[openstandaarden] [Fwd: [Bxl] I have now recieved 5 requests to post my speech.]

[Onno Timmerman]

Is een intressant artikel!

Onno

-------- Original Message --------
Subject: 	[Bxl] I have now recieved 5 requests to post my speech.
Date: 	Fri, 23 May 2003 20:39:44 +0200
From: 	Laura Creighton <lac at strakt.com>
To: 	bxl at ffii.org



I think I said most of this, though without the references.  There is
some 'I wish I had, so I will stick it in now' going on.  And being
written it is more clearly organised.

Going to the Greens tomorrow, so if you think I should revise it,
send your comments in _quickly_.

Laura
.......

Hello, my name is Laura Creighton, and I am a financial investor.  I
am here representing my own company AB Strakt, where I am a founder
and a Member of the Board of Directors (www.strakt.com) and the Python
Business Forum (www.python-in-business.org) a non-profit organisation
representing 50 companies, from all over the world, who develop
software using the Programming Language Python, and myself as a small
investor.  Since January 2000 I have invested nearly 3 million Euros
in small software companies in Europe.  I would like to explain to you
why Software Patents, far from increasing competitiveness, actually
destroy competitiveness and are detrimental to my industry as a whole
and thus to all members of Society.

I am not here to denounce the Patent System in general, or to object
to the notion of one central European Patent Office.  These goals are
laudable.  My objections centre around software patents and software
patents alone.  I would like, at this time, to remind you that what
you are being asked to do is to create new law, and change existing
practice.  You are being asked to regulate something which has never
been regulated before, and establish a monopoly in software creations.
I have read the proposed legislation, and nowhere do I see any claims
as to why Society will be better off if we allow software patents.  The
best I could come up with is that some people think that it would be
good to have software patents because the Americans already have them, 
while other people believe that if patents are good for other technology
based industries, then they ought to be good for Software as well.

These are both misconceptions.  First of all, the granting of Software
Patents in the United States is an extremely recent phenomenon.  Later
today you will hear from American regulators, lawyers, and legal
experts who will report on the results of this experiment.  The findings 
are uniformly negative (see: James Bessen and Robert M. Hunt, "An Empirical 
Look at Software Patents" http://www.researchoninnovation.org/swpat.pdf ).  
American software patents are not responsible for the Internet, or the
editors and other programs with which you are likely familiar.  We
built all of these things before there were software patents in the
United States, at a time when software, if protected at all, was
protected by Copyright and Trade Secrets.  These protections already
exist here in Europe as well.  They work fine.  So the question then
becomes: 'Why are you being asked to change existing practice?'.  As
the colloquial expression has it: 'If it ain't broke, don't fix it.'
Why are you being asked for a fix to a non-existent problem?

A large portion of the blame comes from my corner of the world -- the
investment corner.  In order to understand why many venture
capitalists are in favour of software patents (or were at one time),
we need take a brief, historical tour of the Patent System, itself
(historically speaking) a recent phenomenon.  (For those who are
interested, a more detailed tour is available at
http://www.patent.gov.uk/patent/history/fivehundred/origins.htm)

Why has Society traditionally handed out patents?  What do we get
for the trouble of creating a new class of prohibited  activities, and
making more work for our existing civil servants?  Why Patents?
Traditionally, there have been five reasons, which I will outline.

The earliest patents were King's monopolies. The King would grant a
monopoly, because he wanted to.  This leads to:

1. 	A way for the King to reward his supporters and friends, and 
	often to enrich his own coffers.

These sorts of Patents and Monopolies were common.  Society did not
benefit, and was indeed harmed by such patents.  (In England, patent
abuse was directly responsible for the removing of the King, and his
head.)  

2.	To import a technique that exists in some other part of the world
     	into a country where the technique was unknown.

Sometimes, the only way to import a new technique was to grant a
limited monopoly to a foreign expert.  For instance, the earliest
known English patent for invention was granted by Henry VI to
Flemish-born John of Utynam in 1449. The patent gave John a 20-year
monopoly for a method of making stained glass, required for the
windows of Eton College, that had not been previously known in
England.

Granting this sort beneficial patent was seen by Society (and the
king) to be the lesser of two evils.  It presents the typical case,
where Society is told, in effect, 'grant the monopoly or do without'.
Without the Patent, John of Utynam would have stayed home.

3.	To enforce standardisation.

When the initial English train inventors began to produce trains, each 
picked a different size of a wheelbase.  Thus the tracks were set at
different distances apart, and each train could only run on his own
set of tracks.  This was hideously inefficient.  From time to time,
Society grants monopolies, in areas such as telephony, out of an
intense desire to make sure that everybody in Society is in the same
system.  In this case the monopoly, generally a thing to be avoided,
is what is desired for its own sake beyond all other considerations.

These days, most of this effect can be had by mandating that all
producers abide by some common standard, rather than by allowing
one player's current practice to become the standard by forbidding
others to compete with him.

4.	To allow inventors to acquire private capital.  

An inventor often needs capital in order to build a factory for the
manufacture of his invention.  In some nations, most recently among the
South-East Asian 'Tigers', the government sees the provision of such
capital as one of its jobs, but generally this is left to private
investors.  (People like me.)  But people like me are reluctant to
part with our capital without assurances that the other private
financiers are not all trying to back similar projects.  On the
day our new factory opens, we don't want to discover that there are
14 other factories scheduled to open the very same week.

This is especially true because it is atypical for the first entrant
into any market to also be the most successful.  Later entrants take
the successful idea, and skip the mistakes made by the pioneers, to
produce a more profitable company.  With the granting of monopolies,
the nature of the competition changes.  The initial company only has
to establish such a commanding lead that nobody can catch them.  They
will thus forever remain the market leader.  Their early mistakes go
unpunished, since nobody is competing with them in their industry.

This is bad for Society.  But the alternative is worse.  Private
capitalists would refuse to lend.  They would wait, hoping that
somebody else would be the pioneer, and they would only be 'the team
that did it better'.  This would result in many inventions never
reaching market at all.  Once more, the Patent is seen as the lesser of
the two evils.  'Grant the monopoly of do without', again.

The computer industry has seen plenty of these sorts of patents -- hardware
patents.  We will come back to them later.

5.  	To defer the extremely high development costs of new products.

This is a relatively new development.  Society has seen fit to grant
monopolies because some useful products have enormous development
costs.  For instance, in the pharmaceutical industry, researching a
new drug is fairly cheap and easy -- but the clinical trials necessary
to demonstrate that the new product does not harm consumers is
overwhelmingly expensive.  Pharmaceutical companies have plead for and
received the right to 'gouge' the local consumers by selling new drugs
much above cost, in order to defer these costs.  Again, this is a case
where the benefit is considered to outweigh the disadvantages.  If we
did not grant such monopolies, then the government might have to foot
the bill for the clinical trials.  Better to let private enterprise do
this, and have the users to the newly developed drugs pay more than
they would otherwise need to -- after all, before the drug was
developed and tested, they were doing without.

There is a down-side.  Pharmaceutical companies are motivated
to develop drugs which they can sell to the developed world at monopoly
(high) prices.  Thus research lags for drugs which would cure or 
ameliorate the diseases of the poor, who cannot subsidise any clinical
trials whatsoever.

----------------------------

Now, which of these five reasons apply to the proposed new category,
software patents?

Could it be #5?  To offset development costs?  Not a chance.  It is
only very rarely, as for the deployment of a new Air Traffic Control
System, that software has high development costs. Software is
extremely cheap to develop, compared to other industrial products.
There are virtually no material costs.  You really can start a computer
company in a garage -- this is still going on, and out there in the
audience are people who are doing just that.  Almost anything else
which one can develop will cost more -- scientists need laboratories,
and non-software engineers require materials with which to create
things.  The only comparable activities are in the Arts or Humanities
-- composing music, writing a book, developing a new philosophy or
theory.

What about #4?  To allow inventors access to private capital?

On the face of it, this seems plausible.  But it doesn't stand up,
either.  Hardware companies need capital, indeed, to build factories,
but the demands of Software companies are much more modest.  The
following is the normal development pattern of small software
companies, who intend to produce a product for retail.  (Note, that
companies who intend to produce a product for retail, rather than
a service are in themselves, unusual.  Most people who develop 
software do so as part of the day-to day running of the companies
who hire them as 'the in-house expert', either full time or as
a consultant.  What they produce is not intended for retail at all.
These people will be effected by Software Patents as surely as
those of us who are developing commercial products, but I will leave
them to tell their story.)

Here is how things work in the Retail Software Industry.  A few -- at
most 5 -- people get together to form a company and develop a piece of
software.  They look for funding.  Unless some of the founders have
rich parents, they receive none -- because they cannot convince the
lenders to lend.  This is because all they have to offer is their
very bright idea.  Ideas about the software I intend to develop are
akin to ideas about the hit-CD my band intends to produce, or the
great novel I will write some day.  They sound great, but only rarely
live up to their dreams.  In the Software industry, we have a word
for such unrealised dreams.  We call them 'vapourware'.  And financial
lenders have learned to not invest in 'vapourware', for obvious reasons.

Undiscouraged, our hero-founders decide to develop their software
anyway.  In order to fund their venture, they take on a consulting
contract, typically in an unrelated, but lucrative field.  This means
that their product gets developed more slowly than would otherwise be
the case.  If all goes well, they reach the point where they would
dearly love to jettison the consulting business, and make all of their
income on business related to their new product.  Or, if their
consulting business is related to their product, they need to expand.

In short, they need a round of financing.  This is where I come in.
This is where I do my investing, and most small innovative software
companies need cash to the tune of 50,000 to 250,000 Euros.
This is an incredibly small sum.  There is a tremendous need for
this sort of funding, but it is very hard to find.  And Software
Patents will not help you acquire this.  The amount of money you
need to 'go around the corner' is one or two orders of magnitude
smaller than the amount of money that you need to open a factory.
It is the same problem that faces small businesses in every industry.

The American experience argues that Software Patents were
contributory to the Internet Stock Bubble, and our current climate of
economic weakness.  American Venture Capitalists, who were used to
funding hardware manufacturers to the tune of tens and hundreds of
millions of dollars, were uninterested in investing small sums in
software companies.  They were, however, interested in investing large
sums - the sort of numbers with which they were comfortable.  But
before the existence of software patents, it was very difficult to get
them to invest large sums of money in software, because they could not
tie their money to any tangible asset.  As the expression goes: 'it
was all vapourware'.

Software Patents changed things.  When people were able to patent
their ideas, they were able to go to the capitalists and receive a lot
of money.  Thus they began startups with scores of people, way too
much equipment, and a funny idea which might or might not work.  Too
much money rushed into ventures which had little or no hope of ever
being profitable. Too large an initial development team meant that the
fledgling companies began with a communication burden which is typical
of large, well established companies.  Often they could never develop
the software at all.  When they could develop it, it suffered from
being developed by too many people. Acrimonious fights abounded.
Small groups of 2-3 people went their own way and had a great time
producing something that was unrelated to the core business.  People
changed their minds as to what was their core business more frequently
than they changed socks.  And all of this didn't matter -- as long as
the money came in.  Software Patents encouraged venture capitalists to
make foolish investments, because they believed the patents were worth
something.  Venture capitalists often do not mind if the companies
where they have invested go bankrupt -- as long as they hold title
to the patents.  They can start over again with a different team.

Sadly, when the bubble burst, the venture capitalists discovered that
their patents were only good for a trip to court -- or at least some
legal wrangling with a bunch of lawyers.  A software patent is not
like a hardware patent, where typically one, or at most a few covers
the whole invention.  Dozens, sometimes hundreds of patents, are
relevant to any piece of software.  So an investor, who now owns the
assets of a defunct company -- cannot take its patents and hand them
to a new development team and say 'build this'.  It is impossible to
develop software today without infringing somebody's American patent.

The venture capitalists, having lost fortunes backing companies which
had no real product, are now uninterested in investing in any software
companies whatsoever.  Right now the American economy could benefit
from more investment -- but the capital is not going into software
companies.  Again, part of the problem is software patents.  The
venture capitalists have learned that all software is in violation of
somebody's patent.  So they do not want to touch the stuff.  Thus on
the up side, and the down side, the existence of software patents have
contributed to creating the stock bubble, and making the recovery
slower and harder than it needed to be.
 
So #4 is right out -- the existence of software patents
are inhibiting investment right now, and for very good reason.  

What about reason #3?  Would we get badly needed standardisation?
Would we make sure that all members of society used the same system?
Not at all.  We have standards committees for when we need standards.
Granting a monopoly would not produce a better result for those rare
cases where we desire one standard for all.  Software changes so
rapidly that users of version X of some program frequently find that
their files cannot be read by version X+1.  And consumers frequently
complain about 'lock-in' -- an industry practice where users of a
system cannot change to a competitors system because the conversion
cost is too high.  The fact that they bitterly desire to change
vendors is a strong indication that we should not grant monopolies.
We could generate software standards this way, but we do not want
them.

What about reason #2?  Do we need to import a technique which is not
known in Europe from the rest of the world?  Not in today's global
marketplace.  Assuming that you can find a desired software technique
which is unknown in Europe, -- you will also find a salesman who
trying to sell it to us.

This leaves us with reason #1 -- a way for the king to reward his
favourites and increase his own coffers.  The modern insiders are not
the friends of the monarch, but patent lawyers, insurance companies,
and other assorted purveyors of overhead.  They will come out very
nicely under this scheme.  It will also be good for large businesses.
They already have large legal staffs.  If they can manage to make 'and
have good lawyers' as part of what a company needs in order to compete
within an industry, they are well on their way to locking out the
small and medium sized business.  Right now, it is commonplace to
demand that software produced 'for hire' by independent contractors be
indemnified from patent violation.  Since this is impossible, what
contractors do is to buy insurance, which is hideously expensive.  We
are talking about tens of thousands, sometimes hundreds of thousands
of Euros here.  Small businesses generally cannot afford it, so they
simply cross their fingers and pray they are not sued. Those rare ones
that can afford such things are treated to an experience that has the
same flavour as paying the Mafia 'insurance' to make sure that one's
business does not burn down.

And as for the monopoly-holders?  They often damage themselves in the
process, because the possessor of a monopoly tends to milk it for
profits now, rather than innovate in order to create more profits
later.  Again, the computer industry has an instructive example.  When
IBM released the IBM-pc, they did not patent the design.  As a result,
people in south-east Asia quickly began making cheap IBM-pc compatible
'clones'.  In the short term, this was bad for IBM.  It was, however,
good for Society -- the price of computers plummeted, and soon
everybody could afford one.  And, over the long haul, this has been
good for IBM as well.  Right now they are selling programs and
services to a whole host of people who would never have become
customers if computers had remained expensive.  Not having the IBM-pc
monopoly has benefited IBM, illogical as it seems at first glance.

Notice that I did not mention the reason why most people incorrectly
assume that patents will be good for any industry.  They assume that
patents protect 'the little guy' from the Big Companies.  But in the
case of software patents, the reverse is the case.  The Python
Business Forum unanimously condemns software patents as being harmful
to their businesses.  On the one hand, large companies hold more
software patents than small ones.  This means that it is much more
likely that Big Company will be suing you, than the reverse.  Since it
is impossible to develop software without violating somebody's
American patent, many European companies have quietly decided to do
without the American market.  Lucrative though it may be - the legal
uncertainties make the United States unattractive.

Right now if you produce software in the United States you can be
sued at any time for patent infringement.  It is impossible to avoid
violating patents, which are often left for the courts to determine in
any case.  One typical practice is to wait until a company is about
to 'go public' -- to sell its stock on NASDAQ or the New York Stock
Exchange.  Suddenly, you are told that you are in violation of some
patent or other.  The patent holder - often a company that does nothing
but hold software patents and wait for companies like yours to go public,
will be happy to drop his lawsuit with you if you will sign a licensing
agreement for some undisclosed amount of money.

Most companies pay - even if they believe that they could defeat the
claims in court.  Not only is it likely to be cheaper to settle than
to litigate, but one cannot afford to have the cloud of litigation
as one launches one's Initial Public Offering.  Better to pay the
sharks.  This is why the sharks stay in business -- they simply wait
for companies to go public and bleed them at this time.  This is
bad for business.  It is an unofficial 'tax' on going public, rent
seeking of the worst sort.  

But let us say that the unusual does occur.  Let us say that you are a
real inventor, not a pure rent-seeker, and you patent a piece of
innovative software.  Then you find that Big Company is in violation
of your patent.  Terrific News, no?  Actually not.  The first thing
that Big Company will do is to look at your software, and point out
that you are in violation of several dozen of _their_ patents.  They
will then offer you a cross-licensing agreement.  You will get to use
their patents, and they will get to use yours.  This, of course, does
not suit you, who want to stop Big Company from competing with you,
but Big Company has the cash, the lawyers, the time, and the
experience to put up a fight.  Most small companies give up at this
point and let Big Company do whatever it wants.  But let us say that
you are more stubborn.  You decide to go to court.

How do you pay for your lawyer?  In most cases, you pay him by
assigning him some percentage of rights to your patent.  (Make sure
that you save some back to pay him for the inevitable appeal.)
Usually the small inventor loses.  But even when they wins it is often
a pyrrhic victory -- the court vindicated their position, but now
their lawyer owns the invention.  They have wasted precious months,
often years of their lives in court, rather than creating.  Society
has lost again, the lawyers have won, and Big Company continues on as
usual, often purchasing the patent at some ridiculous low price.

Software Patents have not protected the Small inventor from the Big 
Company -- instead they have made legal expertise an additional barrier
to entry into the software business.  And they scare investors like me
out of investing in software businesses.  In the United States there
are plenty of companies whose fervent desire is to become successful
enough to make their founders comfortable -- and no more successful.
They are trying very hard to remain 'too small to be worth suing'.
This does not benefit Society either.

And Software Patents harm the Small investor such as myself, and those
companies I would like to invest in.  These days I need to reserve capital
in case my own companies get sued.  Thus capital is tied, while hungry
startups go without.  This, too, benefits only the existing players,
who have eliminated the competition long before it could develop into
a threat.  Society is worse off.

In conclusion, software patents are a failed American experiment.  We 
should not embrace American mistakes, because they do not benefit Society,
and indeed harm the small and medium sized businesses which are the
source of nearly all innovation.  I appeal to you to not institute
software patents, to the detriment of all of us.  It is _not_ broken.
Please do not try to fix it.

Laura Creighton
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