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Just a reminder, these posts are not legal advice. This site is the personal blog of Mark Radcliffe and the opinions expressed are those of Mark Radcliffe and not those of his clients, DLA Piper or the clients of DLA Piper.

About Me:

Mark Radcliffe

I have been practicing law in Silicon Valley for over thirty years assisting startups and global companies develop and market innovative products and services. I have participated in multiple business cyles in Silicon Valley from hardware to software to internet to cloud. My projects have included developing the dual licensing business model for open source startup, developing the original domain dispute resolution policy for NSI and assisting Sun in open sourcing the Solaris operating system. Recently, I served on the US Japan Innovation and Entrepreneurship Council (one of ten members) to develop a plan to encourage the innovation in Japan and the United States. I have been working with the same attorneys since 1986 although we have merged with other law firms several times. I am now a partner at DLA Piper, a (relatively) new global law firm formed in 2005 from the merger of three law firms. The firm now has 4200 lawyers in 31 countries and 77 cities. My experience in corporate securities (particularly venture capital) and intellectual property enables me to assist companies structure the financing and intellectual property strategy for developing ane exploiting a new product or service. I and my team work with fifty startups at one time as well as Global Fortune 100. I have been fortunate enough to work with companies in software, cloud computing, semiconductor, health care IT and Web 2.0.

The DLA Piper 2008 Technology Leaders Forecast Survey found that  the use of open source software, while widespread, remains misunderstood. The Survey found that software companies used open source software in 65% of their products, as compared with use of open source software in 55% of the products of all technology companies. This number drops to 29% of the products when all respondents are included. However, only 48% of these companies have an open source use policy (software companies were more likely to have an open source use policy).

Smaller companies, those with fewer than 1000 employees, used open source software in almost half of their products (44%), yet 35% of these companies do not have open source use policies. Larger companies, those with more than 5,000 employees, reported use of open source software in only 9% of their products and 65% do not have open source use policies. I find that this number for use of open source software among large companies is strikingly low.

I think that the survey reflects a continued misunderstanding among large companies about how widespread is the use of open source software.The failure to have an open source use policy is very dangerous in the world of complicated “hybrid” products: open source licenses do not mix well with commercial licenses without careful analysis. http://lawandlifesiliconvalley.com/blog/?p=18. The risk is particularly high now because the financial downturn means that licensors will be carefully reviewing compliance with license terms to try to find new sources of revenue. For additional thoughts on this issue, you can see my interview. http://www.youtube.com/watch?v=MsZKWFmT0qs&eurl=http://www.dlatechlaw.com/search?updated-max=2008-10-21T13%3A46%3A00-04%3A00&max-results=7

Ray Ozzie, Chief Architect of Microsoft Corporation, led off DLA Piper’s Global Technology Leader’s Summit.  In describing the future of computing, he reminded the audience that the existing operating systems were designed in a world of 56k modems.  He believes that the widespread access to broadband has dramatically changed computing.

He noted that the two major trends that will be critical to the future of computing are cloud computing and consumer use of multiple devices. However, these issues are complicated and will vary by country. He noted that in India, the primary “screen” is the cellphone, yet in the PRC, consumers use both the cellphone and the PC. These devices are used very differently and offer different opportunities: the cellphone is very effective in obtaining information with the PC more effective at manipulating information.

He then turned to the growth of social networks and their potential dark side.  He described the problems that the Well and its community had with flame wars and other bad behavior.  He believes that the current social networks need to be careful about how they run their services to avoid these problems. The most interesting point that he made was that frequently what works in a public social network is likely not to work “inside” the corporation because of the different dynamics.

For more information about the Technology Summit, see the official blog: http://www.dlatechlaw.com/

In the midst of a financial and economic crises, and in the midst of uncertainty associated with a historic presidential election, the DLA Piper 2008 Technology Leaders Forecast Survey found that industry leaders have a host of concerns, but are fundamentally optimistic about future opportunities. http://www.dlapiper.com/tech_survey_release/. The survey is part of our first Global Technology Leaders Summit. 

These top executives revealed that 75% of them have been adversely affected by the economic slowdown. Only 15% of respondents think the U.S. economy is likely to rebound in the first half of 2009 and more than half of respondents (55%) believe the IPO market will not begin to rebound until at least 2010. With responses received between September 23 and October 6, the survey was conducted as Congress debated the $700 billion bailout bill and during a tumultuous two weeks on Wall Street.   

Approximately 90% of respondents do not believe the IPO market will return until at least the end of 2009 which is not surprising given the extent of the current economic crisis and the shutdown in the IPO market that occurred following the Tech Bubble Burst in 2000. 

These views of liquidity issues have clearly affected the views of venture capitalists which have a very different view of the financial crisis than executives of technology companies. Nearly half (47%) of finance and venture capital respondents say the current financial crisis will have a more adverse impact on the technology industry than the Technology Bubble Burst of 2000. However, 67% of technology company entrepreneurs and leaders disagree.  We think the difference between the two groups was largely due to the emphasis of venture capitalists on exit issues such as M&A and IPOs – which are likely to be more adversely impacted in the near term – than longer-term operating results.

These concerns are also reflected in the recent pronouncements by venture capital firms such as Sequoia Capital and Benchmark which I have summarized in my earlier post. http://www.lawandlifesiliconvalley.com/blog/?p=77

Matt Aslett of 451 Group notes that announced venture capital investments in open source vendors in the third quarter of 2008 was down 12.2% over the third quarter 2007, from $87.2m to $76.5m.  The overall market itself is down 6% overall.

Given the fact, that the first quarter of 2008 was the largest ever for open source investments and that second quarter investments were also significant, this reduction is unsurprising. Matt noted that the open source market is small enough so that even one missed deal can effect the statistics.  His analysis also notes that the deals in this quarter are more late stage and the average deal size is larger ($9.6m); only two Series A/Seed deals were announced.  For more information, see Matt’s post. http://blogs.the451group.com/opensource/2008/10/16/vc-funding-for-open-source-down-12-in-q3/.

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The question of how Microsoft will respond to competition with  open source software is beginning to be answered. I have already discussed the views of Stanford and Harvard Business School professors in an earlier post http://lawandlifesiliconvalley.com/blog/?p=74.  

Jean Louis Gasse, a smart entrepeneur and technologist who is now a venture capitalist, suggests that Microsoft is working on a comprehensive strategy for the threat to its Windows operating system which includes responses in all three areas of risk: servers, mobile and desktop.  http://www.mondaynote.com/?p=1022. As he describes it:

Microsoft’s Live services are but a rehearsal for a much bigger act, Microsoft’s Cloud OS, sometimes called Strata. And, based on Microsoft’s own Cloud services, we’ll see a Danger-based smartphone, as proprietary as the Xbox and the iPod competitor Zune.  Put another way, Microsoft’s future business model will borrow from Apple and Google, it will have two components: proprietary devices and “universal” Cloud services

I recommend that companies using open source stay alert for the next month as this new strategy rolls out.

I just attended Silicon Valley Bank’s Twenty Fifth Anniversary celebration (Silicon Valley Bank is the leading bank for venture capitalists and venture backed companies). It was attended by many venture capitalists and entrepeneurs, so it was a great event to determine the attitude of the Silicon Valley ecosystem to the rapid changes in the last month. Until recently, Silicon Valley had watched the financial meltdown as an observer, but last week the financial crisis reached Silicon Valley. The crisis became very real to Silicon Valley when Sequoia Ventures, one of the most successful venture capital firms, held a meeting for its CEOs announcing that the “Good Times” are over.
http://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation?type=powerpoint . They recommended strong measures: cutting expenses very aggressively, raise as much money as possible, establish a heavily commissioned sales structure and become cash flow positive as soon as possible. Further, they suggested that any company without a year of cash in the bank was in trouble. 

However, this message of gloom has generated a contrary response from experienced investors such as Alan Patricof, founder of Apax Ventures. http://www.paidcontent.org/entry/419-patricof-on-rip-good-times-dont-burrow-into-a-dark-hole/ . However in a tribute to the respect for Sequoia Ventures and its success, the Sequoia powerpoint has been on the agenda for every Board meeting which I have attended (my friends who are Board members confirm that this discussion is ubiquitous). My experience has been that the Boards have decided that they need to be cautious, but that business will continue. The Sequoia presentation has even generated its own parody. http://www.alleyinsider.com/2008/10/the-last-vc-memo-we-ll-publish-this-week-

This view was confirmed by the conversations that I had at the Silicon Valley Bank event. Both venture capitalists and entrepeneurs were modestly optimistic. They believe that the situation is serious, but that the need for innovative products and services will continue. We will all find out in five years, so stay tuned.

I was in Japan on business for the first week of October visiting my Japanese clients. I always to try extend these trips over a weekend to visit other parts of Japan. I was fortunate to be able to a short weekend in Kyoto this trip. Kyoto is a charming city which is best known for its many beautiful temples and their gardens. Although I was enchanted by the gardens that I visited, the concierge at the hotel also suggested that I visit the Raku Museum http://www.raku-yaki.or.jp/museum/index-e.html. Until I visited the museum, I had always thought of Raku as a technique for making pottery originating in Japan which is characterized by low firing temperatures and removing the pot from the kiln while still hot. The results are difficult to predict, but have a special charm for that reason. The ceramics produced using Raku techniques are quite identifiable and striking (many years ago, I worked with ceramics and used the Raku technique).

However when I visited the museum, I learned that Raku was developed in the sixteenth century and is actually the name adopted by the family that developed the technique (the name is based on a seal granted the family by Toyotomi Hideyoshi, the leading warrior statesman of the sixteenth century). The museum is small, with only three rooms, but this size and focus makes it a gem. In fact, the museum is in a building next to the family’s kiln. The kiln is still being used. The visit reminded me of several other Japanese museums of similarly small size (all very focused) which I have visited. They appear to form a special class of museums in Japan. They are well worth the effort of seeking them out. If you are in Kyoto, you should visit the Raku Museum and when in Japan you should try to visit its other small museums!

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You know that open source has arrived as a business strategy when Harvard and Stanford professors write papers about how to compete with the open source model (although the article covers all free goods).

In their words:

It’s not easy, and it’s more than just a theoretical question. U.S. newspapers are finding it difficult to compete with free news and the commentary of bloggers and other internet sources. And in the software world, the rise of open source products, which are available for free on the internet, is reshaping the technology industry.

“Divide and Conquer: Competing with Free Technology Under Network Effects,” Deishin Lee and Haim Mendelson, Production and Operations Management, January-February, 2008 http://www.gsb.stanford.edu/news/research/mendelson_div_conq.html

They mention three strategies for commercial companies to compete with “free” products:

1. Timing

2. Product features

3. Network effects across other markets.

Thanks to Matt Asay on finding this article and his insightful commentary. http://news.cnet.com/8301-13505_3-10047872-16.html

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Unfortunately, computer problems (my hard drive died) and travel have delayed my summary of the second day. First, we ended the first day with a magnificent dinner cruise on the Seine River. Our hosts, Alexandre and Celine arranged for a sommelier to select special wines for the cruise which meant that we had great wines from all over France. On the second day, we focused the brainstorming sessions on Open Source Licensing and the Definition of Open Source. The licensing discussion was lively, with the European attendees focusing on the challenges imposed by the number of open source licenses. During the licensing discussion, they were particularly interested in the effect of the Jacobsen decision which clarifies the enforceability of open source licenses in the US, an issue was viewed as settled in the European Union.

The discussion of the definition of open source ranged from who should control the definition to whether a new group, focused on commercial open source should be created to provide guidance about how to determine whether products (or companies) are “open source”. The consensus was that OSI definition has served the industry well and should continue to be the core definition and that a new non profit focused solely on commercial open source is unnecessary. The discussion about whether a company can be considered “open source” was very interesting. Most attendees agreed that it is very difficult to meaningfully designate a company as “open source” because most companies follow a variety of approaches to software development and distribution. The better approach is to focus on products as following an open source model. An interesting side note to this discussion was the conclusion that all companies are now following a “hybrid” business model which includes both proprietary and open source products. Even Microsoft is now part of this trend. This conclusion is consistent with the results of our 2008 Napa Open Source Think Tank that open source software is now becoming part of the mainstream. The final presentation was by Rudy Salles, the Vice President of the French National Assembly. Linagora had assisted the French National Assembly in implementing an open source environment and Mr. Salles discussed open source from the point of view of both a user and a policy maker.

The Open Source Think Tank Europe was a great success and was particularly useful in helping the US companies understand the European perspective. We hope to see you there next year!

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