http://www.upi.com/view.cfm?StoryID=20031003-052555-4332r
The Bottom Line: Software and copyright
By Gregory Fossedal
Special to UPI
Published 10/3/2003 5:42 PM
WASHINGTON, Oct. 3 (UPI) -- Globalization worked, as investors and
politicians around the world are learning with the migration of global
exports, investment dollars, and jobs to such countries as China,
Brazil, India, Argentina, and Russia. So also has technological
diffusion worked -- which is why, not by coincidence, those countries
(and various small Western firms) pose major threats to the
intellectual property rights of a number of key U.S. sectors, from
pharmaceuticals to chip manufacturing to computer software.
The bottom line for global investors fishing for a few good shorts at
these high levels for the U.S. technology market is, which of these
sectors is most vulnerable to the kind of domestic and international
assault seen in, for example, the music recording industry -- which
has seen sales plummet in recent months despite the too-late effort to
battle off low-cost piracy abroad and no-cost sharing over the
internet.
Smart investors are putting their shorts on the computer software
industry, with a special emphasis on the pitiful, helpless giants such
as Sun Microsystems, Oracle, and even Microsoft. Awash with cash and
wishy-washy bureaucracy that would have scandalized their founders 25
years ago, these are the giants that have the farthest to fall -- and
will have the most difficult time dealing not only with emerging
market piracy, but the more subtle assault of "open source" software
termites operating in the U.S. and Western Europe.
Straightforward piracy is an issue solved for the software industry 25
years ago by a brilliant young executive named Bill Gates, who
realized that only by basing software on undisclosed "source code"
could the industry ever really thrive. Today, however, the
quasi-monopoly enjoyed (in various sectors) by Microsoft, Oracle, and
Sun is highly vulnerable to outright theft by such nations as Brazil,
China, and Russia -- to name just three.
The collapse of global trade talks last month, led by the U.S. with
its imposition of protectionist curbs and farm subsidies since 2001,
threatens all global growth. But it's especially daunting for the
owners of intellectual property.
It won't be long before some Third World country reverse engineers a
workable version of one of the older (and better, actually) versions
of Windows(r) -- perhaps even using some of the source code the
company has willingly dribbled out in recent years to shield itself
from various anti-trust cases. At that point, neither the U.S.,
diplomatically, nor an army of lawyers from its unpopular corporate
giants, will be able to do more than the vast number of smaller
companies that have already given up in international patent cases.
The problem of outright theft, however, is aided and abetted by a more
subtle, but in the long run even more dangerous, threat to proprietary
software: the "open source" movement. Open source can be a misnomer,
but in general, open source is a product of thousands of programmers
who agree to share their work in developing a joint product with
revealed code -- hence, "open source." There are now many programs
developed in this way, such as the operating system Linux, which might
better be called "mixed source" or "shared proprietary source" --
because under the licensing arrangements for using Linux, programmers
who improve or make changes to the system must agree that their
innovations become the property of the system.
Linux and many programs built on it (such as the Linux-based office
suite) function comparably to Microsoft, Oracle, and Sun products. The
difference is, they're practically free. They thus fit in to a world
in which consumers expect intellectual property to approach the
near-zero marginal cost they now enjoy in sharing music, buying or
selling stocks, making long-distance telephone calls over the
internet, and logging on to the net itself using wifi.
These products and the service they may need, to be sure, are not
truly free over time. Large companies, not to mention whole countries,
that are now dumping Microsoft to run their networks on Linux, want
help servicing their products. Hence such Davids like Red Hat and VA
Linux have sprung up and -- over the last two years -- significantly
outperformed the stock price of the proprietary software Goliaths.
Still, on the whole, no cost up-front is hard to beat. The software
giants already concede their products have no advantages over open
source products in terms of security and reliability. They hope to
maintain sales based on superior service and customer service, but
then again, none of the companies mentioned have a reputation for much
other than arrogance when it comes to dealing with customers.
Furthermore, here again there is an important interaction between the
emerging market of open source software, on the one hand, and the
emerging market countries on the other. The high-tech low-wage
countries of China and India.
"It is no accident," as the Marxists like to say, that China and India
were able to work out a common agreement to implement open source
software for many government systems. This is the least unlikely
partnership one can conceive short of a joint venture firm named
Sharon & Arafat.
According to a reliable U.S. official familiar with Chinese industrial
espionage efforts, the use of Linux products by those governments is
only the beginning. "The Chinese and the Indians both plan to become a
hub for developing countries eager to escape from U.S. software
'hegemony,' if you will," the source said. Today, the People's Bank of
China. Tomorrow, a billion desktops in India, another billion in
China, and another quarter of a billion in Brazil.
In a friendly but powerful critique released this week, a Merrill
Lynch analyst friendly to Sun Microsystems implored the company to lay
off workers, cut costs, and reduce the timidity of the company's
middle management. The same observation might be applied to Oracle and
Microsoft as well.
But cost-cutting misses the point. It didn't help the recording
industry; consumers are balking at paying $25 for a CD that costs a
few pennies to produce, but they will also balk at paying $15 or $10.
The same dynamic will inhere in software, the more so as these
companies partake in the general product license governing Linux and
Linux-based applications.
Sun and Oracle have even tried to sidle up to the Linux and
open-source movement. In effect, they have invited the termites into
their house, hoping that after a little munching a symbiotic
relationship can be worked out. "Let them eat Microsoft," is the
motto, and, to be sure, there is a special hatred reserved only for
Bill Gates among the community of programmers who couldn't get hired,
or compete, with the Redmond wunderkind over several generations of
products.
Even so, it's a better guess that Microsoft, with the most cash and
the largest house and the most solid oligopoly power, will out-survive
Oracle and Sun. Ultimately it, too, is vulnerable. But with a kind of
poetic justice, the first owners of intellectual property rights to
partake in the undermining of intellectual property may be the first
to go.
There are, to be sure, strategies that each of the Big Three could
employ to ward off the termites. That's a job for those companies and
their strategists.
In any case, none of the companies seems interested -- or even awake.
Like IBM 25 years ago, they seem not even to be fully aware of the
threat. Hence it is possible for Merrill, an obviously friendly critic
of Sun, to critique the company's operations without reference to what
is, in the long run, the primary threat to its existence.
THE BOTTOM LINE
Sun and Oracle remain good shorts, as they have for more than a year.
Microsoft is becoming a good short, too; at these levels, it is
already time to start nibbling. On the buy side, there are dozens of
feisty young companies -- Red Hat, Sco Group, and VA Software -- that
are already taking advantage of the new global paradigm.
The little competitors, indeed, are already fighting amongst
themselves, much as some types of insects and carnivorous fish eat
themselves. Heck, they're already suing each other. In this too, the
software industry takes much hope, much as the recording industry
delighted in its ability to crush this music-sharing program, or that
overseas piracy operation. Pirates, one can kill -- but piracy,
especially once it is welcomed into the intellectual community, just
changes its address. And termites, unless completely exterminated,
just keep munching.
Sell the proprietary software makers, buy the feisty open-source
servicers. If the software behemoths awake, you'll read about it first
here. In the meantime, that low rumble you hear from Santa Clara,
Redwood City, and Redmond isn't a giant stirring. It's just a loud
snore.
-0-
(Gregory Fossedal is chief investment officer of the Democratic
Century Fund, managed by the Emerging Markets Group. His firm may hold
some of the securities mentioned his articles. These positions and
opinions are subject to change without notice, and neither UPI nor EMG
assumes any responsibility for investment decisions made by readers.
Investors should contact their own professional advisor before making
any decisions to buy or sell these or any related securities.)
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