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Sunday, July 29, 2007

Lawmaking Interfering With Business Models.

At the end of June 2007 there were

news heralding that after 15 years of dithering, Germany and Denmark have finally approved plans to build a bridge across the

Fehmarn Strait in the

Baltic Sea. I think that it is safe to assume that Executives at

Scandilines were not amused: They run the largest ferry company in the southern part of the Baltic, currently operating, inter alia, a ferry link between Putgarden (on Fehmarn, Germany) and Rødbyhavn (Denmark). Of course, by completion of the bridge, the ferry link will be rendered obsolete. They will have to shut down service on this route. I cite this event here because of it is a nice example where a political decision has heavily interfered with business models of companies: By a mere stroke of a feather, one business model, that of offering ferry services for cash, has been demolished, and another one, pre-financing a huge bridge structure (with state subsidiaries?) and allowing others to drive over it for cash has been newly created. There might be legitimacy issues if a state suddenly decides to hamper one business model while starting fostering others.

With regard to this very particular example of replacing a ferry link by a permanent bridge, proponents might argue that constructing a bridge always represents a significant progress over a mere ferry link in terms of speed, convenience and, at least on the long run, lower costs.

During the first half of the 20th century, most of all companies were run on the basis of a very few traditional business models: Making goods or delivering services immediately in return for money. Giving away valuable goods and/or services for free and re-financing by revenue streams generated elsewhere was virtually unknown. In the newspaper and broadcaster markets we had learnt in the later decades of the past century that it was possible to run a company entirely on the revenues generated by advertising while distributing the main products for free. The upcoming of the Internet has enabled many other business models which had been unthinkable in the pre-digital era. Closely related is the surge of the Open Source economy in the software field. There are masters of the art of optimising business models in today's business ecosystems like IBM. Well, I would even dare to go as far as to say that the particular business model implemented by a company under today's conditions represents its innermost core of value. Businesses blossom and fail with their respective business models.

According to

Wikipedia, the term business model describes a broad range of informal and formal models that are used by enterprises to represent various aspects of business, such as operational processes, organizational structures, and financial forecasts. Although the term can be traced to the 1950s, it achieved mainstream usage only in the 1990s. Many informal definitions of the term can be found in popular business literature, such as the following:

"A business model is a conceptual tool that contains a big set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams."

Ostenwalder, Pigneur and Tucci (2005)

In other words as used by

Vadim Kotelnikov, the business model spells-out how a company makes money by specifying where it is positioned in the value chain.

Chesbrough and

Rosenbloom specify six functions of a business model:

to articulate the value proposition;
to identify a market segment;
to define the structure of the firm's value chain;
to specific the revenue generation mechanisms;
to describe the position of the firm within the value network; and
to formulate the competitive strategy.

It makes sense to assume that intellectual property law should ever be discussed in its relationship to the various business models affected thereby.

Take as an example for bitter fights on business models in the age of the Internet the immense lobbying efforts undertaken by motion pictures as well as phonographic recording industries on a global scale in order to convince lawmakers of the advantages of their approaches to create a legal environment with additional carnassial teeth of IP enforcement provisions wherein their respective companies can survive without need to abolish their old-fashioned business models. But are those companies worth to be preserved at all? Or should they, if they refuse to change their business models, simply be allowed to go down the abyss of Internet while the general public watches this spectacle, some priests of the knowledge society standing by, rhythmically re-citing

Schumpertes's credo of creative destruction?

And now, I eventually come to patent politics. In my view it seems to be clear that the patent system as it stands today fosters some business models and hampers others. But if lawmakers were to adjust patent law somehow they ever would improve conditions for certain companies based on business models fostered by the provisions of such amended patent law while deteriorating conditions for other companies which had florished under the previous state of the affairs.

For example, the patent system as it stands today - including its option to hand down injunctions - clearly enables companies to be run on the basis of business models which are typical for so-called patent trolls (whatever

this concept might mean precisely; my argumentation here does not depend on any details thereof). If, for example, IBM does not like such patent trolls, they might lobby in favour of something like an

European Interoperability Patent (EIOP). But mere EIOPs cannot form a substrate on which patent trolls can survive. Should we therefore put those patent trolls on a red list of endangered species, arguing that a legal ecosystem sould be preserved where they can survive? Maybe there are not be many who would, in this particular question, be ready to rise their voices in favour of patent trolls because of they appear to be quite unpopolar in these days.

However, in reality the problem is much worse because of there is not only something like a bipolar antagonism between, say, IBM, on the one hand, and a few patent trolls, on the other hand. Any significant amendment of IP laws will have at least side effects on many other businesses, whether such effects may be intended or not. And I do not see any system of metrics for gaining some common ground when it comes to taking a judgement on which particular business models deserve to be fostered and nurtured by means of some bespoken IP laws and which do not.

I have argued since years in favour of post-grant measures to adjust the patent system to the needs of society rather than to conduct quite fruitless political debates on criteria of substantive law of patentable subject-matter and, hence, can, at least in view of this aspect, meet IBM's EIOP proposals with some sympathy because of they help steering away from fruitless debates on desirable criteria of patentable subject-matter. However, this cannot render concerns irrelevant that the fate of enterprises might be affected for good or bad by blind or badly understood patent law legislation. Only one thing is for sure: Some businesses will bite the dust anyway: Remember Schumpeter's creative destruction.

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