Month / December 1999

by Clay Shirky

The Abuse of Intellectual Property Law

How lawsuits are stifling innovation.

First published in FEED, 12/99.

1999 is shaping up to be a good year for lawyers. This fall saw the patent lawyers out in force, with Priceline suing Expedia over Priceline’s patented “name your own price” business model, and Amazon suing Barnes and Noble for copying Amazon’s “One-Click Ordering.” More recently, it’s been the trademark lawyers, with Etoys convincing a California court to issue a preliminary injunction against etoy.com, the Swiss art site, because the etoy.com URL might “confuse” potential shoppers. Never mind that etoy.com registered its URL years before Etoys existed: etoy has now been stripped of its domain name without so much as a trial, and is only accessible at its IP address (http://146.228.204.72:8080). Most recently, MIT’s journal of electronic culture, Leonardo, is being sued by a company called Transasia which has trademarked the name “Leonardo” in France, and is demanding a million dollars in damages on the grounds that search engines return links to the MIT journal, in violation of Transasia’s trademark. Lawsuits are threatening to dampen the dynamism of the internet because, even when they are obviously spurious, they add so much to the cost of doing business that soon amateurs and upstarts might not be able to afford to compete with anyone who can afford a lawyer.

The commercialization of the internet has been surprisingly good for amateurs and upstarts up until now. A couple of college kids with a well-managed bookmark list become Yahoo. A lone entrepreneur founds Amazon.com at a time when Barnes and Noble doesn’t even have a section called “internet” on its shelves, and now he’s Time’s Man of the Year. A solo journalist triggers the second presidential impeachment in US history. Over and over again, smart people with good ideas and not much else have challenged the pre-wired establishment and won. The idea that the web is not a battle of the big vs. the small but of the fast vs. the slow has become part of the web’s mystique, and big slow companies are being berated for not moving fast enough to keep up with their net-savvy competition. These big companies would do anything to find a way to use what they have — resources — to make up for what they lack — drive — and they may have found an answer to their prayers in lawsuits.

Lawsuits offer a return to the days of the fight between the big and the small, a fight the big players love. Ever since patents were expanded to include business models, patents have been applied to all sorts of ridiculous things — a patent on multimedia, a patent on downloading music, a patent on using cookies to allow shoppers to buy with one click. More recently, trademark law has become an equally fruitful arena for abuse. Online, a company’s URL is its business, and a trademark lawsuit which threatens a URL threatens the companies’ very existence. In an adversarial legal system, a company can make as spurious an accusation as it likes if it knows its target can’t afford a defense. As odious as Amazon’s suit of Barnes and Noble is, it’s hard to shed any tears over either of them. etoy and Leonardo, on the other hand, are both not-for-profits, and defending what is rightfully theirs might bankrupt them. If etoy cannot afford the necessary (and expensive) legal talent, the preliminary injunction stripping them of their URL might as well be a final decision.

The definition of theft depends on the definition of property, and in an age when so much wealth resides in intelligence, it’s no wonder that those with access to the legal system are trying to alter the definition of intellectual property in their favor. Even Amazon, one of the upstarts just a few years ago, has lost so much faith in its ability to innovate that it is now behaving like the very dinosaurs it challenged in the mid-90’s. It’s also no surprise that both recent trademark cases — etoy and Leonardo — ran across national borders. Judges are more likely to rule in favor of their fellow citizens and against some far away organization, no matter what principle is at stake. The web, which grew so quickly because there were so few barriers to entry, has created an almost irresistible temptation to create legal barriers where no technological ones exist. If this spate of foolish lawsuits continues — and there is every indication that it will — the next few years will see a web where the law becomes a tool for the slow to retard the fast and the big to stymie the small.

by Clay Shirky

1999, the Year the World Wide Web Went World Wide

As of 1999, American internet users are in the minority. What now?

1999 was a turning point in the history of the net — for the first time (and from now on) US internet users make up less than 50% of the net’s total population, marking the end of the American Internet. (1969-1999, R.I.P.) This growing internationalization will have profound effects on the growth of the internet over the next several years, as country after country gets wired. The large and growing
pressure on businesses to get the citizens of their own country online, and then to expand beyond their own borders in pursuit of further growth, will accelerate internet penetration throughout the world. Internet theorist Frances Cainrcross has called the internet “the death of distance” in her book of the same name, and as the
American internet fades and the global internet takes its place, it will finally begin to live up to that promise.

Countries do not get wired gradually. Instead, they pass through a tipping point in their internet population (somewhere around 10%) where for a sizable segment of the population network access stops being a luxury and starts being a necessity. Once this threshold is crossed, the wired population quickly grows large enough to begin affecting that country’s economics, politics, culture. The US crossed that threshold in 1995, and because of this early passage, it is very fashionable these days to assume that most of the rest of the world is still several years behind the US. This view, most recently espoused by Morgan Stanley’s star internet analyst Mary Meeker, is dead wrong. What that smug, Americ-o-centric attitude overlooks is that
internet adoption is accelerating — these days when countries cross the 1/10th tipping point, they are now growing faster then the US did. It took 4 years for the US internet population to go from 1/10th of the country to 1/3rd, 1995 to 1998. In the UK that growth took just 15 months, from fall of 1998 to now. The Chinese internet
population quadrupled in 1999. The big change in these figures is the role of business — in the US, businesses got in the way of the internet in the early years, while in the UK and elsewhere, businesses have now assumed a driving role in the internet’s growth.

In the US, the online services and ISPs created a wired population long before anyone ever heard the word e-commerce, and the early reaction of most US businesses was to ignore or fear the internet, usually in that order. As it became clear that the online audience wasn’t going away, this left the businesses playing catch up, a situation people in the US are so used to it has become almost a reflex to assume that businesses don’t “get it”. Today, however, businesses in countries at the tipping point of widespread internet adoption have learned their lesson by watching the US — once the internet comes along, businesses know they will be valued in part by their internet strategy, and generating loyal internet clients will raise their worth in the market. The results of these lessons is clear in two of todays most dynamic markets, Britain and Brazil; in both of those countries existing banks are offering free internet access for life to their clients, in order to acquire loyal e-customers, while driving up internet adoption as a side effect. The effect of businesses getting it sooner means that once a country crosses the tipping point, its market will grow faster and become net-savvy sooner than the US market did. The Mary Meekers of the world are going to be caught by surprise when they see how rapidly the industrialized world becomes synonymous with the wired world.

This change in the role of businesses — going from sitting on the sidelines to accelerating internet growth — will separate the world into 3 spheres: countries with little or no internet penetration, whether for reasons of insfrastructure or political resistance or both: think Cuba, Sierra Leone, Iraq. In the middle will be countries
with a small but rapidly growing net population, often doubling annually — countries crossing the tipping point, like Brazil, Italy, Taiwan. Finally, there will be a few countries with a large and mature net population, whose growth will have slowed to a more leisurely 25% a year or so. The first country in this group is the US, of course,
but the UK and the Scandinavian countries are joining this club as well. 1999 marks the end of businesses focussed on growing within the net population of their home countries. In the next few years, the real action is going to be between tipping point countries and mature market countries, because every business in both groups is pursuing the same thing: growth.

The cultural and economic logic of internet businesses demands constant growth — in page views, unique users, sales, transaction value, in every possible measure of success. The valuations of internet stocks are based on a climate where that growth has been easy to attain — the US from 1996-1999 — but as the US nears 50%
penetration, the growth in users is still strong but no longer breathtaking. This leaves mature market internet companies with two choices: break the news to their shareholders about lowered growth expectations, or look for customers in other markets. The usual answer has been international expansion: Yahoo is in over 20 countries, the biggest online bookstore and auction site in the UK are Amazon and
eBay respectively, and a host of other US-based internet companies, everyone from AOL to salon, are expanding aggressively overseas. All these companies are trying to hit other markets at the same moment: after they have crossed the tipping point, but before the playing field holds too many well-established competitors.

This pressure from the mature markets is in turn creating huge incentives for businesses in small but growing markets to go international as well, particularly if they can do it along linguistic lines, with Spanish-speaking businesses reaching out across Latin American, English-speaking businesses re-tracing the lines of the
British Empire, and so on. The goal of this metaphorical land grab is two-fold: first to stave off the competition from mature markets where possible and grab the growth in user base for themselves, and second to provide themselves with leverage when the inevitable partnerships and acquisition offers come in from the Yahoo’s and Amazons of the world.

The next five years are going to see several cycles of customer acquisition, consolidation through partnership or purchase, followed by a new round of customer acquisition, and only companies with a credible international strategy will be able to play that game at the highest levels. The US-based intenret companies will have an advantage in this market, but not a complete one, now that the US internet
population is in a minority, 1999 marks the point where the real work of taking the World Wide Web world wide began.