This is bad policy. It is far from best practice. It is not in the best interests of citizens. It will not help the local IT industry as a whole. An alternative strategy to the one now being adopted is something that I’ll be exploring very shortly in a separate research note. But what I want to do here is to dissect the logic of the Australian Information Industry Association (AIIA), the industry body that has been at the forefront of lobbying the government for these changes. I would suggest you all pay attention to how this plays out whether you’re private or public sector, in Australia or out. The reason is that the the AIIA’s position on IPR represents the aspirations of the world’s largest, multi-national IT vendors.

While the AIIA’s mission, as stated, is to “lead and represent the ICT industry in Australia,” its board is comprised almost entirely of large multi-national providers like Intel, Google, Microsoft, EMC and CSC (Gartner has the only non-IT vendor board seat). Several of AIIA’s board members I know personally. Several I’ve met over the course of my career. The personal integrity and reputation of these individuals is beyond reproach.

But the role of any industry lobby group is to advocate what’s in its member’s best interest. And they do that by trying to convince governments that a special consideration to one segment of society results in a benefit to everyone. This is regularly done by wrapping arguments in the respectable garb of lofty and generally-agreed principles like increased employment or free trade. Of course, that calculus doesn’t always work out as promised. Often, special considerations end up entrenching inefficiencies and limiting competition.

So, what are the arguments the AIIA is using to support their lobbying efforts? Those can all be found in the document “Key Issues with NSW Government’s Procure IT v2.1.3” Sadly, their diagnosis of the problems associated with customers seeking to own intellectual property in newly created items is either misleading, illogical, or demonstrably wrong. Let’s consider each:

AIIA Assertion 1

Development of the local NSW ICT industry will be curtailed. If Government owns the IP in newly created IP then it is „locked up‟ as the Government almost never exploits it. However, if the supplier retains the IP then it is likely to exploit it, and so bring jobs and investment into NSW.

Why This Assertion Is Flawed
If by “locked up” the AIIA means owned by someone else who can determine the conditions of use use then yes, that’s true. And that’s the whole point of intellectual property. It’s property.

If by “exploit” the AIIA means “to seek separate commercial settlements with the IP,” then that might be true – might be. But it’s a nonsense to assert that newly created IP paid for by the government is not exploited. It’s exploited as systems, or parts of systems, that facilitate the operation of government and which provide services for the public good. Furthermore, if the government was paying more attention to the asset value of their IT- related IP then those rights which, by default they want to grant to their suppliers, could form the basis of revenue-generating “user-pays” solutions which can offset the cost of government. This has a clear precedence as many government higher education institutions, for example, have IP departments charted with commercializing the IP coming through their own research efforts. Or consider the success of the CSIRO in securing royalty revenue for their wireless LAN IP.

But the biggest flaw here is the logic that client retention of IP somehow limits suppliers’ ability to exploit IP which brings jobs and investment. First off, it depends what type of IP we’re talking about. When the IP in question is copyright the reality is that client ownership does not inhibit a supplier’s commercial opportunities. They simple take the knowledge and experience that comes from the engagement and apply it to the next client-paid engagement (a point they make in assertion 3) through a distinctly different set of code expressing the algorithms at the heart of the solution. More importantly it must be understood that IP rights today are increasingly being used by the supplier community to limit competition. That is abundantly clear by the raft of patent infringement cases dotting the landscape of the IT industry along with the growing use of non-compete and confidentiality clauses to limit the flow of staff between organizations.

AIIA Assertion 2

If the supplier exploits the IP then the customer is likely to benefit from much reduced support costs, and will have an on-going product development path, which the
customer is not paying for. It is uneconomic to support and further develop custom systems only for a single customer.

Why This Assertion Is Flawed
A classic fallacy of the false dilemma. First we take two positions as given; 1) customers benefit from lower support costs if the supplier maintains it, and 2) it is uneconomic to support and develop systems for a single customer. Then we draw a direct conclusion – support costs go up if IP isn’t managed as collective pool by a vendor. But if either statement isn’t true than neither is the conclusion. And that’s exactly the case here.

First, support costs are not necessarily reduced if the IP is controlled by the vendor. Let’s consider packaged off-the-shelf software – the pinnacle of vendor-controlled IP. Accessing support for most of these products usually requires a maintenance agreement which, theoretically, should go down in price as the user base increases. But exactly the opposite is happening – maintenance fees are going up. The reason is simple – it comes down to exit costs. The cost of moving from one software product to another is often so prohibitive that it creates a micro-monopoly that vendors can exploit. So, in fact, the more IP is controlled by a supplier the higher the long-term support costs can become.

Second, it’s not true that the IP relating to a specific customer’s requirements is developed further by the vendor. In all likelihood, if further development is required it will create a separate services engagement that needs to be paid for again by the client.

AIIA Assertion 3

Many customers insist on “we pay for it therefore we own it” when it comes to ownership of new IP in an engagement. This view ignores the fact that IP creation is an iterative process and a customer often engages a supplier due to the supplier‟s skill and knowledge in an area. The customer is not paying for this development of skill and knowledge over time so cannot be seen to be “paying” for the resulting IP that may be created on an engagement.

Why This Assertion Is Flawed
Let’s agree, for a minute, with the assertion that IP creation is an iterative process. Let’s also assume that those iterations involve the client’s “skill and knowledge in an area.” Shouldn’t that then lead to a sharing of IP assets? Why then does the AIIA lobby for supplier IPR retention as a default position instead of a shared public-private partnership (PPP) model? Yet how many agreements do you see where IT suppliers enter into long-term revenue sharing agreements with their clients from shared IP creation? Those are as rare as the proverbial rocking horse manure.

This argument also conveniently neglects to acknowledge that some projects represent the automation of their customer’s trade secrets. There is no real “iteration” in this scenario – the IP is essentially the customers. Why should any customer – government or private – voluntarily concede the rights to their IP assets simply because they sought the assistance of someone else in codifying the concepts or integrating it with existing systems?

Let’s also call out a little inconvenient truth – by and large, suppliers aren’t paying for the development of skill and knowledge over time either. The skill and knowledge that is required is manifested through the individuals doing the work, not the organisations they work for. How do they acquire that skill and knowledge? Some of it is through the formal training they themselves pay for prior to their employment. The more practical, hands-on knowledge comes through their work on all the engagements other clients are paying their employer for. What this means is that a government client can still achieve it’s goal of fostering IT industry growth while retaining IP rights because these engagements are ultimately growing the knowledge of the people which are its backbone.

If governments really wanted to support the growth of the local industry through an IP strategy, they would move to limit, if not eliminate, non-compete clauses that restrict the free flow of this expertise – like in the State of California. It doesn’t appear, however, that the AIIA is clamouring for that change to be made.

AIIA Assertion 4

It is less risky for the customer. This is because if all customers sought to own the newly created IP inevitably some of the code/documentation that was created in customer A‟s project would be re-used by the supplier at Customer B‟s project thus infringing Customer A‟s IP. This could mean that the customer was prevented from using the deliverables from that supplier (or would have to pay an additional fee). The whole point of engaging a supplier with experience and expecting the supplier to use its pre-existing tool kit is predicated on the premise that the supplier can maintain and onward develop its tool kit at each customer engagement.

Why This Assertion Is Flawed
I’m pretty sure the AIIA is familiar with the concept of “indemnification.” So the scenario that they’ve painted probably isn’t going to happen given that indemnification clauses are common.

The real concern for clients is not a scenario of customer A infringing on customer B’s IP. It’s customer A infringing on vendor A, B or C’s IP. Gartner has been warning clients for years that the IP battles that have been playing out between vendors would start to be extended to the user community. And that is exactly what is happening now. We are seeing vendors with huge patent portfolios seeking cross licensing agreements with end users based on their internal, custom-developed solutions. We are seeing some vendors working through patent aggregation organizations to drive litigation-avoidance licensing deals with customers so they don’t have to deliver the bad news.

The only way for customers to manage this scenario is to start building up their own IP portfolio. It is the only way to either have a meaningful defence position for potential egregious infringement actions or to shape out the best cross-licensing terms should that be necessary. Granting suppliers IP rights by default makes the establishment of an IP portfolio extremely difficult.

AIIA Assertion 5

Many suppliers simply will not bid if there is any doubt as to whether they will retain the IP in the IP that they create.

Why This Assertion Is Flawed
And the problem is, exactly? Successful procurement is not based on how many suppliers bid for your business. It based on whether you find the right supplier based on your business requirements. Retention of key IP assets should be part of the client’s requirements – if the supplier doesn’t like that it’s not the customer’s concern. Additionally, this could be a problem if the demand for services was outstripping supply. But there is a global market for service delivery capability – it’s a buyer’s market.

AIIA Assertion 6

There are almost certainly methods of meeting a customer‟s business requirements through appropriate contract clauses, without assigning IP to the customer.

Why This Assertion Is Seriously Flawed
So why then is it not possible to meet the suppliers commercial requirements, through appropriate contract clauses, while still allowing customers to retain the IP they are paying for? Or, to be more specific, can the AIIA please demonstrate, with facts and figures, exactly where client retention of IP rights has materially constrained the IT industry?

In many cases the underlying IP has no particular value to a customer. But that’s not really the point. If the IP has value in the market it is the responsibility of people overseeing the supplier agreements to assure their organization gets the maximum possible value from the assets they are paying to create.

Trade secrets.

To be clear, I have no disagreement with the underlying principles of the anti-software patent argument. I share the view that innovation must be fostered. But the history of innovation in the IT industry is much less a story of the free flow of ideas than the free flow of labor.

Like the making of the American West, the IT industry is largely a story of pioneers. Where would we be today if Gordon Moore and Robert Noyce hadn’t left Fairchild Semiconductor to start Intel? And Fairchild Semiconductor only existed because of a staff exodus from Shockley Semiconductor Laboratory. Whether we’re talking about the founders of start ups or the staff they hire as they expand, it’s been people’s willingness – and right – to pull up stakes and start again that has allowed great ideas to manifest into great products and great companies.

And that is why I’m much more concerned about trade secrets than software patents. Inherent in the execution of a trade secret strategy is the limitation on the free flow of labor. It’s trade secret practices that are responsible for those non-compete and non-disclosure clauses in your employment contract.

And if you think that software patents and trade secrets aren’t intricately intertwined then think again.

The IT industry is now an economic powerhouse dotted with organizations and individuals with unimaginable wealth, power and influence. History has shown, time again, that this type of combination foster efforts to distort markets and maintain the relative power of the status quo. Particularly through the political process. This has happened with the industrialists of the late 19th century, the East India Company in the 18th century and with guilds in the middle ages, to name a few. I see disturbing signs of this occurring with the IT industry today.

Should software patents be abolished it won’t mean we’ll be working in the Elysian Fields of pure, unrestricted innovation. If history is our guide I believe that these moneyed interests will redirect their attention to protect their assets – which are largely intellectual property – by seeking to transform and fortify trade secret law. Particularly as copyright offers a diminishing capacity to protect assets (thank you open source software). The thought that powerful IT players would not respond to an abolition of patents without some reciprocal effort to protect their interests I consider to be naive. And the thought that all forms of IP protection will disappear is down right fantastical. Maybe that’s possible on Pandora, but not here on planet Earth.

Now, if a handful of influential media interests can alter copyright law through things like the Copyright Term Extension Act and the Digital Millennium Copyright Act and even get lawmakers to push their agenda on other countries through Free Trade Agreements I’m afraid I don’t hold much hope for the future of things like California’s ban on non-compete clauses once powerful technology lobbyists focus their attention on eliminating them. Just look at the lobbying effort that has gone on in the State of Massachusetts since they’ve considered outlawing such clauses.

If we all care about supporting innovation then we need to see software patents within a broader framework of IP rights. And we should be advocating action which is politically and economically realistic. I am happy to concede the limited monopoly of ideas if it secures the mobility of labor. The reverse is a truly frightening proposition.

That is why I think we should be focusing our collective effort on banning all restrictions on the rights of people to work where they want, when they want. As a concession to technology businesses we must allow software patents to exist. Such a position does not require one to accept the rubbish software patents in existence today or the broken system which granted them. Rather it necessitates fixing the oversight of the system so we can have a much smaller set of novel and non-obvious innovations that are discoverable and understandable.

Open Core, if you’re not aware, is being pushed by many start up companies as a new approach to delivering products combining open source and proprietary software. There may be others nodding in agreement that this in fact a dazzling new business model. Regardless of the way that vendor struts, you should trust your instincts. You’ll soon realize that the fabric making up the garb of their stated innovation is a fabrication. They’ll then be exposed for exactly who they are – a good old fashion software vendor. Just like every other one you’ve come to know.

The open-core emperor has no clothes.

Let’s keep in mind that when we start talking about business models, what matters is not how a vendor generates incremental revenue but how you generate incremental value. In order to understand whether that’s going to happen or not we should start with the foundation of the open-core model – the distinction between a full-feature proprietary version and a free, open-source functional subset of that offering.

Now, if this sounds familiar to you then you’d be correct. That’s called “freemium” in the consumer world. In the corporate market, attempting to broaden the appeal of a software solution by parring back the functional footprint into a low cost alternative has been a staple mid-market strategy of enterprise software companies for over a decade. Just think of IBM’s Express product portfolio or Siebel Professional Edition. Unfortunately, these product strategies have largely fallen well short of expectations. By and large, organizations want products that represent a nuanced understanding of their needs rather than a product manager’s arbitrary functional pruning process.

And arbitrary is the operative word. A couple of years ago I looked at a number of open-core providers (if you’re a Gartner client you can refer to the research note – “Commercial Open Source – Is All That Glitters Usually Sold?”) and found that none of them had a consistent decision framework in place nor any publicly available covenants that explain to potential users the criteria they use in determining which new capabilities will be made available only in their commercial version. Furthermore I have personally been told by one such open-core provider that the reason a new feature, which was clearly of value to all users, was only being provided in the paid-for, proprietary version was that they “had investors they needed to satisfy.”

Besides, what you already know is that this type of functional separation creates what Gartner refers to as a “super-size trigger.” The minute you require a feature only available in the full version then the entirety of your commitment needs to be scaled up and re-costed to the full-cost offering. If you’re like most corporate IT customers I speak to – at least the ones considering solutions from open core providers – then chances are you’ll be starting your assessment based on their full version product rather than the free open source offering. But on the outside chance that you’re considering starting off with a a community-supported open source version than you should realize that you also face a relationship super-size trigger. Should a functional disparity between what you need and what’s available drive you to the full version, you’ll then be linked to the provider through a proprietary license agreement. Either way, any direct value from an open source license is lost to you.

This is where the hype starts to creep in. The idea that a functionally complete, proprietary solution is somehow unique because it was built atop an open source base fails to recognize the fact that many proprietary solutions are being built using open source components. Open-core providers deserve no brownie points from you because ultimately the end result is the same. You’re licensing a proprietary solution from an organization which builds it with fee open source components. The direction that happens – either open-to-proprietary or proprietary-to-open – is meaningless to you.

That is, of course, unless you are prepared forgo the benefits of the proprietary solution and opt for the open source offering. This entails committing to that projects community for support and code contributions while reciprocating yourselves. But that’s highly unlikely for most corporate IT users. The occasional piece of community supported assistance is common and a code contribution every now and then is not unreasonable. But what we know is that corporate users prefer having a vendor provide support and code maintenance services for things like operating systems, databases, business intelligence software, enterprise content management and other key IT solutions. As of 2006, 97% of Linux users were under a service contract from an external service provider. Of course, these types of support and maintenance agreements are available from open core vendors – all as part of the paid proprietary offering.

Even the very definition of “community” is being adapted to suit the open core narrative. What has largely interested the corporate IT world is the concept of a community as a collection of code contributors working outside a normal project/company structure. But now open core providers are extending the term community to include users and even resellers. That, of course, is what we’ve all been calling a software ecosystem for the last twenty years. Same old, same old – just co-opted terminology used to describe it.

You see, when you start peeling back some of the value propositions being attached to open core business models what starts to appear is a picture of a bog standard software provider trying to use the latest phraseology to cut through the noise of a crowded marketplace. Be clear, there’s nothing nefarious going on with open core. It’s just that there’s just nothing particularly new or innovative going on either.

I’m pretty darn sure that most corporate IT users will figure this out quickly, if they haven’t already done so. And when that reality starts sinking in with the open core providers I have a feeling we’ll be hearing a whole lot less about this business model.

The audience at OSBC seemed most comprised of software vendors – either the established vendors like Microsoft, SAP and Adobe or the smaller open source-specific startups.

As expected, each group was positioning open source in their own way. For the established vendors, open source was was being position as basically an extension to their existing business model. That’s entirely predictable and a bit boring. After all, these vendors are always co-opting the shifting IT landscape in order to say “ya, we do that too.” But in the context of open source this is a huge breakthrough. For years most of these vendors saw it as something that would disrupt their business. Now they’re comfortable enough to be able to say about open source, “ya, we do that too.”

On the other hand the open source-specific startups, particularly the denizens of Silicon Valley, were pushing the point that open source was much more than a simple extension to existing software vendor business models. Their view was that open source required a different approach. The predominate model being advocated was “open-core.” But what really struck me is that this commitment to a “new approach” seemed largely based on obtain financing. Their focus was on appealing to venture capitalists – not end users.

That wouldn’t be a problem in and of itself if it weren’t for the fact that there’s a yawning gap between the value open source provides a venture capitalist (VC) and what it provides an end user.

The VC communities’ interest in open source, as I see it, is based on the view that a project’s associated community will lower development and sales costs. That allows them to build an attractive proposition when selling the company. And their current thinking on the best way to do this is through open-core business models.The net result is a certain open source groupthink. First there are open source startups that want to get financing. They’re the ones trying to apply open-core licensing to their business strategy in order to attract VCs. Then there are the group that already have their funding. They’re the ones who are trying to convince everyone, especially themselves and their VC partners, that open-core is all it’s cracked up to be.

But there a couple of problems. The first is that open-core is a largely a re-tread of tired, old SMB packaging strategies which have almost universally failed in the market. Business don’t blindly jump into a free open source offering and then upgrade to a full-cost, proprietary product like it was some stimulus-response behaviour. From my experience they assess these products, from day one, based on the full version. That eliminates any sales benefit from the open source component of the overall strategy which, in turn, makes these open-core vendors just like any other small software provider slugging it out in a crowded market space. Strike one! Furthermore, I’m not sure most open-core business models have been successful in building large external code contributions. Strike two!

But at the end of the day these flaws will be mostly borne by the open source-specific startups, not their VC partners. As we know, the venture capital model accepts a certain failure rate. They really only need a handful of their investments to pay off. Those lucky few that can get a license run rate off the back of a community (which I heard described as partners, customers, and some mysterious non-aligned code contributors – basically just an extension of a good old software ecosystem) will be sold off for a handsome profit. And who are those likely buyers? Increasingly it appears to be the very same established vendor community that are saying “ya, I do open source too!”

So much for a compelling new business model! Strike three, you’re outta here.

So strong is this apparent pull for funding that founders of these open source-specific startups are willing participants in this open source crap shoot. They’re all hoping to be the one that makes it big when odds are they’ll be one of losers – and losing along with it their time, energy, and youth.

This, of course, is the reality distortion field that Silicon Valley is so famous for. It’s being brought to you by the same people who, a decade ago, were telling us about the riches that would flow from commercializing eyeballs. That this reality distortion field has extended to open source is not surprising. But that it’s being wrapped up with so much sanctimonious debate is what’s disappointing.

But it’s not all bad. There are a number of open source providers that neither are, nor are planning to, ingratiate themselves with Sand HIll Road. They tend to be located outside Silicon Valley and have been largely growing organically. When I speak to these guys they’re far less dogmatic about the inherent value of open source because dogma doesn’t wash with business users. If open source is going to disrupt the business models of the established software vendors I think it’s going to be this group that figures out how.

The most famous incident occurred at an all-company meeting last year. When an employee took a picture of Steve Ballmer with his iPhone, he was single out for some gentle, albeit public, ribbing with Ballmer grabbing the phone and pretending to stomp on it (no iPhone was harmed in the making of his point).

All this reminds me of my personal experience as a Microsoft employee when I insisted on using a Palm Pilot. So, apparently, things haven’t changed much inside Microsoft. But externally Microsoft is a very different company. And what makes them different is their strategic interest in cross-licensing their IP to competitors.

So, I’m left trying to reconcile the examples Wingfield highlights of executive humbuggery about the iPhone against the statements of Marshall Phelps, Microsoft’s corporate Vice President for Intellectual Property and Strategy. In his book, “Burning the Ships: Intellectual Property and the Transformation of Microsoft,” Phelps says;

“The IP collaborations, many forged by top Microsoft executives using IP as the glue to cement the deals together – have enabled Microsoft to establish valuable joint product development with other firms…In short, these IP-enabled collaborations have lead to greater success for Microsoft in the marketplace, materially enhanced the company’s bottom line and advanced the interests of our shareholders.”

Phelp’s observation certainly applies to the iPhone given the ActiveSynch technology that Apple has licensed from Microsoft. The iPhone would be a far less compelling device for corporate users without its seamless integration with Microsoft Exchange Server.

So, why then didn’t Steve Ballmer, upon seeing the guy taking his photo with his iPhone, grab the phone, raise it up and tell the audience “folks, did you know that we’re making money whenever one of these things sell? Our presence in the mobile phone market isn’t limited to Windows Phone 7. It’s pervasive due to our domination of enterprise collaboration. ”

That seems like the message Microsoft CEO should have been sending. Clearly there’s some conflicting perspectives.

But don’t be too hasty in your judgement of Microsoft because those conflicting perspectives will be broadly shared by most of us in the near future.

The underlying challenge stems from the way we understand the nature of intellectual property in software. Traditionally IP, be it copyright or patent, has been seen as a means to an end. It’s stuff that’s embedded into a product. But increasingly IP is being seen as having its own distinct value. It’s becoming the product. Fundamentally software is still licensed, but increasingly it’s being done on a more granular scale and with organizations that might previously have been seen as competitors. All of this is bound to the growth in open innovation.

This will pose is a serious disruption to the status quo. Established vendor sales strategies will be upended and so will enterprise sourcing practices. It will force a rethink of many OEM relationships. Vendor-user relationships will become bi-directional as it’s likely software vendors will cross-license or direct license IP from the organizations they consider today to be their customers. This, in turn, will force enterprise IT organizations to ponder whether they are, in fact, software vendors themselves.

Is it any wonder that Microsoft executives are sometimes operating a little across purpose.

Microsoft is on the bleeding edge of what it means to be a platform provider in the new millennium. A software “product” has always been a packaging construct – a way to draw a meaningful boundary around a code base. In world of highly granular IP licensing, platform success can’t be achieved focusing on selling a set of integrated products to customers. Rather it will be based on achieving technical ubiquity by intelligently licensing IP to anyone and everyone.

Sometime I run across things I have to read a couple of times just to make sure I’m not hallucinating. A recent set of utterances by the International Intellectual Property Alliance (IIPA) has been one such case.

It appears that the IIPA have recommended that Indonesia be added to the US Trade Representative Special 301 status, in part, because they are “…endorsing the use and adoption of open source software within government organizations.” Now, so we’re all clear, the annual Special 301report, according to Intellectual Property Watch;

“…unilaterally evaluates US trading partners on the effectiveness and adequacy of their intellectual property rights protections to combat counterfeiting, internet and digital piracy, or intellectual property as it relates to health policy.”

In fairness to IIPA, this was one of several issues that drove their recommendation. Although I’m assuming that if it’s important enough to highlight so prominently in a list of grievances it must be important enough for the IIPA to see as a problem in its own right. And that would mean a lot of other countries around the world would fall foul of IIPA’s concerns. Hmm, I wonder if the State of California can be given Special 301 status?

Regardless, you might be scratching your head wondering exactly how a circular endorsing the use of open source software would run a country afoul of the US government’s stated objectives. Well, the answer according to IIPA is because this Indonesian circular:

“…simply weakens the software industry and undermines its long-term competitiveness by creating an artificial preference for companies offering open source software and related services, even as it denies many legitimate companies access to the government market. Rather than fostering a system that will allow users to benefit from the best solution available in the market, irrespective of the development model, it encourages a mindset that does not give due consideration to the value to intellectual creations. As such, it fails to build respect for intellectual property rights and also limits the ability of government or public-sector customers (e.g., State-owned enterprise) to choose the best solutions to meet the needs of their organizations and the Indonesian people. It also amounts to a significant market access barrier for the software industry.”

Oh really? Which software industry is the IIPA referring to exactly? Does that include Red Hat, which by IIPA’s criteria must be an illegitimate software company? Does that include all the American software companies frantically figuring out how to embed open source software into their proprietary offerings? How about cloud computing providers that, by-and-large, rely on open source software for their underlying infrastructure? Let’s not forget about the professional services industry which increasing sees open source as key business enabler. The list goes on.

And pray tell, how does a clearly defined copyright agreement – which is what open source software is predicated on – “…encourage a mindset that does not give due consideration to the value of intellectual creation.”

Here’s a key point that the IIPA seems not to understand. Increasingly a key criterion used in deciding what “the best solution available in the market” actually is, is the absence of entity-specific IP control. And that feature is only available with open source software. This is a massively important issue for governments around the world as they look at a software industry largely dominated by US firms. Furthermore, as I’ve noted before, the failure of US software firms to craft variable global pricing models is an invitation to foreign governments with weak currencies relative to the US$ to craft these policies.

But let’s just parse out this out from the Indonesian Government’s perspective. In order to avoid the ire of the IIPA they will need to avoid the following actions which would seemingly be quite acceptable in the US:

• Use Red Hat Linux in their data centers
• Utilize mySQL in e-government sites
• Run Oracle databases on Oracle Enterprise Linux
• Build government private cloud offerings on anything but proprietary software
• Use Google Chrome, Apple Safari or Firefox to browse the web (each either being open source, or relying heavily on open source components). Even recent version of Internet Explorer are questionable as Microsoft has been making some features available via Creative Commons licenses.

What is striking is how each of these scenarios are clearly not in the best interest of the software industry. And that begs the question – who are the IPAA and why are they presuming to speak on behalf of the software industry?

IIPA appears to be a umbrella organization covering a number of member association like the Association of American Publishers (AAP), The Motion Picture Association of America (MPAA) and the controversial Recording Industry Association of America (RIAA). The only member association that has any meaningful link to the IT industry is the Business Software Alliance (BSA). This is an organization whose primary focus is software piracy. Now, if the BSA is somehow linking open source software to software piracy that is a non sequitor of monumental proportions.

Even worse is the damage that this type of policy advocacy is doing to BSA’s own members’ businesses and reputations. It runs contrary to the open source efforts of some members like Apple and WebKit or Cisco and Etch. It undermines the credibility of some members efforts to embrace open source software and open source principles like Microsoft’s OSI approval of the Ms-PL and Ms-RL licenses. It is detrimental to the long term revenue outlook of members like Intel. And it makes an absolute mockery of the enormous contributions of IBM across many different open source projects.

Like I said…absolutely gobsmacking.

Throughout the initial chapters of the book Phelps continually states that Microsoft’s assertion of their intellectual property rights – particular their patents – has been a key part of a shared innovation strategy. I know, I know – I had same initial reaction. Self-serving corporate propaganda. But the more I read, and the more I thought about this, the more I started coming around to his thinking.

As some background, Phelps explains in some detail how Microsoft moved away from the “non assertion of patents” (NAP) clause in their OEM agreements. NAP clauses had been the backbone of how Microsoft protected themselves, and other OEMS, from claims of patent infringement. That was seen, and I believe rightly so, as being monopolistic by those OEMs. So, Phelps moved the organization towards the use of broad patent cross-licensing (PCL) agreements with these organizations.

The underlying objective of a NAP and a PCL are essentially the same – to protect an organization from patent infringement claims. But the approach to achieving those aims are as different as night and day. The NAP achieves this outcome by restraining a particular behaviour – suing for patent infringement. A PCL does this by encouraging another type of behaviour – cross-pollinating innovation between organizations. The whole point of a PCL is to say, “why sue each other, let’s just give each other access to our respective portfolios and spend our energy figuring out how we can our share our ideas.”

This is a disconcerting perspective if you see IP as being tool of exclusion – an exclusive right that derives its value from the ability to stop others from doing something. And I must admit, that has often been my default view of IP. According to Phelps, that view was broadly held by most of the staff at Microsoft too!

Instead, Phelps is advocating a different view of IP, particularly patents, as a tool of inclusion – a right that can be used to bring organizations together. Looking at patents in this light makes it difficult to avoid direct comparisons with the underlying objectives of open source. Instead of the confrontational dichotomy so often drawn between open source software and software patents, the two can actually be channelled for exactly the same objective.

In this context the contrast between open and proprietary blurs. Yes, they are distinct states. But how do these different states create value?

I think the answer lies in Geoffrey Moore’s work on the Flow of Innovation and, specifically, the difference between core and context. Patents are relevant in the area of core capabilities – the activities that create distinct value for an organization because they create clear competitive differentiation. As Moore points out, core capabilities are areas where organizations invest more resources. But nowadays Fortune 500 companies are questioning the value of internalizing all that investment. Companies like Proctor & Gamble have proven how success one can be by integrating innovation between organizations. Patents and PCLs then become a critical requirement in being able to innovate core capabilities in a world of open innovation.

Context, on the flip side, is everything that is not core. And, to Moore’s point, organizations seek to extract resources in these areas. Open source has unique value in achieving that objective. There are few mechanisms more successful than open source in remove price and supplier distortions that make resource extraction difficult, if not impossible. But where patents underpin open innovation, open source underpins shared commoditization. Or, as I define it, patents are critical to achieving core competency while open source is critical in achieving collective competency.

Therefore, open source and patent must co-exist as two components of a comprehensive approach to opening up an organization.

Having said all this there is one inconvenient truth that Phelps avoids – at least up to the point in the book I’ve read up to. What happens to all those organizations that can’t build up juicy patent portfolios because of the cost, overhead and complexity associated with doing so? How do they get to participate in this brave new world of PCL-based shared innovation?

But that’s a topic for another day.

Gift wrapping, once tightly wound around its cardboard tube has long since been shredded, crunched up and shoved in the recycle bin.

The scale in my bathroom has moved a few kilos in the wrong direction.

I’m dreading the arrival of my next credit card statement – a concern my financially-cocooned children blissfully ignore as they keep pestering me for all the downloads and accessories that their digital christmas presents now require.

As the fading autumn light tells the deciduous tree that it’s time to put on its annual spectacle of fall colors, all of these are signals that tells this analyst that the spectacle of annual prognostication, unique to my species, is now upon me. But this year is special. With the advent of a new decade I can now indulge myself in an entire ten years worth of predictions. What unbridled joy.

So, what then do the teens hold for open source? Well, if I look back over the previous two decades I see the nineties as a time of inception and establishment. The naughties were largely about proliferation through growing understanding. I believe we are now moving to a era of “open source normalcy.” What do I mean by that? By 2020 open source will be so conceptually and practically integrated into the way business is done that the concept of blogging on open source in 2030 will be about as interesting as predicting the future of double-entry bookkeeping.

Of course that road will not be without a continual shift in perception and some discomfort as we face a wave of creative destruction. There are five major themes tied to open source that I believe will be taken for granted by 2020.

• Open Source is a supply chain solution – One of the things that makes open source such an interest topic is the amorphous nature of exactly what it is. Is it simply a licensing agreement. Is it an approach to software development. Is it philosophical movement? By 2020 we’ll have answered that question – open source is a necessary component of all organizations’ supply chain strategies. It is essentially a way to manage cost and mitigate 3rd party dependencies. All other aspects of open source will be seen as the tactical components of achieving this objective
• Politicians have a greater impact on open source than entrepreneurs – The politicisation of the IT industry continues to gather steam and unfortunately I see nothing stopping that momentum. IT companies are taking their place alongside large media, pharmaceutical and financial organizations as major lobbyists. Over the last ten years, the advancement in entrepreneurial business models has been central to the growth of open source. But as innovative business models start impacting entrenched industry interests you can rest assured that the establishment will increasingly turn to politicians for legislative and regulatory relief. What we’re already seeing today in areas such as patent reform or anti-trust investigations is only the start of things to come.
• Open source globalizes the software industry – I’m not sure many people in the US realize this but open source has long been seen as an industrial policy strategy by governments around the world. In it they see the opportunity to de-couple a critical industry from the US firms that dominated it. Open source, it’s reasoned, can reduce the cost of government, support greater local employment and retain profits in-country for taxation. The problem is that this lofty industry policy objective is very difficult to achieve in a pragmatic manner. But I’m convinced that these challenges will be slowly overcome and the ramifications for the software industry over this new decade will be massive.
• Open source impacts ERP afterall – Yet another fascinating aspect of open source over the previous ten years has been the way it has moved up the software stack. No longer is open source about operating systems, databases and development tools. It’s about collaboration, content management, middleware, and social software – to name a few. But the one place it really isn’t is in ERP. Some people believe that ERP represents a line that open source simply can’t cross into. I don’t believe that. Does that mean that in 2020 we’ll see large scale open source ERP solutions that compete directly with SAP and Oracle’s products. I doubt it. But I do believe that we will see a proliferation of open source business processes. And that will call into question the value of ERP as a packaging construct for distributing non-differentiating business processes.
• Free is fringe – “Free” – be it gratis or libre – was a defining characteristic of open source in 2000. It is notably less so in 2010. Expect that momentum to continue. I know this will rub some people the wrong way but we don’t live in a world that longs for things to be free. So the more open source becomes woven into the fabric of the world’s economy the more the notion of “free” will be seen as quaint – much like communal farms are in the world of agriculture.

1. Does your organization currently license any of its patents to other organizations?
2. Can you categorically state, for the record, that all patents your organization current holds, or is planning on seeking, are being, or will be directly applied to a product or service that you make?

Both Mr. Simon and Ms. Lee have been outspoken critics – both in blogs and in testimony to the U.S. Congress – of patent aggregators (or, to use their terminology, “non-practicing entities”).

The reason I’m asking these questions is to discern whether they are engaging in exactly the same behaviour as the patent aggregation companies they’re railing against. If the answer to question one is yes, and question two is no then I was hoping to explore the logic of why they feel the law should change to make it as difficult as possible to express these very activities as a discrete business model.

Intel was so kind as to respond in the affirmative to the first question. However, they demurred on the second. Google, on the other hand, ignored the questions outright.

I would be my sincerest hope that both Mr. Simon and Ms. Lee could find the time to respond to these questions. Ideally they could do that on their own blogs and link back to me.

Since both Mr. Simon and Ms. Lee have been on the front foot in advocating legislative changes that will have significant ramifications to the IT industry I would hope they’d be open to engaging in a broader dialogue on the thinking behind their positions.

Both Apple and Microsoft have done quite a lot to advance the state of haptic interfaces. And, as any self-respecting modern vendor would do, both have sought patents on their innovations. In the case of Apple it’s the patents they’ve filed in relationship to the gesture recognition system currently in the iPhone and iPod touch and with Microsoft it’s the surface computing technology currently associated with Microsoft Surface and soon to be seen with Windows 7.

But I’m not particularly interested in whether a courtroom battle between Apple and Microsoft is likely. Instead, I’m wondering how this would be impacted by an extension of the Bilski particular machine test.

Back in October of last year, for those of you not in the know, the Court of Appeals for the Federal Circuit ruled In re Bilski that a business method could only be patented if it was implemented on a “particular machine” or it transformed a particular article into a different state or thing.

Now there are two open questions with the Bilski decision. First, will these same tests end up being applied to software patents? Based on recent rulings by the Board of Patent Appeals and Interferences it appears things are trending in that direction. Second, does a general purpose computer constitute a particular machine? While the court dodged that question in the Bilski ruling it appears that the US Patent & Trademark Office would prefer it the answer to that questions was no.

So here’s the question I’m struggling with – is the iPhone and/or the iPod Touch a particular machine? I certainly wouldn’t classify it as a general purpose computer so I’m assuming the answer to that question is yes. Therefore, if the Bilski particular machine test applies to software it would seem that Apple’s patents would be safe.

But would the same apply to Microsoft’s multi-touch patents? While Microsoft Surface can probably be argued to be a particular machine (it is a specific-built solution requiring custom motherboards) that would clearly not be the case in relationship to the implementation of this technology in Windows 7 or even with a Windows Mobile device.

If this turns out to be the case I think the ramifications are pretty serious.

The issue here is not whether Apple is innovating and Microsoft is not. On face value both are innovating. But Apple’s business model of tightly binding their software to their own manufactured products seems to help them overcome the emerging particular machine hurdle. Microsoft, with their business model of licensing software to OEMs, appears to be more exposed to having their patents invalidated.

Like Microsoft or not, there is no denying that their business model has been instrumental in lowering software costs and driving the prevalence of personal computing. If that business model ends up making it more difficult for Microsoft to protect their growing patent portfolio it would be very interesting to see how Microsoft responds.

I am not a big fan of the Bilski ruling. But if it’s impact ends up being more acutely felt on the business models necessary to commercialize innovation than on innovation itself it, that would seem to me yet another reason to find fault with it.