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Glyn Moody's look at all levels of the enterprise open source stack. The blog will look at the organisations that are embracing open source, old and new alike (start-ups welcome), and the communities of users and developers that have formed around them (or not, as the case may be).

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Submission to UK Independent Review of "IP" and Growth

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As promised in my previous post, I include below my submission to the UK Independent Review of "IP" and Growth. It's a very late draft that I'll be sending off tomorrow, so there's still time to correct egregious mistakes that you spot.

Submission to Independent Review of “IP” and Growth

In this submission I will restrict my comments to two areas: software patents and digital copyright.

Software Patents

Software patents in Europe occupy a curious position. Article 52 of the European Patent Conventions states unequivocally that “programs for computers” “shall not be regarded as inventions”, and are therefore not patentable “as such”. Unfortunately, those two words have sown enormous confusion in the field, and have allowed what are clearly software patents to be granted. To confuse things further, the UK position has also shifted several times over the years, with successive decisions seeming to allow some and not other software patents.

There are two central problems with software patents. First, software is essentially a series of algorithms - sets of computer operations; algorithms are purely mathematical techniques; which means that software patents are patents on mathematics - that is, pure knowledge. Attempts to frame software patents are being “applications” of this knowledge “in the real world” have failed dismally to draw any convincing dividing line between knowledge and its application, or between the “real world” and the digital one that exists inside computers.

The other problem is that software patents are often granted on key ideas that cannot be coded around. This creates a kind of choke hold on knowledge. The situation has got so bad that programmers no longer investigate whether their code infringes on software patents, since it is almost inevitable that it does - so many broad and trivial patents have now been granted around the world. Moreover, in the US penalties for infringement are trebled if there is “knowing” infringement, which leads to the ridiculous situation that it is better not to try to find out whether you are infringing.

Those are conceptual problems with software patents that any programmer is aware of. But such conceptual problems have very real economic consequences, as the book “Patent Failure” by James Bessen and Michael J. Meurer details.

These academics set about to quantify the economic benefit of patents in general, and software in particular (it is worth noting that they are both in favour of patents in principle, and are out to reform, not abolish, the US patent system). They found that the aggregate annual patent profits and costs of US software patents in the years 1996 to 1999 were respectively a profit of $100 million, and a cost of $3,880 million (page 143). As they wrote (page 146):

our evidence implies that patents place a drag on innovation. Without this drag, the rate of innovation and technological progress might have been even greater, perhaps much greater. Moreover, the performance of the patent system has deteriorated markedly since the late 1980s.

...

the evidence available since 1999 suggests that things have gotten worse, not better. Not only has the total number of lawsuits increased, but the probability that a patent will be in a lawsuit has also gone up. In addition, legal costs have also risen and lawsuit damages have gone up somewhat. And no evidence suggests that the value of patents has increased commensurately, suggesting the bill for these policy changes might not have come due yet.

Moreover, patents are not needed for software because the latter is already protected by copyright. This covers the particular way an idea is implemented, not the idea itself - and that is exactly as it should be. Part of the problem with software patents is that they are effectively monopolies on ideas, and often trivial ones that any programmer would come up with when faced with the same problem. What should be protected is the exact form of the solution that is devised, and copyright is the appropriate way of doing that.

Allowing software patents is simply a block on innovation and growth, and exposes software companies to the risk of increasingly large fines for patent infringement, as recent cases in the US have shown. Recent examples include an award of $625.5 million against Apple and $521 million against Microsoft - later settled on undisclosed terms. Clearly, if the UK system allowed similar awards against British computer companies, which tend to be much smaller than Apple or Microsoft, it would put them out of business and cripple the native software industry.

Summary: Software patents are monopolies on knowledge, which often cannot be coded around; as a result, they can give the patent holder a stranglehold on the technique and knowledge in question. That knowledge is often obvious, and would be devised by any competent programmer (software is unusual in that once a problem is framed the solution is often quite easy to find). Moreover, software patents are not needed to protect particular solutions of a given problem, since copyright already does that.

In conclusion, to promote the UK computer industry, and encourage innovation here, software patents of all kinds should be eliminated by returning to the original intent of the European Patent Convention, and excluding them completely from patentable matter.

Digital copyright

The central problem with software patents is that the patent system was envisaged in an analogue age, and struggles to cope with the realities of a digital world. The same is true of copyright, which was designed to regulate who could produce physical copies of a text; the idea that a text might exist independently of those physical instantiations was, of course, never contemplated. In particular, copyright was framed in a world of analogue scarcity, and it is being broken by a new kind of digital abundance.

Digital content can be copied perfectly for almost zero cost (and even that small cost is rarely calculated or even perceived.) The Internet allows digital content to be distributed anywhere in the world almost instantaneously, and also for effectively zero cost.

As we know, this has led to a widespread sharing of copyright materials. The content industries like to frame this as “theft”, but this is factually wrong. Theft involves depriving someone of their property, but here, no property is removed from the possession of others. Instead, rather magically, a perfect duplicate is created - a very different situation.

Although not theft, such copies are currently an infringement of copyright. The problem is that copyright never envisioned a situation where perfect copies could be produced in this way; instead, it was designed to protect content from being reproduced by others in competition with the copyright holder. But very little of the digital content sharing that takes place today competes with the copyright holder. The social dynamics are completely different, and are generally part of the socially-approved habit of sharing with friends and family. Indeed, it is striking that as children was encouraged to “share nicely”, but that as adults, sharing without depriving others becomes “theft”.

However, the key issue is not what we call this kind of sharing, but what its economic impact is. Unfortunately, most research in this area is conducted on behalf of the content industries, and is not independent, as is shown by three high-profile reports purporting to reveal the huge scale of piracy and the damage it inflicts on economics.

The first is a report that was commissioned by an previous UK Government body SABIP, the Strategic Advisory Board for Intellectual Property. Its conclusion:

"Estimates as to the overall lost revenues if we include all creative industries whose products can be copied digitally, or counterfeited, reach £10bn (IP rights, 2004), conservatively, as our figure is from 2004, and a loss of 4,000 jobs."

However, here is what Ben Goldacre discovered about those figures, writing in The Guardian:

What is the origin of this conservative figure? I hunted down the full Ciber documents, found the references section, and followed the web link, which led to a 2004 press release from a private legal firm called Rouse who specialise in intellectual property law. This press release was not about the £10bn figure. It was, in fact, a one-page document, which simply welcomed the government setting up an intellectual property theft strategy. In a short section headed "background", among five other points, it says: "Rights owners have estimated that last year alone counterfeiting and piracy cost the UK economy £10bn and 4,000 jobs." An industry estimate, as an aside, in a press release. Genius.

On the other side of the Atlantic, United States Government Accountability Office (GAO) issued a report called “Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods” [.pdf]. Its rather damning conclusion:

Three widely cited U.S. government estimates of economic losses resulting from counterfeiting cannot be substantiated due to the absence of underlying studies. Generally, the illicit nature of counterfeiting and piracy makes estimating the economic impact of IP infringements extremely difficult, so assumptions must be used to offset the lack of data. Efforts to estimate losses involve assumptions such as the rate at which consumers would substitute counterfeit for legitimate products, which can have enormous impacts on the resulting estimates. Because of the significant differences in types of counterfeited and pirated goods and industries involved, no single method can be used to develop estimates. Each method has limitations, and most experts observed that it is difficult, if not impossible, to quantify the economy-wide impacts.

Finally, the International Chamber of Commerce (ICC) published a major report entitled “Building a Digital Economy” last year. Its conclusions are typical of such documents:

A new study entitled “Building a Digital Economy: The Importance of Saving Jobs in the EU's Creative Industries” released today predicts losses due to piracy to reach as much as 1.2 million jobs and €240 billion in retail revenue by 2015 in the creative industries most impacted, based on current trends and assuming no significant policy changes.

The study shows that this sector is already experiencing substantial losses. In 2008 the creative industries most impacted by piracy (film, TV series, recorded music and software) experienced retail revenue losses of €10 billion and losses of more than 185,000 jobs due to piracy.

These are impressive figures, as they were meant to be. But a closer examination of the detailed methodology reveals an interesting fact:

the net result of this 68-page report, with all of its tables and detailed methodology, is that four out of the top five markets used for calculating the overall piracy loss in Europe draw on figures supplied by the recording industry itself. Those apparently terrifying new figures detailing the supposed loss of money and jobs due to piracy in Europe turn out to be little more than a re-statement of the industry's previous claims in a slightly different form. As a result, as little credence can be placed in the the report as in those criticised by the US GAO.

The message is clear: all of these high-profile industry-funded studies are based almost exclusively on the industries' own figures, and thus simply recycle their preconceived ideas about what is happening. As independent research they have little value, even though they have been uncritically reported by large sections of the media, which has failed to examine where the underlying data has come from.

There is a further major problem with these industry reports in that their economic assumptions are at best naïve, and at worst simply wrong. For example, content industries have long assumed that a file shared is a sale lost, although this has been moderated somewhat in recent years to statements that most file sharing represents a sale lost. This is no doubt in part because there is increasing evidence that sharing digital files often leads to increased sales, rather than losses.

Not surprisingly, the content industries have been reluctant to fund research exploring this interesting possibility, since it undermines their arguments completely. Fortunately, a number of independent researchers have produced suggestive work in this area that seems to confirm that file sharing can and does act as a form of free marketing that actually drives sales of the content in question. Here are some representative examples from different sectors:

CDs:

The researchers conclude that that people who download more music actually buy more CDs. They report: “We estimate that the effect of one additional P2P download per month is to increase music purchasing by 0.44 CDs per year.”

DVDs:

A prestigious economics think-tank of the Japanese Government has published a study which concludes that online piracy of anime shows actually increases sales of DVDs.

Books

Paulo Coelho certainly has nothing against selling books. He has sold an astounding 100m copies of his novels, writes Jeff Jarvis.

But he also believes in giving them away. He is a pirate. Coelho discovered the power of free when a fan posted a Russian translation of one of his novels online and book sales there climbed from 3,000 to 100,000 to 1m in three years. "This happened in English, in Norwegian, in Japanese and Serbian," he said. "Now when the book is released in hard copy, the sales are spectacular."

Comic books:

This week comic book writer Steve Lieber has shared his experiences with book piracy, proving that it also has its benefits. Lieber noticed that scanned copies of his graphic novel Underground were posted on 4Chan, but instead of putting his sales to a halt, they skyrocketed.

Lieber shared his findings in a blog entry, complete with fancy graphics which show that the 4Chan piracy resulted in a flood of new customers.

Although the content industries have dismissed this idea that unauthorised sharing might actually be beneficial, their own figures provide strong evidence that this is the case. After all, it is hard to square the constant Jeremiads put forth by music and film companies bemoaning the destructive effect of piracy on their industries with figures like these from the Motion Picture Association of America [.pdf]:

Worldwide box office for all films released in each country around the world reached $31.8 billion in 2010, up 8% over 2009’s total, boosted by box office increases in markets outside the U.S./Canada.

International box office ($21.2 billion) made up 67% of the worldwide total, a slightly higher proportion than in previous years. International box office in U.S. dollars is up significantly over five years ago.

In fact, according to the MPAA's own numbers, box office takings worldwide have increased every year for the last four years, and in 2010 were 30% higher than in 2006 - hardly the sign of an industry being ripped apart by unauthorised sharing of its content.

The music industry is also thriving, as these figures from the UK indicate:

In 2010 the BPI reports hat there were 281.7 million units sold, which is an all-time record. Never in the history of recorded music have so many pieces of music been sold, but you wont hear the music industry shouting about that. In fact, the music industry is selling more music year after year and today’s figure is up 27% compared to the 221.6 million copies sold in 2006.

Of course, the BPI puts a different interpretation on the figures:

In their press release the BPI points out that album sales overall were down by 7%. Although digital album sales were up 30.6%, physical CDs were down by 12.4%. If we believe the music industry, this drop in sales of physical CDs can be solely attributed to piracy. This is an interesting conclusion, because one would expect that piracy would mostly have an effect on digital sales.

But as the same post pointed out:

Could it be that album sales have been declining over recent years because people now have the ability to buy single tracks? If someone likes three tracks from an album he or she no longer has to buy the full album, something that was unimaginable 10 years ago.

If, as the preliminary research discussed above suggests, allowing non-commercial file sharing boosts sales, it follows that clamping down on such sharing is likely to decrease them (because there will be less free marketing carried out by the public on behalf of the content companies). This, in its turn, means that the following argument by the UK Government about the relative costs and benefits of implementing the Digital Economy Act will be rendered moot:

Response (8): the Government has acknowledged that there may be an effect on broadband take-up should ISPs pass on the full cost of the process. This is regrettable, but needs to be balanced against the wider benefit to the UK’s digital economy.

If there is no “wider benefit to the UK's digital economy”, because sales decrease, the costs will be incurred for nothing, and many of those on lower incomes will be cut off from what is becoming a near-indispensable resource for modern life, with inevitable knock-on consequences for social mobility and social justice.

Summary: The possibility that non-commercial sharing of digital content actually promotes growth, as reflected in the healthy increase of content sales in recent years, rather than damaging sales as frequently claimed by the content industries in their partial and one-sided reports, is a central issue here. If this dynamic is at work, it would dramatically affect views on whether non-commercial file-sharing should be permitted or not, and have major implications for the implementation of the Digital Economy Act. This suggests that large-scale and fully independent research into this area should be an urgent priority before further decisions and actions are taken.

If such research confirms the preliminary results reported above, one of the best ways of supporting growth and innovation in the UK would then obviously be to allow the free non-commercial sharing of digital content.

Follow me @glynmoody on Twitter or identi.ca.

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