Kemp Little LLP - Trends in information technology law: looking ahead to 2010

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Trends in information technology law: looking ahead to 2010

December 2009

This article examines technological developments that affected the market for IT-related legal advice in 2009, and identifies key growth areas for 2010 in this legal sector. It was first published on the Practical Law Company website in December 2009.

Twilight and alphabet soup

What will 2010 bring? Will we see PA Consulting’s ‘zombieconomy’ – a world of ‘half dead, half alive zombie banks, governments, consumers and companies’[1]; or WPP CEO Sir Martin Sorrell’s ‘LUV’-shaped global recovery – ‘L’ in Western Europe, ‘U’ in North America and ‘V’ in the BRICs[2]; or perhaps Mr George Soros’ inverted square root[3]; or then again a ‘W’ double dip; or the Chancellor’s 1.25% GDP growth[4]? Or will the second half of 2009 turn out to be something like – or better or worse than - the ‘new normal’? Take your pick: may we live in interesting times, indeed.

Whatever we’re saying this time next year, on past performance it’s reasonably likely we won’t have seen coming what came. But, economics aside, 2009 for IT was the year when the fog lifted a bit and we began to see more clearly what the contours of the new landscape will look like. With the degree of change that’s now taking place, there’s little doubt that the legal developments following in its wake will continue to make life interesting for all of us.

The industry is towards the start of its period of greatest change since inception of the software sector as a distinct business forty years ago when IBM first unbundled programs from processors in 1969. Fuelled by the Internet and impelled by a Darwinian constant to innovate in a competitive world, these twin drivers of change have been turbo-charged in the adverse economic conditions of 2009 by the resulting business imperative to achieve efficiencies and reduce costs.

Towards service-based computing

Whether you call it ASP, the Cloud, SaaS or utility computing, service-based computing is the destination once the internet is harnessed for remote processing power and computing is let out of the server room. 2009 saw the development of more generally-available enterprise-level services – as well as B2C or single line of business solutions like salesforce.com’s CRM service.

Unlocking the internet will lead to metered use of much IT functionality – as a utility – and, the user community anticipates, reduced cost and supplier dependence. Internet software techniques are starting to enable computing to be broken down into its constituent parts (where each component can be provided at a scale that significantly reduces cost) and then permitting those parts to be aggregated to provide what the customer wants. So, SOA enables business processes to be orchestrated into corresponding software functionality, with SOA’s middleware ESB allowing aggregation of software from different remote sources; virtualisation software helps reach parts of the computer or network other software does not reach; and using open-source software (OSS) frees up expensive in-house development resource for more value-added work. We’re not there yet, but all these techniques became significantly more widespread in 2009. 2010 will see a race towards network effects for cloud platforms as ways of aggregating applications for deployment more cheaply and efficiently than buying software and infrastructure into the business.

This is the background to a number of important initiatives from Microsoft towards the end of 2009 – opening two data centres containing over 500,000 servers in September; the launch of Windows 7 and the new Windows smart-phone operating systems in October; and the launch of its Azure cloud services development platform.

Increasingly, as service-based computing comes to be relied on for more important tasks, the most important legal issues emerging for cloud computing contracts are:

Performance – what are the service levels that will apply during the contract?
Availability – as mission-critical applications start to be entrusted to remote services.
Disengagement – how do you migrate away?
Data – who owns it, how you get it back, audit rights and regulatory responsibilities.

All about data

The law and regulation of data are increasingly important themes in the converged world. Not only does data protection take up more attention year on year, but increasingly wherever you look – for example at trading and market data in the financial services sector, metadata for B2C e-commerce, and search data – the issues of who owns what and the true nature of those ownership rights are being put into sharper relief. Competition regulators are also starting to take more notice of data businesses, as demonstrated in the area of securities identifiers (part of the market data business) by the European Commission in November 2009 sending S&P a statement of objections under EU competition law rules about its licensing practices[5].

The importance of standards

At a more strategic level, service-based computing – indeed communication and processing of data anywhere in the digital world - rapidly becomes all about standards, APIs, protocols and interoperability, so expect to see further developments around (on the one hand) intellectual property rights in limiting, and (on the other) competition law in opening, access to software, data and functionality.

The smart-phone patent dispute between Nokia and Apple that began in 2009 should be seen in this context. Nokia had contributed significant patented technology to the pool used for setting 2G (GSM) and 3G (UMTS) wireless standards. It sued Apple in October 2009 for patent infringement when talks broke down after the parties failed to agree the FRAND (fair, reasonable and non-discriminatory) terms on which Apple would receive a licence for that technology. Apple counterclaimed [6]in December 2009 alleging anti-competitive practices and patent infringement. This dispute runs into 2010 and is likely to run well beyond.

IT in the enterprise

In the enterprise itself, the focus in 2009 was overwhelmingly on cost savings. Outsourcings, supplier consolidations and other IT projects delivering immediate costs savings fared well. OSS became ubiquitous in the enterprise in 2009 according to a Gartner survey, but good governance – in practice, a significant part of the price to be paid for compliant, managed OSS use – remains more honoured in the breach than the observance. Expect OSS governance to rise up the corporate agenda in 2010.

According to a survey of technology industry executives publicised by KPMG in October 2009, the IT industry is much more optimistic for 2010 than it was for 2009: 80% of respondents expect higher revenues and profitability in 2010 as companies reach the limits of achieving measurable benefits from cost-cutting and again turn to IT and the technology sector for help in transforming their businesses.

In the public sector, the future of the £13bn NHS National Programme for IT looks uncertain at the end of 2009, even if the jury is still out on the £5bn Home Office ID card project. The next general election will be held by 3 June 2010, and the cuts in public spending that the new government will have to impose to control public finances will lead to more outsourcing to, and procurement from, the private sector: as the Sunday Times commented on 20 December 2009, “the government is determined to shift more back-office operations into the private sector and make Whitehall more efficient to run”. FESC, the Framework for Procuring Expert Support for Commissioners, which has been in operation in the NHS since 2007 to facilitate the procurement of services at a national level, is perhaps an indicator of the way things will go. Of the 13 approved FESC suppliers, 6 are US owned (Aetna, Humana, McKesson, McKinsey, Navigant and UnitedHealth) so expect to see more large US companies gaining prominence in the UK, in addition to IT heavyweights like CSC, HP and IBM.

Outsourcing (particularly BPO) and managed services will continue to reach further into the organisation in 2010. Law firms first started significantly to outsource legal processes in 2009, and the pace of LPO deals will accelerate in 2010. Outsourcing contract hotspots will include multi-sourcing (avoiding putting all your eggs in one supplier’s basket) and rightshoring (achieving the right blend of on- and off-shore resource), especially now that currency volatility has joined wage inflation as an issue to manage in popular offshore locations.

BSkyB v EDS

For 15 years[7], IT lawyers have been at the centre of a significant and developing body of case law on risk allocation for runaway projects through a line of cases interpreting IT contract liability clauses. 2010 will (let’s hope) finally see the important and long-awaited judgment of Ramsey J in the latest of these, BSkyB v EDS, a case notable both for the nature of the claim - based on allegations of deceitful misrepresentation - and the damages sought (£709m on a £48m CRM contract). Whatever the outcome, the case is likely to have a significant impact on IT contracting.

B2C and convergence

In consumer markets, the accelerating pace of convergence – of digitised content, transmission and access – has seen demand for communications and entertainment products and services remain strong. Here, the race is led by three companies whose scale and reach give them a broad view across the convergence spectrum and whose market capitalisations are closer than one might expect – Apple ($173bn), Google ($190bn) and Microsoft ($266bn). Standout trends include the rise of:

The smart-phone – smart-phones account for 190 million (16%) of the 1.2 billion mobile phones shipped this year, and research firm Frost & Sullivan predicts that they will account for 260 million (20%) of the 1.3 billion total in 2010, with 1 billion mobile devices accessing the Internet by year end.
Mobile applications, built on increasing power in the device and faster broadband wireless: consultancy IDC estimates that the number of Apple iPhone applications will triple to 300,000 and Android applications will quintuple in 2005.
Netbooks – inexpensive general purpose laptops accessing web-based applications.

Internet advertising overtakes TV

In the first half of 2009[8], advertisers in the UK spent £1.75 billion on internet advertising, for the first time more than they spent on TV advertising (23.5% against 21.9%). What made the figures more remarkable was that internet advertising was 4.6% up year on year, while TV advertising was around 17% down. Of the total online advertising spend, 60% was accounted for by search (up 7% year on year), 22% by classified (11% up) and the remaining 18% by display (5% down).

The growth of behavioural advertising and online video seem set to propel internet advertising towards a 30% share of the UK market over the next few years. The legal issues that behavioural advertising, in particular, raises are primarily:

Using or selling keywords as trade mark infringement.
The extent of consent sought and needed under data protection legislation.
Industry regulation.

These will all garner more attention from IT lawyers in 2010.

Swapping analog dollars for digital cents

The growth, reach and power of the internet mean that it is now a disruptive force for many established media businesses. We are seeing this particularly in the news business, in which the debate around whether or not to charge for online content is raising fundamental questions about the future of traditional print journalism[9]. In broadcasting, NBC Universal’s CEO Jeff Zucker coined the phrase “exchanging analog dollars for digital pennies” in 2009 to describe how difficult it is to get digital strategy right where digital: requires significant investment; is growing, but not as quickly as anticipated; and is returning significantly less from consumers than in the traditional analogue broadcasting world. In the online world this aphorism applies more generally than just to the TV industry, and 2010 will see digital-content businesses start to get to grips with its implications.

Two final predictions

Although the results of the Copenhagen climate change conference appear at first sight to be rather dismal, nonetheless sustainable computing and smart use of IT in so many aspects of the environment – power and energy efficiency, management and conservation – will give a fillip to the IT industry in the second decade of the 2000s.

2010 is expected to see significant growth in technology M&A, albeit from 2009’s low base, with continuing consolidation in the telecommunications and IT sectors as larger companies move to integrate across the value chain (as illustrated by Hewlett-Packard’s $3.1 billion acquisition of router, switch and wireless/network management supplier 3Com); the lines between hardware and software continue to blur (Oracle’s $7.4 billion acquisition of Sun Microsystems has yet to complete as at the end of 2009); traditional media companies look to acquire online platforms; and established players buy up niche suppliers.

Trends for 2010: Glossary

2G	See *GSM.*
3G	See *UMTS.*
API	Application Programming Interface - a description (normally consisting of a set of routines, data structures, and protocols) of the messaging and language format that enables communication between the computer program that the API relates to and another program. Example: POSIX (Portable Operating System Interface for Unix) is the API enabling applications to communicate with Unix-variant (and other) operating systems.
ASP	Application Service Provider - the first stage of service-based computing (where the others are SaaS, Cloud Computing and Utility Computing), enabled by the advent of faster modems and routers from the mid 1990s onwards. ASP substituted software on servers at the customer’s computer room with software on servers at the ASP supplier’s centrally managed (‘one to many’) data centre, plus internet access and an HTML web interface at the client PC. Properly viewed as ‘Hosted Application Management’, ASP has benefited from bigger bandwidth but still relies (at the start of the relationship) on significant configuration/installation services and (throughout) on support services, typically supplied separately.
Application	A program that performs specific tasks required by end users. Applications include media players, database programs, word processors, etc. An application can be described as 'sitting' on the operating system’s software as it cannot run without the services provided by the operating system and system utilities.
B2C	Business to Consumer - the supply of services, information, and products from a business to a consumer.
BPO	Business Process Outsourcing - the contracting out of particular business functions (for example, HR or accounts) to a third party service provider.
Cloud Computing	The third stage of service-based computing (where the others are ASP, SaaS, and utility computing). The "cloud" is the traditional metaphor for the internet, and cloud computing is the mass market availability through the internet of the whole range of scalable computer technology-enabled resources provided as a service. Examples: MySpace; searching for flights online; the release of Google’s web browser Chrome and Microsoft’s Windows Azure (Windows in the Cloud) look like a major inflection point along the trajectory from software as a licence to utility computing.
FOSS	Free/Open Source Software - computer software for which the human-readable source code is made available under a copyright licence that meets the OSD (Open Source Definition), including permission for users to use, change, and improve the software, and to redistribute it in modified or unmodified form without payment and providing access to the source code. Examples of FOSS include the GNU Linux operating system, Firefox browser and Apache webserver.
GSM	Global System for Mobile communications, the most popular second generation (2G) and the first digital mobile telecommunications standard estimated to be used by 80% of the global mobile market.
Metadata	Data about other data – i.e high level information describing the context, content and structure of other digitised data.
Operating System or "OS"	The infrastructure software component of a computer system, responsible for the management and coordination of activities and the sharing of the limited resources of the computer. The OS acts as a host for *applications* that are run on the machine.
OSS	See *FOSS.*
Protocol	A set of rules which enables messages to be transmitted, data to be exchanged, communication to take place between different Programs, etc – see FTP, HTTP, TCP/IP, etc.
SaaS	Software as a Service, the second stage of service-based computing (where the others are *ASP, cloud Computing* and *utility Computing*). SaaS is an internet-based, ‘built for the web’, ‘web ready’, ‘one to many’ model for secure, centralised software delivery. SaaS benefits from faster and more extensive development and feature updating. It is typically priced on a periodical, per seat/ user basis, scaled according to service features, resilience level and storage space. The generic nature of the SaaS model makes it inherently scalable and adaptable to different lines of business (like CRM, HR/payroll and Accounts) and market segments (consumer and small/medium business, in addition to larger organisations). In accessing software in this way, a customer does not need to buy/license, install or run the software on its own computers and so eliminates the need to maintain or update the software. Example: Salesforce.com with its market leading SaaS/cloud computing CRM service.
SoA	Service Oriented Architecture - software systems built (architected) around associating (orienting) the business processes (services) in the customer’s requirement with the particular services and processes performed by the software utilised. SOA has three essential elements: Orchestration software: effectively a Metadata list of available Applications to choose from, orchestration is the software representation of the process of selecting, linking and sequencing the services to be performed by the Applications to meet the customer’s business process requirement. ESB (Enterprise Service Bus): ‘middleware’ software that sits below the orchestration software and above the Applications. The ESB is a messaging framework that enables the available software applications and languages (e.g. XML, FTP, JMS, Web Services, JDBC, HTTP) to be connected and data exchanged between them. More technically, the ESB provides the abstraction and messaging systems layers that enable integration. Applications: the application software that sits under the ESB that is selected through the orchestration software and integrated through the ESB to perform the functions required by the customer. Example: Starwood Hotels and Resorts Worldwide new SOA service to replace its legacy room-reservation system.
UMTS	Universal Mobile Telecommunications System, a third generation (3G) mobile telecommunication technology, used in Europe. The most common form of UMTS uses W-CDMA as the air interface.
Utility computing	The fourth stage of service-based computing - the aggregation and packaging up of different computing resources (input, processing, storage, programming, output, communications, etc) for supply on a metered basis, like electricity or another utility.
Virtualisation	The technique of using software to run one or more operating systems on a host computer, including *operating systems* not written specifically for that hardware (platform virtualisation) or to reach the computing resources that ordinary software cannot reach by aggregating a large number of individual computing resources into a smaller number of more powerful resources (resource virtualisation).

Richard Kemp

[1]http://www.paconsulting.com/boardroom-challenges/the-zombie-economy/surviving-in-the-zombie-economy/: ‘Surviving the zombie economy’

[2]http://www.wpp.com/wpp/press/press/default.htm?guid={43edfdf3-f69c-4c86-a94e-d14bc0bee0f1}: WPP Third Quarter Trading Update, 30 October 2009

[3]http://www.cnbc.com/id/30069223

[4]http://www.hm-treasury.gov.uk/d/pbr09_chapter1.pdf, paragraph 1.6

[5]http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/09/508&format=HTML&aged=0&language=EN&guiLanguage=en

[6]http://www.intomobile.com/wp-content/uploads/2009/12/apple-nokia-anwer.pdf

[7]With the line of cases starting with The Salvage Association v. CAP Financial Services Ltd [1995] FSR 654

[8]http://www.iabuk.net/en/1/adspendgrows300909.mxs

[9]http://www.ft.com/cms/s/0/d0960f18-4303-11de-b793-00144feabdc0.html