Supreme Court Decides Kirtsaeng v. Wiley: You Bought It; You Own It
by Matt Schruers on March 19, 2013
In a 6-3 decision, the Supreme Court decided Kirtsaeng v. Wiley & Sons (11-697) this morning, overturning a decision from the U.S. Court of Appeals for the Second Circuit. Adopting a position urged by CCIA and others in the technology industry, the Court applied the so-called “first sale” doctrine to all copyrighted goods regardless of where they were manufactured.
Generally, copyright holders can control the distribution of their goods. That is, the copyright doesn’t just control copying, it also controls distributing. The first sale doctrine is an exception to this rule, meaning that once the rights-holder has lawfully sold a copyrighted good, it may no longer use copyright law to control the distribution of that copy. Its distribution rights are “exhausted.” (Hence the doctrine is also sometimes referred to as “exhaustion.”)
More prosaically, first sale is sometimes described as “you bought it; you own it,” yet until now this rule had been interpreted by lower courts to apply only to copyrighted goods manufactured inside the United States. The consequence of this interpretation was that the domestic resale, lending, or even gifting or donating of any copyrighted good made abroad would violate the distribution right. MORE »
{ 0 comments }
How Wall Street and the Tax Code Discourage Disruptive Innovation
by Daniel O'Connor on March 19, 2013
According to Clayton Christensen, the Harvard Business School professor who originated the concept of “disruptive innovation” and still remains the most-prolific researcher in the field, America’s current brand of capitalism is not finely tuned to produce the disruptive innovations our economy needs for economic and employment growth.
As Christensen argues in the Bloomberg interview featured above in this blog post, “the way financial leaders measure profitability, it appears like investing in innovation is not profitable.”
The gist of his argument: the tax code coupled with the prevailing financial “wisdom” incentivize short-term investments in sustaining and efficiency-enhancing innovation, but discourage long-term investments in empowering innovations that facilitate disruption and create new markets. Unfortunately, empowering innovation is the most vital category of innovation for long-term core economic growth and job creation.
So, why is this important to the average American? Well, in short, it helps partially explain the jobless recovery, as according to Christensen:
Disruptive innovations create almost all of the net jobs in the economy…
[Currently, most companies are] investing to make good products better or invest in innovations that make companies more efficient, and those things on average reduce jobs in the economy and don’t create growth.
In a well-functioning economy, sustaining innovations make existing products better and are useful for maintaining the current economic trajectory. They do not create significant new growth. Efficiency-enhancing innovations focus on making current goods, services or business models cheaper and more efficient. Walmart is a classic example of this type of innovation. The negative side of efficiency-enhancing innovations is that they actual result in job losses. The good part of efficiency-enhancing innovations is that they are free of capital to be invested elsewhere — preferably in empowering innovations that contribute to future economic growth.
So, to recap, a well-functioning economy has a delicate balance of three types of innovation. Empowering innovations create new markets and jobs, sustaining innovations make existing products and services better and sustain the current economic trajectory and efficiency-enhancing innovations free up capital from existing markets to reinvest in empowering innovations that promise to grow the economy and drive core economic growth.
Unfortunately, Christensen argues, we have not seen the correct balance of the three types of innovation — especially since the financial crisis and subsequent rebound, which has largely been propelled by productivity gains (aka efficiency-enhancing innovation). According to Christensen, the financial and investment sectors have focused on efficiency-enhancing innovation because the gains are recognizable in the short-run and they produce the best results for financial managers focused on ratio-denominated measures of financial performance — notably Return on Net Assets (RONA), Internal Rate of Return (IRR), Earnings Per Share (EPS) and Gross Margin Percentage.
When ratios are used to measure profitability, there are two ways to improve growth. Either grow the numerator (generate more income from current assets), or shrink the denominator (shrink pool of assets). Because growing the numerator is more difficult in the short run, incentives encourage managers to shrink the denominator and outsource assets. This is good for profitability in the short term, but disastrous for long-term innovation and growth. Unfortunately, according to Christensen, this creates a positive feedback loop that makes efficiency-enhancing innovations appear more profitable than investing in disruption:
As [capital managers] invest in efficiency innovations they create or emancipate more and more capital, but then what they do is invest it in continued investments in efficiency innovation, so we are just awash in capital. The cost of capital is zero, yet they continue to measure profitability in measures that just aren’t relevant anymore.
MORE »
{ 0 comments }
New European Commission Report Finds That ‘Piracy’ Doesn’t Hurt, And In Fact Helps, Music Sales
by Ali Sternburg on March 18, 2013
The Institute for Prospective Technological Studies, part of the European Commission’s Joint Research Centre, just published a new working paper entitled “Digital Music Consumption on the Internet: Evidence from Clickstream Data.” This report demonstrates that online ‘piracy’ does not have a negative effect on sales, and often, in fact, has a positive impact. As they put it, their research suggested “a stimulating effect of [online streaming] on the sales of digital music.”
One key part of the paper was their finding that “much of what is consumed illegally would not have been purchased if piracy was not available.” In other words, each illegal download should not be perceived as being equivalent to a lost sale. For better or for worse, the music industry has (d)evolved into being singles-driven rather than being album-driven; now consumers can download just the songs they want, rather than having to download an album filled with bad songs. One example from the report:
Consider an individual interested in a few songs of a given artist. While she may not consider buying the entire album (which also contains unknown songs) when offered the possibility to freely download these specific songs, she might nevertheless be willing to pay for them individually.
Later, the report puts it even more succinctly: “After using several approaches to deal with the endogeneity of downloading and streaming, our results show no evidence of sales displacement.”
Another excerpt explains the benefits of online streaming services as a preview tool that leads to more sales:
On the other hand, consumers may well use streaming to sample new artists and/or songs. In particular, it may be the case that individuals assign a higher value to a song when they posses [sic] it, as opposed to simply having access to it. This would enhance the value of streaming services as discovering tools, which would positively affect sales.
The document featured also some important statistics on the health of the music industry:
Nonetheless, digital music revenues to record companies are growing substantially. They increased more than 1000% during the period 2004-2010, and grew 8% globally in 2011 to an estimated US$5.2 billion, reflecting the importance of digitization in the music industry (IFPI, 2011, 2012). [This text had the footnote: “This compares to growth of 5% in 2010 and represents the first time the year-on-year growth rate has increased since IFPI started measuring digital revenues in 2004 (IFPI, 2012).”]
This data comports with the research in the CCIA-sponsored Sky Is Rising reports — both the original U.S. report, and the recent European report — which demonstrate that there are more ways to produce, disseminate, and make money off of one’s creativity than ever before. In an earlier DisCo post, Matt explained the importance of these evidence-based reports and the unsubstantiated “the sky is falling!” rhetoric they counter. Content industries try to persuade lawmakers that new laws are necessary due to ‘piracy’ and ‘theft,’ but the numbers show that these parties are instead experiencing success in the marketplace. Matt also notes that this saga is complicated by disintermediation of middlemen, whose role as exclusive disseminator of content is continually undercut by new technologies that benefit everyone else (the artists and their fans).
Just as the Sky Is Rising reports celebrated the financial health of creative industries, the European Commission study similarly concluded that things are getting better, not worse, for creators:
[O]ur findings suggest that digital music piracy should not be viewed as a growing concern for copyright holders in the digital era. In addition, our results indicate that new music consumption channels such as online streaming positively affect copyrights owners.
Artists, their lobbyists, and policymakers — in both Europe and the U.S. — should read this report, and continue to take advantage of these new, thriving channels and not focus their attention on ‘piracy.’
{ 0 comments }
Samsung Galaxy S4: New Sensors Enable Decentralized Innovation
by Daniel O'Connor on March 15, 2013
Yesterday, Samsung’s Galaxy S4 launched in an elaborate presentation at New York’s Radio City Music Hall. What caught my eye the most was the inclusion of new sensors, that allow the phone to collect more data about the user and her outside environment — enabling a new wave of developer and app innovation. Aside from the already standard accelerometer, RGB light, digital compass, proximity, gyroscope and barometer, the Galaxy S4 introduced 3 new sensors: temperature, humidity and IR Gesture.
In today’s world of decentralized software development (think: app ecosystem), perhaps the most important thing a device manufacturer can do is build in new hardware features of this nature. Even if the device won’t ship at launch with a full suite of programs taking advantage of these new sensors, allowing application developers access to real time temperature and humidity information, or hand and finger gestures, can inspire a whole new wave of app innovation.
After all, most of the functionality of a smartphone is lines of code wrapped around data inputs that the device takes in, whether that is voice commands, time, GPS location data, or Samsung’s new eye-reading functionality that lets the users scroll with their eyes (just a new use of a previous generation’s feature — the front facing camera).
If a team of researchers can figure out a way to monitor your heart rate remotely using a smartphone’s camera, who knows what a huge ecosystem of app developers can build with temperature and humidity information and the ability to sense gestures.
{ 0 comments }
Digging Into A Few Of SXSW 2013′s Disruptive Dreams
by Rob Pegoraro on March 15, 2013
AUSTIN–Attempting to stay on top of the chatter at South By Southwest Interactive is a fool’s errand. Even if you could commute by jetpack around town, the density of the schedule ensures that you will only get into maybe one in three panels that you think interesting.
The past few days, my second visit to SXSW, reminded me of this all over again. But through the haze of talks and demos attended and missed, the view of a few tech frontiers cleared up. Slightly.
3D printing: A perennial favorite at SXSW, this technology took a step forward with MakerBot’s introduction of a 3D laser scanner, the Digitizer; you can already render printable replicas of physical objects using software to process photos, but this could be easier and faster.
A fascinating panel later reminded me of 3D printing’s potential and risks. It can now work for customer support (Swedish synthesizer manufacturer Teenage Engineering lets customers print replacement knobs instead of paying to have them shipped) and may boost marketing too (witness Nokia’s inviting users to print its design for a phone case, which some have since upgraded). But when an audience member asked who would be responsible if a 3D printed part failed and somebody got hurt, there was no clear answer.
HTML5 apps: Web inventor Tim Berners-Lee used his keynote Saturday to tout the possibilities of Web apps. Today’s and tomorrow’s HTML5 standards, he said, will endow them with interactive features traditionally confined to “real” apps: responding to data from a phone’s accelerometer and other sensors, running video conferences and even incorporating digital-rights-management restrictions. (That last bit drew an almost 1,500-word dissent from online-liberties advocate Cory Doctorow.)
The HTML5 developers I talked to Sunday didn’t sound quite so gung-ho about Web apps displacing local ones. But on Tuesday, I saw an impressive demo of a Web-based site-authoring tool, Needly, that offered the kind of control over text styling and placement usually offered only in traditional desktop programs.
Mobile finances: When many major banks have yet to get around to supporting remote check deposit through smartphone camera scanning, there’s plenty of room left for smaller firms to innovate around them.
The food trucks circulating around Austin–well, those not subsidized by exhibitors to give away chow to hungry SXSWers–testified to the runaway popularity of Square and other mobile credit-card-processing apps. That trend may lower the ceiling on services that try to abstract plastic out of the transaction, such as SXSW exhibitor LevelUp and its zero-transaction-fee, no-card-number-visible system of letting you pay with a unique QR Code on your phone’s screen.
Also interesting: TreeSwing‘s play to make mutual funds appeal to 20somethings. Its app will let you invest as little as $1, aggregating those tiny transactions through its DST Market Services parent brokerage. If you want, it will also suggest you kick in a little more based on your activity (along the lines of “you’re at Starbucks, why not another $3″) or the date (“it’s Pi Day, invest $3.14″).
The etiquette of all this: The least predictable aspect of new technology’s arrival may be how people respond to it as they (perhaps) get over early awkwardness and create new norms. Highlight founder Paul Davison, whose people-discovery app didn’t quite live up to the hype at last year’s SXSW, noted how users have tip-toed their way into pinging strangers who also happen to use the app.
He described one shout-out a user received in the app: “Hi, say hi to your coworker Ken to me. He’s a really cool guy. I hope it’s okay that I sent that.”
{ 0 comments }
Pinterest Potentially Profitable: Don’t Assume Startups Have No Business Models
by Ali Sternburg on March 12, 2013
Today, Pinterest announced Pinterest Web Analytics, a new tool which will enhance Pinterest’s utility for businesses, as well as other noncommercial websites. Analytics are available for “verified” Pinterest accounts (verification can be done by users themselves demonstrating that they own their domain, so verified status is not exclusive like it is with Twitter’s coveted checkmark). As many have pointed out today, Pinterest is “lay[ing] base” to monetize the enhanced value it is providing businesses, such as through an API.
It is valuable for website operators, from individual bloggers to bigger publications and businesses, to know which of their images are “pinned” frequently. Although some overly cautious copyright attorneys have suggested Pinterest users should delete their accounts due to fear of being sued for infringement, many website owners don’t want to prevent their content from being pinned, and instead encourage it. For them, this new data feature showing how their copyrighted images are being shared will help them know which content is popular. This represents a fundamental split in how rights-holders choose to manage their content: some remain set on trying to retain sole control, even when efforts may seem futile. Others appreciate the value in their content being seen by more people, especially when dissemination can be tracked and potentially monetized directly, or at least serve as marketing for future sales.
Pinterest Web Analytics demonstrates the value that this service can provide businesses. Its new analytics tool will help businesses to recognize and take advantage of the value that Pinterest provides, a value that may eventually translate into something businesses pay Pinterest for. A common occurrence when Internet startups offer new services, for which there may be no obvious business model, is that when they become popular, the press is pessimistic about the likelihood that they will come up with a business model to actually make money:
Google was not immune to this:
- “Google’s Toughest Search Is for a Business Model.” New York Times. 4/8/02
- “The next hot internet stock: How good is Google?” The Economist. 10/30/03.
Facebook still faces skepticism:
- “The 5 Big New Ways Facebook Laid The Groundwork For Making Money During Q3 2012.” TechCrunch. 10/23/12.
- “2012: The Year Facebook Finally Tried to Make Some Money.” The Atlantic Wire. 12/14/12.
And naturally, the subject of this post, Pinterest, has also experienced doubts:
- “Pinterest Has Users, Fancy Has a Business Model.” Adweek. 6/18/12.
- “How Zappos Could Help Pinterest Pin Down a Business Model.” Wired. 8/30/12.
Pinterest may have become popular before it had a revenue stream. But as the above companies and their contemporaries and competitors demonstrate, new and innovative businesses often come up with new and innovative business models.
{ 0 comments }
FTC Proposes Rule of Thumb for Regulating Disruptive Competition
by Daniel O'Connor on March 12, 2013
A consistent theme here at DisCo is government getting in the way of new business models or disruptive market entrants. Because disruptive competitors do things differently — and usually more efficiently — than incumbents, government regulators often have a difficult time understanding how new types of businesses fit in old silos of regulation. Even worse, the old entrenched businesses frequently lean on their political connections and get the government to come up with some justification for shutting down the new competitors or, at the very least, harming their competitive advantages. Whether it is local governments passing ordinances designed to undercut the business model of food trucks at the behest of local restaurant associations, state governments saddling Internet startups with huge licensing fees just for facilitating transactions, or the FDA taking 8 months to approve a toothbrush that plays music, the story is the same across all levels of government.
Uber — the dynamic startup that has used a mobile application to revolutionize local transportation service — has become a poster child of an innovative company being targeted by anti-disruption incumbent lobbying. Local taxi associations have filed ridiculous lawsuits and ginned up local officials to hit the company with regulatory actions harming its ability to do business in well over a dozen municipalities. Not surprisingly, the Colorado Public Utilities Commission (CPUC) recently followed suit and proposed a series of regulations designed to prevent Uber from being an effective competitor. Furthermore, like actions in other cities, these regulations were offered under the guise of protecting consumers (because saying you are protecting powerful political interests at the expense of the public is politically unattractive). These proposed “consumer protection” regulations included mandating that limousines offer only a specific up-front fixed price (making Uber’s variable demand-based pricing illegal), requiring all services that advertise or offer transportation service to be regulated as an actual transportation company (Uber has no cars, it simply connects limo/taxi drivers with customers via a mobile app), and preventing limousines and non-cab car services from stationing within 200 feet of a hotel, motel, restaurant, bar, taxi stand or airport passenger pickup location. Things did not look good for the company in Colorado.
However, in a little-reported action last Thursday, another government agency stepped in — on behalf of the disruptive entrant (and, more importantly, consumers). The U.S. Federal Trade Commission (FTC), which wears a dual hat as both a competition regulator and a consumer protection agency, filed a great comment in support of Uber. Not only was the brief targeted at the proposed Colorado regulations, but it offered a universal maxim that all regulators seeking to impose restrictions on a new company or business model should take to heart:
In evaluating claims that the practices to be prohibited impose a genuine threat to consumer welfare, we recommend that the CPUC be guided by the principle that any restriction to competition designed to address such potential harm should be narrowly crafted to minimize its anticompetitive impact.
The FTC further articulated the principle later in the letter:
In general competition should only be restricted when necessary to achieve some countervailing procompetitive virtue or other public benefit such as protecting the public from significant harm.
Amen.
MORE »
{ 0 comments }
Square’s Cease & Desist from Illinois Regulators Demonstrates Heavy Regulatory Burdens on Commerce Startups
by Ali Sternburg on March 7, 2013
California-based (and Delaware-incorporated, naturally) payment provider Square (which I mentioned in a previous DisCo post for its ubiquitousness in food trucks, as it allows these small businesses to accept credit cards for payment) received a cease and desist letter from the Illinois Department of Financial & Professional Regulation (IDFPR) for its alleged violation of Illinois’s Transmitters of Money Act. It appears that, as the law is written, Square is covered by the law. But that doesn’t mean it should be.
State regulatory bodies like the IDFPR do an essential service protecting consumers against harmful fraudulent actors, which is especially important when personal and financial information is involved. However, it is unlikely that the Transmitters of Money Act was intended to deter the economically-beneficial transactions that startups like Square facilitate — between small businesses and their patrons.
Companies like Square potentially have to comply with regulations in each state in which a payer or payee uses the service — which, given the point and the technology-facilitated widespread use of these services, is likely to be many. (Square, for example, mails potential users the credit card reader for free, so it is quite likely that this opportunity is being taken advantage of in all 50 states.) In addition to local banking laws, there are federal laws such as the Bank Secrecy Act. As this video explains, the purpose of these state laws is to prevent money laundering or financing of terrorism, and also to protect the payers. These are very broad, diverse goals. The first two involve preventing crime. The third is also a laudable goal, but one would