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Home-sales trends took a step down today. The National Association of Realtors released their monthly home-sales data, and on the face of it, all metrics seem to have declined. But a closer inspection of the release suggests a bifurcation between improving conditions in the Northeast and stagnant to declining conditions in the South and West.
Laurence Yun, the chief economist at NAR, would blame it on the weather and suggest that “some closings were simply postponed by winter storms,” but this was most likely not the case. The Northeast and Midwest, which were both hit heavily by winter storms, also displayed strength and improved from January to February. The South and West, however, neither of which were impacted nearly as much, weighed heavily on the data.
Year over year, the sales-pace increased 7%, but the SAAR declined from January to February, 2010. The declining sales-pace yielded an increase in total housing inventory at the end of February of 9.5% to 3.59m existing homes available for sale, an 8.6 month supply at the current pace, up from a 7.8 month supply in January. Sales-patterns in the Southern and Western regions masked the nascent improvements in the Northeast (up 2.4% MoM, 12% YoY) and Midwest (up 2.8% MoM, 8.8% YoY).
Blaming February’s conditions on the weather belies the possible emergence of two very different real estate markets. First, an area of stabilization and recovery that may be developing in the Northeast and Midwest. And second, regions saddled with the left-overs of a housing boon that made states such as Arizona, Nevada, Georgia, and Florida the poster-children for housing speculation and inventory excesses. The division, however, would not be particularly surprising. Afterall, isn’t NAR also always trying to send the message: all real estate is local.
Although sales have been higher than year-ago levels for eight straight months and home prices are much more stable compared to the past few years, the housing recovery is fragile at the moment…Some closings were simply postponed by winter storms, but buyers couldn’t get out to look at homes in some areas and that should negatively impact near-term contract activity.
—Lawrence Yun, Chief Economist, National Association of Realtors: via monthly NAR release.
Intellectual Ventures wants to define itself before someone else does. It’s been called a troll, a renegade, just another stop on shakedown street. Now, however, Nathan Myhrvold has launched a round of publicity that includes batteries from the New York Times (blog & article) and a single shot from the Harvard Business Review. Myrhvold would have his readers believe that we are standing on the edge of a capital market for invention that will unleash and remunerate the full creative power of our economy, and Intelligent Ventures is just the firm to launch it.
Sometimes, however, a troll is just a troll. But Myhrvold is right. He’s not just a troll. Myhrvold’s ambition is greater than that. He’s planning an intellectual property cartel, and policy makers would be well-advised to monitor his project.
Myhrvold had the good fortune to work closely with Steve Lohr of the New York Times to publicize his manifesto in the HBR and share his vision. Lohr provides a patient and adulating witness to the quirky polymath. With an enterprise so shrouded in secrecy, Lohr understands that Myhrvold won’t just speak with anyone and chooses to reserve judgment and ingratiate himself with him: “white hat or black hat, Intellectual Ventures is growing rapidly and becoming a major force in the marketplace.” Lohr goes further, however, and instills the underdog spirit in Myhrvold, who exclaims, “We have to be successful,” following which Lohr warns us that the “issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation.” Josh Lerner, an HBS economist and patent expert, speaks up in the next sentence and says, “how this plays out will be crucial to the American economy.” Could Myrhvold’s success possibly be tied to answering crucial questions about the ground rules and incentives for innovation in the American economy? Lohr’s thoughtful organization might have you think so, and Lerner’s quote would seemingly substantiate it.
Maybe Lohr was uncomfortable with the persona he had attributed to Myhrvold, for he would couple his article with an early-morning blog post on Bits. While his print subscribers drank deeply of his David & Goliath – styled allegory on patent-law, he quietly published a clarification of the patent litigation dilemma. Lohr frames the next phase of IV in terms of solving the free-rider problem. The label is interesting for two reasons. First, it implicitly says what it is not. For example, it is not greenmail, as Jim Huston, a former licensing and patent executive at Intel, suggested in a 2006 Business Week interview: “If you don’t invest, you’re our No. 1 target.” Second, it suggests that there must be a simple solution to an unacceptable practice. Afterall, we’ve all heard about free-riders.
Intellectual Venture’s limited partners invested to protect themselves from trolls. If Intellectual Ventures can buy up loose patents, then the LPs have a quasi-insurance policy against trolls, who could just as easily, though more threateningly, buy those patents. Myrhvold initially called it a defense fund, almost a patent pool. More money means more insurance, but there’s a quirk. It may require litigation to work.
Though litigation may make Intellectual Ventures look like a troll, be assured, it’s not. Myhrvold claims to have only a reluctant interest in litigation. “It’s a stupid and inefficient way to resolve disputes, but in a polarized world, there will be litigation,” claims Myhrvold. It’s necessary, however, to solve the free rider problem. Some people have paid into the defense fund, others haven’t. IV’s hands are tied. They have to sue, so they can protect the interests of their initial investors. It’s their fiduciary duty.
The solution: bring new members into the Intellectual Ventures project. Litigation, or the threat of litigation, Myhrvold believes, will encourage others to join. As they join, he can manage the free rider problem and assure appropriate and legal access to the trove of intellectual property already collected, thus demonstrating the value of their initial investors’ decision to work with them, while creating a market for invention capital – a market for eureka. “Our licensing task is to go from dozens of companies to thousands,” says Myhrvold.
Myhrvold’s vision would solve the free-rider problem, but it does not mean Intellectual Ventures is not a troll. Lohr mistakenly considers the free-rider problem in isolation. Intellectual Ventures does not have a free-rider problem in the vein of a public good. It’s not the case of a shipping association that has financed and constructed a lighthouse for their benefit, but may inadvertently serve that of the brigands, castaways and competitors who happen along. Lohr’s free-rider problem exists only because Intellectual Ventures has organized a Non-Practicing Entity to collect intellectual property with the intention of monetizing it for their limited partners. The free-rider problem in this case is that which is exploited by a troll.
It wouldn’t be wrong to just say troll, but Intellectual Ventures seems to be more than that. Myhrvold’s proposal would create a troll quite unlike anything that we have seen before – a troll with a cartel-twist: an intellectual property cartel. With “thousands of members” Myrhvold would have an agreement among competing firms to coordinate prices on a vast holding of intellectual property to the disadvantage of non-members. Patents are monopolies, so non-members will have no substitutes. Its alarming size would give it substantial reach in the intellectual property market and engender a network-effect, which would cultivate market power and make membership more valuable on a per-patent-basis as it grows. The problem with this isn’t the idea of patents. The problem is the power that an intellectual property cartel would have.
Intellectual Ventures would increasingly intersect with the interests and inventions of others. When it would, it would find itself better capitalized and equipped to pursue a claim. With growing resources, Intellectual Ventures would be able to take more risks with litigation, actual or threatened. A claim, for example, may be weak, but their credible ability to marshal legal action may force concessions and settlements where none may be merited. Because of the network-effect and the lack of substitutes, settlements and membership will become more costly on a per-patent basis. Moreover, with imperfect information on the scope and character of Intellectual Ventures’ holdings, it may only take a well-phrased bluff to induce a target into membership.
What happens in this model? What is the consequence of an intellectual property cartel? It raises the price of innovation. It puts smaller firms at a disadvantage. And it places us in a world where Non-Practicing Entities can lay in wait, as a hunter in a blind, lash out without warning and stifle the work of companies that may actually be organized to accomplish something, such as provide goods or services, with their efforts. Patents aren’t bad, but these outcomes are.
—part of the quotestream around IV—
If I appear to be a total milquetoast and I say I’ll never [sue], then people will rip me off totally…I say, ‘I can’t afford to sue you on all of these, and you can’t afford to defend on all these.’
—Nathan Myhrvold: WSJ 2008
You have a set of people who are used to getting something for free, and they are some of the wealthiest companies on earth. I was there. I was in the meetings. This is they way this business thinks about it.
Today invention is an area that people view as too illiquid, too uncertain, and too risky, so that nobody wants to invest in it. The world has shown that if you provide capital and expertise to an area that is starved for capital and expertise.
—Nathan Myhrvold, on corporate respect for patents, BW 2006. Izhar Armony, a partner at Charles River Ventures, would say, “I think that Nathan is on to something really good and important. We share a common vision of thinking of [intellectual property] as an emerging asset class.”
The appeal is twofold: the opportunity to interact with a diverse group of thinkers purely for the sake of invention, and the efficiency with which IV translates imagination into intellectual capital.
—Dennis Rivet, on working at Nathan Myhrvold’s Intellectual Ventures, which started as aPatent Defense Fund against trolls: BW 2006.
Bruce Sanford and Bruce Brown commented in the WSJ on “Google and the Copyright Wars” (11/12). Many are focused on the status of orphan works in the Google Books project, but Sanford and Brown argue that the idea of fair use and its application by search engines is the controversy’s center, not orphan works. Sanford and Brown would say that a search engine’s use of the web’s content is definite and definitely unfair.
Fair use of a book’s content, a website, or even the news underpins a search engine’s ability to find and deliver websites to users of the internet. Sanford and Brown stake out a position for search engines that is similar to a public library. Just as a library can employ the contents of its archive to establish an index for its patrons, the search engine uses the contents of the internet to establish an index for anyone at all. Sanford and Brown, however, contend that search engines are not libraries, so fair use does not apply.
Sanford and Brown argue that two distinctions separate search engines from the library model. Search engines not only copy text, they reproduce it in their results as snippets. Rights of reproduction are protected for copyright holders. Second, search engines sell advertising, and the sale of advertising is contingent on their ability to copy, store and reproduce copyrighted material. These distinctions, argue Sanford and Brown, disqualify search engines from the safe harbor of any exemption made for libraries. Their remedy: legislation.
The problem is, search engines don’t find safe harbor in the library model, and legislation is not the answer. Yes, a library applies fair use in its practices, and search engines have been compared to them in the past, but not all applications of fair use are found in the confines a library. This may be why they are so quick to demand legislation to expand copyright, even though expanding copyright may drive more business to the lawyers who protect it than the websites involved.
The Ninth Circuit court framed a four factor test for fair use in the case of Perfect 10 v. Google, et al in May 2007. The test would distinguish between copyright infringement and fair use in the case of Google’s use of Perfect 10 material in its search results. The four factors comprise: the purpose and character of the use; the nature of the work, ie fact-based or creative; the amount of the work used; and the effect on the market for the work. None of them invoke the metaphor of the library used by Sanford and Brown.
When Google displayed the Perfect 10 images, the Circuit determined that all four factors weigh in its favor. The images may have been highly original, but the results incorporate “an original work into a new work, namely an electronic reference tool,” and this is highly transformative: “a search engine may be more transformative than a parody because a search engine provides an entirely new use for the original work, while a parody typically has the same entertainment purpose as the original work.” Though Google would use a degraded thumbnail version of the image, its “use of the entire photographic image [is] reasonable in light of the purpose of a search engine.” The Ninth Circuit, therefore, reasoned that Google’s use of Perfect 10 thumbnails would be considered fair use. Though it didn’t provide a decision, it did suffice to vacate Perfect 10’s preliminary injunction against Google.
Sanford and Brown mistake the metaphor of a library as the only example of fair use when alternatives, such as the Ninth Circuit’s opinion, are perfectly acceptable. Perhaps this is why, having fleshed out their metaphor, they seize on legislation as a solution. Indeed, they would have Congress assert, “once the cache is monetized for the benefit of a search engine, the line of copyright infringement is crossed.” Isn’t this a sort of Hail Mary pass to rights-holders?
Legislation could make it illegal to monetize a cache without permission, but it’s not the panacea that Sanford and Brown are driving at. If the legislation mandated payments for rights-holders, it would, but this is probably not a suggestion that would be found in the pages of the Wall Street Journal. More likely, it would not, and it would leave websites in the position of the prisoner’s dilemma. If everyone cooperates and insists on payment, it will be to their mutual advantage, but the search engines direct so much traffic that each website has an incentive to break ranks; hence, everyone reluctantly opts in for fear that they’ll be the lone hold-out. In effect, it’s as though the legislation never happened, with one important distinction: there’s a new law on the books that requires a few good lawyers to understand. Perhaps that’s what’s really driving Sanford and Brown’s comment.
There is an exception, however. Not all players are equal in this game. Some may wager that holding-out is viable regardless of legislation or whether others do. That’s exactly what News Corp has done. They have begun negotiating a possible payment from Microsoft for the exclusive right to index their content. Though derided by many on the internet, should they find an agreement, their example will prove an important experiment in the question of paying for content.
[The portals] have made assumptions about using our content which are wrong, and we are prepared to demand appropriate compensation.
—Tom Curley, President and CEO of the AP, which now comprises 1400 member newspapers, and former publisher of Gannett’s USA Today: via WSJ
This is about what content providers must do in the digital era. That starts with doing a much better job of protecting the content we create
—Tom Curley, AP: via FT
Thomson Reuters and other news agencies have begun working with third-party content identification firms such as Attributor to track the flow of their material across blogs, websites and aggregators. [FT] Any time you talk about a tracking system, the thrust of [the commentary] is about enforcing copyright. But what we hope is the outcome out of this is the ability to enable more licensed uses of content. We want to keep the content open, we don’t want to keep it behind firewalls.
—Jim Kennedy, the AP’s VP of strategic planning: All Things D
What we are building here is a way for good journalism to survive and thrive. The AP news registry will allow our industry to protect its content online, and will assure that we can continue to provide original, independent and authoritative journalism at a time when the world needs it more than ever.
—Dean Singleton, chairman of the AP Board of Directors and vice chairman and CEO of Media News Group Inc, Fair Syndication Consortium and Attributor: via World Editors Forum
Nice container. Because they need it to protect such impressive stories as this.
[The portals] have made assumptions about using our content which are wrong, and we are prepared to demand appropriate compensation.
—WSJ: Tom Curley, President and CEO of the AP, which now comprises 1400 member newspapers, and former publisher of Gannett’s USA Today
This is about what content providers must do in the digital era. That starts with doing a much better job of protecting the content we create
—FT: Tom Curley.
AP, Thomson Reuters and other news agencies have begun working with third-party content identification firms such as Attributor to track the flow of their material across blogs, websites and aggregators. [FT]
Any time you talk about a tracking system, the thrust of [the commentary] is about enforcing copyright. But what we hope is the outcome out of this is the ability to enable more licensed uses of content. We want to keep the content open, we don’t want to keep it behind firewalls.
—All Things D: Jim Kennedy, the AP’s VP of strategic planning
What we are building here is a way for good journalism to survive and thrive. The AP news registry will allow our industry to protect its content online, and will assure that we can continue to provide original, independent and authoritative journalism at a time when the world needs it more than ever.
—World Editors Forum Dean Singleton, chairman of the AP Board of Directors and vice chairman and CEO of MediaNews Group Inc
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