In 2003, Congress passed the Fair and Accurate Credit Transactions (FACT). Pursuant to the Act, the FTC issued regulations known as the "Red Flag" rules to govern the banks, credit unions, or others that holds "consumer transaction accounts." It also covers creditors (which includes telecommunication companies as well as mortgage brokers, car dealers and many others). After many delays, these rules officially come into effect May 1, 2009.

The point of these rules is to combat identity theft. Any covered creditors must establish a written identity theft prevention program to prevent identity theft in their practices. According to the FTC, the rules fall into five categories:

• alerts, notifications, or warnings from a consumer reporting agency;
• suspicious documents;
• suspicious personally identifying information, such as a suspicious address;
• unusual use of – or suspicious activity relating to – a covered account; and
• notices from customers, victims of identity theft, law enforcement authorities, or other businesses about possible identity theft in connection with covered accounts.

These rules will originally scheduled to go into effect in November 2008, but had been delayed to give covered entities more time to put their programs in place. Theoretically, these programs should all be operating, but consumers are likely to see an increase in identity checks as companies begin to implement these programs with greater vigor beginning in May.

The FTC website "Fighting Fraud with the Red Flag Rules," though not the catchiest title, provides considerable help and guidance. I anticipate that given the FTC's role, these rules will quickly become best practices for all institutions holding identity data and that from there, the failure to meet those best practice could become an unfair trade practice if the situation were sufficiently egregious. In other words, the Red Flag Rules have the potential to be the national identity protection statute that has been missing for so long.

Even if it does not evolve directly into such a statute, state and even municipal lawmakers may look to these rules for guidance on additional legislation. This helps explain why companies were trying so hard to slow their adoption. But the time has finally come. Now we will see whether these regulations have any practical impact on the growing pandemic of identity theft.

Posted by Jon M. Garon at 06:55 AM | Permalink | Comments (0) | TrackBacks (0)

Reuters-UK reported the latest music sales figures from IFPI, the international recorded music trade association. The news is not good. Overall, recorded music sales fell worldwide by 8% to $18.42 billion. The U.S. accounted for much of the fall, dropping 19%.

The transition from CDs to digital downloads continued, with CDs dropping 15% globally while digital sales increased by 24%.

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I recently received an e-mail regarding columns I wrote for the Interface Tech News. (The columns were from November  and December 2001 and the e-mail came from a doctoral candidate in the Institute of Intellectual Property of Huazhong University of Science and Technology - which shows the pervasiveness and persistence of Internet content, but the magazine itself is no longer available.)

Given the changes to the economy and the intellectual property landscape since 2001, the question asked about the importance of looking past audits of only the research and development departments or information technology departments of a business and add additional focus on the rest of the enterprise. For companies hoping to build value using a strong "reintermediation strategy," valuing the enterprise IP or intellectual capital becomes essential.

Many categories of intellectual capital are undervalued. Among these are: (i) internal modifications to purchased software [basis of the recent Oracle acquisition of Sun]; (ii) the copyrights, trademarks and trade secrets generated in the marketing department; (iii) the knowledge base created within customer service; (iv) the scope of the company’s social media network (e.g. its footprint on Facebook, MySpace, YouTube, etc.); (v) the algorithms or other metrics used to predict customer and market trends; (vi) exclusive contracts for publicity rights, trademark licenses and other promotions. I am sure there are many, many others. Privacy and data security are equally important, but compliance for those often is stated as a question of meeting minimum standards as much as creating additional value.


The problem with all of these measures stems from the lack of balance sheet relevance. None of this is shown on a corporate balance sheet, except to the extent that it is lumped into a broad category called ‘good will.’ And yet client retention rates (churn rates or customer renewals, etc.) are perhaps the best summative measure of success. A company with the lowest cancellation rate will outperform its competitors, all other factors being equal. This applies to cell phone companies, subscription services, universities (e.g. graduation rates), sports and arts franchises (season ticket subscriptions), and many other businesses. Combined with 'yield' - the percentage of new leads that ultimately become customers.

But the yield and churn rates detail how the company is performing, not which factors are causing that performance. The intellectual capital audit catalogs the tools used to understand which tools the company owns that affect these measures. They do not replace the accounting tools, but in today's business dealings, they must be used in combination of the accounting audits, if a company hopes to understand the real nature of its business.

So even though I last wrote about IP audits in 2001, the issues remain as important as ever.

Posted by Jon M. Garon at 01:47 AM | Permalink | Comments (0) | TrackBacks (0)

In a New York Times article, "Movie Makers Appeal to the Crowd, for Money," the newspaper reminds us that a direct appeal by filmmakers or musicians to their fans known "crowdfunding" can be used to raise considerable funds in support of a project.



But the article does not explain how these filmmakers are going to bridge the other ninety percent budget gap or the details of crowdfunding and federal securities laws, so here are a few pointers.

Crowdfunding works by selling something directly to the public. In the case of buyacredit.com, the item sold is the purchaser's name in the end credits. That's it: £1 buys you your name on the list. The purchaser is not an investor in the movie.

The more traditional method of publicly funding a project is known as a public offering. In a public offering, a filing must be made by the seller of the securities with the Securities and Exchange Commission that provides an extensive amount of detail regarding the seller and its key executives, the use of the funds, and the financial risks associated with project. The purchasers are then entitled to an ownership interest in the seller - in an amount explained in the securities filing and the prospectus provided to every buyer. Selling film stock or other company stock can be done directly over the Internet, but it is a very detailed process and requires the guidance of securities laws experts. There are stiff civil and criminal penalties for getting this wrong, and I think the government has gone back to enforcing these laws again.

So if the buyacredit.com project is ninety percent short and the sale of corporate securities is too difficult, what should an aspiring filmmaker  or musician do? The answer, my friend, is presell!

Crowdfunding is a great idea, but in most cases it provides too little value to the public, so it fails to raise sufficient funds. Instead, project funders should consider preselling the DVD or CD along with the special thanks credit. For $50, a supporter receives a credit in the film and an advance copy of DVD prior to its general release. Depending on the nature of the project, filmmakers could also consider adding a copy of the screenplay or production tee-shirts into the package (necessarily at a higher cost). Only 20,000 purchasers are needed for a $50 purchase to get the $1 million needed to produce the film. Add ticket sales at advance screenings and the income can really make a difference.

There are details that need to go into the sales contract to protect the filmmaker or musician and make clear precisely what the purchaser is receiving. But combining a creative sales package with a good crowdfunding appeal can move many projects along.

Posted by Jon M. Garon at 12:31 AM | Permalink | Comments (0) | TrackBacks (0)

The buoyancy of the video game industry may be over.  In March, the market research firm, NPD Group has reported a 17% drop in video game sales. This comes after thousands of job losses in the motion picture industry, and dramatic losses in the music industry.

The decline suggests that the constricting economy has slowly reached teenagers and college-aged consumers, who had been relatively immune from the first waves of the mortgage and banking collapses. The economy has trickled ever downward, reaching into the dorm room.

But there may also be other powers at play. The pricing of video games has been growing ever higher. The iPhone has become an excellent, a cool, high quality gaming platform (that happens to be a phone, music player and video player, etc.).

Pricing models should mirror the economy, not try to ignore them. The video game industry has just received a wake-up call. Expect to see some creative pricing in certain segments of the market. And some refusals to acknowledge the drop in sales by others until it is too late.

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As recently reported by the Wall Street journal, the Screen Actors Guild has reached a tentative agreement with the Alliance of Motion Picture and Television Producers. As reported, the deal is essentially the same one offered months ago. SAG was unable to gain jurisdiction over new media or gain financial ground on residual payments for DVDs.

But given the continuing softening of the economy and the dearth of reported feature films in California, a status quo agreement was as much as SAG could hope for. The agreement is for only two years, allowing SAG to return to a schedule that allow it to negotiate alongside AFTRA and the Directors Guild in the next round of talks. Hopefully by then the economy will have rebounded and remuneration strategies for new media will have begun to emerge in earnest.

All in all, the agreement being sent to the rank and file reflects a realistic reading of the economy.

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The Wall Street Journal reported on the accidental deletion of rankings for gay-themed books, ostensibly because of an internal cataloging mistake. As reported by the Journal, Amazon explained only briefly: "'This is an embarrassing and ham-fisted cataloging error for a company that prides itself on offering complete selection,' wrote Drew Herdener, Amazon's director of communications, in an email."

Reading between the lines, Amazon seems to have inadvertently relabeled all gay-themed works as adult material, a category for which it does not provide rankings. The same error is reported to have affected many health books as well.

The error highlights important phenomena regarding online content distribution. First is the importance rankings, and by extension, the entire editorial side of online distribution. The tracking of rankings does not reflect merely the vanity of the authors. Instead, the data provide significant sales information that authors and publishers can use to shape marketing strategies. The transparent nature of the rankings provides information on every book rather than merely one's own books. This gives every author tools that were once held by only the largest publishers.

Second, authors and publishers raise these concerns because of the assumption that readers rely on the rankings to make their choices. Shopping for books, movies or music is a highly subjective process. The cover artwork, packaging notes and reviews all have some influence on the decision to select one item over another. But into this mix comes the pressure to be "current" within our chosen genre. All things being equal, a buyer wants to select the item that everyone else in their interest group is also reading, watching or listening to. (There is another group that wants to be opinion shapers, selecting the newest works, but even here the publication data and rankings shape the selection. Rediscovering back catalog works is a much harder way to influence opinions.)

The reality of the importance of rankings tends to undermine the "Long-Tail Hypothesis" that the Internet will result in greater longer term life spans for creative works. The Internet is great at generating market segmentation, so that one's relevant rankings can be focused on lesbian autobiography, Samaritan religious theory, or quantum astrophysics without the category being lumped into a broad, general topic and lost. But newest and most popular will still apply within each category. While a consumer can theoretically find anything, the editorial tools will not send consumers into the digital stacks.

This leads to the last and most important insight from the controversy. The cataloging is an editorial process, subject to decision-making by the retailer. Amazon has elected not to provide ranking information to its adult selections. Why? Is it afraid of promoting Lady Chatterly's Lover (or its hard-core equivalent)? Walmart is known for controlling the stock in its physical stores and banning albums depending on the content or artwork on the cover of some popular bands. In the same way, the New York Times best seller list is an editorial process which excludes works like the Bible and Complete Works of Shakespeare out of the results. It does not necessarily reflect sales tracking data.

There has been the impression that Internet retailers like Amazon, Netflix, iTunes and others are less involved with editorial and economic selectivity than their physically constrained counterparts. But this is not the case.

So when reading the rankings in the future, we should be careful to remember that the rankings and categories, the popularity and even the availability have all been influenced by real people.

The ham-fisted editorial mistake may ultimately be remembered the most for its brief lifting of the curtain. We have been given a glimpse of the wizard and his hot air balloon.

Posted by Jon M. Garon at 01:39 AM | Permalink | Comments (3) | TrackBacks (0)

As I mentioned in my last post, I am in Jerusalem. I write this on the day between the Seder (not the first Seder, as Israel has only one) and Sabbath. While touring Jerusalem, Masada and other areas in Israel, I have been struck by the lessons Torah provides for the topics on which I write. Admittedly, this blog may be one of the more obscure, but bear with me.

On March 20, 2007 the Bet Din or religious court of Machon Shilo issued a religious ruling ending the debate within Israel regarding the consumption of "Kitnyot" which literally means legumes, but has been extended to many oils and foods that extend the prohibition of Passover foods well beyond the biblical prohibition regarding the ownership of leaven during the Passover holiday. (The Hebrew ruling is available here.)

In many ways, the debate regarding kitnyot reminds me of the debate regarding the scope of copyright protection. For at least the past decade, since the passage of the Digital Millennium Copyright Act and the Supreme Court decision in Eldred, copyright academics and lawyers have been at odds regarding the proper fences or boundaries for copyright policy. This was precisely the same debate our rabbinic sages had when they debated the rules for various religious practices.

The sages taught that one should "put a fence around the law" so that a person would not inadvertently violate the law. As a result, Jews are not generally permitted to climb atop the Temple Mount which is home to the Foundation Rock underneath the Dome of the Rock. When the High Temple existed, the "Holy of Holies" - the Ark of the Covenant - sat on the location. Since we cannot know precisely where the spot existed, the law has been that Jews should not go atop the Temple Mount to avoid inadvertently stepping in a forbidden part of the mount. Of course this ruling also serves a political purpose of assuring the Muslim world that the Jewish community has no claim to the Temple Mount and the important Islamic holy places there.

Copyright policy has followed these same rabbinic precepts. First, there is a tendency to put a fence around the law - to protect an author from copyright infringement, the law added rules making it illegal even to disable technological measure to acquire the copyrighted works. This rule is a fence around the copyright law, making it easier to stop the trafficking of "black boxes" for descrambling cable signals and stealing encoded content. Similarly, the interpretation of fair use that allows copyright holders to show the potential market for the work as evidence that the unauthorized use was not a fair use tends to highlight copyright protection for what may be in addition to what already exists. But other rules, such as the extension of the copyright term and increasing civil and criminal penalties tend to be fences around the fences. They do little to protect the core values of copyright and frustrate the public.

The lesson of kitnyot, then, is that it may sometimes be appropriate to put fences around the law, but it is not appropriate to put fences around the fence. Banning beans, rice and a growing list of foods in recent decades had made it difficult for observant Jews to identify the purpose behind the laws, to meet the religious requirements, and to maintain their identity. Such fences may be useful for zealots to prove their fervor, but I expect that they encourage more and more people to throw up their hands and stop obeying all the laws.

The same risk exists with copyright. The RIAA policy of suing individual consumers for copyright infringement as a result of their unauthorized file sharing frustrated the public, even as raised awareness to the risks to the music industry. But with the education came a public backlash that did nothing to help the music industry.

As copyright academics and lawyers, we must strive to find the same common ground as did the Bet Din of Machon Shilo, so that the core legal values of copyright are reinforced to protect authors and artists while also removing those fences that do not serve creators or the public interest. One good example of such an attempt has been the Best Practices guide for documentary filmmakers, which explains fair use well and encourages broadcasters, insurers and filmmakers to use fair use rather than fear the ad hoc nature of the determinations.

More such examples should be highlighted. In such a way, we can tear down the fences that interfere with creativity while maintining those that protect authors and artistic integrity.

For artists, this is another aspect of their freedom and something worth celebrating during Passover.

Hag Sameach.

Posted by Jon M. Garon at 09:46 AM | Permalink | Comments (1) | TrackBacks (0)

I have had the pleasure this past week to be traveling in Israel, lecturing at Hebrew University and touring the country. As part of the trip, I have been trying to get a better understanding of both Israel's intellectual property laws and its approach to technology.

Recently, David Shankbone wrote a blog entitled "In the Israeli desert there is life." Shankbone described some of the efforts in the Negev desert to lower barriers for solar power use. He mentioned the Jacob Blaustein Institutes for Desert Research, "where some of the world's leading solar energy and water research is conducted" and the Ben-Gurion National Solar Energy Center (home of the world's largest solar dish). Shankbone identifies one of the driving forces behind Israel's push for solar energy is a political independence from oil. Shankbone does not specifically mention the geopolitical ramifications of cheap solar power would be a reshaping of the power politics within the Middle East.

Also today, I visited the Herzl Museum with my family. This interactive museum and movie provided an excellent introduction to the father of Zionism and the Nineteenth century vision of the Jewish state. At the end of the film, a projection of Herzl acknowledged that Israel continues to struggle to win peace with its neighbors and reconcile its relationship with Arabs both inside and outside the nation. But the Herzl personification also described the tremendous technological innovations of Israeli industry and the role Israel is playing in draught relief, food production, power infrastructure and communications as assistance for African nations and leadership around the world.

Thinking about the role of technological innovation as a diplomatic tool occurs too infrequently. The Ben-Gurion National Solar Energy Center reportedly reinvests all proceeds from its solar technology into research to further the efficiency and cost reductions needed to make the solar power available to people all over the world. It reminds me of Benjamin Franklin's decision to eschew the patent for his high-efficiency wood stove as a public benefit. The choice was highly regarded and earned him adoration.

In the same way, Israel's technological innovation makes it a leader among industrial nations. More importantly, its focus on clean water, renewable energy and other problems of the third world create the opportunity for the nation to improve the quality of human life around the globe. Such successes rarely earn headlines and the impact may be hard to measure. Nonetheless, it is a lesson in IP diplomacy that all countries should follow.

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Mercury News’ SiliconValley.com today ran a story suggesting a 65% growth in sales of netbooks this year. Frankly, had the economy been better, I would have expected sales in the 2X range from last year. Prices have fallen dramatically even as features have grown to make these new machines increasingly capable as a primary computer rather than merely a second machine.

The opinion piece by Brandon Bailey and Matt Nauman made an important connection to the potential for multiple operating systems on these machines. Of course, some ship with Windows and others with Linux, but the article speculated that HP might be exploring the potential for Google’s Android operating system. The small laptops might be an excellent place to extend these programs.

Personally, however, I’m rooting for Palm to enter this market with its Pre operating system. A package that includes a WebOS PDA phone and an 6x9 web device could redefine the market segment for Palm and for users who wish to connect these tools.

 

With a good book reader, automatic synchronization of files between the two devices and other features that tie the two machines together, the combination of a smart phone and its larger-screened companion might be the combination of devices that Palm has been trying to develop for years.

 

 

Posted by Jon M. Garon at 07:56 AM | Permalink | Comments (1) | TrackBacks (0)