A Virtual Battle for Value

By Larry Downes  |  Posted 03-03-2008

Aside from missing some favorite shows, why should CIOs care about the recently settled strike by the Writers Guild of America?

Remarkably, the three-month-long work stoppage came down to a single issue: how to value and allocate intellectual property rights for emerging and new media. The writers demanded a fixed percentage of any revenue generated in the future from Internet-based content distribution.

CIOs have a similar problem. How much is software worth? Is it better to pay for a lifetime license or simply pay as you go? How do we value data we buy, sell or consolidate with that of our business partners? Should our compensation be based at all on the usefulness of the applications we develop and, if so, how do we calculate that worth?

It's hard to say whether the parties in the writers' strike got the answers right, or even if they should have spent as much capital--financial and otherwise--duking it out. The tools for valuing intellectual property are lousy to begin with, and when you factor in the uncertainty of emerging new media (iPod, iPhone) or how users will use and misuse them even in the short term (YouTube, Tivo), chaos theory quickly takes over.

It's like predicting the weather ... for next year. Though the industry is in the very early stages of figuring out the right models, the writers risked everything on an unknown future value.

In some sense, our valuation problem is even tougher than the entertainment industry's. For IT products and services, the background rules themselves are changing, and their direction is unclear. Before 1976, there was no copyright protection for source code. Before 1981, there was no patent protection for applications. In both cases, the current level of protection is being challenged as both too generous and too stingy.

No doubt you've faced problems of valuation like these before, when negotiating with a software supplier, deciding the terms of your own or an employee's compensation or developing a joint application with a business partner. If you haven't, maybe you should start paying closer attention. Here are some intellectual-property "gotchas" I've noted in recent client work:

In a complicated licensing agreement with a major software vendor, the client failed to notice that the vendor retained the right to charge more if the client's profitability improved from use of the software--without any indication of how the improvement was to be measured.

The default rule under patent law is that employees retain rights to inventions made even during work hours; the opposite rule applies in copyright. Without proper assignments, your company could lose out on inventions it paid employees to develop.

Service agreements with client-based software vendors often permit the vendor to consolidate data of different--often competing--companies passing through its systems and sell the results back as marketing data, with no compensation to the originators.

Don't think that just because valuating intellectual property is difficult, or even indeterminate, that it's worthless. As the writers' strike suggests, these intangibles could have significant value--if not today, than perhaps in the near future.

They may even be worth fighting for.