Emerging issues for fair trade and taxation of virtual goods

23 October 2013 - A Workshop on Access in Bali, Indonesia

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Full Session Transcript

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This text is being provided in a rough draft format.  Communication Access Realtime Translation (CART) is provided in order to facilitate communication accessibility and may not be a totally verbatim record of the proceedings.

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>> Hello? 
     >> Hello, Mr. Clayton, can you hear us? 
     >> Yes, I've just seen something on the computer.
     >> Can you hear us? 
     >> Hello, can you hear me? 
     >> Yes, can you hear me? 
     >> I can just about hear you. The link is not that great.
     >> Okay, well, we can hear you. And the people who are in your room, we can hear them too.
     >> I'm sorry; can you speak up a little? 
     >> We can hear you and the people who are present in your room.
     >> You can hear me and....
     >> And everybody in your room as well.
     >> Okay. We've been trying to sort out the communication, I think we've done it. Good to meet you.
     >> Likewise.
     >> Are you about to start? 
     >> Yes, Mr. Clayton, we'll start in just a few minutes.
     >> Okay, that's great. I'll just sit here and wait, see what happens. I, unfortunately can't see what's happening.
     >> That's too bad because there are a lot of nice‑looking people here.
     >> Okay, everyone, can you hear me? 
     >> Yes, I can.
     >> PINDAR WONG: Good afternoon, ladies and gentlemen. This is the workshop 160. As you know, the IGF theme for this IGF is Building Bridges. The session today is emerging issues for fair trade and taxation of virtual goods. So the keywords are highlighted in red. My name is Pindar Wong. My job today is to be moderator. As you know, in front of you, this room has been specially set up. There's a microphone on every table. The reason being, we have two, a discussion on virtual goods and it's quite appropriate that we have two virtual speakers. One, Tony Clayton, from the U.K. and joining us shortly will be Peter Cheung from Hong Kong.

Now, I'm going to try and invert some of the ordering because the, the sessions that I've seen thus far are typically just panel presentations, which take up most of the meeting and a little bit of discussion at the end.

So what I'd like to do is really turn the floor over to you, after a little bit of introduction. This is actually quite an expansive topic and we need to be realistic what we can achieve in an hour and a half.

So, can I see, are there any bankers in the room? We have one banker in the room. Do we have any accountants in the room? Any lawyers in the room? We've got seven lawyers in the room. Any people who do trade policy? Negotiate trade policy? One person in the room. Any engineering people? Technical stuff?

Okay...this is going to be an interesting dialogue. Yep, go ahead? So let's begin.
     >> Hello, Pindar, can you see me? 
     >> Very good, this is Peter Cheung joining from Hong Kong.
     >> PETER CHEUNG: Hello, everybody. Good afternoon.
     >> PINDAR WONG: We have lawyers, accountants, technical people, engineers. Economists, we have one economist, I know that. Is Tony listening? He's an economist. There you go, thank you. Two economists, in fact.

So, the theme here is Building Bridges of the whole IGF. We're trying to build a bridge across three different ecosystems. The first ecosystems are those who, like Nick, are involved in the International Trade Ecosystem. The second system are those bankers, part of the International Financial Ecosystem and the traditional, regular participants, the Internet Governance Ecosystem. The way we're going to try to build these bridges is by looking at fundamental challenges and fundamental opportunities in this space of virtual goods.

Now the fundamental challenges has actually, that discussion's already occurred. It occurred at the Asia‑Pacific Regional Internet Governance Forum. We talked about the ban of monetization of virtual goods that occurred last year in Japan and Korea. And this was the ban of monetization of virtual goods inside these game economies where the, the number of players are in the multiple millions.

In other words, the virtual economies, using virtual currencies for virtual goods, in terms of size, may be actually larger than states in terms of participants. And the way we addressed that was through the multi‑stakeholder approach. We had an internet activist. Jong‑Il Kim. We had the longest media firm in South Korea that is famous for its search engine and games. That was Kim Jong‑Il. We had a presiding judge. Some of the issues we read were social. He was also the co‑public lead of CC Korea. We had the Senior Vice President of Korea's largest Telecom company which happens to be very active in the trading of virtual goods, especially with China and Adam Peake was the moderator.

Today's IGF, we're talking about the fundamental opportunities. Today's objective is to look at the fundamental opportunities. This is stage two of a three‑stage process. The third stage is back in Bali in December, there'll be the WTO meeting, ministers meeting and I think, Nick, you'll be participating in that.

This has been a one, two, three‑stage process. And the way we designed it was to look at you know, what technologies are on the horizon that will provide some degree of transformation. Transformative technologies, somewhat argue disruption.

In preparing for today, I basically thought there were two. One involves 3D laser scanning of objects, of perhaps even building size. The second is the 3D printing of those same objects. So if you think about that, if you can scan the 3D object and then print it out. If I scan it in Hong Kong and send that 3D printer file to you in Argentina and you print that out, that's a whole new different dynamic.

As I say in Hong Kong, that has the potential for taking piracy, literally, into a whole new dimension. The third dimension.

The second transformative technology that I see is routing money on the internet. The internet being used as the network to route money. And so, that's the emergence of the 2000, starting next year, ideally finishing in 2017, the W3C web payment standard. You heard about W3C yesterday. We're fortunate to have Manu Sporny, the working group chair of that technology.

Let's look at transformative business models. That's what the goal here is, very simply, to enable business models to make it really easy to legally license and pay for Intellectual Property. We're beginning to see that already. [Static] [Skype disconnected, attempting reconnect].

Tony Clayton, Chief Economist of the U.K. Intellectual Property Office. Not just business models in Hong Kong, such as IP trading platforms, we have four. But also in the U.K. like digital copyright exchange. That leads to transformative policy, copyright reform. We have Jeanette Hoffmann who will add her views later.

So what's the fundamental question that we can frame the opportunity before us in the, in the hour or so that we have. If the last 200 years of global trade was defined by wars, over physical resources, and trade over physical goods, my question is, will the next 200 years of global trade be defined by wars over virtual resources and trade over virtual goods?

So, if that's the question, if it's going to be trade over virtual goods, how are we going to do that? Is there anything that we can, in terms of strategies, does the strategy change? Does the strategy change from traditional divide and conquer? Strategies used over the last 200 years or strategies that connect and liberate, which have been used in the internet era in the last 20 years.

To kick that off, I'd like to turn to Peter Cheung. The first speaker. Peter, are you ready? 
     >> PETER CHEUNG: Yes, thank you.
     >> PINDAR WONG: Can you hear us, Peter? I think we may have lost him. Can we bring up his video in terms of Webex? On this screen? I think what I need to do is log on from this screen. Can you display the Webex video conference on the large screen? Hello, Peter? 
     >> PETER CHEUNG: Can you see my PowerPoint slides? 
     >> PINDAR WONG: We're bringing up the slides, but we can hear you loud and clear.
     >> PETER CHEUNG: Okay, I would like to thank Pindar for having me in this process and to thank IGF for suggesting this wonderful programme. And, I'm now having a new experience to be a remote presenter and want to be talking about a subject called trading of internet goods and virtual goods.

So, I think about some explicit world trends. Immunization, singlization, urbanization. What I'll be talking about is the different trends. Latent, but significant trends. When I go to PowerPoint slide number one.
     >> PINDAR WONG: We're still bringing it up, but please carry on.
     >> PETER CHEUNG: Okay. For my PowerPoint slide number two. I highlight the outline. I shall be talking about the context, the challenges and resolutions, the role of Hong Kong China in this process. Some sharing of the outlook to draw some conclusions as well as some next steps. So everyone can see that.

Okay, I can now see my PowerPoint slides, and then I just covered slide number two. Now can I go to slide number three? That is about the world trade. Slide number three, please? Thank you.

I, I comment on a word called Intellectual Propertization. There's a resource company which has done a survey of the value components of standard things. One result that was discovered was that, was this. Over 80% of the value components of the Standard and Poor's 500 companies rests in intangibles. It's the intangibles, these virtual goods that give these enterprises the competitive edge to, to drive the business.

So, I think, I think the, the economy right now is not just a knowledge economy, but also a creative, innovative economy and more importantly, the economy is Intellectual Property.

Now turning to slide number four, you see some statistics. These statistics are released by the United Nations International Institution for the World Intellectual Property Organization. This, WIPO releases these statistics concerning the Intellectual Property for profit.

You'll see in the year 1970, the total amount of Intellectual Property licensing in terms of royalties in U.S. billions was just 2.8 billion U.S. and then 20 years later, in 1990, it's risen about ten times. In 2009, nearly another 10 times. Now it's 2013, so you see, the sky is the limit.

I would like to cite some more tangible examples in my slide number five. That's about a value for brand enterprises. These are the most valuable brand enterprises done by various agencies. And I should like to talk about what the green one on the left‑hand side. You see that if you want to buy Apple, for example, you might have to pay in terms of millions. Apple Enterprises, not much in relation to technology, but in humanizing technology and setting of standards. You know, that is changing the way of life of many, many people.

Now, on number, number two is Google. Google is, is having a very large, a large market share in terms of digital services market. It is also accumulating some Intellectual Property performance. Because it is Quanta that supports these digital services. Writing on certain intangible assets. The trade secret of this formula. For IBM, IBM changes its business model from manufacturing of hardware to the provision of Intellectual Property related services.

Number five is Microsoft. In addition to the name, Microsoft is generating streaming somewhere in its copyright computer programmes. Number six is General Electric. Used to carry the name Edison too. It doesn't carry that name anymore. It's important in the global value chain.

Number seven is McDonalds. A basic brand name. Samsung is doing very well. It's being innovated. Intel has been riding on loyalties of chips layout design. Toyota also generates a lot of innovative stuff.

Now, now, turning to slide number six, about the business challenge. How, the question is, how to drive business growth and to enhance this competitiveness. Especially for the SMEs, the more medium sized enterprises, which have been operational at the production chain.

Now, this resolution, slide number seven, is this, I would call upon all the stakeholders, especially medium and small enterprises to develop an Intellectual Property business strategy. So they can show in the global value chain. As sustained in the global production chain.

You can see the timeline, the horizontal timeline, also the vertical line, we are living in a knowledge economy, in order to do better, I think it's better for us to do some knowledge management. In the course of doing that, you have to try to turn the toxic knowledge and make that expressive. Try to establish a database to maintain, to do the knowledge management. So as enable people successfully and more importantly to use it. Knowledge management in simple terms.

If knowledge is not value‑added, in a creative, innovative economy, if you want to get at more value, you have to exercise innovation management. That is to say, in order to be creative or innovative, you have to analyze the creative landscape so you can predict change. Predict the market. These are very important innovation strategies.

And more importantly, at the end of the day, as you have heard from Pindar, the markets can be shared by world competitors, I think it's not so much on innovation or marketing or entrepreneurship, at the end of the day, which enterprise will have the market share would depend on the kind of Intellectual Property portfolio.

Take Samsung as an example. They litigate with each other in a number of cases, in a number of jurisdictions, but at the end of the day, which company will have the market share will depend on whether the company's Intellectual Property or virtual goods will be upheld by the court of that particular jurisdiction.

So, this is the big picture, I think it's an important one, and I will invite stakeholders to exercise knowledge management, innovation management and more particularly, to do Intellectual Property management. This would include, for example, aggregating Intellectual Property. If you try to aggregate it in something that would keep the market, it would carry away and would be used as a defensive weapon. In most important day of economic warfare.

Now, turning to slide number eight. About the second business challenge that I have identified. That is how to turn creative and innovative ideas into action. How to resolve that. You can see that in slide number nine, in my view, to resolve the challenge, one has to practice entrepreneurship and that is to say you have to embrace this, you have to be very resourceful and you have to believe in what you believe and therefore, you can build your business up.

These photos are taken by me. I try to assimilate the SMEs, the small and medium sized enterprises. For the big payers, they're in the front. For the small payers, they are followers. The way for them to, to transform and up lift themselves requires a special strategy. A special, unchanging factor and some of which I've identified earlier as Knowledge Management, Innovation Management, Intellectual Properties Management. You have to find that the differentiating factor, that is the strength of your enterprise. We try to do something, people say that you can do, or you can never succeed.

The next challenge I identify is in slide number ten. The how to enhance eCommerce, particularly in the digital economy. In eCommerce, most of the time we are buying intangibles through digital service platforms. But in fact, by Intellectual Property, virtual goods. Some intangible assets that can be digitalized, can be distributed over the internet is intangible.

There is a huge potential for the eCommerce of digital virtual groups. So...and this has been, next slide please? In slide number eleven, the resolution to enhance eCommerce, in my view, could, could begin with trading. At this stage, attaching themselves as photos, audio‑visuals, music, films, and also certain designs and can be applied, can be digitalized. I think this, this digital virtual group has become more tradable.

Similarly, you need the brand, a mark, to identify yourself and also to distinguish yourself from your competitors. And you would need a trade name, a domain name to facilitate your potential customers, world customers, to reach out to present services.

But even this Intellectual Properties is virtual goods. They can be trade items. This may sound unfamiliar, but if you think about what do we trade, it's the time, here is a design of the time. This virtual and valuable stuff can be traded via the internet.

The next challenge, and the last one I've identified in slide number 12 is about how to get low cost of entry and high rate of return. This is what everybody, even small and medium sized enterprises would like to have. The resolution to that is in the next slide, in slide number 13. This is about the Intellectual Property trading that Pindar has alluded to.

Basically, the structure of intellectual property trading, there are basically three institutions. In the yellow column, there are many people or enterprises that have got intangibles. Variable virtual groups, but they're not exploiting them. Copyright work, designs, other Intellectual Properties, patents, train names, domain names, they have the rights, but they're not exploiting that. On, on the, on the, in the blue column, there is the requesting sites. Don't have the money, don't have the resources, don't have the people and what you want is a quick return on your investment. So you don't have the time to invest in something creative or innovative. Maybe you don't bother with acquisition or any Intellectual Property or virtual goods.

So you may simply try to assess to this virtual goods trading platforms to request what kind of trade secret, say in terms of formula that you want. Or copyright works of virtual goods. Photos or sound tracks. The kind of design you'd like to make your investor products. You can request for that. Maybe there's a disconnect between the potential seller and potential buyer. The concept of Intellectual Property trading is that there are intermediates. The people who would do the consulting, doing the due diligence, say for example, the proprietorship of technology competence. Also somebody would have to do the valuation about how much is paid and how much is sold and also people would have the financing, the trading and some would have the legal documentation, translation and in case of this, what to do.

So, this is the concept and structure of international Intellectual Property trading, business open, everyone should be able to use it. It's not one‑to‑one. It's not only one‑to‑one or many to many. It's interactive dynamic.

And, the next slide you will see that Hong Kong has the unique structural capital to do this. This is basically because Hong Kong taxes simple and there is no foreign exchange. Once a transaction is done, you can get your money out. Hong Kong is bilingual, as you can see in this slide. English and Chinese and more importantly, because of Hong Kong geopolitical status, it is the window of China. So far, if you like to do business with China, you can use the Hong Kong window. China can use the special and administrative vision of Hong Kong.
     >> PINDAR WONG: Hello, Peter? 
     >> PETER CHEUNG: Next slide, please. On the next slide, you can see there are ‑‑
     >> PINDAR WONG: I think we covered a lot of ground here. In the interest of time, could we just perhaps come back to the slides later? At a discussion? Is that okay? I think this has covered a lot or perhaps just one more slide. This is the internet, the internet dimension, I think, is in the next slide. Perhaps one more slide.
     >> PETER CHEUNG: Just one more slide. Yes, thank you very much. Now in Hong Kong there, are already several of these IP trading platforms. There are at least four. And the one is coming up. And then we are marketing the business and intellectual in Hong Kong in Turkey in 2012. There were 1,400 participants, just imagine. Talking about the business of Intellectual Property. These people are coming from 20 jurisdictions. So, we'll be hosting together with the Hong Kong Trade and Development Council.

Furthermore, International Trademark Association is being held in Hong Kong next year. From May 10 to March 14th. There's expected to be at least 10,000 participants with the ability to talk, to trade virtual goods, particularly on trademarks, it's valuable in that particular forum. So that's a possibility.

And very quickly, let me turn to the next slide, number 16. The Hong Kong government is very supportive of this Intellectual Property trading platform. Establish a working group on that, trying to formulate strategies, measures, so as to provide the policy environment to make the things happen. And what we need, in the next slide is this. To report the success stories. So that would be there, are proofs of concept. Slide 17.

And then, very quickly, this is the short‑term goals, this should happen very soon. And the medium term is we are working very hard to establish international standards.
     >> PINDAR WONG: Very good.
     >> PETER CHEUNG: The long‑term goal, slide number 19 is to, the Hong Kong, every interested persons and economies to merge Intellectual Property and virtual groups. So my conclusion is this, Pindar, on slide 20. What I'm trying to do, what we're trying to do is to identify the trend, the possibility of trading virtual goods. I hope everyone can recognize that. And try to seize the opportunity to monetize. The next slide.
     >> PINDAR WONG: This is the last slide. Can you talk about this slide and move to Tony, please.
     >> PETER CHEUNG: The future is now. Slide number 21. If we try to trade virtual goods over the internet, we need to find ways to resolve the opticals concerning internet IDs. This is how to, how to get the payments done. And then, the possibility, if everybody is using the internet system, there should be fees to cover administrative expenses and things like that. These are some of the obstacles that Pindar has identified.

And the next slide. Peter, in interest of time, we'd like to hold it here. I think that issue, internet ID payment and taxation is very key. Again, I said at the beginning, perhaps you joined, we want to have a discussion. There's a lot of VIPs in the room.
     >> PETER CHEUNG: Okay, I'll stop here.
     >> PINDAR WONG: Let's just have a dialogue. Tony, quickly.

You there? Can we switch to Tony? So, Tony's a Chief Economist of the U.K. Property Office. Tony is the Chief Economist. I think he'll talk about the U.K. experience, that involve copyright reform and very interestingly, looking at metrics, how do we measure this economy? How do we measure progress? So, Tony, if you're there.
     >> TONY CLAYTON: Can you hear me? 
     >> PINDAR WONG: Why don't you go ahead and keep it clear.
     >> TONY CLAYTON: You'll see a lot of commonality between the presentation I'll give and points made by Peter Cheung. I think the two presentations complement each other pretty well. Thanks for the opportunity, sorry I can't be there in person. I spent the last couple days with the team working on knowledge‑based capital. The Intellectual Property system, the finance systems and impact on innovation and growth.

I'd like to just go through three brief topics. First our take in the U.K., on intangibles and how Intellectual Property rights fits into the economy today and how things are changing. Secondly, what we're doing in the property rights system in the U.K. and finally, I'd like to touch on a report which we commissioned about how Intellectual Property rights are used, or in many cases, not used in order to raise funding for investment in innovation and in creativity. That's a pretty important thing for all of us, I think. Including the internet businesses.

So...slide three, please. What is in our definition of intangibles. The framework we use to think about this stuff for policy. This is the framework which was developed in the states for the U.S. Federal Reserve, about ten years ago now. And which has been developed for a whole range of companies, including China. But we, effectively, use it in the U.K. as one of our measures of innovation. To track what's going on in terms of business spending by firms and changing what they do. Covered by copyright, R&D, largely covered by patents designs, design rights, covered by trademarks. Some business organisation skills, skills of the labor force within a business. Which are not really covered by copyrights at all.

These all spend by a business for future growth and profits. They are really investment or they're not always in the national accounts of countries. Next slide, please?

Slide four. What has happened to this sort of spending in the U.K. and in most of Europe and in North America. Over the last 20 years. And what we see is that intangible spend by a business, overtook spending on fixed assets, sometime around 2000 in the U.K. It was a bit earlier in, in North America and it's a bit later in some other countries, but this trend is happening, absolutely everywhere. It's not just a feature of developed economies, it's happening in China. It will take a bit longer for the overtaking, I think, to happen, but it's going to happen in most of the economies we work in.

And on slide five, you can see where the big increases for us have happened and they have been in the investment in business organisation within the firms. Training people with new types of models. Software and design and to a lesser extent in traditional R&D. I suspect that in China it'll be a slightly different picture.

But, these are radical changes in the investment mix of business. And they feed through into different ways of thinking about business which Peter has referred to, but we can track this stuff by looking at what businesses spend. It's actually much harder to bracket, in terms of what those sell. They're not set up to do that. There's more work to be done.

If we look at slide six, this helps us understand a little bit about what goes on between economists and lawyers. I was interested, you have so many lawyers in the room. Down the left‑hand side of this picture. How economists think about this stuff. They think about it in terms of what firms spend and across the top, you have it the way lawyers think about it, in terms of the rights to have the spend create copyright design rights, trademarks and then we've got trade secrets and restrictive contracts on unemployment.

And, what we concluded when we came to look at this, in, in the detail a few years ago for the first time, was that the, the, the bread of big money is not necessarily in patents, for us, but it's in some of the other rights, particularly in design which covers a whole range of types of spend, including in digital markets, increasing the user interfaces, part of design, they're covered by design rights. As well as by software copyright.

This is increasingly significant in thinking about the investment for the future. And if we go to slide seven, you'll see, this is for the U.K. It is a picture we're in the middle of redrawing. We didn't think we got it exactly right when we did this a couple years ago. We probably underestimated the importance of patents and R&D and also the patents in interior design, but as a rough estimate of how important this stuff is, Intellectual Property rights protect about 50% of the U.K. in terms of spending. That is 65 billion pounds a year U.K. Which is as much as we spend on plant machinery, as much as our businesses spend on plant machinery. This is all private sector spend, not government.

And this, this, the next chart, number eight, is what Peter showed on the proportion of value accounted for by intangibles. Not all of this is Intellectual Property rights. Some is business capabilities, some is workplace skills, but it's, it's, when you see where the money is going, in terms of investment, you'd understand why the value turns up like this. What's interesting about it is, it's an important issue for policy, both in terms of Intellectual Property rights policy and in terms of trade. Here in Europe, we've done some study on values of patents and the distribution and you see that about 1% of the value of all patents is concentrated, sorry, 50% of all the value of patents is concentrated in the top 1% of all patents. Long, a relatively small number of firms, they tend to be firms in the S&P 500 example.

So there, are issues about access to knowledge already in the market. I'm going back to your question on where the battles are being fought. They're being fought now in markets.

So, as we saw in the early slide on where the value is, there's a big chunk of copyright, a big chunk of assets covered by copyright in ways that people don't really understand.

So for example, large amounts of academic research are effectively covered by copyright. Go on to slide ten and we launched in the U.K., a review of the framework. Launched by Prime Minister and the discussion was whether or not the Intellectual Property framework would loyal design of growth. He was asked to do a review and asked could it be true that laws designed, basically in 1710 could affect today in copyright and growth. And his answer was yes.

And the reason for that, certainly in Europe, less‑so in America, I don't know so much about evolution economies, but I note that Singapore has recently adopted the American models of copyright. But in Europe, we have a copyright system which tells you what you can do. And what you can be do is essentially‑based on models for the printing press. And, version states, the system of fair use. As long as you're competing with the original owner of content, you can be in court. That has given enough flexibility in the system to enable digital copyrights to develop.

The purpose of the copyright system, along with the patent system, in the U.S. Constitution, slide 11, it's essentially to provide the incentives that promote science and creativity by limited exclusive rights for authors and inventors and the big challenge we face is to make those incentives work effectively in digital market, not locking up material which should otherwise be used by other, by innovators to create new content or apply new content in new ways.

So, the key principles of the U.K. reforms are to use the basic principles of copyright, but to make markets work, in terms of creation and leaving room in the IP system for innovation and investment. The fair use system case in the USA. Singapore has been in that place now for five years. The fair use model, Israel has just done it and Australia is currently thinking about it. And the idea is to create our principle, because we can't use the phrase, because of the European framework, is to create space within the European system for innovation, particularly by SMEs among new enterprises.

So the progress we made is on page 12. We've already moved, set up a system for the reuse of works where you can't find the author even if you tried. The current copyright system locks up works that are findable. That, effectively, sterilized a huge amount of content. The BBC and national museums as well as for a lot of private archives.

And then we're also looking at specific exceptions to copyright, which will provide the types of freedom which will really exist in the U.S. and our objective is to implement all this in the coming year.

It's not straightforward, there are people who use the existing system who have relied on it and who extract, the business model depends on the ranks. We believe the change is essential in making innovation happen. All the stuff we created in the 20th century. And we are less likely to be there with the digital map of the 21st century in ten years time.

So where we see the economic gains for the changes we're proposing to make, to set us on pace with the team, the licensing system in place in Canada and a number of other countries will free up content which is currently frozen, which was created by people and failed and could create economic value if only people have the right to use it. At the moment, they don't, and they can't get it.

Text and data mining is one which the research community has been in working on in the noncommercial sector. I'm sure many of you are familiar with the academic publishing model. If you write an economic model, you have to sign over your copyright to the publisher who will get it for nothing, he also gets it reviewed for nothing by another academic and sells it back to you at a 40% mark‑up on cost.

Then, if you want the text or data mine articles that your university has subscribed to, European system, you have to pay an additional license to enable electronic copying, because any type of electronic transformation is certainly an additional copying license. We think that's unreasonable and that you should be able to text and data mine company content that you've bought in order to create new knowledge, given that there are 1.5 million peer‑reviewed articles every year in the world, it's text and data mining is the only way to do this.

Copying exception is another thing we're bringing in at the moment in the U.K. If you buy a piece of content, you are essentially allowed to relicense it and transfer it to another media.

I see I'm running out of time. I'll quickly move onto slide 14, if I may. We're also trying to set up efficient markets for Intellectual Property and the particular of initiative suggested for review in the U.K., I think would be international, in order to buy rights, in order to run businesses, in order to just to do it simply and quickly. We try to do it on the basis of economic evidence, basically summarized on slide 15. We collect as much data as we can to set these things in, in play. Economic context.

This slide, this model is on the front of a building in London. It's the first ever experimental testing works, which underpinned the first Industrial Revolution. And it set the standards for engineering innovation around the world.

Finally, if I just say in one word, what we're trying to do, we're in the process of issuing a report on how Intellectual Property rights ought to be better‑used in order to fund innovation and we've come up with a series of suggestions. Some of which are based on ideas which can be launched in Singapore and Korea that are used by small and medium enterprises, in order to get access to finance. That will require, as Peter said, easier ways of going through due diligence. It will require assurance and guarantee systems and it will require a market which gives value for IP and most of these will be electronic. These were launched in the U.K. this week, market for design rights, as a market for patent licenses, being launched in Chicago about three months ago. These markets are coming. As Peter said, the future is indeed now.
     >> PINDAR WONG: Very good. Thank you very much. The key things in markets, technical standards to make this happen. I heard identity, copyright reform occurring and also the issue of tax and payments. So, with, that I just want to move, in fact to open mic in the time. We have about half an hour left. Open mic in terms of time. Can I just jump to Jeanette? 
     >> JEANETTE HOFFMANN: Actually, I did not plan to comment on those two presentations, so I will briefly, add another perspective, which, rather brings users rights into the debate. My question, where I come from, is what in the time of digitized informational goods, what a new framework should look like to not only serve creators and business interests, but also those of users. And, I think that present modalities of trading and using information goods are in many ways deplorable and the least one can probably say is that the current system implies a lot of underconsumption. The most obvious example for that is existing digital goods that are for reasons, because they're orphans, for example, unclear. Right holders cannot be used or cannot be put to new use. So many people have thought about how this problem can be solved and how better access for the public can be gained and one idea is, indeed, to create in the progress report, makes that clear to create new frameworks for trading IP goods on the transnational level. The system we have is more or less national and that is, for many people, no good. We see movies being released in the U.S., but in Europe we cannot get them. The problem is that users right now have every incentive to infringe copyright.

What a lawyer, I know, once said, is that what laws should actually do is keep prices down to a degree where it's cheaper to buy stuff than to illegal download it. So, how can that be achieved? I personally don't believe in the idea of reforming copyright. I think we have so much vested interest in the current distribution of property titles that it's better to try, achieve a better system by new licensing frameworks. And those licensing frameworks I think should not only take into account business interests, but also those of users.

A good example that we've seen is Google books. Google books in many ways was a step forward. It offered an opt‑out solution. People who didn't want their works to be included had to opt‑out. That's opposite of the system we have in Europe right now, but the way users were treated in this framework was, from my perspective and also those of the court, not acceptable because it clearly violated privacy interest of users and it created a new monopoly.

So, I think that new frameworks have to take into account consumer interests by preserving their rights. It has to drive down prices and needs to introduce competition and thereby, also weaken the position that many right holders right now have.

So...I think we need a transnational licensing platform that drives prices down, also by reducing transaction costs, but they need to preserve, if I may finish my sentence, consumer rights.
     >> PINDAR WONG: Fantastic. But what about the existing framework? New licensing models, what's the existing trade system? How does that work? Nick? In terms of Jeanette's comment? 
     >> NICK ASHTON‑HART: I'll try to be brief. I'm a big fan of people in sessions speaking, but at the moment, the TRIPS, the discussions about Intellectual Property in the TRIPS context are really stuck. It's just not a good environment. There are arguments over drugs, licensing of drugs, access to medicine. At the moment, there is an agenda item on innovation and IP that was cosponsored by the U.S. and Brazil to try and talk more about how innovation works with IP, just talk about it, just explain. I think there's a lot of interest in the world trading community, in the internet in general. There's a willingness to admit they don't actually understand how the internet works terribly well. Instead of saying "let's talk about IP" and activating fixed positions and a really bad dynamic, maybe go a different way and say "look, this is what people are doing." And here is some evidence that we could gather on what, what is actually happening. The other side, the other reason for that, I think whatever you, whatever position you take on copyright and IP, it's certainly true that the U.S. is beginning the hearing process to consider changes to its system. The European Union is at the beginning stages of doing the same thing, as we've heard individual EU members are changing their copyright systems right now.

So, changing that system at the international level will be impossible because those countries who are in the change process will be unwilling to change their international obligations until they've settled on something.

So...I, I think this area is promising to study, not from a law and, and IP perspective, but really, more of what are people doing that is innovative in order to trade? And what barriers do they face that are not even IP‑related, but are commonly shared with other internet commerce because taxation, customs, barriers, technical barriers to trade affect, are often agnostic as to what they, whether goods or not goods, and using that as an opportunity to discuss, to have the trade community understand the internet and how it works and how to facilitate it better, you'd end up having the ability to then have a conversation once people have some confidence that the discussion is not some secret plan to, to get them to agree to drug policies they don't want or something else. There's a great deal of sensitivity along that line. I think that would be a way to have a, a needed constructive international conservation about trade online, really.
     >> PINDAR WONG: Right, again, going back to the theme of building bridges. Perhaps again, the trade community, the technical community and this group. One way is to say do we actually reform it or start again in a different way? One of the things, I think Peter mentioned, was technical standards for, to enable internet public trading. The session this morning, the problem of actually routing money. Manu, can you talk about what the W3C is innovating in terms of this? 
     >> MANU SPORNY: Sure, we've been talking about where we need to head with Intellectual Property training, the legal frameworks that exist to do that. There's another part of this. What technical frameworks are we going to use? In the core of the problem here is that in the 1980s and 1990s, we spent quite a bit of time figuring out how to communicate with one another. Put in a person's e‑mail address, hit send and those bytes travel around the world and get to the recipient within seconds. We never actually sat down and figured out how to send money in the same way over the internet. We tried to do it in 1999, but we failed miserably.

The Web Payments Group at the W3C, it's core focus is to try and create, try to build payments into the core of the web. For those of you not particular with the World Wide Web Consortium, we build standards for the web. 2.4 billion people use the standards we create, every day, so the focus here is to take what we've been talking about and build actual internet protocols that make it happen. Let me jump through these pretty quickly to hit some high points.

The W3C is looking at this problem as a, a problem of financial freedom. Right? So, just like we've kind of solved the digital publishing freedom problem on the web, anyone can publish a website, anybody can send e‑mail, we can't do the same thing for money. We need to be able to do that.

We have a number of problems here, there's an infrastructure problem, when we talk about money and equality in the world. 2.5 billion adults don't have access to bank accounts. That's a big problem. The banks aren't really interested in serving those customers, because it costs a lot of money to onboard them. The pinnacle of the payment technology we use on the web today is backed by credit cards and bank transfers. This technology was built in the 1970s, it doesn't scale to the internet. We need a new type of framework that can provide the banks some way of moving into the future.

There are regulatory issues with this that need to be solved and fundamentally, the problem with money on the web, right now, is that sending and receiving money is really, it's proprietary, right? Slow and secure, hostile to innovation. And most of the big technology companies are built on top of this infrastructure. There is no real innovation, they're all kind of modifications, old banking transfer credit card mechanisms.

So the question is, is there room to improve these services? Do we think that credit cards are the future? Right? And more specifically, how do we reach the world's banks. What technologies and policies do we need to create to reach them? Like I said, there's a standard for sending e‑mail, there's no such standard for sending money, and that's what we're busy at the World Wide Web Consortium, creating that standard for payments.

The interesting thing about the W3C is everything is based on an open, Pent and royalty‑free standard. Any country can implement the standard, any small group can implement the standard and operate, they don't have to ask for permission to do it, it's one of the core tenants of the web. It's the reason the web works as well as it does and we're extending that to global financial payments. It's very proprietary now and was designed in the 1970s, we need to change both of those things.

We've, we're building a number of things that I think people in this room would be very interested in, in seeing happen with the payment system, for example, automatic tax revenue collection built into the standard, at the point of sale, go to the website, click the buy button, money flows and tax is automatically collected. You don't have to wait for your vendors or citizens to file their taxes to collect those taxes, it happens in realtime.

We can track complex economic variables, you know, facts, not opinions, we can figure out exactly what money's being spent, and which economic variables are being affected by the purchase. Identity is a big thing, security is a big thing, we need to reduce fraud. There's $100 billion in fraud that happens every year because we have this archaic system where we type in a credit card number into every single merchants website that we want to make a purchase on. That's like a password into your bank account. It's a really backwards way of spending money on the web. There are better ways of doing it and we're using those.

We need to be able to express products and transactions and contracts in a machine‑readable open way. If you go to a home improvement store and buy a hammer, you should be able to, in the digital receipt of the sale, see the brand of the hammer, weight of the hammer, warranty information associated with the hammer. All should be wrapped into a digital contract, sorry a digital receipt, stored at your bank or preferred financial institution and you should be able to use that digital receipt to file your taxes, if necessary, right? This is the type of future we're creating at the World Wide Web Consortium. This is not theoretical. We have implementations and they work.

Payswarm is one of these implementations. This is another one, the Mozilla Firefox phone. It's being sold in emerging markets right now. This isn't some kind of "we wish we had this infrastructure." We do have this infrastructure, and one of the reasons we're here at the IGF is to work with policymakers, regulators to make sure this technology gets into the world's unbanked populations. 2.5 billion adults in this technology can certainly help all of them.

Key here is this work is just starting, the technology is done, but we have a workshop in Paris that happening in February that we are hopefully, we are inviting people from the IGF to come to and participate in the work. There's a lot of regulatory policy stuff that needs to be done and we need help doing that. If everything goes well, we will have a, an official working group pushing this stuff at the W3C next year and we expect the first standard to be done in 2017. We have backers from, with the likes of Bloomberg, Mozilla, Google is interested. There are a number of other key payment companies that are interested in this work.

So, so anyway, that's what we're building. If you'd like to know more, the slides are online. All of the orange links you can follow. Web payments group at the W3C. Join, it's free, if you're interested in this work, if not, please come up and introduce yourself to me. I love talking about this stuff with folks.
     >> PINDAR WONG: We have an online question, and a lot of players. With all due respect, anyone want to take ‑‑ if not, can we move to the online question? No....
     >> MONICA: A freelance journalist in Munich. How do the ideas for enabling IP trade and reform necessarily interact with traditional style bilateral and multilateral trade agreements where there seems to be a perpetuation of old systems.
     >> If somebody else wants to go first? 
     >> PINDAR WONG: Let me jump in. This stuff is happening. It's creating awareness for those in the other traditional trading communities to be aware of what is already occurring and to provide, basically facts not opinions. So whether or not, I mean, if you're going to make an omelet, you have to break some eggs. If you use traditional metrics to innovate, you'll never innovate. The whole purpose of innovation is, in some sense, disruption.

The reason why this is so difficult is because it crosses borders. That means, in some sense, it's international, so, I mean, Jeanette, do you have a comment? 
     >> JEANETTE HOFFMANN: I'd like to comment on where the two systems interact, I think the classical system in terms of licensing, certainly on the national level, the collecting agency. I think in every European country, there's been a call to reform to internationalize the system. It doesn't make sense in the long run when you have global markets for IP to do the whole licensing business on a national level. There has to happen something in the collecting agencies so far behave, they're rather reluctant in terms of internationalizing their system because they fear competition with other collecting agencies.

But I think, where we can, will see a lot of change is actually in licensing agreements between private partners. And I think setting technical standards is one way to set this process in motion. When, on the national level, nothing is happening, then new initiatives have to start and do it first on the, on the technical level, but also on the organizational level. New trading platforms for licensing can be set up even without the consent of national collecting agencies.
     >> NICK ASHTON‑HART: I exploited contracts for exploitation of Intellectual Property. Something very rare of people working in multilateral institutions, in the government space on copyright policy, unfortunately. I think the best way to end up with something more workable, because Jeanette is, of course, right. There are national examples of implementation of rights, which don't assume the default is no, to doing anything. Unless every rights holder says no to you, individually, often manually negotiating with you. In Scandinavia, they do the opposite, the default is yes, unless some rights holder opts out. You first saw streaming services in Scandinavia, because that's the only place you could do it. The answer is to look at situations like that, bring those to policymakers and say "what is it you as a national priority want for your creative sectors in particular?" And the other side of it is to recognize that the creative sector is very economically small. I say this as a person who loves music very much. The whole revenue of record labels is less than the amount made in one quarter by many single internet companies. All record labels revenue is smaller, considerably smaller.

And so, I think there needs to be an awareness in the policy‑making community of where is the value in the IP. The U.K. office made very clear, it's not where we spend most of our time talking, it's in places we spend most of our time not talking. I don't think policymakers are aware of this at all, and should be. We really should have, you know, follow the money of it all, really, with policy‑making and you know, as I've argued before, you really have to oblige some rights holders and say "it's nice you have rights, but if you're a creative, a rights holder of creative works, you have an obligation too, to allow people to find you and let people license on reasonable terms." Not, not keep what you own a secret and prevent anyone from knowing what you own and forcing them to negotiate, call you, and negotiate a deal by phone with you for the same rights for every country.

I honestly think that, that copyright is not as broken on the internet, in law, as it's thought to be, but the, the implementation of it, in particular areas of the creative sector, is just no longer fit. It's not designed for an online world. It's designed for an offline world where you only sold physical copies of one or two variants and that's it. And we just don't have that world anymore.
     >> PINDAR WONG: Question? 
     >> I'm very interested in this web payment stuff, my question is, where is the money in this? What are the businesses that are going to profit first and drive adoption? 
     >> MANU SPORNY: Very good question. There are a couple scenarios, we've been talking with international banks. The banks could interoperate with one another and buy things easily over the web. You could see a huge drop in the percentage you charge. Think of it as a replacement for the Visa and MasterCard for credit cards for buying things on the web. First it could happen online, then it could happen offline. So the banks could be one potential source of people that adopt it.

It's highly unlikely, because they're very conservative and they, and I've had discussions with them where they've said, this looks like it's ten years down the road. Now you talk to the technology companies and the technology companies say this looks like it's around one and a half, two years down the road. So we could see technology companies like people that would like to compete with PayPal or Google or Amazon, come in, agree on a consortium‑paying mechanism for the web and adopt it in that way. Credit unions are another potential. There are companies that extend credit. There are many different types of organisations that could utilize the technology to greatly reduce the amount of money that they pay on a, for example, per swipe base on cards. Business to business, governments could utilize the web technology payments as well.
     >> PINDAR WONG: The question is, is the mobile phone company the new bank. Can you give us an idea, of you know, that I would think the mobile phone market's pretty crowded already. You have the two big players, one in Asia, one in the states. You mentioned the phone you have, how's that going?
     >> MANU SPORNY: Mozilla, the creator of Firefox has gotten into the mobile phone business. They thought the iPhone was threatening the web. Meaning closed application development was taking the hearts and minds of developers. They built this phone to counter that, but their strategy was very different. They decided to go after emerging nations and developing nations. They said, people in the states and Europe really care about you know, they have their iPhones, they're happy, they're happy with paying $600 for a phone. This is a $50 phone, right? This is going after the, or it's going to be a $50 phone once it's sold on the market. This is going after developing nations and they know that the developing nations, they're putting this phone into, don't have the infrastructure, the banking infrastructure that the rest of the world does, or even if they do have it, it'd be cheaper to run transactions over this mobile phone.

So, that's another constituency, another group that could make that happen. And the, and the mobile operators could, then, become the new banks. They're your new financial institution, they already have some kind of contract with you. They've done some kind of know your customer with you. All the types of clearing a bank does to give you access to a checking account, the mobile phone operators could do when they give you your phone. And could even be subsidized so these phones are given away for free because you're running all your transactions over them.
     >> PINDAR WONG: I see a queue of hands here. Can we work across the room, starting with the left‑hand side first? 
     >> I have a question, specifically to the World Wide Web Consortium project. I think it relates to the broader discussion, that's specifically, how, will you create standards that can meet the requirements of the various know your customer regimes around the world? They're very divergent, how would you create a standard that locks them altogether or kind of binds them? That relates to the broader question about what everybody was talking about, which is, when you've got an IP good, a digital good moving across borders and right now, there's WTO kind of digital goods, customs bar, they're not subject to customs duties, but that may not last forever, and so you would have divergent customs regimes all around the world for digital products. So again, you know, it's the same issue, but in a different light, how do you deal with the various regulatory regimes that could exist for payments, but also for digital goods more broadly? 
     >> MANU SPORNY: I'll let the other panelists approach that issue, there are certain things you can technologize, know your customer requirements across the world, that's something that's going to be very difficult to standardize. The way you do know your customers. What we can do, though, is provide a unified online identity that allows you to associate information, such as government‑issued ID number. Whether you're over 18 or not, your shipping address, things like that. We can build that and we are actually building that. It's built into the phone. Regulatory issues, these, everyone here would know better than I would.
     >> PINDAR WONG: We have a question online from Tony. Tony, go ahead. What's your question? 
     >> TONY CLAYTON: It's coming back on the discussion you've been having about the payments. It seems to me that the incentives to do these are so huge that there must be a way of aligning. Tim McNamara gives a nice account of what the potential is for 2 billion, 3 billion consumers on the internet, to whom you can sell something tomorrow. The whole copyright debate. You can sell it to everybody on the internet. If you can get your message across extremely rapidly, the incentives to do this are huge.

The question is how do you get the people who own the channel with other people in the payment systems and the people who organize the regulations and realize that value. Because it is enormous.
     >> PINDAR WONG: That's the purpose of having these meetings, to bridge the different communities, to make them even aware this is coming. Again, the copyright, Nick's point in terms of relative scale and the numbers that you've provided, again, facts, not opinions, the technology is there, to at least, on the technical front, what's not there is a policy coordination across the banking sector, the different concerns about identity. Perhaps there should be a minimum set, as Manu mentioned. A minimum requirement that could at least get everyone moving in the right direction. Experimenting, trying things out with the understanding that we're going to break a few things, but the opportunity, again, today's session is an opportunity. We had the session on basically the, the downside and things that were already banned. The question is, how can we take this forward? That goes back to the next thing, the WTO thing. That'll be back in Bali in December. It'll be interesting to move to the last question, that I think we have and then we can try to wrap up.
     >> A friend of internet and Intellectual Property. My question is actually the way of evaluation of intangibles, you know, first, I heard about these discussions, which is very interesting. I was wondering if you're talking about eCommerce aspect of intangible goods or general trade of intangibles. And assuming that the biggest challenge is eCommerce or over the net transaction of intangibles. In the case of intangibles, one of the biggest issues we have is how to evaluate intangibles. Say for instance in a case of patent protections of you know, some new ideas, based on the great R&D spending, many people have different ways of evaluating the value and people cannot invest properly. So, do you have any good suggestions, how we can have a global system, a good evaluation of those intangibles? 
     >> PINDAR WONG: I think there's two things. The question of value and there's a question of price. The price, I think markets can be a way of determining market price, but value, again, if I remember correctly in Peter's slide, he has the three different, it's a whole ecosystem, lawyers involved, accountants involved. I think Tony's later slides which were all put on the internet talks about how you can look at banking on IP. Looking at the professionals, professional investors, and their views, professional people who are very, who can see the value, not necessarily the price, because again, I guess, just like anything, in terms of investment, there are those who are perhaps ahead of the game. Even if you did have that value, how can you make the transaction? How can you make the phone where you can buy it and pay for it at the same time. In addition to keeping all the trade data and the payment data in such a way that you can track it. Jeanette? 
     >> JEANETTE HOFFMANN: I think this is particularly relevant with goods turning into services that change the market relationship between seller and buyer and the fundamental, in a fundamental way. We see this now with people buying something on Amazon. Suddenly it's gone because they've moved or Amazon has changed its license politics, et cetera. If we want to have a global trade system that also involves consumer goods, we have to come up with general standards that give consumers certain rights, no matter on what continent they live or buy stuff.
     >> PINDAR WONG: In that respect, paraphrase, are you saying we need to reform the international trade system? 
     >> JEANETTE HOFFMANN: Also thinking about consumers.
     >> PINDAR WONG: In the interest of time, it's 6:00, let's finish on time, minimally, last question, if not, I thank Peter, Tony for tuning in virtually. Thank you for attending. Sorry about the overrun. If there's further interest, let's have the discussion. The slides and everything will be online. Thank you very much.
[applause]

 

[Session concluded at 5:03 a.m. CT].

 

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