INFORMATION & TECHNOLOGY LAW

Battered to Bits: Weathering the Storm with Monopolies and Exclusivity

By Jon M. Garon*
As published in Interface Tech News, June, 2001

For the business community of New England, the storm blown in by the Internet will continue to upset historical business relationships, creating new success stories, as well as new casualties. Among the leading casualties will be the information providers. Attorneys, accountants, and consultants are hard-pressed to compete with software products, Internet Web sites, or other information providers that can distribute content over very large consumer populations. Put another way, the Internet shakeout will leave only a few providers of content in any competitive segment.

Despite this dire prediction, some companies will thrive in the new environment. Every successful company must find a way to sustain profit margins, maintain cash flow, and protect its market niche. The surviving business will avoid creating a commodity of its information or content. One proven method of achieving these goals is to erect monopolies and exclusive relationships the bulwarks of surviving the battering storm.

Monopoly

Creating information protected by monopoly provides the strongest key to survival. A monopoly eliminates competition, allowing for much higher profit margins that will not easily be eroded through competition. Although the public often thinks in terms of illegal monopolies agreements in restraint of trade or conspiracies to fix prices many monopolies are legal.

One example of legal monopoly is the trademark. As holders of the Coke, Nike, and McDonalds trademarks can attest, even commodities can become highly profitable if a trademark enhances its perceived value. The costs of competing with Coca-Cola or PepsiCo go well beyond the development of new soda formulas. Competitors must overcome the perception of superiority and the network of exclusive relationships that the perception has generated. Similarly, news from the New York Times carries greater weight than from most other newspapers, even when the information is the same. To create a strong trademark, the mark must be part of the entire business plan, rather than an afterthought to the product. The registered mark should be used aggressively on all information and services. Continual exposure to the mark and its association with the product or service increases both familiarity and sales.

Copyright also provides for a limited monopoly, granting the author of any work of expression the right to control that work. Copyright does not extend to ideas, however, so the scope of copyright's monopoly is relatively modest unless the work is highly expressive. To be effective, the control offered through copyright should be used to maximize value rather than to merely protect the copyrighted work from copying. In this arena, the interplay between copyright and trademark also becomes significant.

For all but the most expressive works, an information provider may be better served licensing a copyrighted work generously, so long as the licensee includes proper attribution and trademarks. Free copies of the New York Times on the Internet and reprinted for schools (or corporate events) increase the importance and trademark value for the newspaper, and eliminate a marketing opportunity for one of its competitors. The leveraging of one monopoly onto a second multiplies the corporate return. Instead of treating the free licensing as a revenue loss, the licensor treats the program as a trademark investment, strategically improving the trademark through generous distribution of the copyrighted works.

This thinking recently led the Massachusetts Institute of Technology (MIT) to provide its online course materials free of charge. Much more than course content, universities sell credentials. The course information may help MIT maintain its dominance by encouraging potential students, employers, and donors to think of MIT when thinking of a science and technology university. MIT will forego only a modest revenue stream in exchange for a marketing strategy that maximizes the reach of extremely rich content while thwarting its competition.

Patents provide an even greater legal monopoly, providing protection for the ideas embodied in the patent for as much as twenty years. Patents have recently been applied to business methods, providing ownership of the process of certain new business techniques. Though costly to develop, successful patents provide broad, absolute control.

Again, the most valuable aspect of monopoly power is the ability to leverage one monopoly into another. IBM remains the world leader in patent applications. By leveraging its patents, IBM has succeeded in creating a strong niche in personal computers, software, and computer services all markets that are generally low-margin, commodity sales arenas. The emphasis on the patents and the trademark has given IBM longstanding dominance in a highly volatile industry.

Exclusivity

A second method of sustaining profit margins, maintaining cash flow, and protecting a unique market segment flows from creating contractual barriers to competition. Joint ventures, strategic alliances, mergers, stock purchases, and licensing contracts all provide opportunities for companies to create long-term, exclusive business relationships. Although not as far-reaching as intellectual property monopolies, exclusive strategic relationships provide a company effective protection from immediate competition.

These transactions involve a wide variety of legal benefits and drawbacks, but all of them offer the opportunity to create relationships among the participants that reduce the danger of the unbundled business. Typically, the exclusivity is based on the right to receive the intellectual property monopoly the exclusive distributor of the information or trademarked service. Exclusive distribution agreements negotiated by either Coke or Pepsi have the two companies furiously battling each other, but have effectively eliminated a third entrant from the competition.

In addition to legal relationships, business can adopt marketing strategies that mirror these goals. The software industry practice of upgrade discounts provides a simple example of this approach. Once a person has purchased a software product (or information service, online brokerage, etc.), the cost to upgrade is significantly lower than the entry cost. Rather than fearing that a dual-pricing structure would keep out new customers, the low-upgrade model places an (artificially?) high value on the product or service. It then rewards its regular customers with significant discounts to remain loyal. This has the added advantage of encouraging the existing customer base to pay again for services substantially similar to those already purchased. Competitors can offer the competing products at the "rebate" price, but this creates the impression the competitor is selling a less-expensive, inferior alternative. The entire model is built on the monopoly provided from the software's copyright protection.

Another exclusive marketing strategy is bundling or single-sourcing goods or services. Microsoft's control of computer desktop icons illustrated the importance of offering multiple services from a single source. The federal district court identified Microsoft's ability to control the placement of the Internet Explorer on computers as a significant reason its browser gained market share from its competitor Netscape. Bundling can be done legally, but care must be taken to comply with federal antitrust laws. The broader the contract, the harder it is for a company to evaluate and compare contracts.

Accounting firms have transformed themselves into broad-based consulting firms, providing multiple services under one roof. Law firms have been fighting to block these consulting firms from offering legal services precisely because such a one-stop-shop will overwhelm many traditional law offices. Indeed, the more entrepreneurial law firms now embrace the model, offering lobbying, public relations, marketing, and many other consulting services of their own.

Ultimately, for a company to successfully navigate the troubled information seas, it must develop a strategy that anchors its services on an intellectual property monopoly that creates some uniqueness in the marketplace. The value of this monopoly must then be leveraged through exclusive contracts and strategic relationships. The exclusivity need not be absolute, just sufficient to differentiate the product or service; but the monopoly must come first. With a monopoly as an anchor and exclusivity as the sails, a company can weather the information storm. Monopoly and exclusivity together allow a company to sustain profit margins, maintain cash flow, and control its market segment the true keys to smooth sailing.

This article is Part II in a series. See Part I: Professional Services Firms and the Economics of Information

*Jon M. Garon is admitted in New Hampshire and California.

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