I. Introduction
The Internet and eCommerce are no longer topics reserved for geeks and nerds. Quickly, mainstream “bricks and mortar” businesses are going “online.” Even more quickly, new businesses are emerging. You have probably heard the prophecy that Internet businesses and eCommerce will soon be coming to a business near you. WRONG! They are already here. New business ventures here in Connecticut include Priceline.com, CTNOW, goSKInewengland.com, and countless others.
II. What Businesses Will Be Affected First by Dot Coms?
Dot coms are major purchasers of print advertising, outdoor advertising, broadcast media advertising, real estate leases, computer equipment, office supplies, labor, travel services, shipping services, and more.
Credit risk is not a proprietary product of eCommerce; however, the magnitude of the risk is far greater with dot coms. During the past year, prized domain names have sold for many millions of dollars. Further, there is an expectation that the Internet will become the ultimate marketing tool. As a result, businesses are “betting the ranch” to develop brand name identities quickly. Companies with no profits are spending millions to develop brand names. In many cases, dot coms are entering into advertising contracts for more than their entire revenue from the quarter before with the hope of capturing market share. Off the record, these businesses will admit that unless they either see exponential increases in sales or new equity they will not be able to meet their obligations.
Radio stations and television stations have told us that the cost of the average spot has jumped during the past 12 months as more and more dot coms compete to purchase advertising time. Similar demand is being seen in print media and outdoor advertising. But can they pay the bill?
III. Bricks and Mortar Go Online.
Publish (html) or Perish.
Americans are going online. We are looking for information. We are researching products and more and more we are buying products online. Unwilling to sit on their keyboards while their customers are marketed to, the “bricks and mortar” businesses are going online too. Whether it is Barnes & Noble or your local deli, chances are that they are now posting a world wide web address.
IV. Identifying Assets in the World of eCommerce and the Internet.
Borrowers and lenders need to fully understand the value of “cyberspace” assets before they can value collateral and determine appropriate lending criteria. Lenders and businesses that extend trade credit need to understand these assets to recover money owed.
Anatomy of a Website
The Internet is a complex system of interconnected computers that originally evolved from a military project designed to create a redundant information system that would work in the event that the centralized telephone routers were destroyed.
Each computer connected to the Internet is identified by an IP address. The IP address is a numerical code attached to a specific machine (much like a telephone number). Not that long ago, the ability to find and retrieve information from other computers connected to the Internet required knowledge and mastery of programs such as Gophers, Archie, and Veronica. These programs could help find some relevant information, which could then be downloaded using FTP protocols. Generally, users do not recall IP addresses and there is probably very little value to them at this time. However, the better business practice would be to recognize the IP address as an asset of its owner.
During the past decade, a system was devised for assigning alphanumerical domain names to IP addresses. For example, typing the domain name IBM.com into a browser (http://www.IBM.com) will result in the retrieval of the first page (usually index.html) from the machine at the IP address assigned to IBM.com. It is now well established that a domain name cannot be used to infringe upon a trademark. Accordingly, the domain name IBM.com probably has little value to anyone other than IBM.com. Well-chosen domain names, such as “Loans.com,” have sold for millions of dollars, even when there was no established business to justify the price. Domain names are clearly assets to be recognized.
The World Wide Web is the result of the development of documents using hypertext markup language (html). A document written in ASCII code that is interpreted by a browser to render a relatively uniform appearance with hyperlinks from within those pages to other documents is known as a webpage. Webpages can contain links to other webpages on the same machine as well as hypertext links to other webpages on other machines. It is from the interconnected nature of all of these documents that the term “World Wide Web” is derived.
A website is a combination of webpages. The website may contain copyrighted or copyrightablecreatives (artwork, graphics, animation, sounds). It may contain copyrighted or copyrightable content or deliverables (data that can be downloaded from the website). It may contain proprietary software or source code. It may contain databases subject to protection as a trade secret or via a contract. Further, the business method itself may be patented or have a patent pending. Each of these elements may be individual assets.
Source Code is the original instructions that tell the machine how to interpret the bits and bites that comprise the software or website. With the software’s source code, one could modify or copy portions of the software. For this reason, software creators guard their code very jealously. What they tend to distribute is a licensed version available in compiled form that is readily usable but not subject to editing or reverse engineering.
Most operators of websites gather substantial information about the traffic that comes to their websites. This information should be recognized as another asset of the business.
Opt-In E-Mail Lists. SPAM is illegal. Even if it were not, it is not very effective. However, the delivery of targeted e-mail to people who have opted to join a list because of the topic it covers is highly effective. The value of the list will depend upon a number of factors that are related to the commercial value of the readers. E-mail lists are assets.
The Server may be computer hardware and equipment owned by the business that owns the website. However, it need not be. In most cases, businesses enter into a service contract for hosting services from a business that specializes in hosting websites. Whether such an executory contract in the form of a service contract has value depends on whether it is above or below market.
V. Conclusion
Whether your business is creating real assets in the virtual world or is extending credit to those who are, it is vital that the legal structure of your transactions keep up with the changing technology. If you have questions about how to best protect your interests in the real assets of the virtual world, please call Myles Alderman.