Lost in the Clouds

By TAP Guest Blogger

Posted on February 6, 2013


What scope of intellectual property protection provides the most effective incentives for people and organizations to develop new ideas and invest in their commercialization? There is a considerable body of research on this question in the realm of patents. But there has been far less work on the arguably more important issue of the consequences of broader or narrower copyright protection. The absence of attention to this question is particularly striking given the intensity of controversies about the Digital Millennium Copyright Act and the proposed Stop Online Piracy Act.

Our research examines the effect of changes in the scope of copyright on venture capital investment in the emerging cloud computing industry, in which firms provide computing as a service rather than a product, with software and data stored remotely and accessible over networks such as the internet. We focus on venture capital investment because it has been shown to have a positive impact on innovation and economic growth.

Furthermore, unlike corporate investment decisions, venture capitalists’ decisions to invest in new firms are well documented and less likely to be affected by existing assets and capabilities of the firms. Thus, while venture capital represents only a fraction of total investment in the cloud computing industry, it is a natural setting for understanding the impact of policy shifts, for example, through court decisions.

To understand the impact of copyright policy changes on the willingness of venture capitalists to invest in cloud computing, we employ a ‘difference-in-difference’ approach, hypothesizing that policy shifts affect investments in different sectors, different years and different parts of the world in varying ways. Such techniques have been widely employed by economists to examine the consequences of policy shifts.

To quantify the impact of copyright policy changes, we first analyze the effects on venture capital investment in cloud computing firms of The Cartoon Network et al. v. Cablevision decision in the United States in August 2008. We then examine the impact of court rulings on comparable copyright cases in France and Germany.

In 2006, Cablevision announced the development of a ‘remote storage digital video recorder’ (RS-DVR). Similar in operation to a traditional recorder, the RS-DVR allows consumers to record, pause and replay television content on a hard drive. But unlike a traditional DVR, in which consumers install and use the appliance in their own home, the Cablevision RS-DVR was located remotely, recording to and playing back from remote servers. When consumers hit the ‘record’ button on their remote controls, the RS-DVR would start to record, just as if it were right in their living rooms.

In response, a consortium of US television and copyright holders sued Cablevision over alleged copyright infringement in May 2006. The case was litigated and in August 2008, the Appellate Court ruled that the DVR did not violate copyright law.

On the other side of the Atlantic, a firm called Wizzgo launched the first online DVR platform in France in May 2008. In response, a consortium of French television and copyright holders filed complaints against Wizzgo over alleged copyright infringement. In November 2008, the Tribunal de Grande Instance de Paris declared a final set of summary judgments against Wizzgo.

A little earlier in Germany, two firms (Shift.tv, founded in 2005, and Save.tv, founded in 2006) began to offer subscription- based services that allow customers to select and store television content on servers. Two German television channels filed complaints over alleged copyright infringement. Although the litigation continues today, a number of court rulings, which were favorable to the plaintiffs, were made in 2006, 2007 and 2009.

The Cablevision decision was widely perceived as easing certain ambiguities surrounding the intellectual property standing of cloud computing firms in the United States and thus was likely to increase venture capital investment in them. In contrast, the French and German rulings were perceived as restricting the intellectual property standing of cloud computing firms in the two countries, and thus were likely to decrease venture capital investment in them.

We find that venture capital investment in cloud computing firms did indeed increase significantly in the United States relative to the European Union (EU) after the decisions. Specifically, our results suggest that the Cablevision decision (along with the court rulings in France and Germany, which either broadened or led to more ambiguity about copyright scope) led to additional incremental investment in US cloud computing firms ranging from $728 million to approximately $1.3 billion over the two-and-a-half years after the decision.

When paired with previous findings of the enhanced effects of venture capital investment relative to corporate investment, this may be the equivalent of between $2 billion and $5 billion in traditional investment in research and development (R&D).

We also separately analyze the effects of the French and German court rulings on venture capital investment in cloud computing firms in these countries relative to that in other EU countries. We find that these rulings regarding the scope of copyrights had significant negative impacts on investment. Specifically, we find that venture capital investment in cloud computing firms declined in Germany and France, relative to the rest of the EU, after the rulings.

Our results suggest that these rulings led to an average reduction in venture capital investment in French and German cloud computing firms of $4.6 and $2.8 million per quarter, respectively. This implies a total decrease in French and German venture capital investment of $87 million over an approximately three-year period. When paired with the findings of the enhanced effects of venture capital investment relative to corporate investment, this is the equivalent of approximately $269.7 million in traditional R&D investment.

Taken together, our findings suggest that decisions around the scope of copyrights can have significant effects on investment and innovation. Rulings that are seen as narrowing the scope of copyright protection, such as the Cablevision decision, appear to have led to increased venture investment, while rulings that are seen as broadening or introducing ambiguities about the scope of protection appear to have led to decreased venture investment.

At the same time, we must acknowledge that this analysis is partial, since we cannot observe investment by large firms or the long-run consequences of the policy shifts. The court decisions may have had different effects on the willingness of incumbent firms to invest. Similarly, even if the short-run consequence of the narrowing of copyright protection were to boost investment, the longer-run consequences are still ambiguous: such a decision may have reduced the willingness of firms to invest in basic research that might form the basis of subsequent investments.

This article summarizes ‘Lost in the Clouds: The Impact of Copyright Scope on Investment in Cloud Computing Ventures’ by Chris Borek, Laurits Christensen, Peter Hess, Josh Lerner and Greg Rafert. TNIT member Josh Lerner is at Harvard Business School. His co-authors are at Analysis Group, Inc.

The preceding post, written by Romesh Vaitilingam, is re-published on TAP with permission by the Toulouse Network for Information Technology (TNIT). “Lost in the Clouds” was originally published in TNIT’s January newsletter.