BEACON 10 IP & OPEN SOURCE

Final report

Index

Project scope Project methodology Key findings

3 4 5

The future is collaborative IP: use it - or lose it Investment: the elephant in the room

25 30 36

The business context

Business models: there are no magic bullets

7
19

There is more to be done

Appendices

42
44

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Final report for Beacon 10: IP & Open Source

Project scope

The speed of digital convergence and the global nature of the digital revolution bring the complex issues of intellectual property and copyright centre stage for all. Long accepted business models are being blown apart; the Internet is radically reshaping consumer attitudes and behaviour; and legal frameworks are not keeping pace. These are critical issues for a strong creative and knowledge economy for the 21st century.

New digital distribution networks are reshaping producers and consumers attitudes towards intellectual property and fair use. New approaches to intellectual property ownership and licensing, such as Creative Commons and open source, are facilitating the evolution of new business models with intellectual property at the very heart of the creative value proposition. It is essential the framework is up to date, relevant, easily usable and fair. This Beacon Project is one of a series of key industry topics being examined by the Creative Industries Knowledge Transfer Network. The project aims to create a strong positive vision of how the creative industries will reconcile the tensions at the heart of this new era and develop models where successful artists and businesses co-exist with empowered customers. The Project, which ran from September 2010 to March 2011, took in views and experiences from a broad range of creative industry sectors, including performing arts, design, advertising, radio and TV, film and video, music,

Dame Lynne Brindley CEO, British Library

publishing, video games and software.

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Project methodology

What are the key issues for creative industries around value generation?

How are businesses meeting these challenges?

What patterns and principles are evident?

What are the implications for IP strategies?

Intellectual Property (IP) is at the very core of the creative industries value proposition. The Beacon Project, led for CI KTN by the innovation directory Inngot, provided an opportunity to examine this central role of IP and assess how businesses can best harness it during a period of rapid, technology-driven change. In order to focus on principles rather than technicalities, the Project started with an examination of the pressures on value generation, using these to understand the themes which underpin current and emerging business models, and bring out the underlying IP strategies. Through desk research, expert interviews, small discussion groups, larger workshops and a national online survey, the Project uncovered and explored twelve strategic themes. Over 400 individual contributions have informed the development of this reports four provocations on the biggest IP-related opportunities and threats facing creative organisations.
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Key findings: the context

Several technology trends are combining to place unprecedented pressure on creative industry business models, particularly affecting organisations producing digital content. Consumer behaviours are also being driven by these technology developments: they are adept at sourcing free content, regularly creating and sharing it themselves. This upheaval creates major issues for the protection and exploitation of intellectual property, or IP, which is of vital importance because it underpins value creation at every stage of business development. Some creative organisations are finding ways to capitalise on the new, more connected marketplace using their IP in many cases by adopting open approaches towards sharing it. The strategic challenge for IP-intensive businesses relates to how they can best embrace the opportunities to share as well as retain their rights, and generate income through indirect as well as direct means.
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Key findings: the provocations

BUSINESS MODELS

There are no magic bullets. Creative businesses need to use a range of business models, or sources of income, to cope with the demands of digital. The industries direction of travel is towards novel, shared methods of revenue generation which will demand careful attention to IP management. The future is collaborative. Joint working is essential if the industries ecosystem of micro and small creative businesses is to prosper. Over 80% of survey respondents are collaborating, and the majority are co-creating IP. These partnerships can generate scale and help secure new markets. IP: use it - or lose it. The digital revolution makes IP protection more difficult and IP exploitation more critical. Scale is now a critical success factor for many creative companies; legal and commercial frameworks and practices need to evolve to meet the needs of this new networked environment. Investment: the elephant in the room. Creative businesses face problems sourcing working capital and finance for R&D and marketing, partly because reliance on intangibles means they have little security to offer. They have to source money where they can, which is limiting their growth potential.
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COLLABORATIVE WORKING

ATTITUDES TO IP

INVESTMENT

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THE BUSINESS CONTEXT Drivers of change: consumers & IP: key issues: value and IP: the new breed: directions of travel

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Drivers of change

Several technology trends are combining to place unprecedented pressure on established business models in the creative industries. Some of the most important factors are: 3G & broadband enable digital content to be downloaded and distributed - anywhere, anytime Digital & physical convergence blurs sector distinctions, especially TV, mobile & web Open source and falling hardware prices drive down costs and reduce time to market Established ways of generating & safeguarding income are being overturned

The empowered consumer: users become designers

New devices, from tablets to 3D printers, bring innovative ways for users to interact with and create content
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Who is most affected: the digital cluster

Digital Focus sectors Content
Advertising Architecture Radio & TV Music Design Publishing Film Social media Computer games

Output

Service

Artefact Physical
Art & antiques Crafts

Performing Arts

Manual Creative process

Technology-aided

The Technology Strategy Board has identified a cluster of content industries that are principally delivering digital output and are technology-aided. These sectors include many businesses who are most strongly affected by the drivers of change.
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Consumers and IP

A number of overlapping trends are apparent in consumer behaviours which create additional challenges for IP owners:

Many consumers seeking content online dont appear to discriminate between legal and illegal sources

With so much free content available online, some consumers dont see why they should pay for anything

Many online business models encourage users to generate content, as opposed to simply accepting it

The social context in which much digital content is used encourages sharing, which costs IP owners sales

How can consumers tell the difference? Do they care?

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How can successful business models be built from so little sales income?

Who owns content produced in this way and how can it be exploited?

How can sharing be facilitated without cannibalising revenue?

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Issues for creation & consumption

The laws that have traditionally formed the legal basis for monetising creative works are under severe strain in the digital age, for owners and users of copyright:
Detecting when an infringement occurs Determining the identity of the rights holder

Enforcing rights in the event of an infringement

The copyright owner

Creating workable binding contracts

The copyright user

Staying within the limits of fair dealing

Obtaining payment from willing purchasers

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Efficient methods of royalty payment

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IP underpins value at all stages of development

IP is not simply vital to income generation. It has potential to add value to creative companies in a variety of ways:
Direct income (differentiation: freedom to operate) Indirect income (monetising data/delivery via advertising/sponsorship) Trading value (ability to share/swap/translate) Profitability (loyalty/lock-in: bundling: cost advantages) Security value (to leverage funding) Influence/reputational/brand value Share value (investment) Exit value (sale)

Early stage
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Growth

Maturity
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Final report for Beacon 10: IP & Open Source

The new breed

Established and new businesses are innovating in this new landscape. In all cases, copyright and other IP rights lie at the heart of the creative value proposition: The iPhone catalysed a whole new form of content the app now taken to a new level for the iPad. Amazon has harnessed the webs reach and flexibility to create a dominant retail portal that has spawned its own community, Creative Commons provides a convenient set of templates for IP originators to determine what to share, and what to retain,

The Guardian has opened up its news archive for any business to access enabling branded content to be distributed via thousands of new channels.

Spotify enables consumers to access whatever music content they want, without having to buy or even download any of it.

Linux shows the potential power of opening up access to IP as a driver for business innovation.
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FarmVille has achieved huge scale by enabling online gaming to be a social, not a solitary activity.
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Directions of travel

A matrix was developed and refined throughout the project stages, to act as a road map for positioning and exploring business models and understanding industry trends. The vertical axis plots the extent to which a particular business model is dependent on direct methods of value generation from intellectual assets, as opposed to cases where original IP creates value indirectly, such as via advertising. The horizontal axis maps the extent to which a creative commercialisation strategy relies on holding onto the IP, or allowing/enabling it to be widely accessed in order to generate value the trend exemplified by the open source movement. The project survey enabled some conclusions to be drawn about the industrys direction of travel: towards indirect methods of value generation that build on the way users share digital content.
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Grouping the strategic themes

The four quadrants of the matrix were given labels to suggest where the emerging strategic themes should be positioned relative to each other. The upper left quadrant, where rights are retained and value is generated directly, was classed as selling. The upper right quadrant, where sales of IP are facilitated by sharing, was called licensing. The lower left quadrant, where rights are still under the originators control but used to generate value indirectly, was labelled as translating. The lower right quadrant, where rights are distributed in order to generate value indirectly, was characterised as leveraging.

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Compiling the strategic themes

The baseline stage of SELLING THEMES the Beacon project Convenience identified twelve stores themes for detailed exploration. These themes were explored by workshop delegates, who used them to produce examples of future business scenarios. These themes are summarised on the following page and explained in detail in the scenarios report. The long tail

LICENSING THEMES
Built for sharing The new royalty Back to the garret Collaborative communities

TRANSLATING THEMES
Fuelling technology Virtual appetizers Intangibles into tangibles

LEVERAGING THEMES
Online hoardings IP for free 21st century patronage

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Summary of the twelve themes

Online Convenience Stores. Producing standardised products that tap into the growing demand for easily accessible and downloadable content. The Long Tail. Targeting a specific niche, using the internets universality and scale to make harder-to-reach audiences profitable. Built For Sharing. Creating legal and organisational structures to make sharing easier, like Creative Commons and the Open Source movement itself. The New Royalty. Obtaining a large number of potentially very small commission payments (particularly for performances). Back to the Garret. Prioritising low overheads and independent working in order to accommodate uncertain income streams. Collaborative Communities. Co-creation of end products which can achieve scale and whose rewards can be shared by a group.

Fuelling Technology. Adapting creative concepts to suit new devices (typically making content IP subservient to the device providers interface). Virtual Appetisers. Using a Freemium model where content is provided at no charge, to encourage some users to trade up to a paid-for service. Intangibles into tangibles. Converting digital products into tangible items, often in order to create scarcity value. 21st Century Patronage. Creating digital content to order, either by being commissioned for a specific end product or sponsored to produce it. Online hoardings. Making content as widely available on the web as possible, and monetising it via advertising models. IP for Free. Giving content away for at no cost in order to generate value in other ways, for instance through data acquisition.

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Themes become provocations

As the strategic themes were examined in the workshop environment and used to model future scenarios, it quickly became apparent that many were not operating in isolation. For example, communities need rules to facilitate sharing, and may need either to interface with shop fronts, or to become distribution channels themselves. They may need to attract benefactors or sponsors to operate, and may target their activities at specialist niches. As these connections were explored, they coalesced into four provocations: Business models: there are no magic bullets The future is collaborative IP: use it - or lose it Investment: the elephant in the room
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BUSINESS MODELS: THERE ARE NO MAGIC BULLETS

Digital technology has opened up consumption and sharing, and in doing so, has undermined established business models the ways in which creative businesses generate income. This is most obvious in the music industry, but its effects are increasingly felt in other sectors, including broadcast, film, games and publishing. No single new model, or magic bullet, is apparent in any of these industries. Instead, creative businesses are having to exploit a range of different routes to market, many of which involve adapting or even re-inventing their core IP to some degree.

Just as technological change has created the potential for more rapid and widespread IP adoption, it also means that scale is becoming increasingly vital just to create the option to monetise it successfully. Even when scale is achieved, the challenge remains to translate digital activity and usage (free services/value/brand) into income (through viable business models). While many creative companies remain largely dependent on direct revenue for now (from content sales or commissions), the Beacon survey suggests new income is increasingly likely to come from indirect means such as advertising or spin-off merchandising . The direction of travel is towards the lower right hand corner of the project matrix, involving models which require IP to be shared and distributed, rather than exploited solely by its originator creating a raft of new commercial and IP challenges. 28/11/2010 Inception report for Beacon 10: IP & Open Source

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Views from the experts

Established industry models built around IP exclusivity, control and limited windows of release are giving way to consumerdriven approaches where no single economic model will assure commercial success. Liz Rosenthal, Power to the Pixel The search for a single solution is missing the point, because there isnt one. Tom Morgan, National Portrait Gallery Were at the beginning of a revolutionary moment in how people interact with the internet. Matt McAlister, Guardian Media Group

We cant have business models that dont take advantage of the content-sharing and user-interaction offered by the new technology. Birgitte Andersen, Birkbeck College The internet has created bigger monopolies than existed before. Feargal Sharkey, UK Music Lots of content isnt really worth anything in its direct form but its still possible to charge if supply is constrained by technology, and to have barriers for content that is high value and time-critical. Christian Ahlert, Open Business CC

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Views from the survey

In the world of photography, there is too much of an attitude that photography should be free to all, irrespective of the fact that someone will have made an expenditure to create the image in the first place and that they have a right to earn money from producing the work. This has come about through the explosion of internet accessibility to images as well as other information. Survey respondent, photography Like many creatives, I find open source to be inspirational yet I fear it. There seems to be a growing ignorance about the necessity of compensation for creative work, as the web has created a virtual free for all. Survey respondent, design & publishing

Copyright is the most important business tool I have. Even UK law is not entirely on my side as it allows newspapers and magazines (for example) to use my work and not give a credit. Publishers frequently use my work without consultation and expect me to second guess uses and only pay on invoice a thoroughly disreputable situation in my opinion. Survey respondent, music, advertising, publishing

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Where are businesses active now?

The percentages shown below indicate the proportion of survey respondents who operate at least partially within each of the four quadrants identified by the project. While it is no surprise to find that most businesses are most active in some form of selling based on their IP, it is telling that many businesses said they operate in more than one quadrant: 19% placed themselves in just one quadrant 48% had activity in two quadrants

24% had activity in three quadrants

9% were active in all four quadrants

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Whats the direction of travel?

43% of respondents said they intend to explore new ways of generating income. Revenue models in all four quadrants are being explored, and 55% of those who are exploring new models are looking in more than one quadrant. Translating
% exploring % not exploring

These pie charts show where businesses are looking for these fresh paths to income. Given the creative industries historical concentration on direct selling and licensing, the data indicate that indirect methods are increasing in importance, and that the model of choice is to have a broad combination of routes to revenue.

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Recommendations

Metadata is key. A better ability to track the origin and use of creative content is vital for future monetisation of both retained and shared IP. There are implications for metadata standards, its protection, and accessible registration of IP ownership. Consumers need clearer guidance. Convergence is working against the need to make consumers better informed on origin and ownership. New technical and marketing solutions are needed to help users distinguish authorised and unauthorised sources. More test beds are needed. As scale is now so critical, facilities like IC Tomorrows digital test bed can give businesses a better chance of success by enabling them to try out new functionality and approaches to value creation on realistic platforms.

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THE FUTURE IS COLLABORATIVE

Beacon Project participants reflect the diverse nature of the ecosystem that makes up the creative industries. Survey respondents are predominantly micro in size (67% with 10 or fewer employees and long-term associates) but include a significant number of medium and large companies (20%). Most firms (of all sizes) have traded for over five years (61%).
Smaller businesses exhibited a strong desire for the internet to remain a free and open space where new approaches can flourish through collaboration and sharing, along the open source model. The Beacons evidence confirms that a lot of collaboration does occur, with 81% of respondents already having at least some involvement in it.

Although having the ability to bounce ideas off others is cited as the benefit most often realised from joint working, blue sky thinking is not the prime motivation: almost half of collaborators frequently charge for their involvement. Similarly, when asked which benefit they most wanted in the future, new ways to monetise our outputs emerges as the top answer, given by one-third of respondents. Co-creation raises particular challenges around IP ownership. Workshop participants identify the need for a support infrastructure to help creative businesses in realising their digital potential. Their scenarios suggest an enthusiasm for bottom-up, industry-led groups, that can assist companies by setting out clear frameworks of rights and responsibilities, delivering practical assistance, providing inspirational success stories and helping them achieve scale. Support for this ecology is also important to help individual businesses to compete more effectively with large corporations, who have the muscle to harness the internet as a distribution system, leveraging their scale and their IP rights.

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Views from the survey

Current collaborative legal frameworks are costly to challenge and maintain creative commons is not yet an effective alternative. Cloud technology and advances on pay-pal type systems may make collaboration more attractive monetarily for freelancers, the dominant group in the CIs. Survey respondent, film & video, music, radio & TV I have a specific need for better legal frameworks with regards to joint IP ownership in collaborative situations. I currently engage in a number of open innovation projects which require clear revenue-share, joint trademark ownership and joint IP ownership agreements. Survey respondent, software
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I don't think we need to change legislation as such - just the interpretation of legislation (case law) and find legal systems (such as creative commons) that serve the need of collaboration (as I strongly believe that collaboration is the future of any successful economy). Survey respondent, education/training Providing IP arrangements and legislation which make copying, sharing and re-mixing easier, while still protecting the interests of artists and authors, is a vital challenge for this century. A better balance must be struck between ease of access and distribution and protecting authors' work and reputations. Systems of micro-payment, Creative Commons licensing and shared licensing arrangements should all be examined. Survey respondent, finance/funding
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Presence of collaboration

Overall, the survey results indicate a high degree of collaborative activity 81% of all respondents said they were involved in it to some degree. Collaborative working emerged as being particularly prevalent among education, administration and software sectors. One-person businesses emerged as the group least likely to be collaborating, at 61% - similarly, it is less prevalent for solo sectors like photography. There is a clear commercial intent behind collaborations: 90% of them involve charges at least some of the time: 45% said charges are at least frequent: 17% always charge for this type of activity.

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Benefits of collaboration

Currently experiencing % Ability to bounce ideas off others Accessing expertise you dont possess Better access to markets/customers Improved market intelligence Greater scale and competitiveness Developing new assets New ways to monetise our outputs Other 83 81 70 67 59 56 44 7

Hope to experience in future % * 6 11 22 19 23 23 33 5

Total (currently or hoping to) % 89 92 92 86 82 79 77 12

Of those who collaborate, the most common motivation is bouncing ideas off others (83%), but it is also the easiest to realise, with only 6% indicating they were yet to experience this benefit. Just over half of collaborators are currently developing new assets (56%), but 81% are accessing expertise you dont possess, both of which have IP implications.

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Recommendations

Co-creation needs practical support. Better information and advisory resources are required to help businesses navigate the rights issues that arise when sharing and jointly developing content, which looks set to become increasingly prevalent. Community matters. Vibrant local ecosystems can form a valuable springboard for new ventures, and a starting point for collaborative working. Established companies and organisations can take the lead in sponsoring their formation.

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IP: USE IT OR LOSE IT?

Open, shared approaches to revenue generation are still fundamentally underpinned by IP rights. Whether companies choose to distribute their output or retain all rights for themselves, legal and commercial frameworks remain central to value realisation. Beacon Project contributors express frustration with IP laws on two fronts. On the one hand, copyright is failing to offer their works adequate protection in the digital age. While technical solutions may be able to address information deficits around who has used what and when, these will not solve the issues of scale and influence many specialists simply cannot afford to enforce their rights if they are infringed.

On the other hand, copyright is also seen as a barrier to exploitation because of the practical difficulties involved in determining ownership of existing IP and gaining consent to build on it, even for non-commercial purposes. This view is particularly evident within the software, broadcast and film sectors, fuelling debate around issues such as fair use and orphan works. The business model evidence from this Beacon Project indicates that the creative industries are being pushed increasingly towards realising value from IP sharing. The precedent of open source suggests that highest value will be placed on IP that delivers scale through widespread adoption and use. Only the largest businesses can retain full commercial control over their IP and many of them are choosing not to do so. This suggests that for most creative industry companies, the priority must be to exploit their IP as widely as possible, since a protectionist stance may not work.

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Views from the experts

The response [to infringement] should be a graduated one, but there needs to be a clear message that further action could follow if the behaviour doesnt change. Marianne Grant, MPAA

We have to make it as convenient to get our legal stuff as it is to steal it... The law itself is generally not the problem its the contract or agreement that is put into place... There is no point in forcing through a law that in our hearts we dont think is going to work. John Howkins, The Creativity Group

I cant think of another time in history where we have new technology and a new business model, and we protect the people who are not able to adjust. If we do, there is certainly a danger of over-regulation as we will impede innovation, competition and new entrepreneurship taking advantage of the technological opportunities of the future . Birgitte Andersen, Birkbeck College

If youre not going to be able to defend your IP in court, whats it worth? Shaun Fensom, Manchester Digital

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Views from the survey: voices for change

The current copyright law around content & distribution of that content is built on the copyright of books & music which are outdated now especially in this internet era. We need to rethink the whole copyright law and the way that the rights for published works are created, attributed and assigned. Survey respondent, film & video, publishing, radio & TV We have taken the view that IP strangles innovation and actively sought to mitigate the effect by using open source, creative commons and a variable scale of charges on licences based on the users social aspect and ability/will to collaborate... Survey respondent, sustainable communities

Patents and other IP are only worth anything to large rich companies as they have the cash and hence legal muscle to pursue infringement. Small companies like mine have ZERO protection from IP as we cannot afford to take things to court. Survey respondent, admin & support

[The current framework] makes organisations very, very defensive in protecting IP. It is becoming very difficult to get a simple IP non-disclosure agreement signed between two parties who want to collaborate without endless tos and fros with lawyers. Survey respondent, finance/funding

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Views from the survey: voices of caution

IP is necessary at present as it is already extremely difficult to realise value from one's creative assets. Clients will pay (happily even) for work done by other trades such as garages and plumbing but they think that artists and designers enjoy their work and only need the exposure as reward! Survey respondent, film and video/publishing The Government seems to listen to creative industries (not creators) whinging about barriers to innovation without considering the effects on the creators themselves. They listen to music and film industries complaining about illegal downloads of their copyright material (not the artists??) but what about individual artists, musicians, photographers etc who constantly experience their work being ripped off, blatantly copied, stolen or otherwise used without any form of recompense. It is the business model adopted by these huge industries that has caused their problem not the copyright laws. Survey respondent, arts & design

Current arrangements with software patents in the EU suits us well, but it would be a very different story if we adopted US style patent legislation. Survey respondent, software

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Is IP legislation a help or a hindrance?

The Beacon Project survey asked respondents to indicate how far they felt a number of different types of intellectual property were enablers of growth and innovation, or barriers to it.

While creative businesses generally view registered forms of IP protection (patents, trade marks and designs) as being more enablers than barriers, around half have an ambivalent view, and a significant minority feel they dont know enough to comment.
Taken as a whole, creative businesses are more likely to feel that the copyright framework acts as an enabler, especially in published works and websites. However, a significant minority highlight copyright as a barrier, especially those from a software, film and video background. The more actively engaged businesses are in collaborative working, the more reservations they have about the operation of IP frameworks. Very few creative businesses view relationship-based forms of intangibles as barriers, and assets which are embodied and protected by staff, such as customer relationships and technical know how, are particularly respected. Company/brand reputation comes across as the strongest enabler of growth and innovation, with 80% consensus though only 36% see a trade mark as an enabler.
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Recommendations

The Hargreaves review has provided an opportunity for this project to contribute formal evidence on the fitness for purpose of IP frameworks. A diversity of strongly held views is apparent on issues such as fair use and orphan works, which makes it difficult to make specific recommendations about legal changes. However, two points are apparent:
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The principle of copyright is vital. The creative industries form an ecosystem of small and large businesses who have to interact with each other. The automatic provision of copyright is a key element in creating the basic rights needed to realise economic value.

Focus on exploitation. Measures to update copyright law should pass the test of facilitating growth and innovation in the creative industries. However, legal change alone will not facilitate exploitation this requires industry-led, commercial solutions.

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INVESTMENT: THE ELEPHANT IN THE ROOM

Changing business models have had consequences that go beyond income generation. They mean that the funding which used to circulate internally within industries (particularly in music, film and broadcast) is under great pressure. During this turbulent period, the need for external lenders and investors to better understand how value is created through creative activity emerges as paramount. With the question of finance continually recurring in project interviews and workshops, the projects online survey seeks to quantify some of the issues raised. Its findings are summarised on the following pages.

Two specific challenges emerge. Firstly, while creative businesses are heavily dependent on their IP, their banks find it difficult to attribute value to these assets when seeking security for borrowing. Secondly, where the relationship between creative output and income generation is indirect, and a businesss strategy revolves around sharing IP rather than retaining control over it, investors find it hard to understand how they can obtain a return on their capital. If these problems are not addressed, the pressure on creative industries to shrink or at least not to attempt to grow can only increase.

A selection of views

Less investment is clearly a bad thing for creativity... If you want quality, at some point someone has to invest in it. Feargal Sharkey, UK Music The funding landscape in the UK does not favour innovation organisations in the UK want to see a proven track record in a business or product before they will agree to funding... at which point the funds are generally no longer needed. Lenders/VCs have a much lower risk threshold in the UK which is generally why start-ups get snapped up by US firms. Survey respondent, music, radio & TV and software
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I need inspired marketing of new ideas that is entirely funded by future profits. A sort of inventor's version of the student loan. Survey respondent, design

In my experience to date traditional lending organisations such as the banks have absolutely no concept or understanding of Intellectual Property at all... if you don't have anything physical that they can see and touch, then forget it. Even when they do talk to you they will want personal guarantees at least equal in value to any facility they extend to you. If there could be some sort of accepted standard accounting practice that gave a value to IP... in a way that the banks could get their heads around it would be a huge leap forward. Survey respondent, publishing & software
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Funding is in short supply

The CI KTN IP & Open Source Survey findings confirmed that creative companies are using a wide variety of funding sources to run and grow their businesses - including quite a few they dont like. As would be expected, the most used funding source, by some margin, is the reinvestment of previous profits and surpluses, employed by over 70% of respondents. Bank overdrafts, loans from business partners/family/friends, credit cards, equity finance from existing shareholders and bank loans also feature prominently. These are present in 24% - 31% of cases. However, it is clear that the three external sources which are most used are the least liked. 27% of respondents used credit cards but only 4% saw them as preferable. Bank overdrafts were used in 31% of cases but preferred by just 14%: loans from family and friends were used in 29% of cases and preferred by 12%. Equity investment emerges as the most sought after form of external business funding, with 29% preferring new angel investment and 25% preferring to obtain additional finance from existing shareholders. However, just 7% said they had actually obtained new angel investment.

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Businesses are looking to grow, not just survive

28% of the businesses responding to the survey said that they had actively sought external finance in the last two years. The top three reasons for seeking external finance were for working capital, research and development and marketing. However, when asked to choose the single most important reason, R&D came out on top perhaps because it is the hardest activity to fund from business as usual. The majority of all creative businesses surveyed, 59%, said that lack of funding was a constraint on their organisations ability to innovate and grow. The respondents who felt their growth was most constrained through lack of funding were those whose activities included design, radio & TV and education/training, followed by music and software. The problem was most acute amongst businesses that were small but not micro enterprises, and who had been trading for less than five years.

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Any external funding is difficult to obtain

Outcome Unable to obtain any finance Obtained some but not all Obtained all but with some problems No problems accessing finance % of those seeking finance 28 35 22 15

As the table above shows, of the businesses who had actively sought external funding, the vast majority had encountered at least some problems along the way, and more than a quarter had been unable to access any finance at all. The problems were spread across most creative sectors, with indications that software, design and publishing businesses are amongst the worst affected. In addition, a substantial 43% of respondents said that security and/or personal guarantees had been raised as an issue by their lender.

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Recommendations

Improve the flow of risk capital. Prospective creative industry investors need to be identified and targeted, to facilitate contact with innovative new businesses, and drive the prospects of successful equity financing for young IP-rich creative enterprises. Strengthen the quality of the pipeline. Creative entrepreneurs looking to grow need to be as investment ready as possible, and need access to more support in preparing credible, evidence-based plans. Find ways to express the value in IP and intangibles. Greater visibility must be achieved for both formal intellectual property and the other intangible assets used by creative companies within investment and lending decisions. Lenders and investors need to see the connection between IP assets and income, and attribute value to them.

10

CI KTN passed the survey findings to the Department for Business, Innovation and Skills as a submission to inform its pre-Budget work on creative industry funding. The extension of R&D Tax Credits and EIS tax reliefs announced in the Budget will be welcomed by businesses seeking to innovate and obtain external investment.

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There is more to be done

This Beacon Project has explored the key opportunities and challenges that face creative businesses in exploiting their IP in an increasingly open environment. There is more to be done to help new and existing ventures to prosper in this new climate, hence the ten recommendations contained in this report. Business models: there are no magic bullets Recommendations 1, 2, 3 Since in most cases the ultimate arbiters of success or failure are consumers, more needs to be done to trace and inform usage and to test models prior to their release. The future is collaborative Recommendations 4, 5

Current spending pressures will make it difficult for publicly funded networks to continue the intensity of industry
support provided in the past. New ways will need to be found to help businesses help themselves. IP: use it - or lose it Recommendations 6, 7 The basic principle of copyright provides a well-established foundation. However, it is not a panacea; whether or not the framework is updated, creative industries need to update and refine commercial practices. Investment: the elephant in the room Recommendations 8, 9, 10 While it is understandable to find financiers currently feeling risk-averse, knowledge-based creative businesses need better access to funding if they are to grow and succeed.
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The Creative Industries Knowledge Transfer Network accelerates innovation among the UKs creative businesses by delivering valuable insights into technology trends and developments, promoting funding and collaboration opportunities and turning visions of the future into business success. We are creating a unique place for innovators to meet, share ideas and shape the future through our social networking platform for innovators. We are also running a series of high profile Beacon Projects that exam some of the key issues faced by the creative industries in relation to technology-focused innovation. The Creative Industries KTN is funded by the Technology Strategy Board, the governments innovation agency. Its work supports the aims and objectives of the Technology Strategy Boards Creative Industries strategy report. The Creative Industries KTN was established by a consortium led by the University of the Arts London. The other partners are Imperial College, London, RIBA and TIGA

CI KTN contact: Jeremy Davenport 020 3355 3062

This project has been led by www.inngot.com Telephone: 01235 85 40 85 Project contacts: Martin Brassell Chief Executive Melanie Mousley Jones Project Leader
Head and registered office: Technium Digital Singleton Park Swansea SA2 8PP
5/16/2011 Document Title

martin@inngot.com melanie@inngot.com

South East and sales office: 99 Milton Park Abingdon Oxfordshire OX14 4RY
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Appendix: Glossary of terms

Some of the terms used in the Beacon Project documents may be unfamiliar, while others are open to a number of different interpretations. Here are the meanings we have applied to some key terms for the purpose of these reports. Business model: Convergence: Creative Commons: Freemium: Intellectual property: A method of trading and means of selling. These are not mutually exclusive, i.e. businesses can employ more than one of them A term used to characterise the alignment or merger of historically separate sectors, technologies or approaches for example, digital music players and mobile telephony A set of templates for licensing content that enables users to waive some of their statutory rights while preserving others, typically used to facilitate sharing A term used to characterise the practice of supplying some content free of charge in order to attract a subset of users to consume additional content on a paid for (i.e. premium) basis Ownership rights over intangible assets which are protected by law. Principally involves copyright for the creative industries, but includes patents, trade marks and registered designs

Metadata:
Open Source:

Most frequently used in this context to characterise the large quantities of information which can be derived from the consumption and usage of online content, often through tags embedded within it
A collaborative process of development where knowledge is pooled to create a particular outcome without asserting individual ownership. Most frequently used to describe software development methods, but with broader applicability. Closely associated with open innovation

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Appendix: The IP & Open Source experts

The baseline for this Beacon project and its ongoing direction were both informed by important contributions from experts drawn from across the creative industries. CI KTN and Inngot would like to give special thanks to the following for their valued participation in this project: Christian Ahlert, Open Business CC Birgitte Andersen, Birkbeck College Tim Collins, DC Thomson Stephen Dunn, Guardian Media Group Shaun Fensom, Manchester Digital Marianne Grant, Motion Picture Association of America Robert Hahn, Guardian Media Group Simon Hopkins, Unthinkable John Howkins, chair of the Creativity Group and the Adelphi Charter
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Jackie Maguire, Coller IP Management Matt McAlister, Guardian Media Group Tom Morgan, National Portrait Gallery Phil Parsonage, The Foundry Carolyn Reynolds, Lime Pictures Liz Rosenthal, Power to the Pixel Fergal Sharkey, UK Music David Tovey, Classic Media

Appendix: Workshop participation

The three project workshops were held in Sheffield, Bristol and London between late November and early December 2010. The workshops attracted over 100 registrations. While freezing weather conditions affected the turnout, 55 attendees participated. Over 70% came from the private sector, with the remainder coming mostly from universities. This provided a broad mix of participants from across the creative industries, thanks to the support of local networks. Combined with the individual one-toone interviews and the round table conversation meetings held during the baseline stage, over 80 creative industry specialists and professionals made a direct contribution to this Beacon prior to the survey. The Sheffield and London workshops featured guest speakers, to provide food for thought and act as a stimulus for debate. In Sheffield the speaker was Robert Hahn, head of rights and content acquisition at Guardian News & Media, who provided insights into the creation of the Open Platform architecture and the challenges of managing the IP issues that result from sharing. In London, the speaker was Liz Rosenthal, founder and managing director of Power to the Pixel. She provided illuminating examples of cross-media approaches to IP and its exploitation, showing how open approaches can lead to mass engagement across a variety of platforms.

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Appendix: The workshop process

The projects workshop sessions were designed to be both informative and highly participative.

After explaining the thinking behind the four quadrant approach, Martin Brassell, CEO of Inngot, provided commentary on the individual themes.

Facilitator Chris Grant of 14a Conversations led attendees through a number of exercises to gather and compare their views on current and future opportunities and threats.

A small group format was then used to explore the selected themes in the context of a future business idea.

Jackie Maguire, CEO of Coller IP Management provided delegates with intelligence on the current intellectual property landscape and the then recently announced government review of IP. She also provided advice and assistance to participants on the IP challenges inherent in their ideas.

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Appendix: The IP & Open Source Survey

The online survey for this Beacon project was conducted over a three-week period from late January to midFebruary 2011. As well as being promoted to the CI KTN community, almost 30 further local creative industry networks helped to raise awareness of the survey amongst their membership, contributing to a strong response with 342 participants in total. The survey questions were designed by Inngot and Emergent Research to inform the projects conclusions using the four provocations as an outline structure: Which of the identified business models , with their varying IP approaches, are organisations using now? Which would they like to use in the future? How many organisations are collaborating now? What benefits are they getting? Is IP a help or a hindrance when doing business? What are the industrys views on the mechanics of using it? How are creative businesses being funded at present? Is lack of funding a barrier to growth and innovation in the sector? Respondents were profiled by sector, size and age of company in order to see which of these factors proved to be predictive. A more detailed summary of findings is provided in a separate document.
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Appendix: Some recommended reading

A wide range of documentation on issues relating to IP and Open Source was studied during the Beacon Project. Those wishing to know more about the subject may find the following of particular interest: Government and government funded publications The Copyright, Designs and Patents Act 1988 (available at www.legislation.gov.uk) the way ahead: A copyright strategy for the digital Other useful publications The RSA Adelphi Charter, 2005 (available at www.thersa.org) Creating growth: a blueprint for the creative industries, CBI, 2010 (available at www.cbi.org.uk) How much do music artists earn online? (available at www.informationisbeautiful.net) Can user-generated content generate revenue? By Price Waterhouse Coopers (available at www.pwc.com) Shackling the digital economy means less for everyone, by Birgitte Andersen (available at www.dime-eu.org)

Age 2009 (available at www.ipo.gov.uk)

SABIP-commissioned papers on consumer attitudes and awareness (various available at www.ipo.gov.uk) NESTA creative clusters and innovation report (available at www.nesta.org.uk) The Creative Industries Technology Strategy (available at www.innovateuk.org under publications)

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