Brad’s paper can be broken down into a few key arguments:

- Newspapers need to make more money than they are making now to survive,

- Collusion to set paywall prices could save them, but antitrust law bans such action,

- Congress should endorse and promote an exception to the antitrust laws to save the newspaper and the United States itself (I added that last part…).

Typical for a guy with multiple published pieces who also blogs on the side, Brad’s piece is refreshingly easy to read for a law article – but that doesn’t mean I agree with his points. Actually, I disagree with just about every one of them. Originally I thought of reasons why each point was wrong – newspapers can make money without paywalls, newspapers could probably escape antitrust charges through signaling their concerted action anyway, points about how the last government-endorsed entertainment/news monopoly (cable) has set us back by a decade. But really, none of those things matter, because ultimately the newspaper is dead and our children simply won’t care because the world will be just fine without them:

Welcome to the 21st Century, now with 100% less Newspaper - 

Newspapers were lazy, crappy, overachieving businesses for decades. These weren’t glamorous jobs, necessarily, but they weren’t well-run businesses either. Major newspapers lived off of two major cash cows – the natural monopolies of the classifieds and print ads. The network effect of having everybody in town looking at the same few pages of paper everyday let newspapers turn 10 cents of ink into a $1,000 ad or a $100 classified. If you needed to fill a job opening in the pre-internet era, you went to the newspaper, and you paid whatever it cost. Couch to sell? Car to sell? Plumbing services to offer for consumption? Same deal. Call the newspaper. The rest of the business wasn’t particularly fine-tuned, because it didn’t need to be.

A decade of Facebook, Google Adsense, and Craigslist later, and suddenly those ad monopolies are gone. Newspapers now offer an unattractive product (ie we pick the news that’s important, deliver it to you in a physical format once a day, and you pay for it) compared to what the internet offers (ie you pick the news you want, whenever you want it, and you don’t pay for it). It’s a lot like what’s happening right now with cable: people are realizing they shouldn’t have to pay for the 200 channels full of shows they don’t watch when all they want is Mad Men and Game of Thrones, and they can watch those on-demand online (if not completely legally at this point).  The fundamental problem facing newspapers is the same one facing cable, but the newspapers don’t have any unique content. The papers that do have unique content (for example, the Wall Street Journal) are having less trouble staying profitable, because they have something they can charge for and make a margin on. The ones that don’t are struggling to drive readers to their website, because in all likelihood those readers are already getting that same news from the few sites that have successfully transitioned online already. Content with value will always find a way to get out – but most papers just don’t have much content of value, and that’s a business problem, not a societal one.

But Brad would tell me that I’m focusing too much on the business and not enough on the societal benefits of the newspapers; ‘why don’t you lament the loss of our bold muckrakers, Dan?’ he might contest. For the most part, I just don’t think there is any risk that the sort of injustice newspapers cover will go uncovered in a digital world. As newspapers die and websites take their place, journalists will make careers (though likely fewer) of breaking and covering the same stories as they did when those stories were cast in ink. Will that make it easier to “corrupt” the news with bribes? To corner the market on an area of journalism and subvert it? Who could say at this point, but the bottom line is, newspapers are on the way out and personally curated digital news has already taken over. I’m almost certain we wouldn’t have missed Watergate if we had only had Twitter to rely on, but only time will tell.

Though the story has been reported on quite extensively, the twitters and techmemes were abuzz yesterday when the jury in the case released their first verdict. The verdict? Well, they didn’t really reach one. The jury was instructed to assume the copyrightability of the Java APIs, and to come to a conclusion on whether Google’s use of the APIs was “fair use”. The jury instruction all but ensured that the jury would decide that Google infringed the API copyrights – the real issue in the case really ought to have been whether the APIs were indeed covered by copyright, but the judge has saved that determination for himself. The jury came back Monday with the statement of “we don’t know” on the issue of fair use.

How is that news being reported? This is Techcrunch’s Headline:

The Verdict Is In: Google Infringed On Oracle Copyrights

Correct, but completely misleading. Anybody following this story knew that the jury was going to find infringement (see here for one example), and anybody following the story also knew that the real issue was whether the jury would find the infringement to be fair use, and whether the court would find the APIs to be copyrightable. Techcrunch’s article is written as if the case is over. It’s not just Techcrunch – Wired is reporting today that “if” APIs are copyrightable (note: many legal pundits say that they are, and have been for a long time), then apparently the world will explode. The lead picture for the article is an atomic bomb. An atomic bomb? Really?

This isn’t the first instance of overzealous tech journalism, far from it, but Techcrunch’s (and other outlets’) coverage of major legal battles has sunk into the realm of tabloid sensationalism. Techcrunch recently reported on the Facebook v Yahoo patent fight by analyzing the patent abstracts, rather than the actual claims, to come to the ridiculous conclusion that “Facebook has the upper hand”. This is, obviously, months before any actual claim construction or significant developments in the case.

These are really important issues for the tech community to understand, but sensationalism and poor analysis only confuse the issues for readers. If Techcrunch wants to help educate on these issues, the least they could do is have a reputable source write a guest post.

In my original handicapping of the internet music scene, I gave a big nod to iCloud and Turntable.fm. iCloud seemed like it would have an immediate headstart based on the cross-promotion possibilities with iTunes and iPhone, and Turntable.fm saw explosive early growth and looked like a winner based on it’s ability to sell virtual goods. Plus, Spotify hadn’t officially launched in the US yet. What’s happened since? Spotify has grown after launch, but not incredibly (just 3 million subscribers, only 20% of whom pay for the service). Turntable has gone legit with licensing by the major labels, and they’ve raised a bajillion dollars. And most people still don’t know what iCloud is.

That gets us to my original review of Spotify. The highlights: On the day I signed up, Spotify was doing pretty poorly and users couldn’t play a large number of popular songs. And the discovery-through-facebook method wasn’t particularly thrilling because nobody was on the service yet. I’m happy to report that 9 months later I’m still using the service, and it has now gotten more money out of me than any single internet service in the past couple years outside of the Apple app store. The viral/social component is great as Facebook jumped on board with Spotify integration whole-hog, and now my news feed constantly shows me songs my friends are listening to. One click there and Spotify launches, and I’m listening to whatever it is my friend listened to. Popular playlists are also a cool feature, and one I actually use. The radio feature and app store are cool too, though I use those less. I gave Spotify a 72/100 in my review based on the nonworking aspects, and modified that to an 80/100 after they fixed the non-playing songs issue. Now that the social features actually work, I’d revise that up even further to a 85/100.

But is Spotify going to solve all of the world’s music problems, and take over the world? If the numbers are any indicator, then my original review nailed the problem:

It’s not better than downloading the whole album for free as a torrent. People who pay for music pay for music, and maybe for them this service makes sense. But people who don’t pay for music get nothing from Spotify that they aren’t getting for free at a torrent site – on both I need to know what I want, and search for it. As a torrent, I can have the whole thing in 3-5 minutes, on Spotify, I have to pay, they may not have it, and it may not stream if they do. The only chance the music industry has to recapture the people who don’t want to pay for music is to either ramp up enforcement (which they’ve tried, and doesn’t and will never work), or to offer them a value proposition that they can’t turn down – Like utilizing the social graph in a new and cool way (turntable.fm) or offering an interesting method of discovering new music (pandora). Spotify doesn’t do either of those things well. It’s just a legal version of Napster, which is cool, but Napster was cutting edge in 1999, and didn’t have the possibility of drawing on advanced algorithms or facebook friends to suggest new music. Spotify should utilize those things, but it doesn’t.

Spotify is absolutely loaded at this point with every feature you can eke out of a service that knows your friends and your tastes – it’s got radio, it’s got an open development app store, it’s got recommendations. It’s doing everything I said it would have to do to have a chance at revolutionizing the industry. But it still is only converting about 20% of it’s (rather puny) 3 million user base to paying customers. In the end, if utilizing the social graph to provide the experience Spotify is now providing can’t convince more than 600k people to pay, there probably isn’t much that will. In my original breakdown of the competitors in this space I noted that even Pandora, hailed as a blueprint for the new internet/music fusion, hadn’t turned a profit. Spotify is likely in the same position, and the music industry still hasn’t found the route to getting another company to make it’s product wildly profitable again.

For one, it signals a growing movement in the technology space to do SOMETHING about software patents. To put it bluntly, many feel that things are out of control. You don’t have to pay too much attention to the industry to have heard about the battles between every major technology company. Patent holding companies are making a fortune off of licensing, and companies are abandoning their Business Plans! in favor of Patent Trolling!. Hell, companies are forming with business plans that consist of Step 1 Acquire Patent Step 2 Sue People. If you are into the efficient allocation of resources (and who isn’t, these days?), let’s put it this way: Nathan Myrvold is currently using his time to buy and license and sue over other people’s inventions. The patent problem is skewing incentives for the economy, luring our greatest minds from more productive innovation! Silicon Valley and it’s bevy of engineers knows something is wrong, and as the inventors of 90% of the problem patents in the country, Twitter is empowering them to do something about it. Or at least, Twitter is saying they will and taking a step towards that end.

On the other hand, think about Twitter from the business aspect. This is a company that is criticized for lacking a revenue plan. It’s the weakest “business” of the major social networks, and it’s seen many changes at the top over the past few years, plus it’s sat on the sidelines while Zynga, Groupon, LinkedIn, Yelp, Pandora, and soon Facebook have gone public. Twitter has some of the highest average salaries in the scene, and it’s a place engineers want to work, yet it has weak ad revenue compared to the company it will always be compared to in Facebook. With patents being so valuable, and social networks becoming so prevalent, and Twitter being a social network with a strong engineering team, one might think that a strong strategy for Twitter to boost revenue would be to start firing off licensing efforts of their own. Here’s the thing though: They only have one granted patent (though it’s a good one that probably reads on all mobile devices and many mobile apps). If a patent nuclear war started yesterday (oh, wait, it started months ago), they are the Melians to the Facebook/Yahoo!/Microsoft Athenians. Twitter is clearly at a bit of a competitive disadvantage in a world where patents are incredibly valuable.

So for Twitter to take this step of limiting the downstream value of their patents (ensuring that the Coase theorem dictates the patents remain with Twitter, though I’m torturing the Coase theorem a bit there [another shout-out to my resource efficiency homies!]), while also potentially cutting off current licensing revenue potential… well, it’s a tiny bit noble, but a whole lot more a Trojan horse for the rest of the patent-holding technology companies of the world. Very clever, really. Twitter is politely asking everybody to sign a non-proliferation treaty, and making a nice gesture by signing it first, but that would be like Switzerland looking to end World War II by being the first to sign a peace treaty. Twitter is hoping this international relations metaphor is a bit more Gramsci and a bit less Hobbes (If I haven’t shaken you yet with all these political theory references, then congratulations). They would love nothing more than for every company that has already invested millions of dollars in patents to sign the treaty for Twitter’s own protection as much as they would like them to for their edification. So Twitter makes this big PR gesture, they will be hailed as saviors by the anti-software patent crowd, engineers will claim this as a great reason to work for Twitter, and Twitter gets to step back and hope others give up more to gain less by doing the same.

So there you go. I’ve successfully told you why Twitter’s move today is great for software patents generally, pretty clever by Twitter itself, and not really a big loss for them in terms of what they had to give up to get some amazing PR and recruiting, all while hitting you with multiple resource efficiency, political science, and international relations references. Hopefully more entertaining than self-indulgent, but the blog does have my name at the top so maybe I can take that luxury every once in a while.

(Some other articles that helped form my thoughts for this article: 1. 2. )

First off, let’s get one thing out of the way: This isn’t going to create many JOBS. Despite the title, this is not a “jobs” bill. No money is being spent on anything (you can imagine the pitch and see why it passed: will you vote for this bill that has JOBS in the title but doesn’t increase the deficit or raise taxes?). The crowdfunding portion of the act will likely increase the misallocation of money in the economy, and the increase in the shareholder limit doesn’t have any clear connection to increasing jobs at all. So ignoring the blatant pandering by the Act’s title, is it a good law?

I’m going to focus on the crowdfunding portion of the bill for now, and save the shareholder number increase for another time. I’m also only going to talk about equity – crowdfunding small business loans will likely catch on as well, but people seem to be more interested in the equity side of the equation. Anyway, two obvious questions spring to mind:

What sort of company will raise money this way?

Not the Facebooks of the world. The startup/technology world probably won’t go the crowdfunding route very often. There is already plenty of angel and VC money available to promising startups in major cities, and startups tend to burn through cash pretty quickly before they become profitable, so few will have a business plan where $2 million is sufficient to get them to profitability. Furthermore, raising 100k from 100 people is going to be less attractive than raising it all from 1 angel who can add some value through expertise and connections. It’s also not going to be pretty to raise a Series A after taking investments from a few hundred random people, and VCs will probably be less than excited to get onboard with that cap table. I wouldn’t be surprised if mainstream VCs never back crowdfunded businesses. So forgetting startups, that leaves your regular ye olde small business, and they are probably the sort most likely to avail themselves to crowdfunding. But….

Who wants to invest in crowdfunded companies?

In an era of Shark Tank and The Social Network, it is no surprise that everyday people want to invest in young companies. But keep in mind, these aren’t going to be the sexy startups that regular Joe American has heard about. The companies that pursue a crowdfunding route will either be less-known startups that are struggling to raise money through traditional channels (which you’d think would lower the potential IRR for a portfolio of such companies, but more on that in a second), and small businesses. I’m no expert on the state of small businesses in the majority of the country, and I can’t say I really have a clue whether this crowdfunding option will be appealing to them as an alternative to other fundraising options. But I just have this gut feeling that if you want to start a small restaurant in a suburban neighborhood, it’s gonna be really really hard to convince a random person on the internet to care, let alone invest. The business plan on the investor side just doesn’t make a lot of sense: investors in startups (Angels and VCs) have one basic premise – if you invest broadly in enough startups, you’ll get a solid return by losing money on 80% of them, breaking even on 10-15% of them, and hitting homeruns (10x+++ returns) on 5-10%. The ability to get the homerun return is absolutely essential to a portfolio where 80% of the investments go bankrupt, but what small business can reasonably project a world where they offer their investors those kind of returns? The local restaurant/crafts store/yoga studio sure can’t.

This is the main problem I have with the crowdfunding plan: In a few years, we will probably say that no rational investor should invest in companies this way. The Act offers low net-worth investors the chance to make small investments in a number of small companies. This is essentially what high net worth investors do at the angel stage for startups, but the companies in the crowdfunding portfolio are 1) less likely to be wildly profitable, as most small businesses can’t even project 10-15x returns with a straight face, and are 2) more likely to be fraud [and this isn't being alarmist - states first passed securities regulations specifically to combat fraud]. Oh, and the portfolio is even less liquid than an angel portfolio, because angel portfolio companies will be acquired or go public with some frequency, something no small business will do. Plus small businesses fail at an extremely high rate. What rational investor would take this portfolio of high-to-extremely-high risk, low upside, illiquid investments over a 5-year treasury? When the stock market is doing well, I just can’t imagine this being an attractive way to invest money.

In conclusion, I think the sale of equity through crowdfunding platforms just won’t catch on. I don’t think investors will want to put money into the sorts of businesses that will use the platforms, and over the long run those investors that do will realize they aren’t making a reasonable return. Maybe debt financing through crowdfunding will take off, but I just can’t see the equity side ever becoming popular.

Today the SEC finally took some action against SharesPost, though by all accounts the action was relatively innocuous and will do little to stem investor enthusiasm in these new pre-IPO markets. The SEC announced fines for SharesPost and the CEO, but the total cost is only $100,000. For some context, J.R. Smith, a professional basketball player, was recently fined $25,000 for tweeting a picture of his girlfriend’s scantily clad behind. Insert comment about America’s priorities here. The complaint is particularly interesting if you want to get a peak into how SharesPost grew into what it is today, and it also reveals that SharesPost has been a registered broker-dealer since December of 2011, making the fines today something of a retroactive punishment.

In a sense, this is a huge victory for both SharesPost and SecondMarket – after a long investigation into the markets for shares of stock in private companies, the SEC did no more than slap SharesPost on the wrist, charging them what the NBA would charge one of their players for four tweetpics of a girlfriend in a thong. Maybe this is just the first step in formally eliminating the 500 shareholder rule, something many pundits have been speculating about since the Facebook IPO was just a glimmer on the horizon.

Users on Zynga.com will generate more revenue from virtual good sales than users on Facebook

Initially this looks like a giant amount of potential revenue: Facebook’s IPO docs revealed that they get about $400 million from Zynga’s virtual goods sales, for doing pretty much nothing besides making the Credits system available. If Zynga could get all that back by moving off Facebook, it would increase revenue by 25-30%, a huge number. But one point that is being overlooked in casual discussion of this story is Zynga’s continued commitment to Facebook Credits, even off-Facebook. Zynga committed to using Facebook credits in a 5-year deal they made with the social network back in Fall of 2010. No criticism whatsoever of that deal – it likely played a key role in moving Zynga from strongly positioned to dominant market leader on Facebook, but now comes the downside for Zynga. Any work they put into moving users over to Zynga.com is in some regard wasted, because Facebook still gets the same cut of the revenue until 2015. As it pertains to the stock price, that 30% increase in revenue from virtual goods will definitely be significant down the road, but discounting those cash flows to today, and being unsure what percentage of users will be transitioned to Zynga.com anyway, this alone shouldn’t account for much of the stock’s movement. So in summary, while this user migration will help revenue from virtual goods eventually, Zynga won’t really see those benefits for 3.5 years.

Zynga will generate ad revenue from Zynga.com

This one has some merit and is what I would be looking at if I was a stockholder (I’m not as of writing, in case that was unclear). Let’s do some back of the napkin calculations: Facebook sees roughly 89% of it’s revenue from ads, or about $3.2 billion. Yep, that’s a lot of money, but Facebook also has 845 million users, around 500 million who return daily (DAU). That’s roughly $6.5 per year/per DAU, or $3.8 per year/per monthly active user. Zynga, by contrast, has about 59 million DAU. Let’s assume Zynga.com can get 25% of those users (~15 million) to visit their platform each day, and can generate ad revenue at the average of Facebook’s two rates, or $5.15 per user – that would generate about $76 million in revenue over the course of a year for Zynga. That’s probably a solid target for next year for Zynga, but in context it isn’t a lot of money for the company, which raked in revenue of about $300 million last quarter. So while Zynga.com might get to the point where it’s generating $76 million in ad revenue in a year, that amount is only 6% of the company’s annual revenue. Definitely a revenue stream to go after, but probably not something that should drive the stock price up 10%.

Zynga.com will turn Zynga into a game publisher

This one is admittedly tough to gauge, because there are two huge questions which will need to be answered that get in the way of accurately valuing this revenue stream: 1. Will developers trust Zynga? 2. What benefits can Zynga offer a developer that Facebook can’t?

Zynga has been accused of cloning other developer’s games throughout their short history, and developers may consequently be hesitant to support Zynga’s platform, or may not trust Zynga with their user data. On the other hand, a dedicated social network comprised of virtual good purchasers may offer developers some advantages over Facebook’s network. The advantage for Zynga is that they can take some cut of the revenue other developers generate. Sounds nice, but what company could buy in enough to generate significant revenue for Zynga in the first place? It’s unlikely EA will be jumping to join Zynga, as EA has emerged as their primary rival. Of the top 15 games on Facebook, excluding Zynga and EA, Wooga has about 10 million DAU, King.com has about 6 million, Tetris has 3.7 million, and a foreign title (no offense foreign title lovers!) has 2.5 million. That’s a combined ~23 million DAU. If ALL of those games jumped on to Zynga.com and took 25% of their users, that would only be about 4 million users. That’s nice, but Zynga has SIX games with more users than that each, and Zynga would only be taking a small cut of whatever revenue those users generated (plus some ad revenue!). That’s chump change for Zynga. So while publishing other games may be a revenue stream someday down the line, it’s probably not going to be a very large one anytime soon.

In summary, Zynga’s new platform is an important step for social games, and with relatively flat user numbers the company is feeling pressure to develop new revenue streams – but none of the revenue streams alone seem significant, at least until the Facebook deal expires in 2015.

(And on the other side of the gaming planet, Journey comes out in 2 days)

This might not sound novel – in fact, I’m sure it’s not (but what on the internet is?). Discovery is a popular topic, indeed a buzzword, in the social/mobile game development universe. Putting your game in front of more consumers is key, and Tapjoy made a lot of money doing just that before Apple shut their main monetization strategy down. User acquisition moves mountains of money and gets lots of attention in social/mobile, and though it is less frequently discussed in the technology/video game blogosphere, similar mountains of money move to do the same in other game platforms, albeit with altered terminology.

Below is my chart of how I personally discover games. Behold!

Hmm, it’s deceptively small, so click it! Anyway, here’s my notes on the subject:

* Obviously this is overly-simplifying a lot of interactions – if something is reviewed positively, I’m more likely to hear about it from a friend, and it’s more likely to be on a chart in a favorable spot. But the basic gist of this chart is how much of my personal knowledge of a game’s existence and quality comes from various categories. I almost never become aware of games on Facebook, for example, based on a review, whereas I almost always become aware of a “Small Ball” game because of a review.

**“My Friend Said it was good”: This is straight, old-school virality. I end up buying a rather large portion of my apps because friends say they are good. If I trust a friend’s opinion, I’ll buy almost anything they suggest in mobile. For blockbuster games, by contrast, the market is so large and I know so many people who play games, I give little credence to one friend saying the game was good. I’m sure you DID like Infamous 2… but I don’t care. I probably already know about the game and its quality by the time most friends have a chance to recommend it.

***“Reviewed Positively”: “Small Ball” games rarely have the ad-spend to raise awareness of their existence, so a lot of the legwork is done by positive reviews and old-school virality. I heard about Trenched/Iron Brigade (I hear you out there Mr. “Omg Double Fine talk about them more” – don’t worry, I’ll get to you) from a friend, so I bought it. Good reviews on Limbo and Braid probably drove the majority of their initial sales. For the other platforms – Blockbuster games are frequently seen as getting de facto positive scores from review sites, in part because they spend that “shitload on ads” at the very places that review them, a conflict of interest that savvy media consumers like myself are slow to forgive. I’m probably starting to conflate knowledge of game with likelihood of purchasing game here, as a positive review of a small ball game leads to a buy from me way more than a positive review of a blockbuster does, but oh well, it’s my chart!

*****“High Spot on Chart”: Lastly I want to point out that this category drives discovery disproportionately for App store / mobile right now, something that must change eventually if the medium catches up with other platforms. And for Blockbusters, nobody reads sales charts unless they are really into the industry and frequently visit Gamasutra, at which point the person probably knew about every game beforehand anyway.

That’s all for now – next post, I’ll stay on this games tangent and talk a bit about Kickstarter and try to connect the dots with this post.

[A]s a matter of efficient judicial process I object to and dissent from that part of the opinion regarding the ’427 patent and its validity under §101, the section of the Patent Act that describes what is patentable subject matter.  I believe that this court should exercise its inherent power to control the processes of litigation,Chamberes v. NASCO, Inc., 501 U.S. 32, 43 (1991), and insist that litigants, and trial courts, initially address patent invalidity issues in infringement suits in terms of the defenses provided in the statute: “conditions of patentability,” specifically §§102 and 103, and in addition §§112 and 251, and not foray into the jurisprudential morass of §101 unless absolutely necessary. (emphasis added).

For some context, the recent conflicting decisions I referenced above are CyberSource and Ultramercial, opinions where the same court came to seemingly opposite conclusions on whether patents on computer-aided software functions were within the scope of Section 101 and thus patentable. In CyberSource, the CAFC described a software patent as covering purely mental steps, where the attachment to a computer was essentially superfluous. In Ultramercial, by contrast, the CAFC described a rather similar patent as good for describing a controlled interaction with a user over the internet. This all follows the infamous Bilski decision, where the Supreme Court declined to issue any concrete guidance on subject matter eligibility.

It’s pretty shocking that a judge for the CAFC, the court with jurisdiction over all patent appeals, would tell lower courts to ignore section 101 and litigate other issues instead. As the “101″ might indicate, that section of the patent act is the most basic description of what is eligible for patent – a topic that has been vigorously debated in recent years, not coincidentally corresponding to a proliferation of patents in software and business methods. Now, obviously this isn’t binding – no party will be getting out of a Section 101 issue by citing this language to a District Court. But it shows the sad state of affairs of Section 101 – even a judge on the CAFC thinks Section 101 has turned into a total mess.

One other thing to consider – how do you value a patent as a company in this sort of climate? Policy advocates on every side of an issue (I’m thinking things like ACTA and SOPA recently) like to throw out numbers in terms of values and investments and jobs, but in a world where the the very concept of what is protected is still in play at the highest level, you have to question how accurate any sort of valuation on that sort of protection can possibly be.