Debunking Ken Brown's 'Outsourcing and the global IP "devaluation"'

by Terry Vessels

This writing is protected in the United States by the freedom of speech guaranteed in the First Amendment. Since Mr. Brown's work is political in nature, and discussion of it requires reproducing that copyright protected work, parts of his writing are reproduced below, with inset margins to indicate that it is quoted. Omitted portions are indicated with "[...]". Mr. Brown's original was seen at http://www.adti.net/outop.htm . The omissions are not for the purpose of mischaracterizing Mr. Brown's writing, but rather for my own protection against retaliation. Fair use doctrine may not apply to the copying of an entire work, even for purposes of criticism or review.

It looks like the Alexis de Tocqueville Institution is once again coming to the aid of Microsoft. As usual, facts are the first casualty.

I do not defend the current trend of outsourcing; I suspect it is far overdone, by businesses which are merely 'jumping on the bandwagon'. I do, however, attack Mr. Brown's use of that buzz-word to glorify "IP". His whole piece appears designed to drum up grass-roots support for the imposition of the broken U.S. software patent system on the world. Outsourcing is something that will grab the attention and the emotions of people right now. He tries to tie that emotional button to protection of "IP", while muddying the definition of "IP" to make it some mystical power that is uniquely U.S. and is the only thing providing value to U.S. corporations. It is Red-baiting for today, with the goal of perpetuating the software patent racket.

In a widely quoted study, Baruch Lev of the Brookings Institution reported that in 1982, 62% of the market value of companies in the S & P 500 Index could be attributed to tangible assets, and only 38% to intangibles. By 1992, Lev noted, the ratio had essentially reversed: 32% of the assets for S & P companies were tangible, while 68% were intangible. A follow-up study by Brookings in 1998 reported that the asset ratio had shifted even more, with 85% of assets intangible, and only 15% tangible.

It appears to me that the market has slowly gone insane. Instead of placing greater value upon the actual assets a company owns or produces to generate revenue, the market appears to be placing a greater value on those things which are ephemeral. History is filled with patent-holders who went broke, producing nothing but litigation in defense of the patent. Those who actually produce something that people will spend money to have, seem to fare better than those who rely upon legislation to force royalties to be paid. In other words, the law of supply and demand, whether for goods or services, is more reliable as an income-producer than legislation.

While similar findings have been pointed to in hundreds of journals and reports, few observers have made the connection to the fact that the devaluation of U.S. intellectual property is directly linked to the widespread export of information technology jobs to foreign countries.

This is a giant leap. I see nothing to support the multiple conclusions in this paragraph. First, where are these "similar findings"? Where did the assertion of a devaluation of U.S. "intellectual property" come from? What "intellectual property" is Mr. Brown referring to? Copyrights? Trademarks? Trade secrets? These are very different animals, with very different laws surrounding them, even if you limit the discussion to the U.S.A. alone. Perhaps "few observers have made the connection" because there is no connection to be made. Perhaps "intellectual propery" has only an artificial value, completely dependent upon the laws, and their enforcement, within any given region of the world.

Instead of the real value of providing, for example, a quick and effortless burger to a hungry customer, Mr. Brown seems to believe it is more valuable to own "intellectual property" somehow associated with providing those burgers. Or, to stay within the "information technology" realm, Mr. Brown appears to think it is better to own some "intellectual property" associated with "information technology" than it is to actually provide some information service a customer wants to buy. This despite the fact that the laws surrounding copyrights, trademarks and trade secrets are very different within any given country. For example, Microsoft, one of the supporters of the Alexis de Tocqueville Institution, has failed to assert a trademark on the common word 'windows' in U.S. courts. So they went court-shopping in countries where the word is not common, in order to use laws in those countries to combat a competitor they apparently felt they were incapable of dealing with in the market.

Our haste to embrace globalization is one of the clearest culprits.

[...]

It almost seems as though the more evidence there is of piracy in a country, the more information technology business and investment we bring in.

[...]

While many would argue that intellectual property theft abroad does not have a significant impact on our economy, the math provides the grim truth. If 85% of the assets of the Standard Poor 500 shrinks by even 1% percentage point, it devalues U.S. corporations by billions of dollars.

It is not clear to me that "our haste to embrace globalization" is a culprit at all. Where did this "piracy" come from? Is there raping and pillaging on the high seas again? What "intellectual property" is being stolen? Copyrights? Trademarks? Trade secrets? How does this relate to globalization? That devaluation is again an indicator of an insane market which places higher value on pieces of paper which can be used to litigate and force royalty payments rather than tangible goods and services that people want to buy. The stock market appears to be basing it's assessment of the value of these corporations on smoke and mirrors, rather than on supply and demand, if Mr. Brown's assertions are correct.

Second, while worldwide IP enforcement needs drastic improvement

[...]

Why are workers abroad able to produce our technology at all? The reason is because they know how to -- because they have our intellectual property.

Is Mr. Brown suggesting that all the world adopt U.S. copyright, trademark and trade secret laws, along with a worldwide police force to make certain that all world citizens pay tribute to those pieces of paper? What is this "our technology" that Mr. Brown is so miserly with? Computers and software are not exclusively owned by the U.S. This should be completely obvious, even to Mr. Brown. People in countries other than the United States are capable of writing software. They do not need "our intellectual property" to do so. Unless Mr. Brown thinks education and thinking are "our intellectual property". It might be an enlightening experience for Mr. Brown to converse with citizens of other countries. He may be surprised to learn that they are not all slavering criminals, intent on the relentless "piracy" of "our intellectual property".

Generally speaking, when you talk to technology firms about IP and outsourcing, their response is either a) we know that they are stealing our intellectual property, but we have no choice but to do business there---and “hope” with our presence, piracy slows down b) we know that they are stealing our intellectual property, but it is not significantly affecting our bottom line or c) just because we show foreign companies and workers how to build our technology, it is not affecting our bottom line, because the intellectual property stays in the U.S.

Which "technology firms" are saying this? Where are the quotes, the persons, the references? And again, what "intellectual property" is being referenced? Lumping the complex legal entities of copyrights, trademarks and trade secrets together is nonsensical. Copyrights involve the use of laws to encourage authors to produce, by protecting them from exploitation by unauthorized publishers. Trademarks are simply symbols of companies, which symbols may be protected from use by others, depending on the laws of the part of the world involved. Trade secrets are those processes developed by a company and protected from disclosure by that company, in hopes of an advantage over the company's competitors. The laws surrounding trade secrets are generally limited to punishment for those who use illegal means to reveal such secrets to the company's competitors.

While the hubris of the first and second responses is predictable, the third response is more problematic than the first two. Today, intellectual property is not just patents, copyrights and trademarks, it is processes, techniques, methodology and talent; described by many experts as intellectual capital.

[...]

The "hubris" is Mr. Brown's, since no references were supplied. Who made the statements? Mr. Brown finally attempts to define "intellectual property", but leaves out trade secrets while actually listing things which fit within the realm of patents and trade secrets. The "talent" item is a bit strange. Does Mr. Brown suggest that people, the only source of talent, are the "intellectual property" of companies? Are we to bring back slavery for the sake of the bottom line?

It is patently false to state that when we outsource IT jobs overseas, we are not devaluing U.S. IP.

[...]

Since "IP" is artificially valued, the devaluation comes from reality. Instead of using courts and police to maintain the artificially set value of those patents, trademarks and trade secrets, it appears that those companies which rely upon providing real goods and services are less concerned with that devaluation than Mr. Brown's supporters. Perhaps these companies realize that providing something people are willing to buy is more profitable in the long run than suing their customers over "IP".

Many U.S. firms are not only devaluing intellectual property via outsourcing, but are also embracing business strategies to devalue (and if necessary, eradicate) their competitor’s intellectual property. Open source software, also described as free software, is the neutron bomb of IP.

[...]

If customers only want to use free software, they will buy more hardware and services because there is no additional cost for software. Moreover, with no software costs, even hardware development, etc. becomes even cheaper. Active international campaigns (many sponsored by U.S. companies) have skyrocketed free software adoption around the world.

Is Mr. Brown thinking of The SCO Group's claims in their lawsuit against IBM and others? His comments regarding "competitor's intellectual property" certainly match The SCO Group's (thus far unsubstantiated) claims. Mr. Brown should realize that business is tough. Competitors compete for customers. If a company can provide what a customer is willing to buy, using software that does not snare that customer and force endless re-rentals of that software, naturally it will devalue the software that relies upon customer lock-in and continual customer re-rental. Bottled water companies do not pretend to sell magic, as some software companies seem to do. Bottled water companies compete to provide a better value for a commodity service. If the companies Mr. Brown seems to be crying about cannot provide customers with better value after those billions of dollars of research then their "IP" is really not that valuable after all. It appears that the free software is the better real value.

Open source software is not also described as free software, except by those who either do not understand the distinction, or who deliberately choose to confuse others about the distinction. All software that is free, as in speech, not necessarily in price, must of necessity be open source, for the user cannot be free to adapt it, examine it, improve it and share it without access to the source code. Software which fits the Open Source Initiative's definition is certainly also free software. But there are those who claim merely revealing the source code makes their software "open source", even as they use laws to prevent the user from doing anything with that revealed source.

I sincerely doubt that IBM's commercials are the sole reason for the "skyrocketed free software adoption around the world". I really suspect that this adoption is mostly because it makes sense. A business can get software for zero licensing cost that does a better job than software that has a continually increasing licensing cost. Which appears to be the more sensible one to choose?

A business can get software which comes with the source code, allowing them to hire in-house programmers to maintain and improve the software while at the same time taking advantage of the global network of programmers also continually improving that software. Contrast this with the secretive, "IP" protected software that Mr. Brown appears to value so highly. That secretive software cannot be altered or copied by the business without risk of severe punishment under the law. The business must place its entire "IT" at the whim and mercy of that software subscription renter.

However, the open source strategy is a triple-edge sword. First, most free software such as Linux, (the most popular because of its operating system capability), comes with a license that dictates that any all development of the product (which would have been valuable intellectual property) becomes community property and must subsequently become free as well.

[...]

While some may argue that Linux only impact the business software sector, BSA reports that the business market for software is over $160 billion.

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The bottom line is this: a non-IP future means that all companies in the Baruch Lev study go to from 85% to 0% in intangible asset value.

Here we encounter a complete and blatant falsehood. Linux is released under the General Public License (GPL) which does not, as Mr. Brown wrongly asserts, "dictates that any all [sic] development of the product (which would have been valuable intellectual property) becomes community property and must subsequently become free as well." The GPL addresses distribution. It is conditional permission by the copyright owner(s) to copy and distribute the copyrighted work. The copyright remains with the copyright owner(s). However, if you distribute the work, in original form or modified, you must distribute it under the same GPL terms. If you do not distribute, the GPL does not apply. The U.S. Defense Department, for example, could develop highly specific and secretive modifications to Linux without ever distributing those modifications. That would ensure that the modifications never came under the terms of the GPL.

Why does Mr. Brown quote the BSA, which is the license policing arm of Microsoft? Could it be that Microsoft is the only one getting really scared of all this excellent free software that businesses are adopting so rapidly? Why should all businesses around the world be forced to remain subservient to Microsoft's bottom line? If they can do the job better without Microsoft's product, and do it much more cheaply, then Microsoft's product is not quite so valuable. That's business. The world does not owe Microsoft a perpetual profit.

Mr. Brown's fantastic leap which leaves "all companies in the Baruch Lev study go to from 85% to 0% in intangible asset value" strains incredulity. Is software the only intangible asset owned by companies today? Where is this strange study, and does it really make such a bizarre claim? I suspect the only business that will go to a 0% value will be those which fail to pay heed to the fact that customers generally expect value for money paid. Shoppers shop. If Joe's Service Station does a better job for a lower price than Bill's Service Station, customers will flock to Joe's.

In conclusion, while it is debatable whether outsourcing can be described as just another business solution or the hemorrhaging of the IT industry,

[...]

Unless intellectual property assets are better protected, we will soon see information technology firms resorting to draconian measures even worse than outsourcing.

In conclusion, Mr. Brown seems more worried about policing the world to maintain the profit margin of buggy whip rental companies than he is about companies producing real goods and services that real people are willing to buy. Mr. Brown continually, and I suspect, deliberately, tries to lump the varied legal constructs of copyrights, trademarks and trade secrets into one apparently holy "intellectual property" package, which he then seems to believe is the foundation and exclusive province of the U.S.A. He does not seem to credit U.S. business people with much sense, as he continually warns that their business decisions with respect to "IT" are somehow, incredibly, going to result in the destruction of those same businesses' value.

My closing question is what "draconian measures" is Mr. Brown alluding to? Is Microsoft about to do something really nasty to prevent all that rapid adoption of better products by their once-captive customers?

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