Re-Fighting the Last War: Dot-Com Ideas in the 21st Century

After a career as patent counsel and general counsel, in-house and out, Mr. Root has launched QualiPat, aimed at providing IP training, outsourcing facilitation, and IP projects. He can be contacted at jroot@qualipat.com.

Generals are often accused of re-fighting the last war, and sometimes they are.  During the 1930’s, André Maginot and the French general staff were horrified at the specter of a return to the trench warfare of World War I, so they build a series of impregnable fortifications, designed to safeguard the Republic into the distant future.  He expected to be remembered as the savior of France; instead, he became an icon for backward-looking strategy, when the Germans moved tanks through the “impassable” Ardennes, substituted dive bombers for artillery, and overran France in a matter of weeks.   

Old strategy is considerably harder to replace than old weapons.  By 1965 the US employed few World War II armaments, but it was determined to apply the “lesson” of Munich by standing firm against the tide of Communism in Vietnam.  A generation later the same reasoning can be heard about Iraq, on both sides.

Figuring out the lessons of history is the real job of the strategist, and it’s hard.  Take a straightforward question:  Would the US leaving Iraq in 2007 be more like the US leaving Vietnam in 1975, an act with relatively small geopolitical ramifications, or like the Soviets leaving Afghanistan in 1989, an act of utmost consequence both for the Soviets themselves and for the jihadis they left behind.  One of those analogies is more correct, but which one?

At least, the generals cited so far were re-fighting battles they had won, the first time around.  How smart is it to hang on to a losing strategy?  In the normal course of history, the losers figure out what happened, come up with a better solution, and do better the next time.  After losing WWI, the Germans thought about the problems of trench warfare, and their innovations swept the field in 1940.  They had fewer and poorer tanks and aircraft, but they had developed superior tactics, strategy and execution.   Contrast them to the punching bags of history, generals who lost time and again, without a glimmer of insight.  The Austrians never had a clue what Napoleon was up to, and Union commander George McClellan never understood Robert E. Lee, so both the Austrians and McClellan got drubbed, repeatedly.

IP strategy seems to fit the latter mold, sad to say.  The dot-com era reads like a corporate version of Napoleon’s Ulm-Austerlitz campaign of 1805, with corporations playing the Austrians, watching helplessly as Napoleon first surrounded and captured one army and then executed a tactical masterpiece to rout another.  The dot-com battles of the 1990’s saw fortunes and reputations made, first in Silicon Valley, followed by Silicon Alley and other clones springing up across the landscape.  Then the crash took it all back, leaving a trail of empty office buildings, idle fussball tables and worthless stock options.

Almost a decade later, what lessons have we, the IP community, drawn from those events?  Based on the way we are approaching today’s battles, not many.  It’s time to start that process.  This article focuses on ideas that animated the dot-com era, but which proved ultimately disastrous.

IP in the Age of Dot-Coms

The relationship between the Internet phenomenon and the Intellectual Capital movement is a story for another time and venue.¹   For present purposes, suffice it to note that this line of thinking, spearheaded by people such as Patrick Sullivan from the consulting / academic world,  James O’Shaughnessey from the corporate sphere, and Thomas Stewart, from journalism, sought to refocus attention from physical to intellectual assets.  The phrase “from bricks to clicks” encapsulates their idea and demonstrates their influence.

The very essence of dot-com era IP was distilled into a single book, Rembrandts in the Attic,² published in late 1999, almost exactly at the high tide mark.  Describing this book as the most influential and popular ever written about IP falls well short of doing it justice.  “Crossover” is a word that fits, suggesting its broad appeal to IP professionals as well as business people, technical managers and the person on the street.  Readable, succinct and direct, it pulls no punches in describing exactly how one should – no, must – use IP to achieve success.

Rembrandts so perfectly captures the spirit and the process of the dot- com era that it provides a window and a point of analysis for the age. The book does not generalize, but one can dig below the level of prescriptive commands to extract three fundamental concepts.  First, IP is the key to corporate success.  Those who use IP correctly will win.  Second, IP strategy is the central task of modern management.  Successful corporations must find and nurture managers who understand IP.  Finally, firms must pursue and enforce IP rights, particularly in key business processes.

These ideas were presented as the IP equivalent to the atomic bomb.  In retrospect, they seem closer to Maginot than to Oppenheimer.

IP as Panacea

Central to the Rembrandts message is the notion that IP, and patents in particular, is the most important factor in corporate success.  Headings tell the story:  “Without patents, the future of your business may be owned by someone else,” “Billions at stake in e-commerce patent rights,” “Patents will be key in determining winners and losers in business competition.” Manufacturing, sales and other management skills no longer matter, as “inventors who once tried to build better mousetraps today nurture the hope simply of coming up with an idea for one.”

The narrative explains that the model new age business produces IP, not products, either directly, like Walker Digital, or as a trading commodity, like Yet2.com  A featured example is Real3D, a Lockheed spin-off consisting entirely of hitherto-unused flight simulator patents.  As described, “a group of fallow patents valued on Lockheed’s books at exactly zero was turned into a 40 percent stake in Real3D that is today worth upward of $100 million.”³

This mode of thought is well illustrated by an historical analogy suggested by the Rembrandts introduction, comparing changes in the IP environment to “the World War II-era advances in long-range bomber and carrier design that enabled nations for the first time to project their air power anywhere on earth.”  The analogy to strategic bombing, particularly in the European Theater of World War II is highly pertinent, because both notions – the primacy of strategic bombing and that of IP – present clear examples of self-proclaimed panaceas that didn’t pan out.

Between the World Wars, airpower advocates in both the US and Britain had developed a doctrine that a war could be won, quickly, by heavy bombers, without any assistance from other forces, air, naval or ground.  American planners had devised a chokepoint approach, called “industrial web theory,” and their detailed calculations proved, for example, that New York could be completely immobilized, for months, with as few as 18 500-lb. bombs.⁴   The strategy reduced to British Prime Minister Stanley Baldwin’s dictum, “the bomber will always get through.”

It didn’t.  The RAF quickly suffered heavy losses and abandoned daylight bombardment.  That precluded any precision, of course, rapidly leaving the RAF aiming at cities, not factories.  The target had supposedly become the workers’ homes, destruction of which would destroy morale.  The US Army Air Forces brought a stronger commitment to daylight precision bombardment, and with the B-17 Flying Fortress, it seemed to have the right weapon for that mission.  In late 1943 both the Americans and British put their theories to the test in coordinated assaults.  The Americans struck deep into Germany in a series of attacks culminating on the infamous Black Thursday raid, against the Schweinfurt ball bearing works.  On that day, 357 B-17’s penetrated German airspace; 65 failed to return, and 17 more were so damaged that they never flew again.  In the same period the RAF mounted their “Main Offensive,” climaxing in 19 heavy attacks on Berlin, fully expecting to knock Germany out of the war.  To the contrary, Berlin suffered only minor damage, and the RAF lost over 600 bombers. Without help, the bomber did not in fact get through. ⁵

That is not to say that heavy bombers made no contribution to victory in Europe.  They played an important part, but they did it with the assistance of fighter escorts, and the Army Ground Forces, and the Navy.  Toward the end of the war, with virtually no opposition and rapidly increasing numbers of available bombers, American B-17’s and British Lancasters reduced Nazi fuel supplies to a trickle and strangled the transportation system.  By the time these effects began to be achieved, however, ground forces of the US / British armies from the West and the Red Army from the East had broken through to the Reich itself.

Allied strategic bombing was based on the premise that heavy bombers could penetrate enemy airspace, effectively destroy targets, and return to base without unacceptable loss.  That strategy claimed priority for itself, absorbing tremendous quantities of resources, as well as horrific casualties.  The bombing campaign cost the British some 55,000 aircrew, about the number of officers lost on the Western Front in WWI.  What the bombing did achieve was the deaths of over 500,000 German civilians and the utter devastation of German cities.

That strategy suffered from reliance on a panacea.   Bomber advocates were true believers; they sincerely thought they held the key to victory.  So, they oversold successes, minimized failures, and saw every fact through the prism of preconceived doctrine.  As General Jimmy Doolittle said in 1945, “we talked about air power in terms of promise and prophecy instead of in terms of demonstration and experience.”⁶

Unescorted patents in the dot-com wars didn’t fare any better than the bombers.  Rembrandts’ description of Real3D’s worth was actually obsolete when published, as that company had in the meantime closed its doors, dogged by failures to execute on actual products and a profitable business model.⁷  Yet2.com, a widely-hailed platform for trading IP, survived, though it largely disappeared from sight.  It scaled back operations from 30 employees to around 20, and it never went public.⁸  And most spectacularly, of all, the story of Walker Digital is set out below.

Rembrandts was vocal, and it was influential, in preaching the IP gospel, but it was not alone.  Consider the following:

• “[People need] to start recognizing that measuring and strategically managing intellectual capital may in fact become the most important managerial activity as we enter the third millennium.”⁹

• “Intellectual property has become a principal driver of the world economy. Those who harness the power of intellectual property will succeed and thrive in that economy; those who don’t will not.”¹⁰

• “Intellectual property, in all its myriad forms, has become the leading product of the U.S. economy.”¹¹

Switch the context and it would be difficult to separate the airpower advocates from the IP theorists.  Give us everything we ask, they both say, and do as we say, and victory will follow.  In reality, promise and prophecy fell short when put to the test in both cases.

IP Management as Critical to Success

Rembrandts’ second notion held that companies require managers who understand (and believe in) IP.  Starting with the entrepreneur and working down through the CEO, management and the entire company, the modern corporation will be successful if, and only if, managers live and breathe IP.

Rembrandts offered role models proving the efficacy of that idea, led by the bold entrepreneur, who took great ideas, patented them quickly, and then extracted value all the way to the bank.   Jay Walker epitomized this model, and his company, Walker Digital, was presented as “an intellectual property laboratory modeled after Thomas Edison’s” lab. Aimed at generating not products but companies, Walker Digital first spun off Priceline.com, receiving stock that after only a year was worth “a phenomenal 1 billion.”

Also required was a CEO who “got it,” who understood the crucial position of IP and organized the corporation accordingly.  Rick Thoman, CEO at Xerox, was the shining example, portrayed in section headings as leading “The New IP-Savvy Xerox” and “Xerox: The Next IBM of Patent Licensing?”  He was portrayed as having a strong belief in licensing, committed to grow the company’s licensing revenue from $8.5 million to $180 million over five years.  We are advised, “Don’t be surprised, however, if their royalties are easily double that amount.”  Even an IP-savvy CEO would not be effective without a committed team, of course, and here Rembrandts singled out the IP managers at Lucent, who had fashioned a new type of business “whose object is to make a profit from licensing patents.”  That business was already earning several hundred million dollars annually.

Expanding the view to an entire company, Dell Computer was brought forward as an exemplar of strategic patent employment.  Unlike Wal-Mart, which depended on its business execution expertise, but “didn’t patent this vital choke point in its operation,” Dell had filed patent applications covering the manufacturing distribution and marketing methods used in its build-to-order sales system, patents that would bee “truly critical to the PC maker’s stunning success.”¹²

Broad, sweeping visions, to be sure, but a perfect rendition of dot-com spirit.  As noted, the book was a smashing success -- excerpted in Atlantic Monthly, a Book of the Month alternate, and a Money Book Club main selection.  The timing was perfect -- Irrational exuberance was rampant in the land, and NASDAQ was within months of its all-time high.  Dow 36,000 had also just been published, proving the imminent tripling of the Dow-Jones Index. 

Over a shockingly short time, though, Rembrandts’ pantheon of IP wunderkinder crashed back to earth.  Jay Walker’s Priceline.com rose to $104 a share, but by November 2000 it had dropped to $2.18.  Walker Digital had laid off 100 of its 135 employees, had bailed out of its internet grocery business, and was being investigated by the State of Connecticut for labor law violations.  Walker’s stake in Priceline had grown from the “phenomenal” $1 billion to $5.2 billion, and had then plummeted to a mere $131 million.  Overall, he is reputed to have lost $15 billion in a week.¹³ 

Rick Thoman, Xerox CEO, was featured in a cover story in Business Week, but the title, in gigantic letters, was “Downfall.”  He was abruptly fired in May 2000, in the midst of a “corporate civil war.”  At Lucent, the management team took their stock from a high of over $80 in late 1999 to 55 cents in 2002.   The company had lost the technology race to Nortel, and Wharton School management professor Lawrence G. Hrebiniak described management as failing "to formulate competitive strategies."¹⁴

In short, IP strategy did not cure bad management.  That fact emerges even more strongly when one turns from the shooting stars of the dot-com era to a solidly successful company, Dell Computer.  Notwithstanding the hype of 1999, and acknowledging the effort underlying Dell’s portfolio of about 1200 patents, one searches in vain for any hard evidence that Dell’s patents were “crucial” to that success.¹⁵  Rather, the key to Dell’s performance can be found in its ruthlessly efficient supply chain management system.   Patents did not block competitors from the build-to-order field – both Gateway and HP tried to compete there.  But thanks to its SCM system, Dell was the only one who could make money there.¹⁶

The Enforcement Imperative

Above all, the Rembrandts message declared, companies in the new IP age must aggressively pursue patents on their key business processes, and then wield those patents to quell competition.  The bookpainted a particularly titillating picture here, showing a supposed darling who had actually sinned, and predicting an imminent accounting for those transgressions.  The disaster-in-waiting was Amazon.com, viewed by the masses as the leading light of clicks versus bricks.  But that success was hollow, Rembrandts revealed.  Amazon did have a strong brand, but it had obtained only three patents, and those covered only non-core technologies.  The prognosis was dire, and it bears consideration at length:

Amazon’s commercial fortunes would have been far better served had it patented technologies truly strategic to its business, such as the one-click ordering system that the company pioneered and that is used widely by on-line retailers today.  That was a real business method choke point… that Amazon could have controlled to no small advantage.  But as it is, without that proprietary advantage and with its brand strength eroding, companies like Virgin Records and PetSmart are unafraid to compete directly against the giant on-line retailer.  Don’t be surprised if Amazon’s stock market fortunes head south when investors realize this fact.¹⁷

Amazon was exposed as an IP apostate, failing to patent its one-click process.

As we now know, Jeff Bezos had already drunk the Rembrandts kool- aid.  Amazon had filed a patent application covering the one-click method, and a patent issued shortly before Rembrandts did.  The patent itself raised some hackles, but then Bezos took the fatal step and applied the Rembrandts enforcement prescription, loding an infringement action against Barnes & Noble.  For a company that depends on its reputation with customers, the ensuing furor can only be described with words like “debacle” and “disaster.”  A Boycott Amazon movement took off,  led by Tim O’Reilly, noted publisher of software guides.  The professional software community expressed outrage, including a protest from Paul Barton-Davis, one of Amazon’s founding programmers.  Within days, Jeff Bezos appeared in public, virtually apologizing for filing the patent application in the first place, and opining that folks really ought to focus on reforming the patent system, anyway.  In a scene from Kafka, or perhaps Mel Brooks, both Bezos and O’Reilly noisily contributed to BountyQuest, an internet-based company set up specially to facilitate invalidation of software patents by gathering and publishing prior art.¹⁸

Juts as the noise level dropped, the lawsuit blew up in Bezos’ face.  The District Court had granted a temporary injunction, but the Federal Circuit quickly vacated it, holding that “BN had raised a substantial question of invalidity” regarding several examples of prior art.  The judges didn’t say “Invalid,” but that word might as well have been written in red on the cover sheet.  The case returned to Seattle, and Amazon dutifully reaffirmed its faith in the patent’s validity, but a settlement was announced a matter of months later.¹⁹

So, Amazon followed Rembrandts advice to the letter, and it achieved the worst of all possible worlds:  It hemorrhaged customer goodwill and reputation over the patent, exacerbated by the suit.  Then, it undoubtedly spent gobs of money fighting for the injunction and arguing the appeal hearings, only to face the unthinkable but probable result of having the patent declared invalid.  Although the settlement details were never announced, no one doubts who won and who lost.

What Amazon did achieve was poster child status as the patent that never should have issued.  James Gleick, writing in The New York Times, commented, “When 21st-century historians look back at the breakdown of the United States patent system, they will see a turning point in the case of Jeff Bezos and Amazon.com.”²⁰  Nowadays, whenever one wants to cast aspersions on the possible validity of a patent, or to criticize the Patent Office quality standards, they simply mention “Amazon One-Click” and the point is made instantly.  Perhaps the most lasting effect was severe embarrassment for the Patent Office, which loudly proclaimed a standard-raising and quality improvement program.  And even with the passage of years, more grief lay in store, as an enterprising New Zealander succeeded in provoking a re-examination of the One-Click patent in early 2006.²¹

Lessons Not Learned

Had such events played out in the realm of politics or statecraft, they would have been analyzed, discussed and assimilated.  Look at the intellectual ferment that followed WWI, with strategists and intellectuals such as Basil Liddell-Hart, J.F.C. Fuller and M. N. Tukhachevsky led a noisy and vibrant debate, all agreeing that the ideas of the Great War just didn’t work, and vigorously looking for new solutions. 

In the IP world, that just hasn’t happened, however.  Notwithstanding the simple fact that our strategies produced financial versions of Verdun and the Somme, the reaction has been complete silence.  To all indications, no one has even thought about IP strategy of the dot-com days, much less how those ideas affect us today.  Instead, books and articles come along in a steady stream, focused entirely on the present and pretending nothing amiss ever occurred.

Take, for example, Business Power: Creating New Wealth from IP Assets, edited by Robert Shearer and published early 2007.²²  The book collects short pieces on all aspects of IP management, from a variety of people from law, business and academia, all of whom seem to know their subjects and have something to say.  The book really is very good, and among other excellent pieces, it contains perhaps the best description to be found anywhere on integrating business and IP strategy.

That said, it must also be noted that Business Power lives in the same historical time warp that characterizes the genre.  Early on, the following statement appears:  “Texas Instruments, Xerox, IBM, and a few others, have quietly pioneered the use of IP assets, not just to build market share but to generate new revenues at virtually no cost.”²³  But wait!  Xerox!?!  Didn’t we just see Xerox featured in an article entitled “Downfall”?  Clearly, then was then, now is now.  On patents as panacea, one author opines that “extracting value from intellectual property has become a business necessity”²⁴  Another, taking up the notion that IP management is the central concern of business, notes, “IP management has dramatically shifted from a purely legal concern to a pervasive business interest that is vital to corporate survival and prosperity.”²⁵  And on the necessity for litigation, this observation:  “One of the shifts in contemporary thinking taking place today is the realization that patent litigation can add significant value to the enterprise.”²⁶

And this from a good book about IP.

Nowhere in Business Power, much less from the stream of writing, websites and seminars, does one hear, “New revenues at no cost?  Let’s recall what happened the last time folks talked like that.”  We don’t need preaching, and we don’t need finger-pointing, but we do need analysis.  Maybe there was nothing wrong with the concepts discussed here – maybe a lot of companies were just unlucky.  Or, maybe not.  What we really need is someone saying, “Let’s think about this,” and, “Hey – Let’s be careful out there.”

Endnotes