INTERNET & E-BUSINESS



Conventional Barriers to Entry Are Evaporating

What are the barriers to entry into, and the requirements for survival in, a traditional pre-e-commerce business? A significant capital investment in factories and equipment, a distribution system, a trained labor force, etc. The pre-e-commerce free market is not perfect - - competition is uneven, inefficient and occasionally non-existent.

A business can profit because consumers find locating or utilizing a competitor too inconvenient or time consuming, or too distant geographically. The pre-e-commerce consumer lacks information about available competition and often pays more than is necessary.

The Internet is rapidly turning that world upside down. An e-commerce business can be started on a shoestring. Traditional barriers of time, convenience, geography, distribution, pricing and information have all but disappeared.

No Company Will Be Immune from the Impact of the Internet

No industry, market or company can escape the coming e-commerce juggernaut. Even companies as large as General Electric are taking decisive action. If pre-e-commerce was a BMW, Mercedes or Lexus, competition on the Internet will be a Lamborghini or Ferrari.

The Only Real Barrier to Competition Will Be Protected Intellectual Assets

Businesses are learning quickly that the only real barrier to entry and to continuing profitability is protected innovation. The ability to generate a continuous stream of innovative new products and/or services and productivity-enhancing processes will quickly separate the successful from the unsuccessful. In e-business, IP assets are the way to differentiation.

Corporate executives can no longer afford indifference or incompetence with respect to intellectual asset management. Corporate management must get a grasp on its intellectual assets – what and where they are and aren’t in the corporation, who is and who isn’t generating them, their value, what should be done to enhance their generation and protection, and how they can be exploited.

Corporate managers are very well versed in asset management on the tangible assets side. However, they have few, if any, tools with which to manage their more significant intangible assets.

Special IP Issues for Internet and E-Business Companies

Internet companies have most of the IP issues of any company – acquiring and protecting key IP assets, selecting, clearing and protecting its name and brands, avoiding conflicts with adversely held IP assets, monitoring potentially infringing activities of competitors, and so forth.

However, Internet businesses have a host of IP issues which are peculiar to Internet companies, or which apply with an exaggerated intensity.

  1. Speed and agility are paramount in order to create and hold a “first mover” advantage in the marketplace.
  2. Investor relations are critical to initial and continuing financial support and business guidance.
  3. Fast changing technology implies shorter product life cycles and times-to-market, and intensified new product development.
  4. Shorter product life cycles in turn means that short term forms of IP protection must be applied in addition to the longer term protection afforded by patents, for example.
  5. The high risk of Internet companies implies a high cost of debt and equity capital, making profitability more problematic.
  6. Business and IP asset strategies must be developed and executed more quickly as wasting IP assets deteriorate ever faster in “Internet time”.
  7. R&D investments must be recovered more quickly.
  8. Greater pressure exists to determine what business applications of one’s technology can be “eaten before they rot”. In many cases, licensing must become an integral part of product strategy.

    In the Internet economy, companies must license or otherwise exploit their IP assets in every way possible. What is not used to support manufacturing must be licensed. No company can serve every application of every technology in every distribution channel in every geographical territory in the global market. Even the largest multinationals can service by direct manufacturing and product distribution but a small fraction of the burgeoning world markets.

    The Internet economy for many companies represents a continuation of the flight from capital. “Let someone else do the heavy lifting. We will open royalty checks.” is the new mantra for many companies. This strategy permits a company to cherry pick just the best markets and monetize the rest in some other way.

    Business Method Patents – Curse or Boon?

    In 1998 State Street Band & Trust v. Signature Financial Group changed the landscape of patent law and paved the way for stronger protection of e-commerce business methods. The U.S. Court of Appeals for the Federal Circuit, ruling that business methods are patentable, triggered a boom in the filing of e-commerce business method patents.

    The State Street Bank case has inspired many new business method patents. Priceline.com’s reverse auction patent (U.S. 5,794,207), Amazon’s “One-Click” patent (U.S. 5,960,411), Netcentives’ “ClickReward Scheme” patent (U.S. 5,774,870) (the Internet analog of frequent flyer programs), Sun Microsystems’ “Shopping Cart” patent (U.S. 5,745,681), and Cybergold’s patent on a method of paying consumers to view ads (U.S. 5,794,210) are a few notable examples of patents which have been granted on business methods since the State Street Bank case was decided.

    While some commentators lament the business method patent as a curse which will impede growth of the Internet economy, it behooves Internet businesses to pull out all stops to avail the vicissitudes in the law whenever possible. Just having a patent on a business method (preferably many patents on all details and possible variations) will increase stature in the investment community and may delay competition for a while.

    Bottom Line for Internet Companies – Competent IP Counsel Is Critically Important

    Because of the heightened importance of IP assets to the success of Internet companies, it is vital that counsel knowledgeable of the particular IP issues which envelope Internet companies is engaged early, even before company formation. Sage advice on IP Internet issues can minimize later costs, help insure acquisition and protection of critical IP assets, and provide important business guidance.

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