The American company Uber has been all over the news in Belgium over the last three weeks. Uber connects passengers with drivers of vehicles for ride-sharing services; it appears therefore as a typical two-sided platform. As Evans (2011) explains it, a business opportunity emerges for a two-sided (or multi-sided) platform when three conditions are met:

1. There are distinct groups of customers.
2. A member of one group benefits from having his demand coordinated with one or more members of another group (i.e., there are indirect, or cross-side, network effects).
3. An intermediary can facilitate that coordination more efficiently than bilateral relationships between the members of the groups.

Uber meets the three conditions. First, the two groups are passengers and drivers. Second, indirect network effects are clearly present; as one can read on Uber website:

By seamlessly connecting riders to drivers through our apps, we make cities more accessible, opening up more possibilities for riders and more business for drivers.

Finally, drivers and passengers would have a hard time to find each other if they could not use the Uber app on their smartphone.

Uber made the headlines in Belgium recently because it first launched its service (UberPOP) in Brussels, then was requested to stop this service by the Brussels authorities, and finally counterattacked by modifying its offering and by making it freely accessible for one week. To justify its decision, the Brussels government invoked the fact that Uber service is illegal because it violates several regulations (the drivers do not pass any exam, they do not follow the tariffs and vehicles do not exhibit the required marks).

Brussels is by far not the only city in the world where Uber is in conflict with the regulators (Seattle just added its name to the list today); and the same goes for similar peer-to-peer transport platforms such as Lyft, Sidecar, or RelayRides.

One can easily understand that taxi drivers feel threatened by these new business models, which make it possible for you and me to compete with them. It is thus logical that they lobby their local authorities to have these services shut down. One can also understand that regulators take sides with taxi drivers, not only because a taxi strike is a nuisance that any reasonable city council is glad to avoid, but more importantly because these platforms are relatively new and it is therefore not clear whether they correctly protect the interests of all the parties involved (passengers and drivers).

In an excellent piece recently published in the Economix column of the New York Times, Arun Sundararajan explains that the current misalignment between newer peer-to-peer business models and older regulations is dangerous because it may impede economic growth.

This is unfortunate, because the emerging peer-to-peer, collaborative “sharing economy” will be a significant segment of the country’s future economic activity, stimulating new consumption, raising productivity and catalyzing individual innovation and entrepreneurship.

In the face of this “regulatory conundrum”, Arun Sundararajan recommends a combination of self-regulatory measures taken by the platforms themselves and some redesigned government oversight:

The solution is to delegate more regulatory responsibility to the marketplaces and platforms while preserving some government oversight, by creating new self-regulatory organizations like those that have succeeded in other markets and industries. (…) the government should recognize that the new peer-to-peer marketplaces have sophisticated controls naturally built in. (…) The platforms have voluntarily adopted additional nondigital safeguards. (…) Self-policing isn’t a universal panacea. We’ll still need government mandates to prevent effects like congestion, or for, say, providing accessible vehicles and ensuring disaster preparedness — things that markets don’t easily self-provide.

I fully subscribe to this view (and, apparently, so does the State of California as it is the first State that made peer-to-peer transport services legal under a dedicated regulatory framework). As noted above, Uber and the other peer-to-peer transport services are typical examples of two-sided platforms. I have already explained in a previous post that

On such platforms, intermediaries have to design various strategies to induce agents on both sides to participate. This might be tricky because of the “chicken-and-egg” problem that pesters all these platforms: to attract one group, you need to attract the other one, but were should you start?

A first role of these platforms as intermediaries is thus to act as platform operators by providing a platform where passengers and drivers are able to interact. Yet, a precondition for having both sides on board is that they can trust each other, which is far from obvious in the presence of asymmetric information. Hence, the intermediaries must also play the role of trusted third-parties; that is, Uber, Lyft, Sidecar and the likes must act as certification agents, mainly by revealing information about the drivers’ reliability or quality. They do so through reputation systems and active supplier screening; another cooperative initiative in this direction is the Peer-to-Peer Rideshare Insurance Coalition, which aims “to build a foundation of insurance best practices, policies and information for P2P Ridesharing.”

Source: creatinemarketing.com

If they want to be considered as trusted intermediaries, platforms have to become bearers of reputation and effectively certify the quality and reliability of the drivers that they take on board. It is indeed in the platforms’ best interest to screen drivers carefully so as to keep only the high-quality ones. Why? Because a driver selected by the platform is believed to be of high quality by a passenger unless she previously experienced low quality of some other driver contacted through the platform. Hence, to avoid any stain on its reputation, the platform will directly discontinue the operation of low quality drivers. Understanding that, drivers do not find it profitable to provide a low quality service, implying that only high quality services are eventually provided on the platform.

In a nutshell, the platform can be trusted simply because it suffices to have one rotten apple in the bag to spoil the rest of them in no time, something that a two-sided platform simply cannot afford.

As many Internet-based platforms share this problem of establishing trust, I would like you to find and discuss some specific mechanisms that they put in place in order to achieve this goal.

Last year, I had to deliver a speech about the economics of Internet to a non-technical audience. To make my presentation (hopefully) more pleasant for this audience, and to seize the opportunity to learn a new application, I decided to use Prezi. The application was rather new at the time (it had been launched in 2009 but the buzz really started in 2012) and I was happy to show off by using it. Yet, that was not my unique motivation: I also wanted to use Prezi as an illustration for one of the questions that I was addressing in my presentation, namely: “How is it possible to make money with free stuff on the Internet?” (a theme that I have already developed on this blog, in French, here and here).

There are three main economic environments in which freebies can be successfully used to make a profit: environments with network effects, with switching costs and/or with uncertainty about the quality of products. It appears that Prezi stands at the crossroads of these three environments.

1. Prezi has implemented various ways to build a true community of users around its application. For instance, users are invited to register via their Facebook profile, to make their presentations public and even, if they wish so, to allow other users to modify these presentations. Prezi also offers an application for conducting meetings, as well as a forum where users can share tips or post questions and answers. Finally, Prezi hires “student ambassadors”, whose mission is to create word-of-mouth on campuses around the world. Clearly, all these measures are designed to generate network effects: the more Prezi is adopted, the more it becomes interesting for new users to adopt it too.
2. Like most applications that require some investment of time to learn how to use them properly, Prezi creates switching costs. Though using Prezi is quite intuitive, the application has some specific features, whose knowledge can hardly be helpful for the use of other applications. In addition, the existence of a community of users and of sharing features contributes to somehow lock users in. Leaving Prezi for an alternative application would be synonymous with forgoing the benefits related to learning the application and to interacting with other users.
3. Like any application, Prezi is an “experience good“. By this we mean that users can estimate how much the product is valuable for them only after having taken the trouble to learn how to use it.

By offering a free version (either via online use, or via a “desktop” version that can be used for free during one month, or by granting free access to students and teachers), Prezi attempts to solve the problems raised by the three environments that I have just described. In fact, the free version …

… attracts the first users, who will generate network effects and, thereby, attract other users;
… reassures users, who anticipate that they may be “trapped” by switching costs once they will have invested time in learning the application;
… allows wary users to get acquainted with the application and realize how much they value it.

www.freemium.org

Of course, Prezi will never become a profitable business if the majority of users content themselves with the free version. The objective is to bring a sufficient number of users (mostly businesses) to turn to the paid versions, which provide users with a variety of advanced (premium) features. This is the so-called “freemium” model, which is based on a menu of free and premium versions.

Note that I wrote this analysis one year ago. Since then, I haven’t checked whether the freemium model does indeed work for Prezi.  This is what I would like you to check for me. You may also want to have a look at other attempts to use the freemium pricing strategy (a useful entry point could be www.fremium.org), or to discuss whether Chris Anderson was right in 2008 when stating that “$0.00 Is the Future of Business”.

(This is an updated and slightly modified version of this post, published on April 25, 2012.)

In April 2012, Lucy Koh, a US District Court Judge, tried to force a truce on one of the fiercest fronts of what is now commonly known as the “Smartphone Patent Wars”. She ordered Tim Cook and Choi Gee-Sung, the CEOs of Apple and Samsung, to meet and work out their bitter and prolonged patent disputes. The two firms had indeed spent long months suing and countersuing each other, all over the world, for alleged patent infringements (this infographic nicely summarizes the main episodes of this “battle”).

As most companies in the smartphone industry are fighting similar battles (for a very effective presentation of the existing feuds, see the animated graphic proposed by the Financial Times), the peacemaking process that Lucy Koh initiated may prove crucial for saving the industry from a potential collective suicide.

The legal quagmire that currently plagues the smartphone industry results from a combination of forces that regular readers of this blog should be familiar with by now.

1. Smartphones are the archetypal example of a cumulative innovation. They exhibit indeed the two types of cumulativeness: complementarity and sequentiality.

• Complementarity describes the fact that a second-generation product requires the combination of a number of different first-generation innovations (‘many-to-one’). This is clearly the case for smartphones as they result from the collision between computers and mobile-phones, which are themselves already cumulative in nature.
• Sequentiality refers to the notion that a first-generation innovation leads to the creation of many second-generation innovations (‘one-to-many’). This is also the case for smartphones insofar as all handsets have to incorporate a number of existing standards (for, e.g., wi-fi access, email transfers or video display).

2. The previous technical features raise important-and potentially conflicting-economic issues regarding the allocation of intellectual property rights. On the one hand, complementarity raises the prospect of the ‘tragedy of the anticommons’: the allocation of strong property rights to separate right-holders results in higher prices (‘royalty-stacking’) and higher transaction costs. In this respect, some form of ‘collective’ or ‘shared’ property is more prone to favor interoperability and easy access to interfaces.

Sequentiality, on the other hand, is likely to create hold-up opportunities for first-generation innovators if intellectual property rights are defined too broadly (i.e., if the first-generation innovation confers the patentee rights over subsequent innovations). For an explanation of the hold-up problem, see my post on ‘patent privateers’.

3. The importance of the previous two problems is magnified by the sheer density and size of the ‘patent thicket’ that engulfs the smartphone industry: according to estimates, a smartphone is open to a quarter of a million patent claims. If you factor in the diversity of players (as companies flock from industries as diverse as equipment manufacturing and software development), the crucial need for interoperability (just try to imagine how painful your life would be if several incompatible email services were coexisting), and the high profitability of the whole market (the global mobile phone industry reached a value of US$1.18 trillions in 2011), you easily understand why even though private solutions to the previous problems do exist (patent pools and standard-setting organizations address the tragedy of the anticommons while licensing agreements may solve the hold-up problem), these solutions are very hard to achieve in the smartphone arena.

Accordingly, some players in the market have called upon the competition authorities to sort out the mess. Some observers have been rather critical of the authorities’ abilities to do so. For instance, in an article posted on this blog, Yann Ménière expresses doubts that competition authorities would be able to impose sanctions that address the fundamental problem(s).

What do you think?

1. Was Lucy Koh’s move effective? Did the ‘Smartphone Patent Wars’ calm down over the last months or did they go on with a vengeance? 
2. Could competition law play a useful role in achieving a truce in the smartphone patent war? Or are there any other solutions that could push the industry back to a path where  consumers benefit more of inventions than patent litigators?

Answer one or the other question in your comment. 

Source: www.last.fm

It is under this title that a series of articles (published in the Belgian newspaper La Libre Belgique on October, 19 2013 and prepared by Laurent Lambrecht; see here) wondered if the future unitary patent and unified patent court might attract “trolls” in Europe. “The risk is not negligible“: this is my answer, summarized in the interview available on LaLibre.be (here).

What makes this issue topical is the open letter (26 September 2013) jointly signed by 16 U.S. and European companies, including Adidas, Deutsche Telekom, Apple, Google and Microsoft. This letter criticizes some aspects of the adopted judicial system and suggests some changes to be made to the still to be adopted rules of procedure before the future unified patent jurisdiction.
As a reminder, the term ‘patent trolls’, which refers to small evil creatures from Norse mythology, is used to describe companies that acquire patent portfolios not to exploit them but to negotiate licenses, potentially under the threat of an action for patent infringement  (see the article ‘patent troll’ in Wikipedia). We also speak, more neutrally, of ‘Non-Practicing Entities’ (NPE) for non-operating entities, or “Patent Assertion Entities” (PAE) to identify entities that put their patents into practice through litigation. Such legal actions have proliferated in recent years, as shown in the table hereunder (taken from a White House blog). Some people, like Paul Belleflamme noted in one of his articles on this subject on IPdigIT (What to think of ‘patent’ trolls’?) defend these trolls as they are ahead of other companies in anticipating technological progress. I also refer you to other posts that Paul published on this blog on various aspects of the subject (see here and here).

Many observers disapprove the actions of those entities because they assimilate their business model to judicial ‘blackmail’. But can we talk of blackmail when one does nothing but enforce a legal right that one owns? When is a legal action abusive? Couldn’t it be that the problem is just that the patent shouldn’t have been granted in the first place? Behind the abusive behavior of ‘patent trolls’ would therefore lie the question of the quality of the patents granted by the Patent Offices. These are broad and complex issues indeed. But these issues start to be addressed by public authorities, at least in the United States. To a point that President Obama, in February 2013, spoke harsh words against patent trolls: “They don’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them” (see also the article in the New York Times: Obama Orders Regulators to Root Out ‘Patent Trolls’).

One of the advisers to the President wrote in June on the blog of the White House (here):

When businesses need to constantly worry about abusive patent litigation they are able to put less of their efforts into creating new products and serving customers. Today, some of the largest innovators in high-tech spend more money on patent litigation and acquisition than they do on research and development for new products. Smaller companies are getting hit just as hard, and 40% of technology startups targeted by patent trolls reported a significant impact on their business operations due the suit or threat thereof. It’s clear that the abuse of the patent system is stifling innovation and putting a drag on our economy. The trolling has gotten out of control, and it’s time to act.

As reported in the Financial Times of October 21, 2013 (U.S. Plans to crack down on patent ‘trolls’, access to the article through online registration), bills to limit these abusive behaviours are on the table of the Congress, just two years after the adoption of the Invent America Act, which amended the U.S. patent law rather significantly. Here are some of the proposed measures to fight patent trolls: increasing transparency regarding the NPEs which file those court actions, strengthening the review process of the patents after they have been granted so as to eliminate “bad patents”, reforming the law of evidence (discovery procedure very cumbersome and costly), etc.

But back to Europe. Why does the risk to see ‘patent trolls’ coming increase with the establishment of the system of unitary patent and unified patent court (official texts here)? The main argument has to do with the increased leverage of the future patent: it will indeed be possible to obtain a legal injunction valid on a large market (at least 13 Member States, including the three largest countries: Germany, France and the United Kingdom). Today, court injunctions in case of patent infringement can, in principle, only be effective for a single country (no cross-border effect). But isn’t it the case that the ‘sword of Damocles’ of an injunction already exists in the current system? Can a company that wants to enter the European market succeed if it does not sell on the German market? In any case, as far as the large companies that signed the letter mentioned above are concerned, one can hardly imagine that they can do without the German market to distribute their products and services in Europe. Hence, it is not that clear that the leverage effect will be seriously raised in the future.

In addition, German patent law already features what is known as ‘bifurcation’ (for an explanation, see here); so, the potential risks of this system (reported in the letter) are already present on the key market for Europe.

There are counter-arguments, pertaining, for instance, to the specificity of the US procedure and to the culture of litigation that is well known in this country. As I recall it in the interview, “In the U.S., 60% of cases are judged by a jury (see the statistics compiled annually by PWC.) We do not know which way a decision can go and this puts the ‘patent trolls’ in a strong position to force companies to settle.” In Europe, only professional judges rule on patent cases, thus limiting somewhat the uncertainties caused by juries.

The damages that are awarded at the end of these proceedings for infringement are also much lower in Europe. This being said, the cost of legal defense can be very high in Europe, a fact which may encourage companies targeted by trolls to directly negotiate a license, rather than to engage into a lengthy and costly procedure. To balance correctly the costs and benefits of an action versus a transaction, we need to add to the direct costs (attorneys’ fees, expert assessments, etc.), the time and energy that corporate lawyers and engineers devote to legal procedures instead of pursuing their usual job within the company.

As can be seen, there are arguments going in opposite directions. Ultimately, what do you think? Does the unified patent package seriously reinforce the risk of ‘patent trolls’ landing in Europe? Do you agree with the position defended by the companies that signed the open letter?

Patents are vitally important to protecting intellectual property. Plenty of creativity occurs within the technology industry, and without patents, executives say they could never justify spending fortunes on new products. And academics say that some aspects of the patent system, like protections for pharmaceuticals, often function smoothly.

However, many people argue that the nation’s patent rules, intended for a mechanical world, are inadequate in today’s digital marketplace. Unlike patents for new drug formulas, patents on software often effectively grant ownership of concepts, rather than tangible creations. Today, the patent office routinely approves patents that describe vague algorithms or business methods, like a software system for calculating online prices, without patent examiners demanding specifics about how those calculations occur or how the software operates.

As a result, some patents are so broad that they allow patent holders to claim sweeping ownership of seemingly unrelated products built by others. Often, companies are sued for violating patents they never knew existed or never dreamed might apply to their creations, at a cost shouldered by consumers in the form of higher prices and fewer choices.

US vs. EU

The extent to which software should be patented has been – and still is – a topic of intense debate. Nowadays, there is no harmonization across countries on this matter. As indicated in the quote above, the US Patent and Trademark Office broadly grants patents that may be referred to as software patents (and it has been doing so since at least the early 1970s). In contrast, the European Patent Office has adopted a more restrictive approach (see here):

The truth of the matter is this: Inventions that use computer programs to provide a business process – not a technical process – are not patentable.

A patent application for an Internet auction system was not granted because the system used conventional computer technology and computer networks – which meant it made no inventive technical contribution to the level of existing technology. Such a system may provide business advancement to its users, but that is not the type of advancement required by the EPO.

On the flip side, the problem of improving signal strengths between mobile phones is a technical problem, even if it is solved by modifications to the phone software rather than its hardware. Such an invention would obtain a patent, provided that the solution is also novel and inventive.

In this respect, the granting practice of the EPO differs significantly from that of the United States Patent and Trademark Office (USPTO), where patent protection for software is granted, even if it does not solve a technical problem.

Adjusting patent subject matter, length, and/or breadth?

The contrasting approaches of the USPTO and the EPO are in terms of “patentability” (or patent-eligible subject matter): what are the conditions for a software (or a “computer-implemented invention” in the European terminology) to be patentable? Two other, and potentially complementary, ways to tackle the issue would be to discuss the “patent length” and the “patent breadth” for software.

In terms of length, some scholars, among them Richard Posner (Federal appeals court judge and professor at at the University of Chicago Law School), recommend a shorter patent term for digital technologies. How long should software patents last? Although Posner does not propose an explicit length, others do. For instance, according to the Electronic Frontier Foundation,

A patent covering software should survive for a term of five years, beginning from the date the application is filed.

Other scholars suggest to reconsider the breadth of software patents. For instance, Mark Lemley suggests to limit software patents to their specific way of accomplishing a function. In his paper “Software Patents and the Return of Functional Claiming“, he claims that the real problem with software patents (in the US) is the following:

Software patent lawyers are increasingly writing patent claims in broad functional terms. Put another way, patentees claim to own not a particular machine, or even a particular series of steps for achieving a goal, but the goal itself. The resulting overbroad patents overlap and create patent thickets.

As summarized by Eric Goldman in a Forbes article:

Prof. Lemley argued that many software patents use “functional claiming,” which is patenting a software function (basically, the problem that needs to be solved) rather than a specific way to implement that function (the innovator’s solution to the problem).  For example, currently we allow patent claims in the form “a computer programmed to achieve this result” or “a computer programmable/capable of achieve a result” (his research identified 11,000 patents using the “capable of” language).  Prof. Lemley argued that we should prevent functional claiming in software, allowing patents only on methods of achieving the function, not the function itself.

And you? What do you think? If you had to weigh the pros and cons of software patents, what patent duration and breadth (if any) would you recommend? To help you organize your thoughts, you can use the framework proposed by William Nordhaus in his book “Innovation, Growth, and Welfare” published in 1969  (see Belleflamme and Peitz, 2010, pp. 517-521 for a textbook presentation).

(This is an edited version of a post that I published on this blog in October 2012.)

Once Research In Motion (RIM), the Canadian company that makes the BlackBerry, has been market leader in the mobile phone market; since then, Apple and other Android phones have hugely overtaken it. Beth Snyder Bulik offers a clear and better understanding of the reasons why the company’s leader position (and profits) plunged through the past years. In order to turn over its critical situation, the firm has operated several key changes early 2013, among which the release of the new BlackBerry smartphone Z10. A few days after the announcement of this release, an article published in The Economist in early February 2013 raised the issue: “BounceBack or ByeBye?”. This question emerged as RIM finally reacted to its difficult situation by announcing some novelty: (1) a brand new operating system (OS), (2) a new generation of mobile phones, (3) a renaming from “RIM” to “BlackBerry”.

In short, through the past months the firm has been striving to restore its image. Yet, do these key changes arrive on time? Or aren’t they already too late? Will they be encouraging enough for the company to sustain its activities?

“Network effects”

As explained in “Industrial Organization: Market and Strategies” (Belleflamme and Peitz, 2010), network effects in the digital world can be formally defined as follows:

“a product is said to exhibit network effects if each user’s utility is increasing in the number of other users of that product or of products compatible with it”.

From there, it is obvious why BlackBerry should care about generating network effects. Active in the digital and social media world with its mobile phones, and forming a system market with its OS, BlackBerry has a lot of reasons to focus on network effects as a prime aspect of its strategy. In this regard, one can particularly observe three types of network effects at play.

Cross-sided network effects. The most important network effects concern the applications (apps) available on BlackBerry’s OS. Smartphone users are indeed concerned about being able to download a wide variety of apps while at the same time, the more an OS is used (i.e. the more users have adopted it), the more apps developers are willing to invest in apps compatible with this OS (at the advantage of the users). Such OS are thus facing a “chicken-and-egg” problem: how can they get both apps developers and apps users at the same time, since both of them are waiting for the other side to adopt the OS first. BlackBerry is aware of that and has therefore announced the availability of about 70,000 apps for the launch of its new OS. Despite this effort, this basket is still far less attractive than the main competitors’ ones (there are more than 700,000 applications available on Google and Apple’s OS). BlackBerry’s new claimed focus is thus to foster the development of many apps compatible with their OS. Thanks to network effects, they expect that the quality and the size of the developers’ community will bring in new customers, hence launching a virtuous circle (or snowball effect).

Direct network effects: communication benefits. The second source of network effects relevant to BlackBerry’s business has to be found in a specific application of the firm that has largely contributed to make its past success: BlackBerry Messenger. As much as Skype or MSN messenger in their fields have succeeded in gathering a community of loyal users, this app did the same for former mobile phone users. It was meant for its users to send text messages through the app for free; in other words, the success of the app rested on network effects: the more users got the app, the more the app was useful and beneficial for its users. It is worth noticing that while network effects may create a positive snowball effect, they may induce the opposite as well. Regarding this app, it has suffered from the decline of BlackBerry and hence from the reduction of its users, fostering further the disutility of the app. Because of the potential of this formerly-successful-community, BlackBerry has recently made an attempt to counteract the negative slope on which the app was stepping. It indeed announced during the BlackBerry Live 2013 event on May 14, 2013 that BlackBerry Messenger was going to be compatible with Android and iOS by this Summer. While we are still waiting for it, it seems that it is going to come soon, this Thursday? Using their famous app would thus be another way to rely on network effects to bounce back in the mobile phone market.

Direct network effects: word-of-mouth. Finally, another network effect on which BlackBerry could plan its catching up is particularly observable in emergent countries, where the firm has substantial market shares (e.g., India, Indonesia or Venezuela). In those countries, people are not technology-informed as we are. The word-of-mouth is still predominant, and BlackBerry is still surfing on the good reputation it acquired over the past years. However, this is not going to last forever, and it is even already changing in some places, like Christopher Mims mentioned it in his article:

“In September 2012, Android became a more popular mobile OS than BlackBerry in Indonesia, which had previously been the biggest market in which it still held sway. Once that tipping point was crossed, network effects that were preserving RIM’s lead started to work against it.”

This network effect is thus useful for a while but it cannot be part of BlackBerry’s new strategy.

A good device, but not an astounding one.

Combined with the release of its own OS in its attempts to revive in the smartphone market, BlackBerry has launched a new model: BlackBerry Z10 (note that the Z30 is going to be released soon). Outwardly, it is a well-designed and manufactured smartphone, working on the new and interesting OS. Per se, it is able to compete with Apple or Samsung. Furthermore, a gigantic marketing budget has been unlocked to make sure having a sufficient impact on the public (e.g., the ad for the Super Bowl, or the presence of Alicia Keys at the presentation of the Z10 and Q10. BlackBerry’s CEO indeed announced for the Wall Street Journal:

“it’s gonna be big. Let’s say several hundreds of million dollars. You will see a huge spend coming in the next quarter once it’s launched, with a global marketing campaign.”

However, one can reasonably be doubtful about the ability of such new phone to capture substantial market shares. Its advantages and qualities are indeed not sufficiently different from competitors’. Moreover, what historically generated the reputation and the competitive advantage of BlackBerry mobile (e.g., security, reliability, BlackBerry’s Messenger’s concept, etc.) has vanished as these features have been successfully imitated by the competition. As a matter of example, iOS and Android have been adopted by some US federal institutions over the past years.

Besides, another former BlackBerry’s competitive advantage was their stranglehold on the B2B market: many companies bought plenty of phones to redistribute them for a professional use to their employees. However, a new conceptual model seems to prevail nowadays: “Bring Your Own Device” (BYOD); it refers to the new practice when employees use their own phones in a professional way. Then, companies do not contract anymore with phone manufacturers, and B2B tends to disappear.

The question is then: can BlackBerry secure a new competitive advantage now? In this respect, it seems that the new OS has been conceptually well-thought out; however, it is still not differentiated enough to reasonably forecast a mass effect of adoption at the expense of competitors’. Furthermore, the marketing positioning does not seem to be optimal. BlackBerry is indeed mainly effective in emerging countries where there is a lower purchasing power, while the Z10 is a high-quality smartphone, likely to be too expensive for such markets. In a nutshell, the old competitive advantages the firm used to possess do not longer exist and, on the other hand, the new BlackBerry Z10 only seems to catch up with competitors’ devices without offering anything on top; at best, the phone is above the market regarding to common characteristics, but it does not offer something more, something that could switch Apple and Google users towards BlackBerry.

Switching costs

On top of these considerations, another obstacle may impede BlackBerry’s successful revival: the costs of switching from another smartphone and/or another OS to BlackBerry’s phone and OS. Switching costs have indeed a strong potential to discourage users from changing of services or products. Potential buyers would for instance have to learn how to use the new phone, the new OS, the new apps compatible with it, etc. In this respect, it may be argued that as the smartphone market is in constant motion and that users are changing of mobile devices relatively often, switching costs are not that important regarding the device in itself (read: the hardware). Moreover, BlackBerry’s OS has been highlighted as simple, and it seems there is no apparent difficulty to move from one competitor’s OS to BlackBerry’s. However, this regards the OS itself; it is another matter regarding the services that are running on it. As a matter of example, iOS and Windows are designed as to be optimized with Apple and Microsoft’s other services, such as calendar, mail, cloud, etc. All these features make the cost of switching to another OS with other apps higher. Switching costs are thus a true concern for BlackBerry.

Moreover, “true” costs may be considered as well; by switching device, users may indeed be required to repay for applications they owned previously. Besides, applications for sale on BlackBerry are on average more expensive than on Apple Store or Google Store, which may drive consumers choosing for the latter instead. Finally, the costs that the developers may face for adapting their apps to BlackBerry’s OS is quite low in itself. As mentioned earlier, what really matters for them is the whole network that will concretely use their new applications.

All in all, the onetime market leader position that BlackBerry enjoyed now belongs to the past, and the situation does not seem to change soon. The prospects are indeed gloomy, and only time will tell us how well the Canadian firm will stand up to a fierce market with such a loss of shares in the recent past. What about you? What is your opinion about BlackBerry’s future? Do you have any advice about how the firm could turn around the situation in its favor?

In 1572, Queen Elizabeth I of England commissioned Francis Drake to sail for America and encouraged him to plunder Spanish vessels on his way. Drake had thus all the attributes of a pirate, except that he was not working for his own account but for a government. This type of pirate was known as a “privateer”. Privateers presented the big advantage of allowing one nation to harry another one without officially attacking it. In other words, nations were avoiding the costs (and risks) of state-run warfare by outsourcing the “business” to profit-maximising entrepreneurs.

The “new privateers”

Although privateers disappeared with naval warfare in the 19th century (and an agreement by all major European powers to abolish it), they seem to have recently reincarnated into a new breed called “patent privateers”. Like their forefathers, patent privateers are armed by a powerful sponsor, with the aim of assaulting their sponsor’s rivals. In the 21st century version, sponsors—and their rivals—are established operating companies, mainly in the IT and consumer electronic sectors. The arsenal also differs from the 16th century version: instead of ships and guns, privateers receive patents and raids take the form of expensive and incessant patent infringement litigation.

Given that they do not manufacture any products (and thus, unlike their sponsors, are not restrained by any fear of “mutually assured destruction”), patent privateers could be mistaken with “Patent Trolls”, aka (in their new—and more politically-correct—denominations) “Patent Asserting Entities (PAEs)” or “Patent Licensing and Enforcement Companies (PLECs)”. Some commentators, however, see one subtle difference:

“unlike patent trolls, patent privateers share their revenues with others—the companies whose patents they purchased.”

Actually, it would be more correct to rewrite the end of the previous sentence as: “the companies who sold them their patents”. As David Balto (an Antitrust attorney and former policy director of the U.S. Federal Trade Commission) explained it recently in the Huffington Post:

“[O]perating companies transfer patents to trolls that have demonstrated a particular talent for “monetizing” patents. The transferring operating company typically maintains a perpetual royalty-free license for itself, and often extends a similar courtesy to business partners. The terms of the deal usually contain a payment schedule that enables the troll to earn more for meeting certain litigation milestones, thereby incentivizing the troll to leverage patents against the operating company’s competitors. The operating company may also maintain a right to a portion of the proceeds.”

Two recent and prominent examples of patent privateering agreements are between Microsoft, Nokia and MOSAID on the one hand, and Ericsson and Unwired Planet on the other hand. Both MOSAID and Unwired Planet (formerly known a Openwave Systems) are well known trolls, and both deals involve the transfer of more than 2,000 patents. As David Balto reports it:

“the contract between MOSAID and Microsoft/Nokia calls for MOSAID to reach “minimum royalty milestones” and Microsoft/Nokia’s right to collect a “shortfall payment. (…) The agreement [between Ericsson and Unwired Planet] is reported to contain a payment schedule that rewards Unwired Planet for success, and even contains a commitment by Ericsson to continue developing, obtaining, and feeding more patents to Unwired Planet over the years.”

Sponsors of privateers see nothing wrong in such deals: they are simply looking for the most efficient way to realize a legitimate return on their high and risky investments in intellectual property. Using privateers is efficient indeed as it allows operating companies to outsource litigation and to avoid a countersuit against their own operations; and if the competitors’ costs are raised in the process, even better!

Naturally, the targets of the privateers’ raids have a totally different opinion. Standing at the forefront of the fight against privateering is Google. Last month, Google wrote a letter (co-signed by BlackBerry, Earthlink, and Red Hat) to the FTC and US Department of Justice to ask them to take action not only against patent trolls but also against the companies who supply them with weapons. Google also claims that the US patent system over-rewards the work of coming up with an idea while taxing those who do the work of actually implementing it.

Economic analysis

Google’s claim epitomizes the difficulty that the patent system faces when dealing with sequential innovations. Sequential innovations are such that one innovation can only be achieved by using the results of another innovation; therefore, if the first innovation does not exist, nor does the second. If separate innovators are responsible for sequential innovations, then the question arises as to how to allocate IP rights among them. Ideally, one would like to give some rights to the initial innovator over the subsequent innovations as he/she contributed to make them possible; on the other hand, considering subsequent innovations as infringements to the initial one is likely to undermine later innovators’ incentives to invest. There is thus an inherent contradiction as the larger the rights granted to one innovator, the lower the incentives for the other one…

Source: http://funpicc.blogspot.be/2010/12/hold-up-evolution.html

As modeled by Green and Scotchmer (1995), the problem becomes particularly acute when the first innovation is not valuable in itself; that is, it only becomes valuable through the extra value that the subsequent innovation creates. In that case, a ‘narrow’ patent (granting rights only over the first innovation) would not work as the first innovator would not find it profitable to invest in R&D; as a result, neither the first nor the second innovation would be produced. The first innovator must then be awarded a ‘broader’ patent, which gives him/her rights over the subsequent innovation. However, such a situation would put the second innovator at risk. This is the classic situation of holdup. The second innovator can rationally anticipate to be held up: once it has sunk the R&D cost of producing the second innovation, it will be in the first innovator’s best interest to appropriate the total value of the second innovation. Therefore, the second innovator will not be able to recoup its investment and will prefer not to invest. As a consequence, the second innovation will not be produced, and nor will be the first as the first innovator will not be able to appropriate enough value.

As Belleflamme and Peitz (2010, p. 528) further explain:

“In a more general setting, it can be argued that, because of the difficulties in dividing profit, patent lives will have to be longer than if the whole sequence of innovations occurs in a single firm. Then ex ante licensing (i.e., licensing before the second innovator sinks funds into R&D) is a way of mimicking the latter outcome. The other possibility is that licensing occurs ex post, i.e., after the second innovator has achieved the improvement or application of the first innovation. The difference, of course, is that the second innovator has sunk his costs at the time of the negotiation, which opens the door for opportunistic behaviour on the part of the first innovator (i.e., of holdup).”

Legal analysis

A sure thing is that the behaviour of privateers (and of their sponsors) is opportunistic. Yet, although such behaviour can be discussed on moral grounds, it is much harder to attack it on legal grounds. On a general level, at the core of intellectual property lies the right to (try to) exclude others. Both intellectual property and access to the courts are fundamental rights and parts and parcel of a market-orientated economy.

That being said, most rights are not absolute, and antitrust authorities in the EU and the US have undertaken recent (preliminary) actions with regard to the seeking of injunctions on the basis of a particular set of IPRs, so-called standard-essential patents (“SEPs”); see, e.g., the sending of a Statement of Objections by the European Commission to Samsung and Motorola as well as a draft consent decree between the US Federal Trade Commission and Motorola (Google).

Evidently, these actions do not target privateers. But, if they are seen through by the competition authorities and do not get overruled in court (e.g., the European Court of Justice has recently been called upon to rule on whether the seeking of injunctions on the basis of SEPs can actually be contrary to competition law), they would take one very important weapon out of the arsenal of privateers. They could no longer use injunctions against companies that are willing to take a licence under FRAND terms to twist the arms of the latter to achieve unjustified licensing terms.

Still, many issues concerning privateers remain unresolved: for instance,

• What if privateers still succeed in raising the cost of the sponsor’s rivals, e.g., by demanding very high royalties for SEPs or by seeking injunctions on the basis for non-SEPs? This question is linked to the more fundamental questions of how the increased activities of non-practicing entities affect innovation and competition and what, if anything, antitrust authorities could do (see, e.g., the workshop that the US Federal Trade Commission recently hosted on that topic).
• With regard to privateers, another question arises linked to the relationship between privateers and sponsors: could the agreement(s) between them run afoul of the antitrust laws?

IPdigIT and its readers would very much like to hear your views about these issues, and especially about the latter two questions.

As Christmas is drawing nigh, I found it fun appropriate to collect a number of “IP Xmas stories”. As you will discover below, these stories add some Christmas spirit to the IP, IT and innovation issues that we regularly discuss on this blog.

* Like everyone, I loathe love poinsettias. Because they blossom in winter and display striking red and green colors, poinsettias are ideal for Christmas decorating. Yet, their market domination did not happen by chance. It resulted from more than a century of clever decision-making by the Ecke family in California. The story of the Ecke poinsettias provides a nice illustration of two major choices that many innovative firms face one day or another:

• What is the most effective way to protect an innovation: secrecy or patent?
• Which market(s) should an innovative firm operate in: the market for ideas and/or the market for products? (See the related IPdigIT post.)

Regarding the first question, part of the Ecke’s success is due to a technique for grafting together two varieties of poinsettias that was kept secret for decades. It is only when this technique was discovered that competitors were able to enter the market. Yet altogether, secrecy allowed the Ecke family to protect their innovation for a longer period than if they had been granted a patent.

The discovery of the Ecke’s secret brings us to the second question. As competitive pressure increased on the product market, the Ecke family decided to focus increasingly on the markets for ideas: they sold off more than half of their land, invested heavily into new research facilities, and started to patent new varieties.

*  You probably remember Nick Hornsby’s novel “About a boy” and the eponym movie (if not, you can watch the trailer here). You also probably remember that in the movie, Hugh Grant plays the role of a self-confessed “shallow” man, who does not have to work because his dad wrote a huge Christmas hit. You may then wonder how realistic this story is. I do not mean whether it is possible to be as shallow as Hugh Grant’s character (I hope it is not!), but whether those lucky enough to have written a classic Christmas hit are actually living in clover.

Well, as you might have guessed, the reality is much tougher than movies would like us to believe. Even if some Christmas hits turn out to be cash cows that can be milked December after December, songwriters and recording artists often get very little of that money. As written in a Guardian article published last December,

“The biggest non-charity Christmas hit in the UK is Mary’s Boy Child by Boney M. (Watch the cult video here.) (…) In the unlikely event that Boney M sold £1m-worth of Christmas records a year, the four band members would receive £357.14 each.”

And the numbers are pretty much the same on the other side of the Atlantic, as explained in this article (published last December as well):

“When it comes to CD sales, a record label has to pay the writer 9.1 cents per song, which is often split with the publisher. That means a songwriter will earn $45,500 on a million-selling CD — half that if the song was co-written. Given that only 13 albums went platinum last year out of around 100,000 releases, that’s not such a high payout for 1 in 8,000 odds.”

*  To top the Christmas tree, I propose two short stories. The first comes from the blog IPWatchdog, which tracks, year after year, the oddest “Xmas patents”. The so-called Santa Claus Detector is definitely worth a look!

The second story is more recent and, potentially, of great practical use. A team of math students from the University of Sheffield proposes a calculator to compute the number of baubles, tinsel and lights needed for a perfectly decorated Christmas tree. (I’m not sure it would be of any help for this one, though…).

Happy festive season to you all (and if you are, like me, a Seinfeld fan, “Happy Festivus”)!

Source: technorati.com

In a recent article (October 7, 2012), entitled, “The patent, used as a sword“, the New York Times gives a critical view of the current state of the US patent system:

Patents are vitally important to protecting intellectual property. Plenty of creativity occurs within the technology industry, and without patents, executives say they could never justify spending fortunes on new products. And academics say that some aspects of the patent system, like protections for pharmaceuticals, often function smoothly.

However, many people argue that the nation’s patent rules, intended for a mechanical world, are inadequate in today’s digital marketplace. Unlike patents for new drug formulas, patents on software often effectively grant ownership of concepts, rather than tangible creations. Today, the patent office routinely approves patents that describe vague algorithms or business methods, like a software system for calculating online prices, without patent examiners demanding specifics about how those calculations occur or how the software operates.

As a result, some patents are so broad that they allow patent holders to claim sweeping ownership of seemingly unrelated products built by others. Often, companies are sued for violating patents they never knew existed or never dreamed might apply to their creations, at a cost shouldered by consumers in the form of higher prices and fewer choices.

The extent to which software should be patented has been – and still is – a topic of intense debate. Nowadays, there is no harmonization across countries on this matter. As indicated in the quote above, the US Patent and Trademark Office broadly grants patents that may be referred to as software patents (and it has been doing so since at least the early 1970s). In contrast, the European Patent Office has adopted a more restrictive approach (see here):

Programs for computers as such are excluded from patentability (…) a program for a computer is not patentable if it does not have the potential to cause a “further technical effect” which must go beyond the inherent technical interactions between hardware and software.

(…) A patent application for an Internet auction system was not granted because the system used conventional computer technology and computer networks – which meant it made no inventive technical contribution to the level of existing technology. Such a system may provide business advancement to its users, but that is not the type of advancement required by the EPO.

On the flip side, the problem of improving signal strengths between mobile phones is a technical problem, even if it is solved by modifications to the phone software rather than its hardware. Such an invention would obtain a patent, provided that the solution is also novel and inventive.

The contrasting approaches of the USPTO and the EPO are in terms of “patentability”: what are the conditions for a software (or a “computer-implemented invention” in the European terminology) to be patentable? Another, and potentially complementary, way to tackle the issue would be to discuss the “patent term” for software. Some scholars, among them Richard Posner (Federal appeals court judge and professor at at the University of Chicago Law School), recommend a shorter patent term for digital technologies.

How long should software patents last? Although Posner does not propose an explicit length, others do. For instance, according to the Electronic Frontier Foundation,

A patent covering software should survive for a term of five years, beginning from the date the application is filed.

And you? What do you think? If you had to weigh the pros and cons of software patents, what patent duration (between 0 and 20 years) would you recommend? To help you organize your thoughts, you can use the framework proposed by William Nordhaus in his book “Innovation, Growth, and Welfare” published in 1969 (for a presentation of this framework, see the slides for Lecture 4).

Source: http://blog.thomsonreuters.com/index.php/mobile-patent-suits-graphic-of-the-day/

Last Wednesday (April 18, 2012), Lucy Koh, a US District Court Judge, may have paved the way towards a truce on one of the fiercest fronts of what is now commonly known as the “Smartphone Patent Wars”. She ordered Tim Cook and Choi Gee-Sung, the CEOs of Apple and Samsung, to meet and work out their bitter and prolonged patent disputes. The two firms have indeed spent the last months suing and countersuing each other, all over the world, for alleged patent infringements (this infographic nicely summarizes the main episodes of this “battle”).

As most companies in the smartphone industry are fighting similar battles (for a very effective presentation of the existing feuds, see the animated graphic proposed by the Financial Times), the peacemaking process that Lucy Koh initiated may prove crucial for saving the industry from a potential collective suicide.

The legal quagmire that currently plagues the smartphone industry results from a combination of forces that regular readers of this blog should be familiar with by now.

1. Smartphones are the archetypal example of a cumulative innovation. They exhibit indeed the two types of cumulativeness: complementarity and sequentiality.

• Complementarity describes the fact that a second-generation product requires the combination of a number of different first-generation innovations (‘many-to-one’). This is clearly the case for smartphones as they result from the collision between computers and mobile-phones, which are themselves already cumulative in nature.
• Sequentiality refers to the notion that a first-generation innovation leads to the creation of many second-generation innovations (‘one-to-many’). This is also the case for smartphones insofar as all handsets have to incorporate a number of existing standards (for, e.g., wi-fi access, email transfers or video display).

2. The previous technical features raise important-and potentially conflicting-economic issues regarding the allocation of intellectual property rights. On the one hand, complementarity raises the prospect of the ‘tragedy of the anticommons’: the allocation of strong property rights to separate right-holders results in higher prices (‘royalty-stacking’) and higher transaction costs. In this respect, some form of ‘collective’ or ‘shared’ property is more prone to favor interoperability and easy access to interfaces.

Sequentiality, on the other hand, is likely to create hold-up opportunities for first-generation innovators if intellectual property rights are defined too broadly (i.e., if the first-generation innovation confers the patentee rights over subsequent innovations).

3. The importance of the previous two problems is magnified by the sheer density and size of the ‘patent thicket’ that engulfs the smartphone industry: according to estimates, a smartphone is open to a quarter of a million patent claims. If you factor in the diversity of players (as companies flock from industries as diverse as equipment manufacturing and software development), the crucial need for interoperability (just try to imagine how painful your life would be if several incompatible email services were coexisting), and the high profitability of the whole market (the global mobile phone industry reached a value of US$1.18 trillions in 2011), you easily understand why even though private solutions to the previous problems do exist (patent pools and standard-setting organizations address the tragedy of the anticommons while licensing agreements may solve the hold-up problem), these solutions are very hard to achieve in the smartphone arena.

Accordingly, some players in the market have called upon the competition authorities to sort out the mess. Some observers have been rather critical of the authorities’ abilities to do so. For instance, Yann Ménière recently posted an article on this blog expressing doubts that competition authorities would be able to impose sanctions that address the fundamental problem(s).

What do you think?

Could competition law play a useful role in achieving a truce in the smartphone patent war? Or are there any other solutions that could push the industry back to a path where  consumers benefit more of inventions than patent litigators?

Under what circumstances could the litigation of patents (or other IP rights) become abusive and objectionable from a competition point of view? (In responding, you should refer, where possible, to the ECJ case law and take into account, among others, the fundamental right of private parties to defend their rights before the courts).