Effects of New Supply-Chain Models on Intellectual Property Rights

As we move forward into a world of greater complexity filled with rapidly developing inventions and innovations, product owners and manufacturers are modifying their supply-chain models to complement the changing global economy. This post will discuss how both the high-tech and intangible intellectual works sectors are re-thinking their distribution models and suggest how these changes might affect intellectual property rights.

A recent McKinsey & Co. article focuses on the benefits of original equipment manufacturers (OEMs) in the high-tech sector using two-tiered distributors in emerging markets. Two-tiered distributors buy from manufacturers and sell to resellers. While two-tier distributors can be the key to success in emerging markets, there are potential intellectual property issues, especially if the distribution is on a global scale. Because of the wide global reach of two-tier distributors, and the additional steps in the supply chain, there is a possibility that OEMs would have less control over which country their products may end up in. As such, the scope of protection of intellectual property rights can be uncertain and unpredictable. Some foreign countries have laws that are not as protective of intellectual property rights as they are in North America and mechanisms to enforce these rights may not be as effective. Because of this, there may be significant challenges in protecting the OEMs’ proprietary technology and brand. Any intellectual property infringement could adversely affect the OEMs’ business and position in the global marketplace.

In addition to the high-tech sector, another area that has seen significant changes in distribution models is that of intangible intellectual works. Intangible intellectual works include a broad range of information-based products and services that people can receive electronically. Some examples include stock market information, videogames, music, films, etc. These are items that once had been distributed in tangible forms, but are now increasingly being distributed electronically. There are many benefits of electronic distribution. First and foremost, the intellectual work is distributed directly from the copyright holder. Because of this direct distribution, the copyright holder can more easily set and control prices, without the additional cost effects of having different wholesalers or retailers as part of the distribution process. Other benefits include the elimination of the costs associated in manufacturing and packaging a physical item, as well as the shipping of such items. However, the benefits of electronic distribution, come at a price. When distributing electronically, a copyright holder may have less control over their intellectual property and the risk of illegal distribution by a third party may increase. 

It seems that the new distribution models of both high-tech products and intangible intellectual works could benefit from open source distribution. Open source describes a general type of license that makes source code/schematic/files available to the general public for free, with relaxed copyright restrictions. Some examples of open source products include Red Hat’s Linux (operating system), Mozilla’s Firefox (software) and Arduino’s microcontrollers (hardware). So far, the business prospects of these companies are extraordinary. You can read about their successes here, here and here.

Open source products are generally licensed under a Creative Commons license, something that represents a middle ground between full copyright and the public domain. These licenses allow creators to choose which rights they would like to keep and which rights they would like to waive for the benefit of other creators. For example, under their Creative Commons License, Arduino inventors allow anyone to produce copies of their product, redesign it, or even sell products that copy the original design. No license fee has to be paid to Arduino, and permission does not even have to be granted. However, if the reference design is republished, credit must be given to the original Arduino inventors. Additionally, if the design is modified, the new design must also use the same or similar Creative Commons license to ensure that new versions of the Arduino design are equally free and open. The open source movement began in the realm of operating systems and software and has now expanded to include hardware like the Arduino products. If this trend continues, we can only begin to imagine the multitude of other industries that may jump on the open source bandwagon in the near future. The music industry would be an example. Opsound is a project that applies the open source model to music. Under a Creative Commons license, musicians and sound artists are encouraged to contribute their own music to the Opsound pool and are invited to download, share and remix the music that is available in that pool.

One Comment
  1. I think it is positive to identify the nature of a “digital” initiative because so much of what is being recognized as digital innovation is nothing more than supply chain innovation for traditional formats – as the title to your post clearly states. As such it may be misleading to suggest that all of these distribution options reflect new revenue models.
    On the supply chain….
    Some examples of digital sales/distribution models relating to intangible products might be:
    1) Licensing to consortia e.g. libraries of digital works,
    2) Increasing traffic to a web site to sell works by exposure through Google Scholar, Google Book Search, etc.
    3) Providing free online versions (e.g. PDFs) but charging for print published versions or online versions at bundled pricing or online pricing with tangible alternatives free – basically whatever works for the market targeted,
    4) Allowing one-time purchase from subscription services (transactional access usually involves a contract or click-through terms and conditions, micro payment model). Actually subscription services were developed in the legal market to incent users to increase usage – for any user other than a dabbler, subscription models introduced predictability in the cost of information and were, and continue to be, a significant advantage over the transactional model,
    5) Providing micro-content for purchase (e.g. individual articles; individual songs).
    The commercial sector in the content industry (tangible and intangible products – let’s leave copyright and licensing for a minute) has moved rapidly to digital locater tools, digital delivery options and to address pricing expectations around digital or multi-format consumption. In almost every case these options are alternatives to perpetual traditional models because consumer demand for those models has not disappeared.
    The most inexpensive option is not always the consumer’s choice. It would be convenient if it were so straightforward. There are many additional considerations that go into consumer choice – relationships, format, packaging, integration with other offerings, availability and, of course, personal preferences. Certainly the trend in business is to maximize the consumer’s options. However, if no option disappears, there may be no reduction in the distribution cost. Furthermore, distribution channel choices may not attract different pricing. My recent download of Intuit Quicken was the same price as buying it off the shelf.
    On business….
    Bluntly, business models are about making money. Truly giving everything away is not a business model. That being said there are many approaches worthy of examination including the ones that you have highlighted.
    In music you might have mentioned a few of the recent “experiments” on distribution and sales. The variable price option is an interesting one (user pays whatever he or she wants) but it is still just a digital dissemination model. These musicians are experimenting but revenue is clearly an expectation. If a majority of the users paid less than the recommended price or nothing at all the model would very likely be changed. Another “business model” being experimented with is music for “free” when the user purchases a T-shirt or buys tickets for a concert. Again, if the T-shirts don’t sell or the consumers don’t buy tickets to the concert these models will change. These types of models also work best for a “hit” or “cult” artist whose fan base is already established and tuned in to the options. It may be unfair to a significant number of quality artists to suggest this model would be universally applicable. “Selling” the music, whether on CD or by downloading tracks through distributors on the Internet may be the preferred, and reasonable, approach.
    All 3 of the articles you refer to discussing open source success stories talk about the revenue generating aspects of those businesses. For example, the Wired article on Firefox references the difficulty in finding a balance between funding the core business venture and the non-commercial open source strategy – ergo the close relationship to Google? It seems that Arduino’s core revenue stream is from both consulting (promotion of Arduino’s expertise is an outcome of the open source strategy) and selling hardware to those who choose not to build their own using Arduino’s designs for free. The open source strategy delivers new product research and development to Arduino from outside expertise, at virtually no cost, since all enhancements must be available on the same share model licence.
    On copyright…
    Copyright is rarely “abandoned” in these models. The music models above do not necessarily include any open approach to redistribution or use of the music. The copyright owner in using a Creative Commons and open source licensing approach is really pre-approving certain uses as long as the terms and conditions are met. In the same way on many sites on the Internet, terms and conditions pre-approve the use of content for educational purposes, for non-profit use, for reuse with attribution, etc. There is nothing in our current copyright legislation to preclude a copyright owner from utilizing any and all forms of licence as long as licensing does not purport to eliminate the exceptions such as fair dealing.
    I don’t see the use of these licences and pre-approvals as a “middle ground” between copyright and public domain. I see them as a positive exercise of the bundle of rights a creator has at his or her disposal to manage intellectual property. Creative Commons has become somewhat of a standard and it does introduce predictability that benefits both the rights holder and the consumer. It does not ensure attribution. Persistent linking of metadata to content is not supported by many licensing tools which may reflect the considerable resistance by some in the user community to digital rights management.
    You rightly point out that the digital distribution of creative works has increased the vulnerability of copyright owners to abuse. What these licences don’t do is protect the rights holder from a consumer who fails to comply with the licence and wrongfully distributes or uses a creation without attribution or appropriate compensation. However, the rights holder is often criticized if technological protection measures are used to address this risk.
    For me it is not the licences that are the new and exciting aspect of ventures like Opsound but the risk-taking and creativity in the ventures themselves that open up new commercial and promotional opportunities. Some ventures will succeed in delivering “free” content to the consumer while harvesting the financial fruits of sponsorship, advertising or self-promotion. Some of these experiments will fail.
    There is lots of room for a wide range of models. Not every rights holder is willing or able to fly on the bleeding edge of business and technology. A creator who wishes (or has to in order to support himself/herself) to sell his/her creation by charging for the actual product and has a market prepared to pay for it should not feel demeaned by that choice or obligated to experiment.

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