Fool.com: Intellectual Property Online[Rule Maker] May 5, 2000

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RULE MAKER PORTFOLIO
Intellectual Property Online

By Rob Landley (TMF Oak)
May 5, 2000

All intellectual property laws in the United States are based on Article 1, Section 8 of the Constitution, which allows Congress to pass laws "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."

Simply stated, the constitutional purpose of intellectual property is NOT to make anyone rich, but to promote the growth of science and industry. Right there in black and sort-of-yellowish-brown, the constitution states its intention of promoting progress, which benefits consumers, in a way that incidentally benefits producers as well.

Trademarks are there so consumers can know which products they're buying, and make a vaguely informed decision. Copyrights are there to encourage authors to write, musicians to compose, painters to paint, and the really important thing about copyrights is that they expire into the public domain, increasing the generally available body of works like "Alice in Wonderland" (the book is public domain now, the animated movie by Disney isn't yet).

Patents are all about documentation and disclosure. The limited monopoly is bait to get authors to disclose and document their inventions. To get the monopoly they have to describe their invention in enough detail that others can study it, duplicate it, and improve on it once the patent expires.

Of course the constitutional purpose of intellectual property is at odds with the profit motive of corporations, which never want to give up any intellectual property (IP) rights. They're constantly lobbying Congress for stronger protections, to close "fair use" exceptions, and to extend the durations of patents and copyrights. Patents once lasted 7 years, then 17 years, now they last 20 years. Copyright has gone from expiring within the author's lifetime to life plus almost a century.

The ironic thing is that this is a short-sighted attitude to take. Disney could do its Alice in Wonderland movie because the book had fallen into the public domain. Corporations benefit from the level playing field provided by intellectual property entering the public domain, but at the same time they would much rather rest on their laurels and continue to milk existing intellectual property rather than have to compete on a level playing field.

In the last couple decades, the rise of digital technology has also profoundly affected intellectual property. From determining whether "contract-o-matic" programs that ask you to mouse click on a digital button to agree to their terms actually make a legally binding contract, to arguing before the Supreme Court whether or not software is patentable, a lot of new boundaries have had to be determined. But the biggest stresses have been to copyright law.

To a computer, everything is a number, and all numbers are the same. A computer can't tell a copyrighted number from a non-copyrighted number, and the complete works of William Shakespeare (public domain) look the same to a computer as this column (copyright 2000 The Motley Fool). Text, music, video, programs, they're all just big numbers to a computer. A computer understands copyright about as well as a ballpoint pen understands it.

Prosecuting copyright infringement was easy when copying required bulky and expensive equipment (such as a printing press or an industrial CD press) that was only owned by a few people, and when it took days to physically distribute. But now, with computers and the Internet, copyright infringement is often accidental. Press a few keys, attach an MP3 file to your e-mail, and it's on the other side of the country in seconds.

Commercial interests have responded to the steady erosion of the enforceability of IP rights with increasingly draconian measures such as UTICA and the Digital Millennium Copyright Act, granting themselves more rights and more weapons with which to enforce them. Consumers have responded with disgust, disdain, grassroots protests, and widespread civil disobedience.

The problem with the corporate approach is that laws work because people obey them. Enforcement must be the exception, not the rule, or the system breaks down into a police state. There's a big difference between trying to dam a river and trying to channel the flow, and building the dam higher is not usually a sane response to flood conditions. IP rights are also a bit like tariffs in trade; sometimes they cause real problems, and when they do strengthening them just makes the problems worse.

The recording industry is terrified of MP3 music, but then they fought against "burn your own CD" kiosks back in the 1980s that let people unbundle music from albums and choose to buy only the songs they actually wanted. The movie industry is terrified that digitally recorded movies might someday be transmitted over the Internet (thus the flap over deCSS and DVDs), yet they initially fought against the introduction of videotapes 20 years ago (and the resulting video rental industry) because, horror of horrors, people can record stuff onto videotapes.

Digital video distributed online has already subverted the independent film market, including the Sundance film festival. Internet radio stations are springing up all over without needing expensive equipment or an FCC license, and garage bands can put MP3 files up on their Web pages and acquire a fan base and organize performances without signing a deal with a record label.

The thing about the Internet is it drastically lowers barriers to entry, and the dominant players in these markets almost instinctively respond with intellectual property laws to try to defend their comfortable perch. Thus, they're being attacked on two sides, first that digital technology has made breaking intellectual property laws as easy as speeding or jaywalking, so respecting their copyrights is now largely a matter of choice on the part of the consumer. Secondly, their competitors are embracing the same new technology that's causing them so much trouble, and making it central to their emerging business models!

The moral of all that is that intellectual property laws cannot effectively defend an obsolete business model. IP is a tool, not a strategy. At best, relying on intellectual property by itself to fend of competitors is a holding action (as it was meant to be by the founding fathers), and lobbying for stronger IP protections is, in my opinion, a sign of weakness bordering on desperation.

That said, I'd like to quickly clear up an issue from Wednesday's column on patents, which got edited for space after it left my hands and wound up being a bit harsher on the U.S. Patent and Trademark Office (USPTO) than I had intended. I think the USPTO is underfunded, victim of a tight labor market, and trying to enforce laws that really need to be updated, but none of that is actually their fault.

Here's an article about how the USPTO is at least trying to take positive steps to deal with the situation. This by itself isn't likely to satisfy the League for Programming Freedom at MIT or the people behind the grassroots "Stop Bad Patents" website, but it's a start.

Finally, here's a recent series of open letters between Amazon's CEO Jeff Bezos and book publisher Tim O'Reily, discussing how patent law should be reformed:

  • Tim's February 29 "Ask Tim" column
  • Tim's initial "Open Letter to Jeff"
  • Tim's description of their first conversation
  • Jeff's response to Tim (on Amazon.com's website)
  • Tim's response to Jeff

    Have a great weekend,

    - Oak

  •  




    Rule Maker Portfolio

    5/5/2000 Closing Numbers
    Ticker Company Day Chg % Chg Price
    AXPAMER EXPRESS3/80.95%$146.13
    CSCOCISCO SYSTEMS1/86.48%$67.75
    GPSGAP INC-1 9/16-4.34%$34.44
    INTCINTEL CORP13/163.19%$123.38
    JDSUJDS UNIPHASE CORP5/162.53%$93.81
    KOCOCA-COLA CO-1 7/16-2.96%$47.06
    MSFTMICROSOFT CORP11/160.98%$71.13
    NOKNOKIA CORP ADS11.79%$57.00
    PFEPFIZER, INC5/83.78%$44.63
    SGPSCHERING-PLOUGH3/86.04%$41.69
    TROWT.ROWE PRICE ASSOC12.99%$34.50
    YHOOYAHOO INC1/21.21%$125.69

      Day Week Month Year
    To Date
    Since
    2/2/1998
    Annualized
    Rule Maker 2.55% -2.28% -2.28% -3.10% 65.14% 24.90%
    S&P 500 1.65% -1.36% -1.36% -2.49% 46.14% 18.32%
    S&P 500(DA) 1.65% -1.36% -1.36% -2.49% 47.92% 18.95%
    S&P 500(DCA) n/a n/a n/a n/a 22.93% 9.58%
    NASDAQ 2.60% -1.14% -1.14% -6.20% 135.70% 46.24%

    Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
    6/23/1998150CSCO16.432$67.75312.30%
    2/13/199865INTC53.762$123.38129.48%
    2/17/199935YHOO70.647$125.6977.91%
    2/3/199866PFE27.433$44.6362.67%
    5/1/199882GPS22.708$34.4451.65%
    2/3/199859MSFT49.352$71.1344.12%
    5/26/199822AXP107.998$146.1335.30%
    2/15/200068NOK47.500$57.0020.00%
    2/3/199856TROW33.673$34.502.46%
    2/15/200032JDSU100.750$93.81-6.89%
    8/21/199844SGP47.993$41.69-13.14%
    2/27/199827KO69.107$47.06-31.90%

    Trade Date # Shares Ticker Cost Value LT $ Val Ch
    6/23/1998150CSCO$2,464.86$10,162.50$7,697.64
    2/13/199865INTC$3,494.54$8,019.38$4,524.84
    2/17/199935YHOO$2,472.64$4,399.06$1,926.42
    2/3/199859MSFT$2,911.79$4,196.38$1,284.59
    2/3/199866PFE$1,810.58$2,945.25$1,134.68
    5/1/199882GPS$1,862.06$2,823.88$961.81
    5/26/199822AXP$2,375.95$3,214.75$838.80
    2/15/200068NOK$3,230.00$3,876.00$646.00
    2/3/199856TROW$1,885.70$1,932.00$46.30
    2/15/200032JDSU$3,224.00$3,002.00($222.00)
    8/21/199844SGP$2,111.70$1,834.25($277.45)
    2/27/199827KO$1,865.89$1,270.69($595.20)
      Cash: $218.42  
      Total: $47,894.55  


    Notes
    The Rule Maker Portfolio began with $20,000 on February 2, 1998, and it added $2,000 in August 1998 and February 1999. Beginning in July 1999, $500 in cash (which is soon invested in stocks) is added every month.





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