Category Archives: Law

October 25, 2011 · 3:08 pm

Breaking my hiatus with a flurry of random thoughts

After a long hiatus for some personal reasons, I’m back! But, this means I have a store of ideas that I didn’t write about. Some of those ideas are now no longer worth covering because they’ve been beaten to death by other sites, but the ones that are still interesting I’m just gonna run through right now to get it out of my system, no rhyme or reason, and little theme besides being among the topics I frequently write about. Let’s get going:

Arkham City is great, but the initial user experience is flawed, and the game outlines a problem with comics-as-broad release media

Loved Arkham City. Played a LOT of it last weekend, probably only possible because my girlfriend is out of the country at the moment. Arkham City launched with a pretty bold, but increasingly common plan to increase sales and profits. Sales, by offering a ton of extra content for new game purchasers (as opposed to used game purchasers), and profits, by having a ton of extra downloadable content to squeeze a few extra bucks out of hardcore fans. It’s hard to fault Rocksteady, the studio behind the game (or any of the other members of the supply chain), for this approach – the used game market is a constant concern for studios, especially during a recession, and providing lots of bonus content both incentivizes new game purchases (by including the content for free with new games), and giving the studio a way to make money on the used games (through the customers then paying for downloadable content). I’ve ranted about terrible DRM as a system that only punishes good customers on my blog before, so I should be in favor of this setup, right?

The problem is, the customer is still the loser here. I bought the game (in fact, I pre-ordered it!), and my reward was that the first time I sat to play the game, I had to enter 3 separate 16 digit codes into the Playstation Network, wait for each of those 3 packages of content to download, and then wait for each of those packages to install. So I spent 15-20 minutes downloading and installing the content I paid for before I even got to fire up the game. Loading screens are obviously a problem for any game with downloadable content, and installation is unavoidable in some situations (PC games in particular) – but having your big blockbuster piece of work open with 20 minutes of downloading and installing is not exactly a killer introduction to the product. Is it better than a lot of DRM? Definitely, because at least it rewards the honest customer with more content rather than punishing them with potentially invasive bloatware. But it’s still a pain, and there must be a better way.

In another unrelated complaint, of the many reviews for Arkham City I saw this week, only one (Kotaku) mentioned a major gripe I had with the game – it doesn’t really push the Batman plot anywhere. This is a problem with any comic-based mainstream story at this point, in that the non-comic media is often limited to stories drawn from the official “canon” of the lore as told in the comics. Put another way, Batman can’t die unless he dies in the comic. Obviously nobody is going to kill Batman anyway, but this mostly holds true for every plot element – none of the villains can die unless they die in the comics. So they are stuck rehashing events that comic fans would already know, and they can’t deviate far from the story as outlined in the comics. This has basically been an issue for every single superhero movie in the recent wave of superhero movies, and while it hasn’t hurt box office numbers much, it might in the future as the limitation plays out over sequels. I’d love to see more companies take the JJ Abrams/Star Trek approach with their IP, giving full reign to a new retelling of an old story keeping just the characters and breaking canon.

Seed stage funding bubble, part II of my post on regulating securities of private companies rumored to come soon

Basically everybody reported on a WSJ article that claimed there was a dearth of funding out there for seed stage companies. It was vigorously responded to, mostly by people refuting the sentiment. My opinion is that while the data the WSJ looked at seems to match historical, quarterly variations in funding statistics, it still seems obvious that new technology has been making it easier to invest, while not making it quite as easy to gain liquidity and get out. Assuming there is a class of people who only want to invest in the seed stage (the angels), then those people have had an easy time of late finding companies to invest in, without finding an easy way to get liquidity from even successful early investments. Angel.co has made finding companies to invest in quite easy, but the time it takes to get money out of those investments hasn’t been quickened in any respect (in fact, given the many delayed IPOs and general malaise of the economy, it’s probably harder than it has been in the past). SecondMarket is definitely doing something to help liquidity for pre-IPO company stock, but it is probably being utilized by employees more than investors, and it’s still a relatively small group of companies compared to the number of companies on Angel.co. So, to me, it seems quite natural that there would be a slowdown in seed funding, and that companies who found plenty of seed investors would have trouble finding Series A and B money. Tech is also prone to bubbles, but that’s for my future, upcoming post on private company regulation.

Tale of two major branding efforts of social games, with very different results

Probably the two most anticipated social game releases on Facebook this year were by traditional console/PC powerhouses new to the Facebook platform. I’m talking about EA’s Sims Social, and Firaxis’s CivWorld. Both were closely watched, as they both were backed by major studios, utilizing the full force of their IP, hoping to break into the Facebook social game scene. Obviously there is a major difference between the studios in that Electronic Arts has 45 titles on Facebook right now, and they’ve spent hundreds of millions of dollars on acquisition like Popcap and Playfish to become a force in the social game market, whereas Firaxis has just the one title, CivWorld, and no experience on Facebook (parent company Take-Two also has no titles on the platform). Both games have been out for a while now (CivWorld in July, Sims Social in August), so it’s safe to make some conclusions about how the efforts went.

Who won? Sims Social by a landslide. Sims Social reached an all-time high of 65 million monthly users (though they took a 20 million hit when Facebook updated their user calculation algorithm), and they are currently cruising along with about 8 million daily users. CivWorld, on the other hand, completely crashed. The all-time high for CivWorld was only half a million monthly users, and they’ve since slid quickly to less than 100,000 monthly users and only 10,000 daily users. I haven’t played either game enough to know if there was some sort of specific disaster with CivWorld, but I played both and they were both solid efforts. Reviews were mixed for both (nobody knows how to review a social game yet, though), but obviously the results were dramatically different.

There are probably numerous takeaways here, but the big one is that having a strong IP, with lots of buzz, and even a strong game itself, isn’t enough on Facebook. The Firaxis team just simply doesn’t have the experience that the EA team has, and obviously those Playfish and Popcap acquisitions are paying off in some fashion. EA knows how to make social games now, and Firaxis doesn’t. Lots of factors go into that – the ability to effectively cross-promote with other games in the network is obviously a huge advantage for EA, but one would have thought that the amount of exposure CivWorld was getting could have made up for that. Now we know that no amount of exposure can make up for a huge installed user base and multiple games to draw experience from. Zynga has probably known that for years, but if there was any question, CivWorld’s flop may have settled it. People may look at EA’s success as a sign of weakness for Zynga, but that’s overlooking the fact that EA spent over a billion dollars to acquire two huge social game studios to reach a point where it could leverage it’s IP into fans on the platform. A billion dollar barrier to entry is pretty solid protection for Zynga’s business model.

Leave a comment

Filed under Copyright, Funding, Games, Social Games

September 29, 2011 · 1:30 pm

State of the Android market; is the patent fight going to encourage the move to Facebook as an operating system?

A bunch of things have happened recently that seem to be pointing to an inevitable conclusion in mobile devices – Android is going to die, and if HTML5 comes around soon enough and with enough developer support, the mobile operating system as we know it might die as well.

The most recent cluster of news in the space consists of Samsung agreeing to a patent licensing deal with Microsoft over Samsung’s Android devices, Samsung joining forces with Microsoft and Intel to work on a new mobile operating system based on Linux, Google buying Motorola to bolster it’s ability to mount a defense of Android (which should have the unpleasant effect of scaring away the other OEMs who push out Android phones), and Amazon launching an Android-based Kindle Fire which aims to be an ipad killer. Oh, and Spotify’s partnership with Facebook is coming to fruition, proving to be a rather genius way to ween people off of itunes (i’ve barely opened itunes since starting with spotify, and once I can open spotify through Facebook on my phone, I may never touch itunes again).

How does all this information fit together?

Amazon is going to get hit with a patent infringement suit from Apple really fast. Then Android is going to die.

Apple has been aggressive, to say the least, in attacking the Android ecosystem with patent suits. Microsoft has done the same. The combined effect? Companies will be wary of putting money behind a system that may get them sued into oblivion. If Amazon somehow evades the ire of the anti-Android coalition, maybe Android is saved as a potential OS to compete with Apple’s iOS. But given Apple’s aggressive attacks on Samsung in Europe over tablet competitors and their attacks on the Android ecosystem in general, I wouldn’t hold out hope that Amazon is going to get away with launching a major Android tablet without Apple taking action. Maybe there is hope beyond the Kindle Fire, but I’d also wager that if it fails, it’s going to be the last major Android tablet to come out. Android tablets have done absolutely horribly this year, to the point where retailers are having to discount them to almost half-price just to move them. Given the lukewarm reception and patent woes, it’s a bad investment for companies to keep cranking out Android tablets. If companies continue to be exposed to massive patent suits for using Android, it’s only a matter of time before the entire OS collapses.

Facebook is in a better position than ever to become the mobile company they plan to be.

Facebook has been vocal recently about wanting to be a mobile company, and if their Spotify partnership is any indication of where the company is going, I think it’s only a matter of time before they become the default starting location for all things on mobile phones. I was lukewarm on Spotify when it launched – my review of my initial experience concluded with a passing grade of “B” for the service, but that was on the first day it was available in the US. I said I wouldn’t still be paying for the service after a month, but 2 payments later and I’m still using it. I can’t stress how important Spotify’s partnership with Facebook is in my mind – this partnership puts Facebook in position to attack the core of iOS – iTunes. As I mentioned, iTunes is going to die in the face of this partnership – Spotify + Facebook nails the social element of sharing music unlike any prior service, and it just simply offers more than iTunes at this point. So Facebook has an iTunes killer now (only a matter of time before Spotify runs inside Facebook), they’ve got big dedicated app developers (Zynga, EA, Kabam, etc.), they’ve already had messaging and chat, we know they are working on an app market based in HTML5, and the newsfeed is an excellent homepage if you snap a basic web browser on the top. Plus users are comfortable navigating Facebook, so the transition to Facebook-as-operating-system would be seamless for most. Only a matter of time in my mind, and if Facebook approaches device-makers who are frustrated with Android and looking for an alternative, Facebook could make major in-roads into mobile almost overnight.

Google+ can’t transition to mobile like Facebook.

Why can’t Google do the same thing with Google+ that Facebook is going to do with… Facebook? They could, but they don’t have nearly what Facebook has in terms of critical user mass, nor do they have the partnerships in place to transition app developers to Google+. Developers don’t work directly with Google on Android apps like Facebook developers do with Facebook, and if Android dies anyway, the transition from Android to a different Google+ system would likely be more rocky than for Facebook to move developers from web to mobile (especially if web IS the mobile OS… it’s like the twilight zone). Also, Google is tied to Android now with it’s Motorola acquisition, making a transition away from the OS unlikely.

So I’m liking Facebook right now, I think Google is in a tough spot with Android because of the patent issues (forced to buy a company to acquire patents to defend an ecosystem that other device-makers don’t want to be a part of if Google owns a competitor), and Amazon has to really really hope that Apple doesn’t notice that they just launched an Android tablet.

Leave a comment

Filed under Misc, Patent, Social Games

September 29, 2011 · 1:10 pm

I could forgive the Milkens, but that doesn’t mean I want their money

Most of my blog posts are about random topics that I find interesting in IP law, startups, or whatever. This post is so that in the future, when somebody asks me how I felt about my law school accepting a gift from Lowell Milken, I can rest easy knowing that I publicly announced my disapproval.

UCLA Law recently accepted a gift from Lowell Milken for $10 million dollars, and it has caused a bit of a stir (though shockingly little is actually said about it on the campus itself). For the uninitiated (which I was until very recently), Milken’s brother Michael was the centerpiece of the junk bond scandal in the 80s that resulted in Michael serving 2 years in jail and paying $600 million in fines and restitution on 98 counts of racketeering and fraud. He also paid investors $500 million in a civil suit. Lowell, Michael’s brother, was Michael’s second-hand man in many regards, and he hardly escaped the scandal unscathed – Lowell was charged with securities, wire, and mail fraud, he was barred from practicing before the SEC, and barred from holding a position with any member firm of the NYSE. Lowell, however, was never convicted of anything, as his brother made it a condition of his own plea deal that charges against Lowell be dropped. Many critics seem to think that because Lowell was never convicted of anything, he should be absolved of all blame – that’s one opinion, but I think an equally valid one is that being barred from practicing before the SEC and the NYSE is a pretty bad thing for a securities lawyer.

I don’t object to Lowell Milken’s gift because he is a horrible person – honestly, he’s done some very philanthropic things with the money he made. That money might not have been made through the most ethical of means, but at least he and Michael have put it to some good use in a multi-decade campaign to improve their family’s name. Michael served his time and paid back a tremendous amount of the money he made, Lowell evaded more formal penalties and kept all of his money, so maybe it’s time to stop holding it against them that they were involved in a massive fraud scheme (I’m not saying we should stop holding it against them, but at least there is an argument to be made). Michael’s apparently been extremely generous in donating to cancer research, and Lowell to education, which they both deserve credit for despite their past. I’m definitely not saying that Lowell or Michael are terrible people who should go to jail.

I object to the money because UCLA doesn’t need $10 million badly enough to justify subjecting the professors and students at the law school to scrutiny about our ethics. I don’t want it made more clear to the world that Lowell Milken went to UCLA! He’s barred from practicing in the field he made all his money in because of ethical violations! What’s more, the school now wants to name the entire business law program after him. If I was a part of that program, I would quit immediately and demand it be removed from my transcript. The first thing prospective employers see when they google ‘UCLA business law program’ will now, and forever, be the name of an attorney infamous for being a centerpiece to securities scandal. And in this climate, post-massive-bailout, to name the business law program after this man? MAYBE his transgressions are forgivable as a person, and perhaps his money would be fitting as a general gift, but as an attorney I would not want my reputation tied to a business law program named after a man who was barred from practice before the SEC and NYSE.

Not that it should matter what the amount is, but furthermore, $10 million is nothing speaking longterm. Because we are part of the UC system, 40% of that goes back to the main campus. The rest goes to the now-tarnished business law program. So the law school takes a reputation hit, our business program is forever tied to this man who was barred from practice before the SEC and NYSE, we will likely lose out on professorial talent (both current and prospective), all for about $6 million bucks. Listen, I’m a law student, I KNOW what it’s like to be strapped for money – but I say no thanks to the Milken gift. I’m not even sure the benefits of the money outweigh the costs, and you don’t compromise your ethics as an institution because the economy is tight regardless, especially in the environment attorneys currently practice in where ethics surrounding securities transactions are a constant concern. UCLA is doing no favors to their graduates by naming anything at UCLA after this man, and I respectfully object to accepting the gift.

Leave a comment

Filed under Law

September 22, 2011 · 10:15 am

Oddities of the new patent act

If you read my blog often, you know I like patent law. It’s a fascinating, convoluted mess that’s become (fortunately or unfortunately) incredibly relevant for technology companies. Major areas of law rarely receive substantive overhauls, and even more rarely does an overhaul happen in an area of law that you have an intellectual interest in, so I feel lucky to be around studying Patent law at a major turning point. The zeitgeist of the patent world/blogosphere is rather unique right now – It’s like a new season in a sport or a television show; nobody knows exactly what to expect, there are lots of unanswered questions, and everybody has an opinion on how that last season went and what needs to change.

In my opinion, the last season of Patent Law:USA went just okay. Got a little out of hand there at the end, akin to a TV show that gets a bit away from the writers in the final few episodes – sort of like LOST season 2. Everything was going pretty well in the Patent law world until we got to the late 90s, when business methods patents and the internet sort of took us in directions we hadn’t contemplated originally in terms of intellectual property rights. “Prior patent + ‘on the internet’ = bad patent” was the rallying cry of a host of critics – but those critics likely don’t see much on the face of the new act to give them hope that the problem is solved. I for one am somewhere in the middle when it comes to opinions on the last season of Patent Law – I’m not an extremist who thinks we need to blow up the whole system, but there are definitely problems with patent trolls and with software patents in particular that I think need to be addressed, as they put an impossible burden on new companies and reduce the efficiency of capital flowing to useful ends.

Anyway, enough opining on our long lost Patent season (which, as it turns out, will have plenty of support in reruns… see below). We have a new patent act that takes effect in various stages anywhere from last friday to 18 months from now, and I want to cover some of the strange aspects of this reform:

There are now two different, substantive bodies of law on patents, and there will be for the next 25+ years

Every patent currently issued and every patent currently on file (except for those filed in the last 4ish days) is subject to the “old” patent law regime. Considering that the PTO takes quite a while to grant a patent, that there are provisional patents out there (many, many filed last thursday), and that you can file continuation patents and extensions, that “old” patent law we all know and love is far from dead – it will take 25 or more years for every patent issued and subject to the “old” laws to expire. That sounds like just a cute and potentially confusing nuance until you consider that major companies will likely hold patents under both regimes – and they will sue asserting patents from both regimes. Starting in 3-4 years once we see issued patents under the new regime, we may see litigation where completely different rules apply to different patents at issue in the same case. This could be extremely confusing for juries given some of the other substantive changes to the way things like prior art are handled, with some prior art able to invalidate earlier patents but not later patents, a result laypeople will find illogical.

Similarly, there are now four different types of reexam

I haven’t tracked the timing of various parts of the bill closely enough yet, so I’m not sure if there will every be a moment in time where all 4 types are potentially going on at the PTO, but in theory there are 4 types of reexam proceedings that can be initiated in the next year or so (the current ex parte and inter partes, and the new post grant review and new inter partes). Reexam is actually getting a huge substantive overhaul, the primary changes being that it now takes place like a mini-trial with discovery in front of a 3 judge panel with a one year timeframe. That timeframe might be a huge boon to defendants, who may be able to convince judges to stay a district court case more easily if they can guarantee that the PTO will finish the reexam in a year, when a district court is often just getting to the Markman hearing. Lot of “maybe” in there – the thrill of a new patent act – but it seems that reducing the timeframe for reexam should encourage defendants to explore that option more frequently, with courts likely more willing to stay a case in the meantime.

It’s hard to imagine anybody using the new Post-Grant Review form of reexam

The new reexam regime is split into two timeframes – if you apply for review within 9 months of issuance, you do the new Post-Grant Review process; otherwise, the new Inter Partes process. The standard is either lower or higher than the standard for inter partes depending on how you interpret the statute, and you have access to more prior art to invalidate the patent, but you also risk never being able to challenge the patent again – the loser of a PGR is estopped from asserting invalidity on effectively ANY ground. That’s a pretty big risk even for a challenger who has a slam dunk piece of prior art – even if you are 90% sure you’ll prevail in that review, why not wait and bring out the prior art in court? It will be interesting to track how firms and companies strategize around the new review process, but given the incredibly high stakes for losing a PGR and the relatively low stakes of a district court ruling, it seems unlikely that the PGR will become a popular choice. And remember, PGR is only available for 9 months following issuance of a patent, which is a rather narrow window considering the planning that needs to go into filing for the process.

That’s just a few of the interesting twists thrown into the system by the new Patent Act – haven’t even mentioned changes to the joinder rules, or the odd place obviousness may be in after switching to the first-to-file-or-publish system. Lot is still up in the air, there are lots of terms in the Act (which is pretty poorly drafted, actually) that will garner significant debate and eventually litigation, and the full scope of the changes probably won’t be appreciated for many years.

Leave a comment

Filed under Law, Patent

September 15, 2011 · 1:03 pm

SEC considers loosening regulations, how big would a “crowd-funding” market for startups actually be?

The SEC has formed a committee to analyze regulation around fast-growing companies, and today the House held a hearing on “crowd-funding” for small companies.

On the SEC side, looking to reform regulation around private companies and their ability to raise money is probably a good thing – the market is already doing it, perhaps most publicly exemplified by Facebook using Goldman Sachs and a special purpose vehicle to effectively beat the 500 shareholders of record limit – so, it’s about time that the SEC at least looked at the regulations and decided if they make sense in the context of successful, private companies. But considering those market shifts, I’m not sure regulation is needed to further open the floodgates to private, unsophisticated investors – The Groupons, Zyngas, and Facebooks of the world have no problem raising money until the time comes to file for an IPO, and smaller companies don’t feel pressure from the 500 shareholder limit, which is really the only regulatroy constraint on a company’s growth in that stage. If Facebook’s Goldman Sachs strategy becomes popular, I’m not sure there’s a good reason to loosen regulations on a segment of the capital market that seems to be working quite efficiently. That said, the makeup of the committee is largely representatives from the big private companies I just mentioned, and likely they will push for an abandonment of that 500 shareholder cap.

As for the notion of “crowd-funding”, that doesn’t make much sense to me either. Small companies as a whole have a tremendously low success rate, and I’m not sure it’s in the public’s best interest to have a private market with lower disclosure requirements for funding small companies with 90% failure rates. Even if you focus on the technology/energy/etc startups that tend to come out of startup-heavy regions like Silicon Valley, those startups still have a huge failure rate (at least 40%, my quick survey of blogs seems to suggest), and the startups already have pretty excellent access to capital through VCs, superangels, and angels on Angel.co. Maybe the costs of raising capital for some of those startups would go down, but probably not by much, and it might be better for the public if the risk of those companies failing was taken on by large institutional investors who can better calculate the odds. While I’ll admit that I’ve only considered the benefits of “crowd-funding” for about 15 minutes, it doesn’t strike me as something the startup world is dying to have – picking winners in the early stages of startups is hard enough for institutional investors, and I imagine after one or two rounds of losing money on short-term, low-value investments, most small-time investors would realize it isn’t as fun to invest in startups as it is to read about them. VCs aren’t even that great at picking winners: ten-year returns for VCs as a whole are reported at anywhere from 8.4 percent to a loss of .09 percent, depending on where you get your information, which isn’t necessarily a better return than investors get in the existing public market. If VCs can’t pick winners with all of their knowledge and all of the advantages they convey to the companies they invest in, why would anybody think the public could?

Leave a comment

Filed under Funding, Law

September 8, 2011 · 7:56 pm

Walmart makes lemonade in class action settlement, Twitter reveals user numbers, Patent reform to pass today

Random news from the day/week:

Walmart manages to settle a suit in a highly creative way that really hurts Netflix, if it goes through

Summary – Walmart is sued in a class action along with Netflix, with the suit claiming that the two conspired to split up the DVD market into retail and rental spaces. Maybe the settlement proposal would be good evidence in court that that ISN’T what Walmart had in mind – Walmart just acquired Vudu, a competitor to Netflix, and Walmart has recently proposed a settlement where Netflix customers will receive gift certificates for $40 at Walmart. Netflix has pointed out that this will incentivize people to switch to Walmart’s own streaming video service, using Netflix’s channels to market directly to the people most interested in streaming video! I don’t know a lot about the specific law behind class action settlements, but this would be a pretty amazing turn of events for Walmart if the settlement is approved early next year.

Twitter revealed their numbers today, strong user numbers, but is it really that impressive?

Numbers for Twitter: 100M monthly active users, 50M daily active users, 400M unique visitors per month. Some pretty crazy designer numbers too, such as every NFL team is on Twitter, 75% of NBA players, and 87% of the Billboard Top 100 artists. The bad news? 40% of those active users don’t tweet. Last I heard, this activity was generating roughly $150M in revenue for the year.

First off, I love Twitter and I defend it’s merits in the face of criticism all the time. But just for fun, look at CityVille’s stats. Zynga makes $600 million in revenue from Cityville, Empires & Allies, Texas Hold ’em and Farmville, which have a combined 186M monthly active users and 34M daily active users (Zynga actually makes $600M from all their games, but those 4 are the biggest). I’m not saying Zynga is analogous to Twitter – But Facebook gets 30% of Zynga’s revenue (haven’t checked the S-1 to see if that 600M is before or after Facebook takes the cut, but I imagine it’s after). These are definitely some back-of-the-napkin figures I’m spewing out, but even a conservative estimate would have Facebook collecting more just for hosting Zynga games than what Twitter makes on ads in a year.

I’ll admit that’s a little unfair and comparing Twitter to Facebook and Zynga is harsh – Facebook is a fully developed platform and the most popular social network in the country, Zynga a one-of-a-kind game company – but Twitter is probably approaching the climax of it’s growth and it can’t make more in revenue than Facebook gets from a social game company. It also has a ton of users that aren’t really active. Like I said, I love Twitter, it’s much more interesting to me than Facebook, but the monetization is lagging.

Patent “reform” passes today

A much-lauded and much-criticized (see conflicting reports in picture above) patent bill has passed Congress today, signaling the first significant shift in patent law in decades. Some say it does nothing, some might make comments about rearranging deck chairs on the Titanic, and both are right. The biggest change is the switch to a first-to-file from a first-to-invent system, which, while theoretically significant, probably won’t impact any of the major problems in patent law that industry criticizers frequently note. The next biggest changes are some dramatic adjustments in the way the USPTO can charge fees, opening the office up to raise a significantly larger amount of money by charging more. This might turn out to be the biggest practical change – an “activist” USPTO might consider raising fees for certain activities to discourage abuse. But one need not even pray that the USPTO turns activist to be optimistic that this change will trickle-down to improve other aspects of patent law – simply raising enough money to hire some more patent examiners might be enough to see an increase in the rate of rejected applications. There will be a deluge of articles in the next week detailing how much or how little this reform will change patent law, but until we see how the USPTO decides to utilize the fees they collect, we can’t really know.

1 Comment

Filed under Games, Law, Social Games

August 22, 2011 · 2:18 pm

Would regulation of the VC/private company market help anybody? Part I

Some background for this post: Facebook has recently been rumored to have raised money at a valuation of $100 billion; SecondMarket, a brokerage for private company stock, has grown as a place for robust trading of consumer web company stock, transacting over $150 million in the first quarter of 2011; interest in private or pre-IPO consumer web companies like Groupon/Facebook/Zynga are possibly at an all-time high; everybody is sure that we are either in a bubble, or not in a bubble. Also, I’m writing a paper for a class. 🙂

Now, looking at the information above, it’s not clear by any stretch that the market for private company stock needs to be regulated more than it is. In fact, the presumption is probably that government should stay the hell away from one of the few sectors of our economy that is experiencing some growth. Considering the general health of the industry, regulation seems to make little sense – But I would argue that the industry could benefit from regulation if and only if that regulation helped cure the one systemic ill that seems to serve as a detriment to the startup/tech world, the bubble cycle. As people in the tech world are acutely aware, tech seems to ebb and flow, with a bubble/crash/bubble/crash cycle. The system, unregulated trading and all, seems to work great in the boom years, and then in the bust years nobody is looking to put more restrictions on already rare funding rounds, so regulation seems unlikely to ever be advocated for by insiders. But if some regulation would soften the bubble by lowering the volatility of the market, that would be one scenario where regulation might be favorable.

Currently, private company funding is essentially unregulated. Public companies are forced to disclose a whole ton of information through various (expensive) public disclosures. On top of restrictions regarding insider trading, liability for false statements, and other shareholder protections, this is how public companies are regulated. Private companies are largely exempt from reporting most of these things, as they raise money from institutional investors or “accredited investors” through non-public offerings.

Why we don’t regulate private companies now – 

The justification for the exemption of private companies usually falls into some combination of: “accredited investors” don’t need as much protection as the public and transaction costs associated with disclosure are too high for small companies to afford. The first justification, however, is slowly becoming less applicable, as the standard for who qualifies as an “accredited investor” has failed to keep pace with inflation, and sweeps in a much larger percentage of the population than Congress must have intended when they wrote the regulations in 1933. The second justification becomes less convincing when the companies seeing large markets for their stock are highly profitable and valued in the billions, as is the case with currently-private Facebook and Zynga. So maybe it is time to start considering whether some regulation for at least the upper-class of private companies could temper the boom and bust cycle without disrupting the markets for fundraising at the lower end of the private company spectrum.

Could regulation temper the bubble cycle? – 

The most common form of securities regulation is probably mandatory disclosure. Public companies are asked to do this very consistently, as a way of providing their shareholders or potential shareholders with a broad view of the state of the company. Private companies don’t provide public disclosures – they get information to their smaller group of investors through other means, such as by granting those investors board seats or simply meeting with the investors frequently. Being a seed or angel investor in a private company surely grants that angel a more favorable position in terms of access to information than I have buying stock in Microsoft, thus the lack of formal disclosure has little practical significance for the institutional investor in the market for private companies.

But the issue I am most interested in, and the angle from which I believe regulation looks most desirable, arises when the successful private company files for an IPO. Focusing here makes sense – many use the IPO market as a proxy for whether there is a tech bubble, and bubbles seem to burst at the IPO level rather than at the level of, say, Series B or C investments. When a company files for an IPO, they are forced to make their first public disclosure, and likely the only disclosure they’ll make before shares of their company are put up for sale (unless they make Groupon-level mistakes and are forced to amend multiple times). This, and the newspaper articles describing the unbelievable valuations of the company, are all the public investor has to go on to make his or her judgment about the value of the company – and in reality, the public investor probably didn’t actually read the public filing anyway, but maybe skimmed a blog post on it. I’ve also noted elsewhere on this blog that usually VCs backing the IPO company are looking for a hasty exit, so the very group setting the earlier valuation now benefits from a public perception that the company is worth more than it actually is.

So the real question is, would forcing companies like Facebook or Zynga or Groupon to file more than one public disclosure before filing for an IPO make the market any more efficient? Would it effectively stem the tide of irrational investments into non-performing or underperforming companies, the canary in a mineshaft for a bursting bubble? Are there any other mechanisms or other forms of regulation available to fight the bubble problem? I’ll save looking into those answers for Part II.

Leave a comment

Filed under Funding, Law

August 16, 2011 · 1:26 pm

Diablo 3’s DRM : why I don’t like it

Blizzard announced last week that Diablo III will come with DRM that prevents players from playing the game unless they are online. Presumably this is an anti-pirating measure – being online will allow Blizzard to check your CD-Key against a database of CD-Keys, and thus prevent multiple people from using the same CD-Key simultaneously. But DRM is a terrible idea – As Sony found out this Spring, restricting what your consumer can do with a product they purchase can have tremendous consequences for a company. Blizzard is obviously unlikely to be attacked as viciously as Sony was, but the business and legal ramifications of bad DRM can be far-reaching even in the field of computer software where DRM is relatively common. EA saw a hard backlash against DRM in the game Spore a couple of years ago, with players harshly rating the game on Amazon to express their displeasure.

But back to Diablo III: Everybody who is looking forward to the game knows about this DRM by now – it’s garnered a tremendous amount of attention on websites of all varieties. A Diablo fan site recently conducted a poll, with the following results:

Obviously these aren’t the most scientific poll response choices, and the political science major/statistics guy in me is cringing at the double-barreled options on there (I hate the DRM but it definitely isn’t going to cripple my play opportunities), but clearly a lot of people don’t like the DRM. 40% either dislike or hate it.

Besides being interested in games, there is a legal component to this – when you buy Diablo III, you’ll be buying it under a lease agreement subject to a terms of use, which is how companies like Blizzard control and restrict the activity of a player. Doing this with software is nothing new, but let’s be honest – nobody reads those terms of use when they install a video game. Players have been clicking through those terms without thinking about the property rights (understandable, really) for years. Players simply assume that they purchased a game, that they are free to resell it, that they own it currently, and they can do what they want with it (except for a few things that will get them banned online, but that doesn’t usually enter the mind of a player as a limitation on a property right). As the phrasing of the “dislike” option in the results above shows, consumers really do think they “own” the games they purchase free from obvious limitations on things like copyright.

When a company like Blizzard makes a move like putting an online-only DRM onto a major release, it pushes the fact that the player doesn’t own the game into the player’s face. I’d argue that this isn’t a good thing for game developers – for better or for worse, players believe they own the games they purchase, even if that belief is somewhat incorrect. When that belief is disrupted by new, invasive DRM, players tend to get upset and generally pessimistic about the intent of the companies, who players view as punishing their paying customers.

I’m generally against putting DRM in a game for a few reasons:

For one, it isn’t a low cost for a developer.

Putting in traditional DRM like a CD-Key is cheap, but it also is incredibly easy to break, because hackers have had years of experience cracking existing DRM. For DRM to really work with computer software, a company needs to make something relatively customized, which usually involves hiring a security company. This isn’t going to be cheap, and the consumer gets to pay for that cost a lot of the time, though often indirectly through a diversion of resources away from making the game higher quality.

Second, it never works and doesn’t make financial sense.

I don’t have the stats to back that one up, but DRM doesn’t work. There’s something of an economic reason for it, so that will have to suffice for lack of empirical evidence. Think of the PC game economy as having 4 actors – there is the game developer, the paying user (“user”), the non-paying user (“pirate”), and the hacker. Putting DRM on a game has a cost – the initial payment is made by the game developer, but the cost is ultimately passed on to the paying user in the form of a lower quality game for the same price (since the developer diverted some resources away from making a higher quality game to put towards the development and testing of the DRM). The pirate bears none of the cost, because they aren’t paying anyway, and the hacker (who might also be a paying customer, a pirate, or even a developer in rare cases) is presumably motived by the desire to crack the game. This is actually a somewhat interesting point that I think is overlooked – hackers are naturally attracted to new challenges, and DRM is one place where an amateur hacker’s natural propensity for computers and likely shared affinity for games played on them leads to a cracking race. PC games are often cracked by the hacker community in less than a week, and major releases with new DRM tend to excite that community more than the simple CD-key crack, because new DRM brings some level of prestige to the first hacker to crack it. I can guarantee you that not only will Diablo III be cracked in a week after release, but it will be widely reported news because of Blizzard’s approach thus far. So hackers actually see new DRM as something of a gain, pirates are unaffected, and paying customers lose, while the developer is spending the same to put out an inferior product, which will likely sell worse. All the costs of DRM are born by the people already paying to play, and there’s mostly only an incentive on the side of the nonpaying pirates and hackers. The financial logic just isn’t there.

Third, it generates bad press, and burdens the paying customer more than any other party.

As the poll above and hundreds of other articles on the topic show, Blizzard has already paid a price for publicizing the DRM they are throwing on Diablo III. Will it hurt sales? Maybe not – it’s a multiplayer game that 90% of people want to play online anyway. But they basically just killed all of their single-player only sales, and limited the ability of some to enjoy the game entirely. I plan on buying the game, and now I’ll have a slight chip on my shoulder for having my play limited by Blizzard’s desire to cut back on activity that I don’t even engage in (though I’ll admit to having hacked Diablo II a vast number of times back in high school). If Blizzard wasn’t making a game that I’ve been waiting for for almost a decade, I’d actually consider avoiding the game. I’m sure less interested fans will be turned off completely.

Leave a comment

Filed under Copyright, Games

August 4, 2011 · 2:38 pm

What’s really going on with this Google/Microsoft public patent spat

It’s been a very entertaining 24 hours if you follow tech news, with the legal head honchos of Google and Microsoft getting into a very public spat over the sale of $4.5 billion worth of patents from defunct Nortel to a consortium lead by Apple and Microsoft.

First, Google SVP and CLO David Drummond went public on the Google blog with complaints of how the Nortel patents were “bogus” and only purchased as an anti-competitive play by Apple and Microsoft to try and kill the Android ecosystem by suing Android manufacturers. The blog post was initially (remember, the internet moves pretty fast) hailed as a potential opening salvo in a war against software patents by Google, and was generally praised.

Soon, though, the tide turned in the war for the media. Microsoft’s Brad Smith replied by tweeting this, which I’m sure is his most re-tweeted tweet ever:

Google says we bought Novell patents to keep them from Google. Really? We asked them to bid jointly with us. They said no

Sounds beautiful, but as we will get to in a second, it’s a red herring from the real explanation. Microsoft’s apparently a collaborative place, and realizing this was a media play by Google (and a poor one), Microsoft’s Frank Shaw jumped in, posting an email from Kent Walker, another member of Google’s legal team, to Brad Smith:

Brad –

Sorry for the delay in getting back to you — I came down with a 24-hour bug on the way back from San Antonio. After talking with people here, it sounds as though for various reasons a joint bid wouldn’t be advisable for us on this one. But I appreciate your flagging it, and we’re open to discussing other similar opportunities in the future.

I hope the rest of your travels go well, and I look forward to seeing you again soon.

– Kent

Ouch, right? How embarrassing!

Well, actually, not really. As those familiar with patent licensing would tell you, most patent licenses and especially consortiums like this come with an agreement that the members won’t interfere with the activities of other members as it pertains to the enforcement of the patents. You also usually agree not to challenge the validity of a patent you own/license in one of these arrangements. Obviously, Google would have been better served if they had anticipated Microsoft’s response, because Microsoft seems to be getting the last laugh in this one, but in reality Google would have paid lots of money to join the consortium, then been unable to protect their interests (defending the Android manufacturers from attack) anyway. So for Google, no consortium with Apple or Microsoft would have been agreeable, the only option was to own the Nortel patents outright and hide them in a closet, else they would have spent money to be contractually prevented from defending the manufacturers.

Google actually may have learned this mistake from Apple, or, actually, Google may have already made the mistake once before. Apple is currently trying to intervene in a series of suits against Apple app developers launched by patent troll Lodsys, but as Florian Mueller has noted multiple times on his blog, Apple’s hands are probably tied because they have a license to the same patent through Intellectual Ventures. Apple’s license probably precludes them from challenging the validity of the patent itself – thus they are stuck with only one strategic option, an unappealing and likely hopeless claim that the license extends to the developers. Google might be in the same position, assuming they have a similar license from Intellectual Ventures, and perhaps this explains their reticence to enter the battle, as they have thus far been quiet as it comes to the Lodsys suits against apps on Android.

So I feel for Google’s legal squad right now – their developers are being sued by trolls over silly patents, and their hands are tied because of a patent license, while their manufacturers are getting sued by Apple over silly patents (with more ammunition on the way if the Nortel deal isn’t blocked or force-licensed by the DOJ), and Google was hopeless to stop that as well. Google’s maybe in the best position ever to make a strong case against software patents right now, with their truly innovative and consumer-approved Android platform being taxed by patents. With a conveniently timed article today on Huffington Post (tl:dr version) showing how patent reform is mostly a Congressional lobbying game, maybe Google can step up and be the hero we need.

Leave a comment

Filed under Law, Patent

August 3, 2011 · 12:02 pm

Zynga sued over a patent in dressing up avatars

Lots of noise in the patent world lately, especially in the realm of apps and social games. Lodsys is making headlines for suing a litany of small app developers, as well as super-successful game developer Rovio, for a rather broad patent. As of Monday, Zynga was officially added to the list of companies attacked by patent trolls, though not by Lodsys.

Segan LLC, a company with no website and no products aside from broad patents, is suing Zynga for infringement of a patent in a “System for viewing content over a network and method therefor”. The title of the patent is actually broader than the claims of the patent, though as you will see below, the claim is rather broad as well. In case you aren’t familiar with software patents, here is the pertinent claim, below. If your eyes glaze over and you can’t figure out what this means, that simply indicates that you are normal:

What is claimed is:

1. A system comprising: a user device having a processor and comprising: a browser program capable of being run on said processor for viewing website pages; a graphical user interface (GUI) application capable of being run on said processor, containing a proprietary communication protocol and providing a GUI for depicting a character icon; and a unique identifier for identifying the user of the user device; a service provider for maintaining a user record corresponding to said user, for communicating with said GUI application by means of said proprietary communication protocol, for authorizing the GUI application to depict the character icon, and for providing one or more previously enabled character enhancements for the user’s character icon depicted in the authorized GUI application, wherein said user record comprises identification of the user’s character icon, predetermined user preferences, and the one or more previously enabled character enhancements; and a target website for offering a new character enhancement for the user’s character icon, wherein the new character enhancement is capable of being enabled in the user’s record at the service provider without requiring user interaction with the service provider, and wherein the character enhancements are obtained per predefined authorization rules from the service provider and/or the target website in addition to the predetermined user references; and wherein, when the user visits the target website using the browser program, the target website uses the unique identifier on the user device to access the user’s record at the service provider without requiring user interaction with the service provider, whereby any new character enhancement offered to the user is appropriate for the user’s character icon.

To really boil that down, the patent covers the concept of putting a new item on an avatar in an online setting. The description is more illustrative of the purpose of the “invention”:

Illustratively, a user may be interested in acquiring fishing-theme enhancements for one character icon, and baseball-theme enhancements for another character icon.

For one, this patent covers something that seems completely obvious now, and almost every social game has some version of this incentive system. Just off the top of my head, I know Yahoo! does something similar with their avatars, Xbox Live uses avatars, every fashion-themed social game on Facebook uses avatars, and every cafe-themed game uses avatars. This could be an extremely damaging patent if asserted against every one of these companies.

The whole patent is pretty ridiculous; the idea of accessorizing a doll has been around forever, and the fact that you can use the concept to incentivize activity on a website isn’t much of a leap from early video games that did the same. Diablo is the earliest example I can think of off the top of my head – it incentivized further play by allowing you to change the appearance of your character through the acquisition of new items, and it still came out four years before the patent was filed. Moving that activity from a single computer to an online interaction between a user, a GUI, and a website ought not to create a patentable “invention”.

To get more technical, I’m not even certain I understand how the patent reads on what Zynga does in a game like Farmville. There’s lots of potential for the patent to be read in a way that doesn’t implicate what Zynga does, depending on the definition of some of the specific terms. But the problem with patent suits is that, even if Zynga decides it is worth it to fight the case rather than settle, the suit could go on for a very long time even after the district court chooses the definitions for those specific terms. An appeals court would get to redefine the same terms, and the entire district court decision could be irrelevant as a result. This is why patent trolling is so effective – big companies would rather pay a small settlement than risk years of legal fees. We will see what Zynga does, and we will see if Segan LLC goes after any of the other major game developers who do essentially the same thing.

Leave a comment

Filed under Law, Patent, Social Games