Wednesday, October 18, 2006

Innovation, intellectual property rights, patents and prizes: open-sourcing and crowd-sourcing.

A recent article in the New Scientist magazine by Nobel prize winning economist Joseph Stiglitz questions the effectiveness of the patents system in delivering innovation in the modern economy. Patents are intended to grant exclusive rights to inventors for the use of their inventions for a certain period after the registration of the patent. They thus effectively provide the firm with a monoply on the exploitation of the innovation and a chance to earn profits that will allow it to recoup its R&D expenditure before other firms can get in on the act. (Of course patent holders can grant licenses for others to make use of their ideas in return for payments, providing an alternative way of recovering initial outlays.) As we all know with a monopoly there can be higher prices and lower outputs than in a competitive market. There is a danger that the monopoly power granted to a patent holder could be abused. Stiglitz notes that courts around the world have found Microsoft to be guilty of such abuse of market power.

Stiglitz argues that the patents approach to innovation carries with it another danger. Sometimes knowledge that is in the public domain but does not have specific property rights attached to it is appropriated by a company who use it as part of a patent registration and thus effectively privatise it. People find that they now have to pay for the use the intellectual property concerned when before it was free. You could argue that the fault here lies not so much with the general idea of the patents system but with the inappropriate enclosing of already established knowledge. But Stiglitz also notes that conflicting claims over patents can make innovation more difficult. Until a legal dispute is clearly resolved nobody is able to make use of an innovation which is the subject of a patent dispute. A related point was made by Carl Shapiro in a paper published in 2001. He suggested that in an area subject to rapid technological change, such as ITC, a "patent thicket" can develop where there are so many new patents being granted that it becomes difficult to keep up with what has been registered and unwitting infringements of patents can easily occur.

Stiglitz's main concern relates to the pharmaceutical sector and the harm that unreasonably stringent enforcement of patents can cause for the availability of low cost life-saving drugs for fighting diseases such as AIDs and malaria. Although patent disputes in ITC might not be so immediately life threatening they can nevertheless inhibit the very innovation they are supposed to promote. And there is another legal and regulatory issue that Shapiro has identified. Cartels, price fixing and other forms of collaboration among market competitors are rightly discouraged and regulators take legal action under anti-trust laws to penalise firms that have been found to engage in such practises. But some fledgling markets may only get established if firms work together to establish agreed standards and protocols. Such collaboration and associated research should be seen as "pro-competitive" rather than anti-competitive and encouraged rather than discouraged. Shapiro distinguishes between competitition in the market and competition for the market. Once a market has been established competition between suppliers should be rigorously enforced, but at the early stages of a market's development regulators should recognise that some forms of cooperation and collaboration where expertise is pooled are not anti-competitive.

But what other models of innovation are there? Clearly incentives must play a key role here as rational behaviour would suggest that developers of new ideas will expect some kind of return for their efforts. One idea to have found favour recenly, and one which Stiglitz feels whose time has come, is the use of prizes that can be offered in return for successful innovative ideas. As he notes this approach is not totally new - the Royal Society of Arts in the UK has been advocating such an approach for many years. But perhaps it is catching on. In his freakonomics blog with Stephen J Dubner, Chicago economist Stephen D Levitt notes that the online DVD rentals company Netflix has offered a prize of $1 million for the development of a movie recommendation system that would improve the current take up rate by 10%. Rather than just researching in-house Netflix thus effectively outsources development work - but not to a single research team but to anybody out there. Jeff Howe, writing in Wired magazine, called this phenomenon "crowd-sourcing". However it seems to me that unless a prize is publicly funded it doesn't get over the patent problem. I don't believe that Netflix plans to share any improved recommendation scheme that is developed as a result of its prize offering with all and sundry. It will surely patent the system and then let others use it only under (paid) licence. Nevertheless I'm sure that the prize offer is a useful way of developing new ideas from beyond its own research team.

There is, of course, another approach to innovation that is particularly effective in the area of ITC, namely open-source development. The Mozilla Foundation for example, is a not-for-profit organisation that exists to promote the development of open-source software. Code for software such as the browser Firefox and the new e-mail system Thunderbird is made publicly available for anyone to look at and to provide improvements and to identify bugs. In a sense here the incentive is CV enhancement - work put in on software development is not entirely altruistic as career opportunities can be improved when it becomes known that individuals have been responsible for important contributions to such projects. I guess blogs are a bit like this too!


Tuesday, October 10, 2006

Google and YouTube

There is no question about what this week's Internet Economy news story is. It is the $1.65 billion (£880 million) acquisition of the social networking/video-sharing/ entertainment site YouTube.

According to press reports YouTube will continue to operate independently "to preserve its successful brand and passionate community". Apparently it was this reassurance (and maybe just a bit the money?!) that persuaded YouTube CEO and founder Chad Hurley to sell. In July media reports already put YouTube ahead of its rivals MySpace, Flickr and Bebo with a 3.9% share of global Internet daily visits. The deal with Google will presumably further promote the growth of the site and give it access to the Google team's technical know-how and experience. PcWorld reports that Google Video will continue to operate although one would think that in the long run it would make sense to merge its activities with YouTube operations.

YouTube is of course an example of what some writers have called Web 2.0. People who use this phrase stress that recent developments in web use have tended to involve users much more, with web sites accommodating user-generated content rather than simply displaying company material. So as well as these social networking sites like YouTube we have seen the growth of blogs, podcasts and Wikipedia. I have been rather sceptical about whether these developments constitute on their own a new phase of Internet development. But Google executives obviously think that it is worth paying a huge sum of money (well via highly valued Google shares actually) to get hold of YouTube. And the market has responded well with Google shares up by $8.50 (=2%) on news of the deal. Is this another dotcom bubble that will have to burst at some point or the genuine creation of new wealth?

Google's business model is of course based on revenue generated from personally targeted advertising. So Google will hope to generate additional revenue from adverts linked to YouTube content. There are two interesting elements to this. First, there has been an emerging market for video advertising so that what you see when you click onto an advertiser's link is not static text or graphics but a short video clip. Obviously it makes sense to put video advertising next to user generated videos. Secondly, some of the revenue generated in this way is promised to the creators of the YouTube content who attract users to their site. This extra revenue could allow content creators to be more imaginative and creative in what they do and provide an explosion of high quality content, challenging the traditional TV and movie industries even more.

There are still some problems to be faced however. There have been complaints that YouTube has aloowed pirated clips to be uploaded and so Google may face expensive copyright lawsuits. Of course some entertainment companies have already signed deals with Google - Warner, SonyBMG and Universal Music Group among them. Perhaps Google will find a way through this and set up a system where copyright holders (whether multinationals or just individuals) will get paid for what they have made as it is viewed. While Google has seen itself become a rival to Microsoft on one front now it will increasingly face a challenge from Rupert Murdoch's News Corporation. Not only is the company the owner of MySpace but it also has FoxTV as part of the global empire. Exciting times!

Google nets YouTube in $1.65bn takeover Andrew Clark, The Guardian 10th October 2006.
Google buys YouTube for $1.65bn BBC News 10th October 2006.
Google swallows YouTube for $1.65bn Joe Fay and Chris Williams. The Register, 9th October 2006.
Dot-Com Boom Echoed in Deal to Buy YouTube Andrew Ross Sorkin, New York Times 10th October 2006.
Adding to the House of Google John Markoff. New York Times 10th October 2006.
Google to buy YouTube for $1.65 billion Eric Auchard, Reuters 10th October 2006.
It's Official: Google Buys YouTube Nancy Weil, IDG News Service, PcWorld.Com, 9th October 2006.
YouTube may add to Google's copyright worries Declan McCullagh. C|Net News 9th October 2006
Google signs video deal with Sony, Warner Music AFX News Limited. E-Commerce Times, 9th October 2006.
YouTube Inks Content Deal With CBS, Sony, Universal AFX News Limited, E-Commerce Times, 9th October 2006.
YouTube in 'landmark' music deal BBC News 18th September 2006.