• What are the implications of a reasoning based on the balancing of fundamental right?
• As a result of those decisions, does copyright move from the sphere of private law to the realm of public law?

You do not necessarily have to respond to all those questions, you can select a few of them. What is important: your text should be concise, well-structured and to the point. Also it should flow well.

You do not have to be too … balanced in your response!

(You might as well take into account this additional question: Do you think the decision Akdeniz is completely in line with the previous case law of the ECtHR?).

Economic issues

The picture of the copyright industry that we outline in the third post of this series has many economic consequences. An important one deals with the economics of mediatisation and its impact on creation or diversity. Another with the role of copyright and related internalisation strategies.

Each copyright industry is now confronted with a change of its ecosystem, which affects both mediatisation and distribution. And which in turn, loops back onto production. This process is uneasy to address in a general way because each industry evolves within its own ecosystem. Moreover, each public figure – artist, author, columnist, sportsman, politician, etc. – behaves like an autonomous brand, generating its own topicality, building its own community on social networks.

intellectuallicensing.com

From a microeconomic standpoint, the utility of a copyrighted works can be termed as the sum of the expression and its associated mediatisation. When the mediatisation is subject to network effects, its utility grows with its coverage and with the consumption of the mediatised good. Copyright industries – from the serialized novels published in the newspapers to the Hollywood star-system (Caves, 2000) – have always been confronted with the necessity to generate network effects around brands and branded products. In the analogue world, such network effects were obtained through well-tested strategies combining a release investment calibrated to reach a critical mass and a media reverberation buzzing on the product. And when the buzz was feared to be negative, then the release investment was made to avoid it. (Cf. the case of the Hollywood “ten-ton turkey” release commented by Richard Caves (2000) p.166.)

An open question concerns the achieving of such network effects in digital ecosystems. According to a recent consulting study,

“total global artist income from recorded music in 2013 was $2.8 billion, down from $3.8 billion in 2000 but up slightly on 2012. Meanwhile artists’ share of total income grew from 14% in 2000 to 17% in 2013 (Mulligan, 2014).

But the top 1% artists grasped 77% of this revenue making digital recorded music a “superstar economy”. This suggests that network effects may be more massive but less accessible in digital ecosystems than in analogue ones. Such a trend would favour on the one hand, big incumbent artists whose long lasting presence grants a critical mass (a lower access cost to media), and, on the other, new artists showing extravagance enough to saturate news and social media (Rihanna, Psy, Lady Gaga, Miley Cyrus…). In other words, the competition for network effects in global digital media seems to induce more “winner-takes-all” behaviours than in the analogue walled ecosystems.

The current paradox of digital ecosystems is that works have become accessible through nearly infinite databases but they are less extensively consumed than in the analogue system. Some more empirical evidence is required to validate such hypothesis, but whether true or not it means that the “long tail” theory (Anderson, 2004) is seriously challenged by the economics of mediatisation. In effect, the diversity of creation – when related to effective consumption – relies more on mediatisation economics than on the productivity of search. A key issue both for economists and media is to design mediatisation models that could enhance the notice of niche products.

Mediatisation economics has long been associated with marketing or advertising whose external effects on sales are difficult to quantify. Simply because the utility of the meaningful complement relies on network effects that are as hazardous to predict as the success of creative works. However, more and more consulting firms are now measuring brands digital presence and their apparent valuation by consumers. Such data, if their collection costs are affordable, might be used to model the network effects associated with mediatisation procedures. (According to our experience, the collection of homogeneous data picked up from various digital media sources requires a dedicated task force with a high fixed cost. The specificity of each mediatisation scheme tends to inhibit such an investment.)

Copyright policy implications

Last, but nor least, the growing importance of mediatisation changes the traditional vision of copyright exploitation. While copyright was for long identified as a way to internalise creation efforts, it is also a way to internalise mediatisation strategies. In a media ecosystem, a copyrighted good can be given for free if its consumption increases its media component. This means first, as noticed by various authors, that piracy or counterfeiting can prove socially useful. Not because it provides access to a lower segment of consumers (Watt, 2000). But because it can raise the utility of the good (the media component) and then, generate a higher willingness-to-pay that is collectable where excludability can apply (as already explained by Paul Belleflamme on this blog).

It also means that the previous consent of copyright holders may raise transaction costs preventing them to benefit from mediatisation opportunities. The “notice and take down” procedure applying on digital platforms corresponds to an ex post consent that allows some right holders to better internalise many spontaneous mediatisation efforts. At the cost, of course, of a careful watch of their product mediatisation. The case of the countless parodies posted on YouTube that can be withdrawn on right holders’ request illustrates this trend. Parodies are pieces of the informational complement that add value to the original copyrighted expressions.

The previous consent rule should then apply but with lenience. A too stringent behaviour would prevent right holders from valuable media externalities. Conversely, take down notices corresponding to an effective internalisation decision of the right holder should involve the responsibility of the noticed intermediary. This is the point where copyright enforcement now meets tort law (Lefort, 2013).

More generally, the dissemination of copyrighted works is anything but natural. Following the B&M premise, the utility of copyrighted expressions relies on a media complement produced through publishing and progressive dissemination. Such complement carries network effects and, thanks to its contextual dimension, allows right holders to gain from economies of scale in publishing other works. This point is clearly underestimated by the economic literature. It explains why the Copyright Term Extension Act (CTEA, 1998) has been mocked by so many conventional economists while supported only by a few copyright experts (Liebowitz and Margolis, 2004): the loss of property rights on the Mickey Mouse cartoons would have, no doubt, spoilt the Disney brand and its ability to mediatise new works. Hence, the economics of mediatisation deserve more research and quantitative analysis. It should also promote a better coordination between trademark and copyright law.

Media ecosystems

The term ecosystem is primarily used in biology do designate a community of living organisms (plants, animals and microbes) in conjunction with the non-living components of their environment (things like air, water and mineral soil), interacting as a system (Wikipedia). These biotic and abiotic components are regarded as linked together through nutrient cycles and energy flows. Willis (1997) traces back the history of the concept and its adaptation to the description of natural systems. Ecosystems are defined by the network of interactions among organisms, and among organisms and their environment. They can be of any size but usually encompass specific, limited spaces.

By analogy, a business ecosystem applies to a community of economic agents interacting for the balance of all, in a framework favourable to externalities (Teece, 2007).

A business ecosystem finds its roots in the idea of value networks and can be seen as a group of companies, which simultaneously create value by combining their skills and assets. Business ecosystems create value for a participant only when the participant is not capable to of commercializing a product or service relying on its own competences. (Clarysse, Wright, Bruneel, Mahajan, 2014, p.1164)

The concept of ecosystem differs from the one of industry, market or sector, because it relies on the prevalence of external effects. Quite frequently, the externalities come from private or informal information exchanges – on individuals, organizations or institutions – that decrease transaction costs and favour various forms of business clustering. Such kinds of ecosystems could be called “transactional” since most of the externalities come from the impact on transaction costs of circulating knowledge, informal relations and institutional information.

Similarly, one can consider that a communicating society runs like a biotope in which public messages are received and re-emitted by media. Media interaction participates in society coordination although media are not systematically linked together by formal or contractual relations. As such ecosystem contributes to the production of a “favourable notice”, the participants rely on it to commercialize their products. Quite often, “the skills and assets” that are shared by media deal with trademarks or talent names equivalent to “brands” that provide a meaningful context to goods or expressions (Bomsel, 2013). The mediatisation of people, firms or goods proceeds from ecosystems dedicated to specific products. One can distinguish the ecosystem of books, the one of the news, of scientific papers, of plastic arts, of music, of cinema, of sports, etc. But there is also a media ecosystem for fashion, luxury goods, cosmetics, automobile, food, drugs, etc. While transactional ecosystems decrease transaction costs between the participants, media ecosystems produce the public image – the informational complement – of business or institutional agents and their related products.

Digital technologies are bringing new media in all ecosystems: online newspapers and magazines, blogs, science portals, audio and video platforms, social networks… The echoing of the news, for instance, can follow many new routes and reach consumers faster and wider than could the pre-digital media. Moreover, the connection between advertising or mediatising a product and its actual purchase by a customer can be internalised through online procedures: an html link will transform a viewer into a purchaser, an audio or video platform teases for free until the viewer decides to pay for a service. As a consequence, the borders between mediatisation and sales tend to blur. This trend affects the economic means used to internalise the externalities of the media ecosystem. This is particularly sensitive in all the copyright industries that produce expressions to be distributed in a dematerialised form.

The mediatisation of copyrighted expressions

Copyrighted expressions are informational goods that have to be mediatised. An inspired poem or a scientific theorem posted on an anonymous blog will remain unnoticed. The release of a novel, of a scientific article, of a music tune, of a movie or a TV series, of a sports event, follows a symbolic route constituting a publishing protocol. The public image of a movie disclosed at the Festival de Cannes will differ from the one of a blockbuster presented in a Hollywood showy opening, and even more from a B movie released straight on DVD. The mediatisation of copyrighted expressions adds meaning and value to the works. It is achieved through a media ecosystem providing a direct and indirect echo to the works.

Copyrighted expressions differ from other goods by the fact that, being non-rival, they can be mediatised through free consumption. Thanks to external effects, the supply of free copyrighted works can be financed by ads paid by other firms, by authors (gold open access reviews), or by other contents bundled on a publishing platform. Digitization, which extends the non-rivalness thanks to the dematerialisation of the supports, increases the potential of mediatisation through free consumption. Hence, the coexistence of free and pay content – news, music, video, scientific articles, sports, etc. – on the same digital platforms, tends to narrow the gap between mediatisation and distribution.

In effect, a media ecosystem reflects a state of the technology. Let’s take the case of music. Under the phonographic period, music was taped on records and mediatised through record sleeves, radios, concerts, magazines, video clips and record shops. The radios had to notice the release of the records and to start the buzz. Competition between record producers gave even rise to the payola system – a bribe to disc jockeys in order to get aired – that was depicted by Ronald Coase (1979) as a hidden publicity. Concert tours were keeping the topicality of the artists. Magazines were feeding fans with stories related to music performers. At the end of the chain, record shops were the ultimate media displaying the sleeves and their assortment in racks. In this ecosystem, most of the relations between copyright holders and media were internalised by formal arrangements. The production and sales of records was shaping the ecosystem. Broadcasters were paying license fees while getting paid through publicity. Showcase and tour operators were hiring performers as to sell tickets and drinks. For the most popular artists, record producers invested in video clips and TV ads. Distributors were rewarded on record sales. Only a few players (magazines, talk-shows, variety-shows) benefitted from informal cross-externalities.

With digitization, the phonographic ecosystem gets supplemented both on the media and the distribution side. On the media side, streaming platforms and social networks can create and amplify a buzz that was formerly produced by showcases and radios. The online press will link a music review to a playlist that is just one-click from the reader. TV promotion is re-focussed on ads and talent shows whose viewers argue on social networks. On the distribution side, music downloads and, increasingly, streaming services substitute to CD sales.

A key pattern of this trend is the convergence of mediatisation and distribution. Streaming platforms deliver both mediatisation – through free access service and discovery or thematic apps – and distribution. On such platforms, a subscriber can share his playlists with his social network’s friends. Thus, a listener can become a disc jockey, now called a curator, getting followers for his selection service. On video platforms, amateurs can post video parodies that will increase the popularity of the original. Right holders can either accept or refuse such parodies and even, for a commercial use, license performers their music publishing rights. In other words, with the continuous surge and rollout of new media, the music ecosystem gets denser and denser making the internalisation strategies more open and flexible than in the past.

What happens with music also happens with books, scientific articles, news, sports, cinema, TV series… Each copyright industry – characterised by the production and the publishing of specific expressions – is confronted with the surge of new media that change its former ecosystem. For a while, this change has been perceived as a dematerialisation arousing competition or cannibalisation between distribution channels. This view was suggested by the vertical design of the industry resulting from the copyright transaction chain and the distribution of material supports.

Actually, the change is far more sophisticated. The newness of the digital ecosystems is that mediatisation gets blurred with distribution. In other words, digitization makes copyrighted works distribution a particular case of mediatisation. This already existed when, for instance, radio stations had to pay license fees to mediatise music. But with digital ecosystems, such practises are widespread and continuously expanding. This in turn, makes internalisation – copyright exploitation – an iterative process adapting to new media, new practises, requiring new contracts and new pricing schemes.

The last post of this series examines economic issues and policy implications related to media ecosystems.

Advertising as a complementary good

Since George Stigler’s paper on information costs (1961), the issue of advertising is widely discussed among economists. For many of them, advertising is a means to reduce consumer’s transaction costs and therefore, to increase demand by decreasing the real price of the product. However, as many advertisements do not provide objective information, some economists see them also as a means to change consumer’s preferences about the product. Therefore a distinction is made between informative and persuasive advertisement: informative ads are perceived as socially useful because they cut transaction costs, while persuasive ads generate artificial, if not lousy, needs (Dixit and Norman, 1978). This approach raises two issues: first, it is nearly impossible to separate informative from persuasive advertising as most messages carry the two aspects; second, from a theoretical point of view, if the consumer has free will, his or her preferences cannot be manipulated by third parties (Stigler and Becker, 1977).

This is why Becker and Murphy (B&M, 1993) uphold that advertising should be seen as a complementary good being positively or negatively valued by the consumer. Advertising is then an informational complement, comparable to a quality surplus or deficit, that helps to better discriminate among consumers: consumers who value more advertising will get more of it attached to the product while others will buy the product according to their valuation of its plain utility. Since the meaning associated with information can have a social value, the information complement may carry network effects increasing the utility of the good with the number of consumers. Such analysis of a meaning value brought by advertising to the product is both in line with the free will consumer hypothesis, and with the change in product utility that publicity can bring.

In their approach, B&M define advertising as giving a “favorable notice” to the good advertised so that an increase in ads raises the marginal utility of this good. They underline that such “notice” can either be paid by the advertiser and given away to the consumer, or sold to him or her through various media channels.

For example sports columns in newspapers provide plenty of notice about local professional teams, even though sports sections are not free to readers, and team owners do not pay for the columns.” (p.946).

Such notice generate additional audience to sporting events, whatever their distribution channel.

Marketers commonly distinguish three kinds of channels: paid media that is used for traditional advertising (TV, radio, Press, etc.); owned media, that is the information delivered by the product itself, by an integrated distributor, by an owned website and all the channels related to it; earned media that is the information published by reviewers or consumers, more and more through social networks (Edelman and Salsberg, 2010). In other words, the information complement associated with the product is not only paid advertising it is the accrued meaning resulting from all media channels. This is why we prefer to call it “mediatisation”. Mediatisation economics consists in getting the most valuable complement at the cheapest cost.

thinkofthat.net

A good illustration is given by the historic launch of the Apple Macintosh by Steve Jobs in January 1984 (Isaacson, 2012, Chapter 15). At that time, Jobs had financed a commercial movie shot by Ridley Scott setting up the myth of the liberating machine. The ad was such a storybook that the machine did not even appear in it. Jobs decided to broadcast it during the Super Bowl, reaching at once 96 million Americans. The ad created a massive expectation enabling Jobs to disclose the product in a theatrical keynote echoed as a global event. In other words, while the paid ad was focussed on persuasion, the informative side was covered by the keynote, which got relayed for free all across the world. This “publishing protocol” became a routine that helped Apple to establish its brand as a powerful context adding value to all the new products marketed by the firm. The innovative genius of Steve Jobs did not only focus on products but also on their mediatisation that catalysed their commercial success.

The multiplicity of media channels and the differences in their pricing schemes underline the importance of external effects in providing the media complement. The quest of such effects does not concern only marketers, but all the talents involved in the product, as well as media professionals and consumers. In the Apple example, the media earned by Jobs’ keynotes are external effects of the initial ad investment. The heuristics of marketing aim at generating the most valuable mediatisation as possible. It is frequently related to the maximisation of the externalities associated with the release investment.

Mediatisation results from a publishing protocol

www.dulwichclassics.com

Schematically, two components contribute to the media complement value: one is the myth, the story conveyed by the media; the other is the reach, the social coverage of the message. The myth, which starts with the design or the packaging, the visible appearance of the product, relies on a creative work. It adds a universe that can be more or less valued by the consumer. (For instance, Alfred P. Sloan (1965, pp. 272-273) explains how the curvaceous design of the 1929 Buick has been mocked as « the poor Buick enceinte » leading to a pitiful commercial flop.) The social coverage can either be obtained trough paid, owned or earned media. It may generate network or snob effects according to the positive or negative valuation of the number of consumers. In some cases, the buzz corresponding to earned media can get hi-jacked by angry consumers willing to spoil the image of the product.

However, these components are not independent. For instance, the disclosure of the product relates both to the story and to the coverage: the product’s entry into the public sphere, its arrival to the world takes part in its mythology. The delivery of the Macintosh coming after the Super Bowl announcement and brilliantly staged by its creator, is fully part of Apple’s myth. The disclosure sets up a before and an after which has the dimension of an event. If spectacular, such event can be covered and echoed freely through the news. A resounding release establishes both the newness and the coverage of a product whatever its objective innovation.

In other words, mediatisation proceeds from a “publishing protocol” which provides the product – whether material or not – its meaningful complement (Bomsel & al., 2013). We use this expression by analogy with a correspondence protocol, which connects together two identified agents who agree to start an information exchange. A publishing protocol connects an identified emitter to indistinct receivers. It announces the disclosure of a message and establishes its public status. By doing so, it creates a context adding meaning to the published expression. Hence, such protocol has the economic dimension of a creative work: nobody knows in advance what its utility will be and how much it will add to the product. Although a mediatisation is needed to give the product its public status, it can be perceived either as a good or as a bad.

In this process, the information complement (the myth) is embedded in a set of names: the emitter of the expression who can be a single artist, a sportsman, a politician, or a cast, a team, provides a context which adds sense to the expression. It is the role of the publishing protocol to make the emitter identified by the public and to provide his name – in fact, his brand – with a contextual value. A publishing brand can be seen as an informational asset providing the branded expression with a context valued by the consumer. Such context has cumulative properties: its meaning value changes at every occurrence. A football team, where each player gets mediatised at every game, is a contextual asset portfolio (Bomsel & al., 2013).

Once the utility of the myth is tested, many techniques can be used to maximise its social coverage and the sales revenue. Because a “publishing protocol” deals with disclosure, it is also a piece of news. Hence, it can benefit from the externalities of the news echo. In effect, the news is not restricted by copyright and fuel media competition: a sensational event is instantly relayed on all the news channels including social networks (Facebook, Twitter, Instagram, Weibo, Weixin, QQ, etc.). Moreover, the brand value of popular artists attracts audiences on every platform that takes up the news. The importance of such externalities in producing the media complement deserves a specific focus. It will refer to the concept of ecosystem, which we explore in the next post of this series.

The objective of this series of posts is to show that in the case of copyright, the value added to proprietary expressions is produced through media ecosystems. The prevalence of external effects associated with the media coverage – the mediatisation of the works – reinforces the internalisation function of copyright. But in a way that differs from the traditional vertical chain of contracts. And that makes copyright exploitation a highly empirical activity.

Copyrighted expressions are usually created to address audiences, e.g. receivers that are unknown from the emitter. They are then brought to the attention of the public through media.

Media provide to the expression its public status. Conversely to business talks, or private correspondence, mediatised expressions are messages formally addressed to the public.

Of course, this is not only true for expressions. It applies to any kind of goods addressing indistinct consumers on competitive markets. Consumers are noticed through media of the availability and characteristics of tradable goods and services.

However, expressions are specific because they consist of information, a non-rival commodity subjected to peculiar property rights. As long as copyrighted expressions were published on material supports, the symbolic dimension of the mediatisation was hidden by the economics of the support. The support was bringing rivalness to the expressions, which were then considered as the informational component of a delivery media (Watt, 2000). In a digital environment, the publishing of copyrighted expressions adds information to information.

This series of posts deals with mediatisation that is the operation carried by media so to give material or immaterial goods a public status. Mediatisation indeed covers signalling or advertising, but also all the kinds of information – design, brands, names, reviews, buzz, word-of mouth, social image – attached to a public or tradable item.

Our thesis is that mediatisation is an information complement attached to the mediatised item. It is a complementary good that alters – increases or decreases – the utility of the plain product. The complement is produced through a set of media packed with information externalities. In the analogue world, such ecosystems used to be rather stable. So were the relations between producers, media and distributors, allowing fixed arrangements to internalise the externalities. In the digital environment, media ecosystems get continuously denser which makes internalisation strategies a moving target.

Mediatisation adds meaning to functional goods or services. In the case of copyrighted expressions, this meaning is added to products whose utility is already meaning. Besides, as we will show, the dematerialisation of media tones down the borders between mediatisation and distribution. Hence, mediatisation economics are even more difficult to assess for copyrighted goods than for material ones.

The rest of this series of posts (to be released in the coming weeks) is structured as follows:

• The second post recalls the economic literature presenting advertising as a complementary good instead of a transaction cost. This approach will be extended to unpaid advertising or mediatisation. This post also examines the mediatisation content and its production through what we call “publishing protocols”. Publishing protocols will be used to describe the information externalities that shape the media ecosystems.
• The third post describes the specificities of the mediatisation of copyrighted goods and the changes brought by digitization.
• The fourth post underlines the importance of mediatisation economics and its impact on creation diversity. It also presents our concluding comments, regarding the internalisation function of copyright in media ecosystems.

Pour contourner l’obstacle juridique de Capital Records, ReDigi a annoncé début 2014 (communiqué de presse disponible ici) qu’elle avait désormais recours à une nouvelle technologie brevetée. Le brevet américain n° 8,627,500 B2 concerne une méthode de gestion et de revente de contenus numériques qui ne nécessite aucune copie sur la plateforme de revente. Cette technologie assure une “transaction atomique” selon les termes utilisés par ReDigi: il s’agit d’un mécanisme de transfert de fichier basé sur le cloud qui transfère automatiquement un bien “original” d’un propriétaire vers un nouveau propriétaire, sans faire de copie intermédiaire. Le système garantit aussi que la copie de départ, ainsi que les copies personnelles qui auraient été faites par le vendeur du fichier d’occasion, ont été retirées de son ordinateur. (Mais l’effectivité de cette technique reste à démontrer, notamment compte tenu des autres copies que le propriétaire originaire a pu faire sur d’autres machines). La technologie de ReDigi se distingue donc de celles dites de “copy and delete” qui font une copie tout en s’assurant que la copie originale est détruite. Ces dernières technologies déjà connues (et brevetées par Amazon ou Apple) ne permettraient pas de contourner l’écueil mis en évidence dans l’arrêt Capital Records v. ReDigi. Cette innovation technologique illustre bien le jeu permanent de cache-cache qui se joue entre technologie et droit.

La question demeure de savoir si la règle de l’épuisement du droit de distribution connue en droit européen est applicable dans l’univers du numérique. L’arrêt Oracle c. UsedSoft du 3 juillet 2012 de la Cour de justice de l’UE (C-128/11) qui porte sur l’épuisement du droit de distribuer des logiciels reste la référence en Europe.

Trois questions à examiner.

Faut-il considérer l’arrêt UsedSoft comme définissant une lex specialis applicable aux seuls logiciels ou, au contraire, considérer que la même règle de l’épuisement est applicable à d’autres fichiers numériques (par ex. des MP3 musicaux ou des ebooks)?

Ensuite, si l’on conclut que la jurisprudence UsedSoft est applicable aux seuls logiciels, cela vaut-il pour des jeux-vidéos ou des ‘apps’ distribués en ligne? La réponse oblige à s’interroger sur la notion de logiciel et à revenir sur un autre arrêt de la Cour de justice de l’UE, l’arrêt dit BSA ou BeSoft (22 déc. 2010, C-393/09).

Enfin, pensez-vous que la nouvelle technologie proposée par ReDigi permet de toute manière de considérer comme licite la revente en ligne de fichiers audio ou texte licitement acquis?

Extracted from a betanews post entitled Apple is a patent troll now

Hee-Eun Kim, an associate with Covington & Burling LLP,  where I work as Of Counsel, has prepared a very useful survey of the last developments involving non-practicing entities (NPEs), more widely known as “patent trolls, in Europe. Paul Belleflamme has addressed the trolling problems in several posts: Beware! Privateers patrol thse patent waters, What to think of ‘patent trolls’? The return and (in French) Patent trolls et marché des brevets, but this is a legal update on the situation in Europe.

There have been lots of developments in Europe concerning non-practicing entities (NPEs) after the post “Will ‘Patent trolls’ soon appear on the European market?” that Alain Strowel posted on ipdigit.  Since then, some NPEs have filed patent cases with European courts.  Also, both industry and policymakers are raising their voice about NPEs in Europe, particularly on the prospects of NPEs litigating in Europe’s upcoming unitary patent system.

The question of the status of NPEs in Europe is taking on increasing importance.  Will ‘patent trolls’ soon appear on the European market?  Or have they longlanded on this continent?  To find out, we need more rigorous evidence-gathering.  Hopefully, the European Commission’s study will shed some light at least on NPEs in the semiconductor industry.  But a lot of homework lies ahead.     

What did industry and policymakers say about the prospects of NPEs in Europe?

·       25/02/2014: As you remember from our previous post, on 26 September 2013 a coalition of manufacturing and non-manufacturing companies sent a letter to the Preparatory Committee of the Unified Patent Court (UPC) expressing concern about certain procedural aspects of the UPC.  On 25 February 2014, the coalition sent another letter recommending to the Committee to incorporate “guidance to the judiciary from the outset on the issues of bifurcation and injunctions when validity is raised, including when to issue a stay of an infringement action and when to issue injunctions.”  Without this guidance, the letter points out that “the potential exists for a court to order an injunction prohibiting the importation and sale of goods even though the patent may ultimately be found invalid (emphasis added, as elsewhere in this post).”   

·        21/02/2014: Benoît Battistelli, President of the European Patent Office (EPO) stated on an EPO blog that “… some users, mainly US, expressed their concerns regarding the potential extension to Europe of [these] patent troll phenomena [of the U.S.]  The legal framework defined by the treaty on the UPC, integrating the European legacy, and the on-going implementing and procedural work done by the Preparatory Committee give all reasons to believe that it will not be the case.  This new litigation system will be well balanced and fit for the purpose.”

·       08/01/2014: EU Internal Market Commissioner Michael Barnier responded to the European Parliament that the Commission “fails to see how the recent Union legislation on patents, namely Regulations 1257/2012 and 1260/2012, could increase the activity of so called ‘patent trolls’ in Europe.”

·       09/12/2013: EU Competition Commissioner Joaquín Almunia mentioned in his speech on IP and competition policy that “[f]or a variety of reasons, patent trolls have been less active in Europe than in the U.S.  However, this could change in the future.  (…)We are watching this space very carefully.” 

In Europe, we are also seeing interesting developments in patent and antitrust cases involving NPEs.

·       10/03/2014: Unwired Planet announced that it sued Google, HTC, Huawei and Samsung in London and Düsseldorf alleging infringement of patents related to wireless communications.  Unwired Planet acquired nearly 2,000 patents from Ericsson in January 2013, most of which cover mobile communication technology.  

·       28/02/2014: The Mannheim Regional Court dismissed IPCom’s two lawsuits against Apple and one against HTC concerning standard-essential mobile technology patents.  IPCom had claimed €1.6 billion ($2.2 billion) in damages from Apple.  IPCom is a German-based NPE that acquired Bosch’s wireless patent portfolio in 2007. 

·       24/02/2014: In a standard-essential patent (SEP) dispute filed by Vringo against ZTE, Vringo announced that the Karlsruhe Higher Regional Court denied ZTE’s motion to stay the lower court’s injunction order until the EU Court of Justice concludes on the legality of injunctive relief based on SEPs in Huawei v ZTE.

·       February 2014: The European Commission apparently closed an antitrust case against InterDigital shortly after Huawei withdrew its complaint against the company.  In December 2013, the two settled most of their patent disputes.     

·       09/12/2013: French sovereign patent fund French Brevets announced that it sued LG and HTC in Germany and in the U.S. for infringement of patents related to NFC technology.

The topic of NPEsin Europe is under study, and more such efforts would be welcome!

·       16/01/2014: The European Commission launched a “Study on the changing role of intellectual property in the semiconductor industry – including non- practicing entities,” dealing with changes in IP strategy and patenting practices in the semiconductor industry due to concentration and specialization, the emergence of ‘foundries’ and ‘fabless,’ technological developments in the sector and the appearance of NPEs.  A Dutch consortium of TNO and CWTS is conducting the study.  The Commission expects the result to be released in April 2014.   

·       02/12/2013: Erich Spangenberg, founder of IPNav explained in an interview with Intellectual Asset Management (IAM) why his firm favors the patent litigation system of Germany to that of the U.S.  The benefits which he mentioned include bifurcation, speed, limited discovery and expertise of judges. 

·       26/09/2013: An academic study by Prof. Christian Helmers and others concludes that NPEs are responsible for 11% of all patent suits filed in the U.K. between 2000 and 2010.  This  study notes that “NPEs litigating in the U.K. overwhelmingly assert high-tech patents – even more so, in fact, than their U.S. counterparts – despite higher barriers to software patentability in Europe.  (…) We see evidence that the U.K.’s loser-pays legal regime deters NPEs from filing suit, while at the same time encouraging accused infringers to defend claims filed against them.  U.K. NPE suits are initiated by potential infringers more often than by NPEs; rarely end in settlement;  very rarely end in victory for NPEs;  and, thus, result in an attorney’s fee award to the potential infringer more often than a damages award or settlement payment to the patentee.  Together, these findings (…) may serve to quell concerns that Europe’s forthcoming Unified Patent Court will draw NPEs to Europe.”

This blog will keep monitoring NPE developments in Europe.

By Hee-Eun Kim, Covington & Burling LLP