Software and Computer Industry Perspectives

Testimony by
Emery Simon
The Alliance to Promote Software Innovation
November 30, 1995

Before
the
Federal Trade Commission

Mr. Chairman:

My name is Emery Simon. I am the Executive Director of the Alliance to Promote Software Innovation (APSI). I would like to thank you for giving us the opportunity to appear before you today.

This important series of hearings is of special interest to American software and computer companies because "innovation" is the single most meaningful ingredient in our industry's success--it constitutes both the critical building blocks as well as the mortar of our competitiveness and prosperity. In our industry, innovative, growing and competing sets of technologies constantly cause companies to redefine themselves. Moreover, this rapid pace of innovation and high levels of competition tend to rapidly dilute the market-place acceptance that any one company may develop. Over the past decade we have seen wave after wave of once successful products eclipsed, and often fully displaced, by new and better alternatives.

It is our understanding that your goal for these hearings is to elicit information about how innovation and technology affect competition as we enter the 21st century. In this connection, I will address two issues:

• The importance of maintaining strong, comprehensive and consistent protection of intellectual property rights, because it is essential for continued innovation and competition in our industry, and not subjugating such protection to policy goals which are better pursued through other means.
• The appropriate role of standards and the means for setting them in a timely and efficient manner.

Before turning to these specific issues, I would like to take a few minutes to describe to you the context which forms our outlook and positions.

Information is Driving Our Economy

Software and computing are at the heart of the information industry. Already today, pervasive access to information is transforming the nature of the domestic and international economy, and it promises far more ubiquitous change in the near term. Reduced to its essential elements, harnessed and applied information consists of using software and computing tools to create, access, use and distribute information.

• First, harnessed information is generating demand for a wide array of new products and services which rely on advanced computers and sophisticated software. This has, and will continue to produce new opportunities for expanding the technology base, thus creating new high paying, high skill jobs.
• Second, new applications of digitized information will offer businesses large and small, as well as all persons, regardless of their location or economic position, access to the latest information in such areas as health care, education, asset management and manufacturing.

Software and computing constitute the critical component parts of such harnessed information. The twin effects of technological change and consumer demands are causing computers to become more mobile, and to perform functions unobtrusively and intuitively, with minimal input from the user. Computing has evolved from the data processing center, to the desk-top, and into the briefcase. We are moving toward information and content becoming available in pocket-sized devices, which we carry with us very much like we carry a wallet or a set of keys.

Fully attaining the economic benefits of harnessed information requires policies which promote relentless innovation. Over the past decade, wave after wave of innovation has made our products:

• more adaptable--positively predisposed to incorporating technological improvements and flexible enough to apply them quickly;
• more compatible with products made by competing vendors;
• more accessible to diverse users and service providers;
• more reliable; and
• more affordable.

The American and global software and computing industries are thriving: the benefits of continuous software innovation permeate much of the American and international economy. Today, global computer and software sales exceed $400 billion per year, increasing ten fold in the past twenty years.

Software has one very special characteristic: it improves the competitiveness of other industries which utilize software products to make themselves more innovative, efficient and competitive.

Today, every governmental, academic and industry study of technologies that are key to future economic viability has identified the essential role played by the software industry. Here are some facts about our industry:

(1) Software is the fastest growing industry in the United States. Between 1980 and 1994, the computing and software industries grew at an annual rate of over 28 percent, while our overall domestic growth was less than 3 percent per year.

(2) It is now larger than all but five manufacturing industries, and combined, computing, software and semiconductors account for over 1,200,000 U.S. jobs, and the Commerce Department estimates that over the next ten years, employment in our industry will increase by 56 percent, creating over 600,000 high-wage and high-skill jobs.

(3) It contributes to the economy of virtually every state in our country, and every nation around the world.

(4) It has achieved tremendous success in the international marketplace. American off-the-shelf software accounts for 70 percent of the world market, and exports exceed 50 percent of the software industry's output.

Notwithstanding this impressive record, which we believe is fully a result of our ability to innovate, the industry's role in the growth of the nation's economy will become even more important as new and advanced technologies continue to evolve. Moreover, the American software industry has produced these impressive results without government sponsored programs or intervention.

Private ventures are already developing and deploying the critical software, content and communications elements. Over the past months we have witnessed the establishment of a broad array of new enterprises, joint ventures and business alliances as companies get ready for the digital future. Driven by consumer demands, we expect this trend to accelerate over the coming months and years.

The Importance of Sound Intellectual Property Protection

From a business perspective, the precise contours of an information rich future are still uncertain. We know that no one individual, company or even industry will shape the many technological and economic choices ahead. We are certain, however, that strong intellectual protection--in the form of copyrights, trademarks and patents--is indispensable for our future success.

For our industry, copyright protection in particular is necessary to instill confidence in the owners of software and other works that their products will not be subject to piracy and unauthorized use. Notwithstanding the tremendous success of the software industry to date, piracy- -unauthorized duplication and/or distribution of software--remains a major, continuing threat. Worldwide, we estimate that the industry loses about $15.2 billion annually due to piracy.

Since the 1980 amendment of the Copyright Act, the U.S. software industry has been a great success story. In no small measure, this success has been the direct consequence of the copyright law achieving its intended goal: to purposefully "promote the progress of science and the useful arts."

Congress has imposed only two conditions on the copyrightability of any work, including computer programs and all others: that the protected work be "original" (i.e., not be copied from another) and that it be fixed in a tangible medium (whether paper, canvas, cassette tape, or a computer disk or chip). The Act does not impose any special rule with respect to the level of required originality, the mode of fixation, the presence, absence, or degree of useful application, or the commercial or other merit of computer programs, or of any other literary work.

The attraction of the copyright system for our industry lies in its balance. It is broadly available to protect original creative effort, yet does not forestall competition among those seeking to reach similar ends through independent means. It serves the public interest by fostering creativity, innovation, and improvement among both the first and later comers to a market; and by leaving ideas and methods freely available to all who would fairly compete to exploit them.

Though arguments are posed for ending copyright protection once a product has attained wide-based success in the marketplace, such arguments have no relevance at all to copyright law and the successful application of that law as it has evolved over two hundred years. Would be competitors of particularly successful programs argue they should be permitted to make their competing products look the same as the original by "borrowing" its "distinctive characteristics." It would be "inefficient", it is said, to require consumers to re-learn how to use a new piece of similarly functioning software.

We believe these arguments stand copyright on its head, since it would perversely ration copyright protection so that the most successful works obtained the least protection. The fact that a particular piece of software has become sufficiently popular that some label it a "standard," does not give its copyright owner an unfair advantage in the marketplace. Others remain free to create and market a competing non-infringing product that will perform the same functions and, if better or cheaper, will likely supplant the original. This has repeatedly happened in the software marketplace as, for example, the early market leaders in word processing, spread-sheets, database management, and communications software for microcomputers have all been replaced at least once by works of their competitors.

The Role of Standards

We recognize that for computers and software to perform as true information appliances, end users must be able to use those devices in conjunction with a variety of products made by different companies. Thus, we believe that ensuring compatibility is an indispensable element of a dynamic and competitive industry. We also recognize that achieving these goals requires consumer choice among devices used to access information.

We know from experience that private sector initiatives can effectively establish needed standards. Standards in our industry have been, and are being, developed efficiently through private voluntary efforts, driven by marketplace dynamics and consumers' demands. Technologies incorporated in these standards are regularly licensed on commercial terms.

We do not believe that public policy goals, or generalized competition policies require or justify government intervention in setting standards for the way information is created, processed and used by consumers in their homes or offices. Such standards are far more efficiently set by the marketplace and through voluntary industry led efforts. We also disagree with the presumption that the intellectual property rights inherent in these technologies stand in the way of public policy goals.

Three basic considerations lead us to these conclusions:

• First, overly broad regulation and administrative proceedings could undermine the incentive of companies to invest in new technologies -- including technologies subject to protection under our Federal intellectual property laws.
• Second, setting standards too early in the development of key technologies would lock us into technologies which will ultimately retard further innovation.
• Third, we fear that government intervention could drastically change today's successful, open, voluntary, private-sector-led, consensus standards development process in the important technology area of the information marketplace.

As a general matter, it should be noted that a market which is growing at 28% per year does not on its face appear to be remiss in meeting the needs of its customers, whether for "open systems" or other requirements. Given this growth pattern it would appear that vendors are stepping in to fill customers' needs whenever some vendors are at all remiss in meeting their customers' requirements.

Our companies devote a huge amount of time and resources to developing new technologies. Their success in the marketplace is directly related to their ability to provide superior products which gain broad consumer acceptance. A critical element of this mix, is being able to distinguish these products from those of competitors, based on performance, features and quality. Effective intellectual property protection for these innovative technologies is a critical element. We believe that "open" and compatible systems are being implemented in circumstances where intellectual property rights are present, as well as where they are not.

A term often misunderstood in this context is the concept of "open". This term is used both correctly and incorrectly.

In our industry, the term "open systems" is used in two ways. Some have characterized a system as "open" if the developer, as a matter of business strategy, chooses not to assert any intellectual property rights which may subsist in a specific technology, thus others can use that technology freely. While this is a proper characterization, "open" systems can also consist of technologies where some form of intellectual property is involved in connection with their use, thus while permission--generally in the form of a license--is needed, such permission is readily available to all vendors, service providers and users on marketplace established terms through contracts, licenses or other voluntary means.

The term "open" is also used in an incorrect way: to justify compelling companies to share key components of their software or their hardware technologies with their competitors for free, or for non-market-place determined licensing fees. To advance this perverse sense of "open", some have argued that regulatory, competition, standards bodies and other authorities should step in to mandate such licensing or force divestiture of key technologies--the very technologies that differentiate one product from another.

These arguments are often justified on the basis of the need to achieve "interoperability". A distinct minority of the software industry would interpret this term to mean that competitors can "use" (clone) each others' technology, to make their specific products (implementations) function and behave in the same way as products which are successful in the marketplace. They champion interoperability--and the corresponding mandated standardization--as a means to acquire their competitor's technology without incurring financial or legal liability.

In fact some interests claim that their definition of "interoperability" is so important that it overwhelms any and all intellectual property considerations. Following this prescription, we believe, is a formula for certain failure. Without full protection for intellectual property, entrepreneurs and companies would have no incentive to take the risk of investing in research and development, because they would be forced to share the fruits of their efforts without fair compensation. Abolishing or diluting the incentive provided by intellectual property rights in key technologies will not promote the formation of new companies and industries; it will have just the opposite effect, discouraging entrepreneurs who would not be able to benefit from their own creative efforts and inventions. Such policies would have an intense and permanent chilling effect on innovation in our industry.

The computer industry has an unmatched history of intense competition, amazingly fast technological advancement, rapid and recurrent engineered obsolescence and widespread entrepreneurship. The ability of an individual to start with one good idea and build a successful company is based on protection for intellectual property. To remove or limit intellectual property protection for key technologies in which U.S. companies have an international competitive advantage, is to throw away that advantage and allow the appropriation of these inventions by competitors.

We believe that basic competition goals--lower prices and ensuring that users have choice among various technologies--can be best achieved through marketplace dynamics and industry led voluntary standards setting activities.

There is vast experience and evidence to show that standards for critical interfaces have been and can be established successfully without trampling intellectual property rights. Today's prevailing marketplace driven voluntary, private-sector-led standards development process provides for access to standard interface specifications through contracts, licenses or other voluntary means. In the marketplace, business considerations dictate that for products to succeed they must be implemented by a diverse and wide array of applications and users. Moreover, in the voluntary standards setting process, for a standard which incorporates technologies protected by intellectual property rights to be adopted, the owner of the rights involved must voluntarily agree to license the intellectual property on reasonable and nondiscriminatory terms. These processes produce agreed and sustainable results through consensus building. This policy, which was the subject of a recent extensive review, is followed by all the principal national and international standard setting bodies.

The existing standards process produces fair results and allows competition to flourish, while providing inventors and innovators the incentive they need to invest money, take risks, and devote time and effort to create new technology. These important benefits are realized without the need for government intervention. The intellectual property policy common to all major standards setting organizations appropriately balances the needs of users and the rights of technology creators. There is no need to change this policy.

Simply put, watering-down intellectual property rights is not necessary to achieve interoperability. Standards have been, and are being created for the computer and software industries without government control, mandates, or deadlines. The marketplace and voluntary consensus standards setting have produced timely results. There is no evidence to suggest that the private sector will somehow stop creating timely standards for the NII where the market demands it.