INTELLECTUAL PROPERTY IN THE REAL WORLD
by Russell Peterson
INTRODUCTION
"Many years ago, there was an Emperor, who was so excessively fond of new clothes, that he spent all his money in dress. He did not trouble himself in the least about his soldiers; nor did he care to go either to the theatre or the chase, except for the opportunities then afforded him for displaying his new clothes. He had a different suit for each hour of the day; and as of any other king or emperor, one is accustomed to say, "he is sitting in council," it was always said of him, "The Emperor is sitting in his wardrobe."
Hans Christian Andersen probably would have been baffled by the term "intellectual property" even though he inadvertently wrote about it. His story told of two con artists who fooled an emperor into buying clothes made of material which would remain "invisible to everyone who was unfit for the office he held, or who was extraordinarily simple in character." In other words, they were selling an idea. The thieves made a handsome profit before their scheme was eventually exposed.
Ironically, had they been alive today, the thieves could have applied for a "business process" patent from the U.S. Patent and Trademark Office, though another government agency would have been responsible for prosecuting them for fraud. We live in a society in which people claim the right to own ideas. In this Information Age, the public has become familiar with intellectual property; information ownership has become big business.
But ask seven different IT professionals to define "intellectual property" and you'll likely get seven different answers. If "real" property consists of tangible assets in the physical world, what is "intellectual" property? My favorite definition is "that which I think I own." Since intellectual property doesn't exist in the physical world, my ownership is based on convincing others that I can own something that is completely immaterial.
In the United States, large intellectual property corporations have helped convince an entire society that they own valuable goods. Laws have been established for the purpose of protecting the interests of these companies. We have been conditioned to think that copying intellectual property is tantamount to stealing.
Society has decided that companies should have exclusive rights to their intellectual property, and such claims are not without merit. However, recent actions of influential IP enterprises have forced me to conclude that, as a whole, the IP industry has a limited understanding of how its products interact with the larger economy.
For our purposes, the term "IP industry" refers to companies whose products can be reduced solely to ones and zeros. The biggest players in the IP industry are software companies, record labels, and movie studios.
ORIGINS OF INTELLECTUAL PROPERTY
To understand the origins of intellectual property, we must remember that prior to the modern age, information was distributed primarily by books, which were painstakingly copied by hand. The value of a book was a function of the amount of time it took to reproduce. Had you asked someone from the 14th century to weigh the value of a book's information independent of the pages on which it was printed, you probably would have received a blank stare. Prior to the modern age, information was inseparable from the medium on which it was recorded.
With the invention of the printing press, information could be infinitely reproduced, and for the first time, its value could be considered separately from the physical object to which it was attached. People became aware that information could be its own store of value. They perceived that a book's real value was not in its pages, but in the information it contained.
It would certainly run contrary to human nature for people to recognize something as valuable without also seeking a way to own and profit from it. In doing so, they conceptualized information as property though it was immaterial and therefore fundamentally different. Since information could be freely reproduced for only the cost of printing, supply could easily exceed demand, flooring prices and making profits difficult or impossible. How could something have economic value if it couldn't be sold for profit?
The answer was to apply principles of market economics to the exchange of information. In order to prop up demand, supply had to be limited. The monarchies of Europe happily granted information monopolies (copyrights and patents) to the creators of intellectual "property," because doing so provided them with opportunities for revenue and control. The crown taxed the sale of information (hence the word "royalties") and the content holder retained his potential for profit. The system benefited both IP owners and the government.
When the founders of the United States framed the Constitution, their stated purpose in establishing intellectual property rights was to benefit the public. In Article I, Section 8, Clause 8, Congress is given power "to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."
The phrase "for limited Times" is important because it indicates that the framers' intent was not to keep creative works forever out of the public domain; rather, it was to benefit the public by providing IP owners a limited period of time during which they could receive financial compensation for their work.
Consider that with the expiration of a patent or copyright, the public becomes the principal beneficiary of a contribution to the intellectual commons. Consider also that financial remuneration has been the principal test whereby someone other than the titleholder could utilize intellectual property. Traditionally, using another's intellectual property was permitted as long as one did not profit financially from its use or undermine the creator's ability to be compensated (e.g., by mass reproduction or distribution).
INTERSECTIONS OF PHYSICAL AND INTELLECTUAL PROPERTY
Historically, intellectual property was tied to the physical form by which it was conveyed. Books, for example, are physical objects, but they exist at the intersection of tangible and intellectual property worlds. Though I may not own the rights to the information printed in a book, it is well established that once I own a book, I can do anything I want with it. I can read it, sell it, modify it, or destroy it. I don't just own a license to read a book, I own the book itself.
A patented object represents another intersection between tangible and intellectual property. As its purchaser, I become the owner of physical property although I don't have the right to profit from the patent holder's intellectual property. However, as with a book, it is well established that once I own a patented object, I don't just own the rights to use it, I actually own the item. As its owner, I can do with it whatever I wish: I can use it, sell it, modify it, or destroy it.
People seek to own things because doing so gives them power over their environment. It is implicitly understood that part of the value of ownership is the complete control of the object that is owned. If there are restrictions on what I can do with my property, my ownership is called into question. If someone else has the power to direct how I use something, they have control over my property and indirectly, over me.
This is one essential concept that the intellectual property industry repeatedly fails to understand. It wants the public to purchase its products while retaining control of how they are used. On the other hand, consumers want more than licenses to use products according to the dictates of IP owners. When they purchase products, they want to own them and to be accorded all the customary privileges of ownership.
Examples are numerous of how IP companies seek to retain control over their property even after it has been purchased by consumers. With books and patented objects, ownership of a physical object was clearly acknowledged. Today, however, IP companies understand that they retain ownership of intellectual property. Their methods differ, but they actively seek to control their intellectual property even after it has passed into the hands of consumers, and even when consumers are only asserting their "fair use" rights under applicable law.
THE BATTLE FOR CONTROL
The IP industry would contend that it is only acting prudently to protect its investment in product development. There are several indications to the contrary. Consider that the Digital Millennium Copyright Act (DMCA), which was sponsored by major players in the IP industry, would make it illegal to construct a DVD player that could ignore the "must watch" instructions placed on the DVD whereby viewers can be forced to watch a movie's previews. The reason for this is obvious, but it ignores the fact that when I purchase a movie on DVD, I should be able to experience it in the manner of my choosing. If I wanted to view a film on someone else's terms, I would have watched it in the theater.
In Utah, a company by the name of CleanFlicks has found a niche market for family-friendly videos. CleanFlicks purchases videos and edits them to remove sex, violence, and profanity. But its actions have raised the ire of the Directors Guild of America (DGA). Martha Coolidge, former president of the DGA, minces no words: "We will fight to express ourselves on this issue. We will fight to get control of this technology." Coolidge apparently has little tolerance for those who want to experience films on their own terms and not hers. She says that even temporary editing is not an option: "We are talking about a technology that obliterates the intention of a movie. Parents can control what their child sees by not allowing [a particular movie] in the house."
Coolidge seems to be saying that if a movie cannot be seen without all its original sex, profanity, and violence, it should not be seen at all. But the debate about content editing is beside the point. At issue is what I can do with the property I own. Coolidge ultimately asserts that the film industry has the right to direct the manner in which consumers use its products even in the privacy of their homes. She is very moralistic in her reasoning: "Tampering with any work of art--film, theater or books--is an ethical issue."
Ironic as it is to have a Hollywood spokesperson preaching about right and wrong, it should come as no surprise that Coolidge's reasoning evaporates upon even casual inspection. Imagine how absurd her logic would be if it were applied to book reading. Were she a publisher, would Coolidge attempt to ensure that readers experienced books only as their authors intended? In her desire for control, would she forbid reading the last page first? How about skipping pages or sections? This would be out of the question!
Strange as it may seem, this is the world the DGA wants for movie viewers. It would prevent them from skipping scenes; it desires to control the consumer's experience even after the movie is brought home. What next? Would the DGA outlaw fast-forward buttons if it could? Even if we agreed that most of Hollywood's movies could be considered art (a far stretch), Coolidge's comments ignore the fact that art must be free to be individually experienced.
When I see the Mona Lisa featured in a TV commercial with her lips moving, I appreciate the fact that someone else's experience of the Mona Lisa is different from mine. Altering a creative work is a form of expression in and of itself. It is offensive mainly to artists who are insecure about their work. If it really wanted to, Hollywood could suppress the editing of movies by not releasing its films on video.
As ridiculous as it seems from an artistic perspective, the DGA's stance makes even less sense economically. The DGA seems to forget that most movies are edited by the studios themselves for airline flights and television audiences. The technology the DGA wants to control could fit two versions of a film on one DVD. The movie industry could solve its own problem--and increase its revenue in the process--by releasing its own edited versions to the public.
But this seems too difficult a concept for the movie industry to grasp. Instead of identifying and meeting consumer demands, it spends time fighting those who do. Remember our earlier suggestion that the economic value of intellectual property depends on market manipulation. Without artificially restricting supply, prices for IP would fall below the point at which financial profit is possible. Like other players in the larger IP arena, the film industry is more interested in controlling markets and technology than it is in adapting to them.
This preference is understandable; market forces are unpredictable and understanding them takes effort, time, and skill. Who would purposely choose a course involving risk when it could be avoided altogether by legal or legislative means? What the IP industry fails to remember, however, is that market forces continue to operate in spite of efforts to control them.
Case in point: A movie industry lawsuit might stop CleanFlicks from editing videos, but it won't be able to stop ClearPlay, Inc. ClearPlay is the next step in family-friendly video viewing. Perhaps in anticipation of legal action from Hollywood, ClearPlay's newer technology allows subscribers to download editing scripts. Without modifying the DVD itself, ClearPlay's technology intelligently instructs the DVD player to skip over objectionable content.
"We have done extensive legal research on it," says ClearPlay chief executive Bill Aho. "We don't ever touch that DVD." The movie industry apparently feels that if it doesn't want to supply a market for which there is an established demand, it can sue or legislate it out of existence. But free markets don't work that way. Markets will find a way to give consumers what they want, whether or not the movie industry chooses to be part of it. ClearPlay is but a prime example.
Suffice it to say that movie studios are so focused on whether or not they can control every aspect of their intellectual property that they fail to question whether or not they should. Consumers desire to experience creative works on their own terms, and they are willing to pay to do so. Attempting to control intellectual property after consumers have purchased it is counterproductive. In attempting to control market forces, IP companies miss opportunities to capitalize on new markets. They seem to believe that demand will cease even if they aren't willing to provide supply.
MICROSOFT AND THE IP CONSUMER
If the Directors Guild of America seems excessive in its desire for control, you have probably never scrolled through an End User License Agreement (EULA) governing the use of a Microsoft operating system. The OEM EULA for Windows XP is 18 pages long, and it explicitly states that "The SOFTWARE is licensed, not sold." Given this statement, the number of restrictions placed on a Windows non-owner should come as no surprise. Indeed, it would seem easier for Microsoft to specify what a user can do instead of listing what he or she cannot.
Many users routinely backup their hard drives. Making several backup copies allows a user to backup different configurations from different points is time--essential if the user would like to roll back to a particular point in time during which a system was most stable. If you have ever done this, you might be surprised to know that you are acting illegally according to the Microsoft EULA, which states that "YOU MAY MAKE A SINGLE BACK-UP COPY OF THE SOFTWARE."
What if you bought a music CD and discovered that you could only play it on one of your CD players? Consumers wouldn't tolerate such controls on music, but Microsoft places similar restrictions on its software. The Windows EULA specifies that the OS may be installed on one machine only. It doesn't matter if you own two computers and never use both at the same time. Microsoft insists that you must buy (or rather, LICENSE) two copies of Windows.
Next, Microsoft specifies that a user may allow a maximum of ten "computers or other electronic devices… to connect to the COMPUTER to utilize one or more of the following services of the SOFTWARE: File services, Print services, Internet Information services, and remote access." The EULA doesn't specify whether a user is in violation of this limit if more than 10 hackers simultaneously exploit the "share level password" vulnerability to gain access to a particular file share.
Finally, when your machine is at the end of its useful life and is ready to be uploaded to that great Computer Lab in the Sky, make sure that you leave your only copy of Windows on it, because you cannot keep it with you. The EULA for Windows XP states that "THIS LICENSE MAY NOT BE SHARED, TRANSFERRED TO OR USED CONCURRENTLY ON DIFFERENT COMPUTERS. The SOFTWARE is licensed with the COMPUTER as a single integrated product and may only be used with the COMPUTER."
So there you have it: four prime examples of how Microsoft wants to control your use of its intellectual property throughout the life and death of your machine. If you have ever made more than one backup copy of your system, you have violated the EULA; your license is technically invalid and you are illegally using Windows. (And all this time you thought you were a law-abiding citizen because you purchased Windows pre-installed on your system!)
Let's digress for a moment. For all the restrictions listed in the Windows EULA, what Microsoft really wants is your money. Whether specifying how many backup copies of Windows a user can have or how many computers can connect to a Windows machine, the EULA restrictions are designed to ensure that each user pay a fee to Microsoft at every conceivable opportunity. Bill Gates doesn't want you copying software when you could be purchasing his newest products instead. It is not consumer-friendly, but it is understandable.
What's not understandable is the paranoia about piracy. Microsoft officials apparently have nightmares about people installing copies of Windows on computers with reckless abandon, but in the real world, it seldom works that way. Sure, I've installed Windows dozens of times for friends when hard drives have crashed or when file systems have been corrupted. But if you've ever tried to install a newer Microsoft operating system on an older computer, you know that the results are rarely worth the effort; the older computer usually isn't fast enough to make the upgrade worthwhile.
So when I reinstall Windows 95 from a copied CD, it's on a computer that came with it preinstalled from the factory; likewise with Windows 98. I'm sure this isn't technically allowed by the Win9X EULA, but the license fee was paid when the machine was originally purchased. Would Microsoft really want to charge the user twice?
If this question seems unintelligent, or if you think that Microsoft is only trying to protect its intellectual property, consider the following scenario: A year after buying a new PC running Windows XP, your system suffers a total hard drive failure. You call the manufacturer and are informed that the warranty period has expired. So you buy a new hard drive at Circuit City and take it home to get your system up and running again. How are you going to install Windows? Your new PC didn't come with a system recovery CD; that software was included on the "system restore" partition of the hard drive that just crashed.
You can't borrow your neighbor's system recovery CD because he doesn't have one either. You call Microsoft only to be informed that "support for the SOFTWARE is not provided by MS, Microsoft Corporation, or their affiliates or subsidiaries" (Windows EULA). Microsoft suggests that you contact your hardware manufacturer. Product activation will prevent you from borrowing a retail copy of Windows XP even for a recovery installation. If you want to install Windows XP again, you will be forced to purchase a retail version.
Microsoft will obviously appreciate your business, but that won't change the fact that you will have "purchased" XP twice. Microsoft is likely requiring hardware manufacturers to do away with system recovery CD's to thwart piracy, but this will end up costing you, the consumer, in the event of a hard drive failure.
Like the movie studios, Microsoft is so focused on whether or not it can control every aspect of its intellectual property that it fails to question whether or not it should. In its effort to squeeze every possible dollar from the consumer, MS has ignored the fact that its efforts will ultimately harm and alienate consumers. Most people don't reinstall Windows for fun; they reinstall it because it fails. People get irritated when Windows crashes, but they expect it. When they discover that they can't reinstall XP because of product activation, they will become genuinely upset.
With its well-established monopoly of the desktop market, Microsoft isn't likely to pay attention to consumer complaints any time soon. It didn't stop consumers from copying Windows when doing so helped establish its monopoly. Why is it doing so now? Because it can. Microsoft has never been focused on anything but its own best interests. And now it perceives that product activation will increase its revenue stream because consumers will have no choice but to comply with its requirements.
MICROSOFT'S CONTROL OF CORPORATE CLIENTS
Corporate clients fare no better in their dealings with Microsoft. In May 2001, Microsoft announced that it was changing its corporate licensing program. Instead of selling particular products or upgrades as it had done for years, Microsoft proposed a program of "software assurance." Under this new program, subscribing clients would gain free access to new products or upgrades as they became available.
Microsoft's primary goal with Software Assurance was to steady its revenue stream. But it also addressed a separate problem: Prior to the new subscription service, Microsoft had trouble convincing corporate clients to purchase software upgrades every time they became available.
The solution was for Microsoft to change its pricing structure such that a subscription to Software Assurance would be slightly less expensive than purchasing individual upgrades every time they became available. Without a subscription, however, individual upgrades would cost significantly more. The net result was the following gun-to-your-head proposition: Either subscribe to Software Assurance, or pay approximately twice what you would otherwise to upgrade on your own schedule.
Not surprisingly, the corporate community was incensed. Microsoft was clearly taking advantage of its largest clients when the economy was already taking a turn for the worse. But Microsoft persisted. In doing so, it demonstrated that it was not interested in the economy. It was only interested in Microsoft's economy. Microsoft was focused solely on its own best interests, even at the expense of the rest of the corporate community.
Marie Antoinette said it best: "Let them eat cake." Perhaps Microsoft has been so dominant for so long that the company has come to expect that it can force "the masses" to accept its world view indefinitely. Those at the top don't see the world as it is; they see it as they would make it. But their sense of control is ultimately an illusion borne of fantasy. In the 21st century, free markets have an intelligence of their own. They have responded to Microsoft and the whole IP establishment in a way that is completely revolutionizing the world of intellectual property.
The revolution is one of open source technology. Most have heard about open source software and the Linux project. But few recognize it as the market response to Microsoft and the larger IP establishment. Open source is more than a model for collaborative software development. It is a technology that permits the free exchange of information in an otherwise heavily regulated and closed market.
FREE MARKETS AND FREE NETWORKS
Few in America would conceptualize intellectual property as being traded on a closed market. We are so accustomed to thinking of supply and demand in the context of free markets that we forget what the term "free market" really means. The "free" in "free market" has little to do with price; it has everything to do with unrestricted exchange.
As we established earlier, if governments didn't establish mechanisms for the protection of intellectual property, supply would outpace demand and make profits impossible. We don't usually recognize that government regulation halts the free flow of information and therefore closes what would otherwise be a free market, wherein ideas are exchanged without artificial barriers or constraints.
A clarification is in order. The word market denotes a medium of exchange for physical property. The medium for exchange of information is called a network. We understand that, in the exchange of physical goods, free markets create the largest amounts of wealth for the greatest numbers of people. They do so by giving everyone the opportunity to trade for profit.
How about with networks? The information equivalent of a free market is an open network--a system of information exchange in which all parties may freely participate. Like free markets, open networks create the largest amounts of wealth for the greatest numbers of people. To explore the difference between open and closed networks, we will compare the open source movement to the propriety software industry.
We turn again to Microsoft as an example of a closed system, since Microsoft is a company with which most are familiar. Consider information exchange between Microsoft and its customers; it is largely unidirectional. Microsoft develops its software in-house and closely guards its source code. Microsoft is not interested in opening its source code to external inspection because of concerns that others might copy its technology or gain information that could help competitors develop superior products.
When sufficient numbers of users discover problems with Microsoft products, Microsoft might decide that it is in its own best interest to engineer a solution. Otherwise, the problem becomes a "known issue" and Microsoft might suggest a workaround. Suffice it to say that, beyond problem discovery and reporting, Microsoft's customers can't modify or improve the products they use because Microsoft retains exclusive access to the source code. It can do this because international copyright law has granted Microsoft a monopoly on its intellectual property.
Microsoft is an example of a closed network; it completely controls how (and whether) it exchanges information with the rest of the world. Not surprisingly, Microsoft is the principal beneficiary of this system. MS sells the products for which it has been granted an information monopoly, and its customers accept the prices and terms that Microsoft sets for their use.
In the open source world, information exchange is not regulated by a single entity, so information can flow freely across a network for the benefit of all participants. Anyone can modify or improve open source software as long the source code for the change is freely published. Thus open source implicitly favors collaboration over competition, because improvements to the source code become community property from which all may benefit.
To the corporate world, open source has huge potential advantages: (1) Development cycles are considerably shortened (largely because of increased communication between participants), and (2) Open source makes it possible for companies to control their IT environments; they no longer have another (possibly competing) company dictating the terms under which they must operate. An important fringe benefit of open source software is its price. Since no single party owns or controls an open source project, the software is free.
When Linux and the open source movement started to gain industry recognition, price was immediately targeted by Microsoft and other proprietary companies. How could commercial vendors compete with free? Microsoft officials made dire predictions about how open source software could threaten the viability of the entire software industry, and Microsoft immediately launched a "total cost of ownership" (TCO) campaign to highlight the hidden costs of deploying open source solutions.
Focused as it was on the price of open source software, Microsoft's TCO campaign ultimately missed the point. Open source is not about free software as much as it is about the ability to control one's technological environment. Microsoft's reputation as a monopolist was well known to the corporate community even before the government's antitrust litigation. However, when it became clear that Microsoft would face no significant penalties for its monopolistic behavior, corporate clients realized how much power Microsoft had over them, as well as how little recourse they had if Microsoft abused that power. Software Assurance was but the latest example of Microsoft taking advantage of the corporate community to pad its own pockets.
THE FREE MARKET RESPONSE TO MICROSOFT
Earlier we discussed how IP companies would rather control markets than respond to them. Although Microsoft's predatory business practices might strengthen its monopoly in the short term, market forces continue to operate. In this case, Linux is the market response to Microsoft, and Microsoft has wonderfully succeeded in fueling corporate interest in Linux and the larger open source movement.
Companies are keenly interested in controlling their IT expenditures and environments, and Linux is the key to doing so. For all the hype surrounding Linux and the open source movement, however, few people recognize what it truly represents. Open source signifies a seismic shift in the public perception of intellectual property. It represents an emerging social awareness that critical IP functions optimally belong in the public domain.
Consider public utilities. Utilities are private or government-owned companies that provide a critical service with little or no competition. When privately owned, utilities are regulated to ensure that their prices are reasonable in spite of their monopoly status. Microsoft could be considered a utility because it also provides a critical service: Through its products, it operates 95% of the world's desktop computers. It has attained monopoly status.
State and federal governments have had centuries of experience regulating traditional utilities, but with Microsoft they stumbled. Ultimately this was because a solution to the Microsoft problem was needed in the same decade as the problem presented itself.
The Clinton Justice Department launched antitrust proceedings against Microsoft to classify and regulate it as a monopoly; however, Microsoft's financial resources were such that it could delay the process almost indefinitely. By the time the Bush Administration inherited the problem, the original antitrust questions no longer seemed relevant. Neither were such matters a priority for the new administration, and subsequently antitrust withered to the slap on the wrist it has become.
The one force that proved capable of offering a real-time response to Microsoft turned out to be an open network (in this case, GNU/Linux). Remember our previous definition of an open network: a system of information exchange free from unnecessary government regulation (i.e., traditional copyright "protection.") Under an open source model, the Linux project not only evolved quickly, it was able to offer the corporate world something that had long escaped Microsoft's offerings: stability.
Microsoft operating systems had become infamous for crashing; the notorious "Blue Screen of Death" had become part of IT culture. Prior to the Linux revolution, Microsoft had not faced a credible threat to its operating system monopoly; hence, it had had no impetus to build a reliable operating system. The fact that MS poured so much effort into platform stability during development of Windows 2000 was a testament to the quality of open source offerings against which Microsoft finally had to compete. Eric Raymond does a fabulous job of explaining why open source is such a robust model for software development and how it inherently fosters quality.
Beyond quality and responsiveness, Linux demonstrated the power of open source collaboration in creating products of extraordinary sophistication. In his article, "More Than a Gigabuck: Estimating GNU/Linux's Size," David Wheeler analyzed the size and complexity of the then-current Red Hat Linux distribution (version 7.1). Including more than 30 million physical source lines of code (SLOC), Wheeler estimated that this version would have cost more than US $1 billion to develop according to conventional, proprietary means.
Furthermore, 7.1 represented a 60% increase in size over Red Hat version 6.2, which was released about a year earlier. Estimates of SLOC counts for Windows 2000 run between 29 and 35 million SLOC, which puts it in about the same size range as Red Hat 7.1. Indeed, Microsoft boasted that it had actually spent more than a billion dollars developing Windows 2000, so Wheeler's figures have real world validity.
MOVING BEYOND INFORMATION OWNERSHIP
Important as it is to appreciate the power of open source collaboration, it is essential to understand that open source is more than a model for cooperative software development. At its core, open source is a legal technology that creates a rift in the world of intellectual property, reaffirming the reality that certain factors can cause information to transcend ownership.
What are these factors? The first is the passage of time. We inherently expect information to pass into the public domain over time. Perhaps this is because, with time, information proliferates and becomes part of common experience. IP regimes have traditionally rewarded information monopolies to content creators for limited periods of time, after which the content enters the public domain. According to the US Constitution, copyrights were meant to secure content for limited periods of time. This rule has recently been ignored by Congress and the Supreme Court, but the original intent of the Constitutional language was clear.
The second factor is ubiquity. When information becomes universal in its application, it enters the public domain as a matter of course. IP regimes have long recognized this fact, particularly in the area of trademark law. When a trademarked word or phrase becomes universally applied to a type of product instead of a particular brand only, it loses its trademark protection. The legal process by which this is accomplished is well defined; precedent has been clearly established.
The third factor is what I will term "criticality." Regardless of ownership, private property can enter the public domain when there is a compelling public interest for the transfer. In the physical world, this principle has been codified into law and is known as the doctrine of "eminent domain." Quite simply, it means that a private party cannot refuse to relinquish its property when doing so is deemed necessary for the public good.
We will consider the operating system in light of these last two factors, in reverse order. Operating systems easily pass the test of "criticality" because every computer requires one to function. Though it would be operating in an unfamiliar context, the government could apply the doctrine of eminent domain and require the release of a dominant operating system into the public domain. Of course, just compensation would be difficult to determine, and the operating system could fracture as a result. A net positive result for the consumer could not be guaranteed.
Microsoft Windows clearly passes the test of ubiquity. Because of its platform dominance, it is the de facto standard around which most of the desktop world has been built. Windows has become universal in its application; however, in this case there is no defined legal process for designating as generic something as complex as an entire operating system. Thus ubiquity is not likely by itself to propel Windows into the public domain, although it is directly related to the success of the Linux project in providing a decentralized alternative.
The ubiquitous nature of the operating system ensures a sufficient talent pool by which an operating system can be developed and maintained as community property. It drives investment in cooperative OS development and becomes the lifeblood of an open source project. The more potential benefactors of a particular project, the more likely it will succeed under an open source model. To succeed at all, the project must attain and sustain a critical mass.
The concept of critical mass is key to understanding both the viability of the proprietary software model as well as its limitations. Without the critical mass necessary to drive development of an open source product/solution, the proprietary model will remain the most cost-effective means of software production. Thus, contrary to Microsoft's dire predictions, proprietary software will always remain a viable and productive part of the economy.
For projects that are able to sustain critical mass, however, open source will inevitably eclipse proprietary software development. This is a market reality because over time, market forces will justify exorbitant expenditures (such as Microsoft's $1 billion spent on development of Windows 2000) only when there is no viable alternative. Linux has proven to be a viable alternative; hence, Microsoft is no longer necessary. It may have tremendous inertia, but inertia does not equal essentiality. Economies of scale will always favor open source solutions when their projects achieve critical mass.
OPEN NETWORKS AND THE CREATION OF WEALTH
Earlier we stated that open networks, like free markets, create the maximum wealth for the greatest numbers of people. This assertion is challenged by leaders of the proprietary software industry, who claim that open source software completely undermines profit potential. How can it be defended when the comparative fortunes of Microsoft and Red Hat would suggest otherwise?
The answer lies in understanding how value and wealth are calculated according to the divergent worlds of information and substance. In the finite, physical world, value is a function of rarity and wealth is comparative in nature. Gold is valuable because its supply is limited, and wealth means having more than someone else. Resources in the physical world are finite and limited.
With information, the opposite is true. The supply of 1's and 0's is inexhaustible; therefore, the world of information is infinite. Whereas the value of a physical item is determined by its rarity, the value of information is a function of its distribution. Why? Because information has power to persuade, and the greater its distribution, the greater its sphere of influence.
Furthermore, in the physical world, ownership implies exclusive possession. Information is nonexclusive, which means that possessing it does not prevent anyone else from acquiring it also. With information then, wealth is not comparative but cumulative in nature. I increase my store of information by sharing because doing so increases the likelihood that others will reciprocate. It is the understanding of information's fundamental properties of which open source takes full advantage.
It is easy to understand how open networks build intellectual capital through reciprocal exchange; understanding how they build financial capital requires more effort. There is no denying that industry moguls have made incredible fortunes from proprietary software. But our premise is not that open networks create tremendous individual wealth; rather, it is that they create the maximum wealth for the greatest numbers of people. This is not necessarily an intuitive concept.
In the case of Linux, open networks free up resources that would otherwise be spent on the acquisition of intellectual property. These funds are then more available for the purchase of tangible property, which has a chance of retaining value (and building wealth) over time. Intellectual property only loses economic value with the passage of time. Ultimately, it becomes financially worthless when it becomes outdated or enters the public domain.
This article on intellectual property has briefly considered the origins of information ownership as well as some of the problems inherent in attempting to own something that is completely immaterial. Given these problems, some would argue that the only logical course would be to abandon information ownership altogether. In the modern world, this stance is simply not feasible. Like it or not, intellectual property is here to stay.
This is not to say, however, that information ownership is without some critical limitations that are only beginning to be fully recognized. We have postulated that when information is both critical and universal in its application, it is ripe for transition to public ownership. Precedent has been established in trademark and real estate law; open source is but one means of accomplishing the transfer in the new context of information. There may be others.
We have further considered the collective shortsightedness of the IP industry in attempting to control its intellectual property after it has passed into the hands of consumers. We have illustrated how this focus on control keeps the IP industry from capitalizing on and adapting to new markets. Ultimately, failure to adapt to new models and markets will spell the demise of individual companies and entire industries.
STOP CONTROLLING, START ADAPTING
Earlier we discussed how the IP industry would rather control markets than adapt to them. This tendency is dangerous for any enterprise, but particularly hazardous for the IP industry because of the manner in which it is structured. IP companies derive most of their income by serving as intermediate information brokers, connecting potential consumers with content creators. They may contract with content creators or employ them in house. Either way, they profit by marketing and distributing intellectual property created by artists, software engineers, and others involved in IP production. IP companies are useful only to the extent to which content creators require company services to sell their products.
For example, consider record labels. Record labels formerly played a critical role in the production and distribution of music. Fifteen years ago, the average consumer didn't have access to the technology required for high quality music duplication or distribution. But gradually CD burners and broadband internet connections have become commonplace, giving the average consumer distribution channels and digital recording capabilities that were once the province of industry professionals only.
The recording industry has cried foul ever since. Instead of adapting to new technologies and market realities, it has been busy diverting attention from its growing irrelevance by whining about them.
Of course change is tough, and a certain amount of whining is inevitable. But modern society seems to forget that technology has always required segments of the IP industry to reinvent or face obsolescence.
Reflect for a moment on the technological progress of portraiture over the last two centuries. Prior to the 1800's, portraits were painted by artists, and only the wealthy could afford them. Modern photography began in the 1830's with the discovery that photosensitive chemicals could be applied to plates, which were then exposed to light. Certainly the invention of photography caused more than one portraitist to worry about the future of his livelihood. But no one sought to stifle emerging technology to prevent a decline in portrait commissions.
In the 1900's, Kodak cameras brought photography to the masses. Since film development was beyond the expertise or interest of hobbyists, Kodak and others provided the service for a fee. Film development provided a revenue opportunity beyond the initial sale of equipment. The photo industry flourished under this "sales and service" model for years.
Fast-forward to the 1990's. Technology finally started to bring digital photography to the public. The photo industry's business model was jeopardized because digital photography eliminated film development. But camera companies didn't go to Congress seeking to regulate digital imaging. Instead, they embraced the digital revolution and found new opportunities for revenue. Kodak introduced the Photo CD; Canon started manufacturing color printers. The industry adapted to new technology; it reinvented itself and survived.
The recording industry has categorically refused to follow suit. Instead of adapting to the new technological landscape, it has lobbied Congress relentlessly, casting large segments of the population as criminals. Instead of recognizing historical precedent in industrial evolution, Congress decided that the recording industry did warrant special protection and subsequently passed the Digital Millennium Copyright Act (DMCA).
In attempting to insulate the recording industry from the realities of modern technology, Congress probably did more harm than good. Passage of the DMCA furthered the music industry's expectation that legislation could take the place of innovation and reinvention.
As we discussed earlier, IP companies are useful only to the extent to which content creators require their services to sell products. If the recording industry does not reinvent itself, sooner or later musicians will discover profitable business models in which record labels aren't required for promotion and distribution of their products.
Such a revolution could be closer than most people realize, and the tools for it are already in place. A music superstar could end a contract with a record label and have almost everything in place for interfacing directly with the public. MP3's made freely available via the Internet could simultaneously promote an artist and distribute his or her music.
Consumers could burn their own CD's or purchase them from the performer's web store. The artist would generate additional revenue through concert performances and product endorsements. But what would inspire an artist to "go it alone"? Motivated self-interest. Success as free agents would allow artists to retain profits that were previously kept by the studio. It's only a matter of time until someone discovers the magic formula of independent success.
Thus an entire industry could be rendered obsolete. Free agency is only one possible model by which recording labels could become irrelevant; doubtless there are others. Given the fear with which the recording industry approaches online music, it is probable that MP3 sharing has given the industry a premonition of its own demise. If left alone, the recording industry would reinvent itself out of necessity, as every other industry has done. Propping it up with legislation has only delayed the inevitable.
Certainly the recording establishment isn't the only sector of the IP world that favors regulation over reinvention. This inclination is endemic to the entire industry because the economic viability of intellectual property depends on restricting information exchange through the instruments of IP ownership. With information exchange already highly regulated, legislation is viewed as the next logical step.
SUMMARY OF ESSENTIAL CONCEPTS
Thus far our analysis has been largely critical of the IP industry and its attempts to subject information to the same laws that govern physical property. We will conclude by summarizing our central points and by recommending some changes necessary for the IP industry if it is to remain viable into the 21st century.
1) Intellectual property and physical property are fundamentally different, as are the laws that govern them. Tangible property exists in the physical world and is governed by the laws of supply and demand. Its value is determined by comparison. Intellectual property, on the other hand, exists only in the minds of those who believe in it. It is cumulative, immaterial, and nonexclusive, which means that its value is a function of its distribution.
If this seems obvious, remember that IP regimes have been attempting to subject information to the laws of supply and demand for centuries. The result has been a system wherein exchange of information is highly regulated. Thus regulation and legislation have come to be viewed as the principal means whereby the IP industry hopes to sustain its profitability in lieu of adapting to new market realities.
2) The IP industry profits by connecting potential consumers with content creators. Technology, however, is making it increasingly possible for these parties to communicate directly, reducing the need for (and expense of) intermediate information "brokers." Reinvention and adaptation will be essential for each sector of the IP industry if it is to retain relevance and sustain profitability.
This point is best illustrated by the recording industry and its collective response to evolving technology. Instead of recognizing technology as an unstoppable force and finding business models that utilize it, the recording industry has turned to Congress and the courts.
In court it claims that millions of Americans are engaged in criminal acts. In Congress, the recording industry contends that it deserves a guaranteed place in the universe because of its economic magnitude, regardless of its failures to face new market or technological realities. It has even asked for permission to sabotage users' computers with impunity in the name of piracy prevention.
3) When key conditions are met, information will inevitably transcend ownership. When information is both critical and universal in its application, an open system will find a way to bring it into public ownership. Open source is only one way to accomplish this; there may be others. Additionally, information becomes part of the public domain with the passage of time. This social expectation has been codified into law even though IP regimes are under increasing pressure to extend IP rights indefinitely.
This idea points to the emergence of Linux and the open source movement as the natural response to Microsoft and its unsavory business practices. In essence, the premise of open source software is that some functions are too critical and/or universal to be left solely in the hands of a proprietary software vendor. This is partially because of the conflict of interest between a company's profit motive and the best interests of its customers.
4) Attempts to control intellectual property after it has legitimately passed into the hands of consumers are most often counterproductive. These efforts destroy customer loyalty and generate consumer backlash such that customers seek alternative solutions or rally around projects that create them. Ultimately they are lose/lose rather than win/win.
This idea is illustrated by Hollywood's desire to control the editing of movies after they have been purchased by consumers, as well as by Microsoft's desire to control every installation of Windows XP through product activation. Hollywood alienates consumers with its stance as does Microsoft. Too often, the IP industry is so focused on controlling its intellectual property that it fails to recognize when doing so is counterproductive.
COURSE CORRECTION
What will it take for the IP industry to overcome its collective shortsightedness and move successfully into the 21st century? Certainly there are no magic solutions; however, I will close with a number of recommendations aimed at helping IP companies avoid the mistakes that plague so many organizations today.
First and foremost, IP enterprises need to recognize and appreciate the differences between physical and intellectual property. Understanding the fundamental properties of IP is the key to using it effectively. Information has the power to persuade, and its sphere of influence expands with distribution. Hence in contrast to tangible property, intellectual property (information) becomes more valuable as it is disseminated.
Recording studios apparently forget this fact when they determine how much consumers must pay for CD's. Instead of pricing products to maximize sales, the music industry would rather charge high prices and then complain vociferously when music is copied. Perhaps it would do well to remember that the supply of 1's and 0's is inexhaustible. The current prices for music CD's reflect the fact that record labels treat music like tangible property rather than the infinitely reproducible information it really is. Like other forms of intellectual property, music does not lose value with increasing distribution.
When information reaches the practical limits of ownership, IP enterprises would do well to remember its ability to persuade. Information that is difficult to sell on its own (such as music singles) could be used to entice customers to purchase tangible property. For example, if music stores couldn't profit from selling singles, studios could contract with food manufacturers to put them in cereal boxes. In addition to selling cereal, such an arrangement would inevitably drive sales of the album being advertised.
Given information's power to persuade, the IP industry should actively seek new markets and profit opportunities. In 1990, Salon Magazine revealed that US television networks collaborated with the federal government to incorporate anti-drug messages into primetime programming in exchange for financial compensation. The government's attempt at social engineering was justly criticized; however, the episode illustrates that the IP industry could develop new markets for using its products to influence public opinion and discourse.
Second recommendation: Before rushing to Congress or the courts, the IP industry needs to ask whether doing so will solve its problems or simply delay the inevitable. Judicial or legislative actions are often pursued by the IP industry in lieu of strategies that would work with technology and consumer demands to give the public what it wants. Before suing to protect IP rights, the industry should ask itself if it is doing all it can to fulfill consumer demands.
The music single offers a prime example here. Consumers love to download music because it gives them the opportunity to acquire single songs without having to purchase entire albums. But the recording industry has only recently--and reluctantly--begun to facilitate consumer preferences by partnering with online music venues. Indeed, it would rather go back in time to when consumers had to purchase entire albums to listen to one desired track. Instead of learning about consumer needs and catering to them, the recording industry turned to Congress and the courts. The backlash from consumers has been considerable. By following such a course, the recording industry will only succeed in alienating millions of potential customers.
The Business Software Alliance (BSA) offers another example of how not to treat consumers of intellectual property. In 2000, it conducted an unannounced software audit of guitar string manufacturer Ernie Ball and found that approximately 8 percent of the company's software was illegally installed. The BSA, headed by Microsoft, made a public example of Ernie Ball and widely publicized its penalties.
Ernie Ball responded in an equally public manner by turning to open source software and ridding itself of all Microsoft products. In doing so, it demonstrated to the rest of the world that open source solutions are viable when proprietary IP companies start abusing their customers. The IP industry needs to understand that imprudent and unnecessary legal action will inevitably backfire, causing itself serious harm and lost profit opportunities.
Third recommendation: When revenue opportunities from IP sales shrink, companies can add value to information by moving toward a service model. This is something that IBM has been doing for several years with substantial success. IBM's operating system venture wasn't profitable, but IBM recognized the opportunities presented by Linux and seized upon them by incorporating Linux into the solutions it marketed to business customers. As open source projects proliferate and profit margins shrink accordingly, proprietary software companies will find it more and more important to sell services and solutions instead of boxed products only.
The final recommendation is for the IP industry to work with technology rather than fighting or seeking to control it. Following this course requires a basic understanding of history and technological evolution. Emerging technology has repeatedly displaced information brokers as well as entire segments of the IP industry in the past, and it will continue to do so in the future.
It is only recently that we have decided that certain sectors of the IP industry have a right to exist regardless of their market justification (or lack thereof). The recording industry doesn't need to survive in its present form for the larger economy to thrive. Markets will find a way to efficiently connect consumers with producers, and top content producers will always be well compensated. In light of history, arguments to the contrary are bogus, especially when they come from recording industry or other IP lobbyists.
Yet the Directors Guild of America, the Motion Picture Industry Association of America, and the Recording Industry Association of America all talk about solving problems and fighting piracy by controlling technology. They want Congress and the courts to solve their problems in the absence of risk and creative effort. Instead of adapting to technology, they portray millions of Americans as criminals for using it. Is it any wonder that consumers are starting to fight back?
The current RIAA uproar about Internet music distribution is reminiscent of the debate over the VCR nearly two decades earlier. Hollywood was worried that VCR's would undermine movie ticket sales and sued to have them outlawed. Had it prevailed, it would have prevented the video rental business from growing into the billion dollar industry it has become, and its revenues would be half of what they presently are. But the recording industry refuses to learn from history. It would rather consume its resources in a useless fight against technology.
To summarize, the IP industry needs (1) to recognize the differences between physical and intellectual property. IP (information) has the power to persuade, and companies need to use it accordingly. (2) Before seeking to have Congress or the courts solve its problems, the IP industry needs to be proactive in working to meet consumer demands. (3) IP enterprises need to expand their product offerings to include services and solutions; they need to add value to information. (4) As a whole, the IP industry needs to work with technology instead of fighting against it or seeking to control it.
We are at an IP crossroads in our society. With each new law or court case, we decide whether we will attempt to own every new intellectual creation, or whether we will avoid information gridlock by recognizing the practical limits of IP ownership. Business processes, software functions, genes, and even viruses and living organisms are already regulated under current IP law. The Supreme Court has recently implied that Congress can extend copyrights indefinitely regardless of specific language in the Constitution requiring otherwise.
Much of the recent legislation governing intellectual property in the US has been passed by Congress at the behest of the IP industry, expanding the privileges of titleholders and curtailing the rights of everyone else. We would do well to consider the potential outcome of our unbridled pursuit of IP rights, lest we find ourselves living in a world where every creative work must be scrutinized by the state prior to distribution to ensure it meets sanctioned IP standards. Whether in the world of substance or intellectual property, the price of freedom will always be vigilance.
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About the author: Russell Peterson lives in rural Idaho with his wife and five children. Reach him at rhpeterson-at-gmail.com.
(c) Copyright 2004, Russell Peterson. This article may be freely reprinted or redistributed in its entirety or in part, as long as the copyright attribution is preserved and the original URL (http://www.russ.zayda.net/realworld.html) is included.