Introduction to Computer Technology, Network Economics, and Intellectual Property Law

Introduction to Computer Technology, Network Economics, and Intellectual Property Law

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Description: Computer software and Internet commerce are among the fastest growing and most promising industries in the United States. A recent government report notes that more than half of U.S. nonfarm industries either produce information technology (IT) directly or invest in and use information technology products and services.

U.S. Commerce Department, The Emerging Digital Economy II (1999). The information technology sector of the U.S.

economy represented 8 percent of gross domestic product (GDP) in 1999, accounting for more than $700 billion. Computer software accounted for $200 billion of this total. The IT sector of the U.S.

economy has steadily increased its share of the GDP in the 1990s and shows no sign of slowing down. These patterns can be seen throughout the global economy.

 
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Introduction to
Computer Technology,
Network Economics,
and Intellectual
Property Law

Computer software and Internet commerce are among the fastest growing and
most promising industries in the United States. A recent government report
notes that more than half of U.S. nonfarm industries either produce information
technology (IT) directly or invest in and use information technology products
and services. U.S. Commerce Department, The Emerging Digital Economy II
(1999). The information technology sector of the U.S. economy represented 8
percent of gross domestic product (GDP) in 1999, accounting for more than
$700 billion. Computer software accounted for $200 billion of this total. The
IT sector of the U.S. economy has steadily increased its share of the GDP in the
1990s and shows no sign of slowing down. These patterns can be seen
throughout the global economy. A World Gone Soft: A Survey of the Software
Industry, The Economist (May 25, 1996).
While firms such as Intel, Microsoft, Compaq, IBM, Cisco, AOL, and
Amazon.com attract much of the attention in the IT marketplace, the IT
industries touch almost all aspects of the modern economy. For example,
traditional manufacturing firms, such as General Motors, make significant use of
computers, computer software, and computer networks in their businesses.
Automobile manufacturers use CAD (computer-aided design) software to
design new vehicles, CAM (computer-aided manufacturing) software to assemble these designs, and digital networks to purchase component parts and to
distribute vehicles to customers. Few businesses, government agencies, schools,
or other organizations operate today without extensive use of computer
technology and digital networks. An increasingly wide array of companies —
whether they sell information, cars, or anything else —use digital networks,
principally the Internet, to market products and transact business. While it is
easy to scoff at estimates of the potential growth of global electronic commerce
because they seem like (and probably are) rank guesswork, electronic commerce
1

2

≡≡≡ Introduction

has surpassed what once seemed like exaggerated estimates. The Emerging
Digital Economy II report notes that in 1997 “private analysts forecast that the
value of Internet retailing could reach $7 billion by 2000—a level surpassed by
nearly 50 per cent in 1998.” While the popular press has mainly concentrated
on the growth of Internet business-to-consumer companies, such as Amazon.com, many industry experts believe that business-to-business ecommerce
will be larger and have more far-reaching implications for the U.S. economy.
Internet technology makes possible great efficiencies in the ways businesses are
structured, distribute product and service information, and conduct transactions. The extent of these possibilities are just beginning to emerge.
This chapter describes the early history of computing in Section A. It
explains how computers work in very basic terms in Section B, and introduces
the principal models of software engineering in Section C. Section D discusses
the distinctive economics of computer software and network markets. Finally,
Section E offers an overview of the principal intellectual property laws
protecting computer technology. Subsequent chapters address these legal
regimes in greater detail.
Readers with a strong understanding of how computers work and how
programs are written should feel comfortable in skipping or skimming Sections
A through C. They should read the balance of the chapter in detail, however,
because the economics of computer software and the intellectual property
background may be unfamiliar —and will be important in the chapters to come.
Students who do not have a strong background in computer technology
should review Sections A through C at this time. For those students, a brief
note on methodology in this chapter is in order. Our goal in providing information about the computer industry is to offer students essential background
on how computer software works and how markets for computer software
function. We do not intend this introduction to provide a complete understanding of the field. In our summaries below, we reference a number of
excellent sources providing detailed background. The reader who is interested
in more detail than we can possibly provide here should seek out these sources.

A.

THE EARLY HISTORY OF COMPUTERS

This Section introduces the reader to the early history of computer
hardware and software. The purpose of this Section is to describe the enormous
changes that occurred in the early days of the computer industry in order to
provide context for the discussions that will follow. This Section does not
describe events up to the present day. More recent developments (including
the growth of the Internet) are discussed in the sections that follow, and in
later chapters, where modern technological developments often present new
legal issues.

A. The Early History of Computers

≡≡≡ 3

Following the invention of the abacus approximately 5,000 years ago, the
field of computing machines did not develop significantly until the eighteenth
century. Leonardo da Vinci (1425-1519) sketched some designs for mechanical
adding machines. Blaise Pascal (1623-1662) invented and built the “Pascaline,”
a sophisticated mechanical device for counting. Although not commercially
successful because of its cost and delicate construction, the counting-wheel
design served as the basis for most mechanical calculators until the 1960s. At
the turn of the nineteenth century, Joseph-Marie Jaquard (1752-1834)
introduced a new loom technology that used punched cards to control the
movement of needles, thread, and fabric to create distinctive patterns through a
binary mechanical automation technology. In the mid-nineteenth century,
Charles Babbage envisioned mechanical devices (the Difference Engine and the
Analytical Engine) to perform arithmetic operations. His designs, involving
thousands of gears, proved impractical. One of his students, Lady Ada August
Lovelace, proposed the use of punched cards to automate the operation of such
devices.
Toward the end of the nineteenth century, a U.S. Census Bureau agent
named Herman Hollerith developed a punched-card tabulating machine to
automate the census. Drawing on the use of “punched photography” by
railroads (to encrypt passengers’ hair and eye color on tickets), Hollerith proposed the encoding of census data for each person on a separate card that could
be tabulated mechanically. After developing this technology for the Census
Bureau, he formed the Tabulating Machine Company in 1896 to serve the
growing demand for office machinery, such as typewriters, record-keeping
systems, and adding machines. The company grew through the expansion of its
business and merger with other office supply companies, and in 1924 Thomas J.
Watson, the company’s general manager, changed the company’s name to
International Business Machines Corporation (IBM). By the late 1920s, IBM
was the fourth largest office machine supplier in the world, behind RemingtonRand, National Cash Register (NCR), and Burroughs Adding Machine Company. IBM made numerous improvements to tabulating technology during the
1920s and 1930s and eventually developed a machine that could compare cards,
a significant innovation that enabled machines to perform simple logic (if—
then) operations.

1.

Computer Hardware

The critical breakthrough defining modern computers was the harnessing
of electrical impulses to process information. In 1939, Professor John Vincent
Atanasoff, with the help of his graduate student, Clifford Berry, developed the
first electronic calculating machine. This computer could solve relatively
complicated physics computations. Atanasoff and Berry built a more sophisticated version, the ABC (Atanasoff Berry Computer), in 1942. Shortly thereafter,
driven in part by wartime demand for computing technology, Professor Howard
Aiken, funded in substantial part by IBM, developed a massive electro-

4

≡≡≡ Introduction

mechanical computer (MARK I). This machine contained three-fourths of a
million parts, hundreds of miles of wire, and was 51 feet long, 8 feet high, and 2
feet deep. It could perform three additions a second and one multiplication
every six seconds. Although it used an electric motor and a serial collection of
electromechanical calculators, the MARK I was in many respects similar to the
design of Babbage’s analytical engine.
At about this same time, Dr. John Mauchly persuaded the U.S. Army to
fund the development of a new computing device to compute trajectory tables
to improve the targeting of ordnance. Mauchly envisioned using vacuum tubes
rather than mechanical relays to store binary information. In collaboration with
J. Presper Eckert, Jr., a young electrical engineer, Mauchly completed the
electronic numerical integrator and computer (ENIAC) in 1946. This computer
occupied 15,000 square feet, weighed 30 tons, and contained 18,000 vacuum
tubes. It operated in decimal (rather than binary) format and therefore needed
10 vacuum tubes to represent a single digit. The ENIAC could perform over 80
additions or 8 multiplication operations per second.
The flexibility provided by programmability greatly enhanced the utility of
computers. In the early 1950s, Mauchly and Eckert developed the first
commercially viable electronic computer, the universal automatic computer
(UNIVAC I) for Remington-Rand Corporation. Limitations on electronic
technology, however, constrained the computing power of the first generation
of computers. Vacuum tubes, which were bulky, failed frequently, consumed
large amounts of energy, and generated substantial heat. This first generation of
computers was programmed in binary code (zeros and ones), which could be
understood by only a few specialists. IBM introduced its first commercial
computer, the IBM 650, in 1954. IBM made incremental improvements to this
technology and emerged as the market leader.
Because computers use binary electronic switches to store and process
information, the great challenge for the computer industry was to reduce the
size of these switches. The second generation of computers replaced vacuum
tubes with transistors, which were smaller, required less power, and ran without
generating significant heat. This and other innovations in data storage
technology made computers smaller, faster, and more reliable. The first scientific
computer using transistors was the IBM 7090. A second important innovation
of this era was the development of high-level computer languages, which
enabled computer specialists to write programs using coded instructions that
resemble human language. The IBM 705, introduced in 1959, used the
FORTRAN language processor. This model became the standard machine for
large-scale data processing companies. Notwithstanding these innovations,
computers of this generation remained complex and expensive because circuits
had to be wired by hand.
The development of integrated circuits enabled computer manufacturers to
incorporate many transistors within the layers of semiconductor material. The
greater computing power and efficiency of computers brought the cost of data
processing services within the reach of an increasing number of businesses.
Many businesses contracted with companies specializing in data processing

A. The Early History of Computers

≡≡≡ 5

services, and a few acquired their own computers. IBM’s 360 series of mainframe computers emerged during this period as the market leader. These
machines used a single machine language. As businesses upgraded their
equipment within the 360 series, they could continue to use the same computer
programs. This increased the benefit of owning a computer (rather than outsourcing data processing) and expanded the mainframe market. This larger
market generated greater demand for computer programmers and spawned new
companies to provide computer-related services. An independent software
industry began to emerge.
The 1960s and 1970s also witnessed the implementation of time-sharing
and telecommunication technologies, which enable multiple users to access a
computer from remote terminals. In addition, computers developed during this
period could handle multiple tasks simultaneously (parallel processing and
multiprogramming).
In 1965, the Digital Equipment Corporation (DEC) introduced the first
minicomputer, the PDP-8 (programmed data processor). This machine was
substantially smaller and about one-fourth the price of mainframe computers.
Minicomputers substantially widened the market for computers and computer
programmers. Domestic consumers purchased 260 minicomputers and 5,350
mainframes in 1965. Minicomputer unit sales surpassed mainframe unit sales by
1974. By the 1970s, computers incorporated “semiconductor chips” no larger
than a human fingernail and containing more than 100,000 transistors. As chip
technology advanced, the size of computers decreased while their computing
power increased. Semiconductor chips today can hold many millions of
transistors. For the past two decades, the memory capacity of a semiconductor
chip has doubled approximately every 18 months.
In the early 1970s, Intel Corporation developed the microprocessor, a chip
that contains the entire control unit of a computer. Very large scale integration
(VLSI) technology led to the development of the microcomputer. Originally
oriented toward computer hobbyists, microcomputers came to dominate the
computer industry by the mid-1980s. With its Apple II computer system, which
included a keyboard, monitor, floppy disk drive, and operating system, Apple
Computer vastly expanded the market for computers. Microcomputer unit sales
surpassed minicomputer unit sales in 1976, their second year of production. By
1986, sales of microcomputers (costing less than $1,000) reached approximately
4 million units and produced revenues of almost $12 billion, giving
microcomputers the largest share of computer industry revenues.
The rapid growth of the microcomputer sector of the industry spurred the
emergence of independent software vendors (ISVs) who developed massmarketed programs for this growing market of versatile machines. Microcomputer owners were anxious to experiment with different programs. The cost
of developing software for these machines was relatively low, product cycles
were short, and there was constant pressure to upgrade products.
IBM entered the microcomputer market in 1981 with its PC (personal
computer) product. The IBM PC utilized an Intel microprocessor (16-bit 8088
chip) and an operating system, PC-DOS (disk operating system), licensed from

6

≡≡≡ Introduction

Microsoft, then a fledgling company. Microsoft’s MS-DOS is a single-tasking,
single-user operating system with a command-line interface. Like other
operating systems, MS-DOS oversees operations such as disk input and output,
video support, keyboard control, and many internal functions related to
program execution and file maintenance.
IBM’s strong trademark in the business computer industry as well as its
vast distribution network for computers enabled IBM to rapidly attract customers for its PC product. Many ISVs and hardware manufacturers developed
and marketed software and peripheral products to run on the IBM PC. IBM
actively encouraged ISVs and the makers of peripheral equipment (e.g., printers
and monitors) to develop products for the PC. While promoting an “open
architecture” with regard to these sectors of the industry, IBM included a
1
specialized chip (BIOS) for transferring data within the PC that hindered other
original equipment manufacturers (OEMs) from offering fully compatible computer systems. This enabled IBM to charge premium prices for its PC product.
The rapid success of the IBM PC spurred ISVs to develop a wide range of
programs to run on the IBM PC, including word processing, database, and
spreadsheet software. For example, Lotus Corporation developed a version of
the spreadsheet Visicalc (originally designed to run on the Apple II) to run on
the IBM PC platform. Within a year of its introduction, Lotus 1-2-3 eclipsed
Visicalc and became the spreadsheet market leader. Its success led to the label
“killer app” to designate an application program of such widespread popularity
that it spurs sales of a hardware/operating system platform. This reinforced the
importance of owning an IBM PC, thereby adding further to the value of IBM’s
trademark in the microcomputer market. The powerful IBM trademark and the
growing availability of software designed to run on the IBM/Microsoft platform
catapulted IBM to a dominant position in the early microcomputer marketplace
and greatly encouraged the dissemination of microcomputers. It also made
Microsoft and Intel well-recognized trademarks in the microcomputer industry.
Microsoft and Intel retained rights to market their products to other
OEMs in the computer industry. Because of the availability of software designed
to run on the IBM PC platform, other OEMs sought to develop computer
systems that could run the growing supply of IBM-compatible software.
Although Microsoft’s MS-DOS operating system could be licensed in the
marketplace, IBM refused to license its BIOS chip. As a result, other OEMs
could not fully emulate the internal operations of the IBM PC readily, and some
software designed for the IBM PC did not operate satisfactorily on the
computer systems of other OEMs. As a result, consumers strongly favored IBM
PCs. Other computer companies had little choice but to offer IBM PC
compatibility in order to compete effectively in the microcomputer marketplace.
Computer manufacturers that developed their own platform did not fare well.

1. The BIOS chip is the set of essential software routines that test hardware at startup, start
the operating system, and support transfer of data among hardware devices. It is typically stored in
read-only memory (ROM) so that it can be executed when the computer is turned on. The BIOS is
usually invisible to computer users.

A. The Early History of Computers

≡≡≡ 7

With the exception of Apple Computer, which maintained a niche in the
marketplace, no serious alternative to the IBM PC/MS DOS platform survived.
By 1984, Compaq developed a BIOS chip that successfully ran software
developed for the IBM PC. Later that year, Phoenix Technologies Ltd.
developed a fully IBM PC-compatible ROM BIOS, which it licensed to a broad
range of OEMs. Other OEMs entered the market for IBM PC-compatible
computer systems. As consumers became increasingly confident that software
application programs designed for the IBM PC would run on the computer
systems of other OEMs, these PC “clone” computers eroded IBM’s dominance
of the marketplace by offering lower prices, wider selection, and additional
features.
By 1986, numerous OEMs competed in the IBM-compatible/MS-DOS
marketplace and IBM’s hold on the market had significantly loosened. The
broad range of software available for the IBM-compatible/MS-DOS platform
enabled MS-DOS to emerge as the de facto operating system standard in the
industry by the late 1980s.
At about the same time, Microsoft began developing the Windows operating system platform incorporating a graphical user interface. The Windows
platform was backward-compatible with MS-DOS (i.e., applications designed to
operate in the MS-DOS environment could run on the Windows platform as
well). Most MS-DOS users as well as new computer users migrated to the
Windows platform, which has been the dominant platform since the mid-1990s.

2.

Computer Software

During the 1940s and 1950s, hardware and software innovation were
integrated. The development of computer software was a highly specialized field
of scientific research done by academic, government, and government-funded
commercial research laboratories. Those who worked with computers had
significant scientific and technical expertise. The computer languages and
techniques for developing programs were just being created and tested.
Computers had relatively narrow use in scientific, military, and space applications. Each computer was unique, and programming was specialized for
each machine.
IBM became and remained the dominant force in the commercial
computer industry from the 1950s until the early 1980s. During the 1950s and
1960s, IBM and other mainframe manufacturers (e.g., Burroughs, Raytheon,
RCA, Honeywell, General Electric, Remington Rand) bundled operating
system and application software with hardware for the same price, commonly
through a leasing arrangement. During the early stages of the industry, this
bundling arrangement made economic sense because there were relatively few
computer applications and the hardware manufacturers were able to support
these uses of their systems.
As the industry developed, manufacturers encouraged their customers to
share software among themselves through software-sharing institutions. IBM

8

≡≡≡ Introduction

formed and supported a user group named SHARE, which served as a
clearinghouse for programming information and software for computer users.
SHARE distributed software programs, including libraries of subroutines,
algorithms published in technical journals, computer code published in textbooks and, in some instances, programs written to solve problems in specific
areas. Those companies contributing to the software-sharing “bank” were
entitled to borrow the works of others. But as computers became increasingly
powerful, versatile, and affordable, the sharing model began to break down.
Those companies making substantial investments in software development were
less willing to share these innovations with others. In addition, computer
technology was diffusing from government and scientific uses to commercial
applications.
Specialty software supply houses, such as Applied Data Research,
Inc. (incorporated in 1959), emerged to provide customized and generalpurpose software in direct competition with the hardware manufacturers. Offering specialized services on a contract basis, this early software
industry competed with the bundled (and, hence, unpriced) software programs provided by mainframe manufacturers through mainframe sales and
leases.
The advent of less expensive minicomputers as well as the growing
versatility and computing power of mainframes spurred the independent
software industry. By 1965, there were approximately 40 to 50 independent
software suppliers. F. Fisher, J. McKie, & R. Mancke, IBM and the U.S. Data
Processing Industry: An Economic History 322 (1983). Applied Data Research
introduced Autoflow, a flowchart program, which was the first internationally
marketed computer program. International Computer Programs, Inc. (ICP)
published catalogs of software programs. The independent software industry
grew quickly. There were almost 3,000 vendors by 1968. In 1969, contract
programming produced revenues of $600 million; software products generated
another $20-25 million. Id. at 323. Nonetheless, this accounted for less than 10
percent of the amount spent for programming; the remainder was spent on
programmers working in-house.
Founded in 1959, Computer Sciences Corporation (CSC) became a
successful software company during the mainframe era. CSC began its business
by designing, developing, and implementing software systems for computer
manufacturers. Over the course of the 1960s, its computer programming
business branched out to serve large companies outside of the computer
industry and federal, state, and local government agencies. During this same
period, CSC increasingly shifted its focus toward the development of software
products. It developed a range of products generally directed to business uses,
including tax, accounting, and personnel management software.
IBM’s increasing dominance of the computer industry led to antitrust
scrutiny by the federal government. In addition, the costs of software development within IBM increased dramatically, and there was increasing pressure
within the company to price software separately. Following the lodging of the
government’s antitrust complaint in 1969, IBM voluntarily unbundled its

B. An Introduction to Computer Technology

≡≡≡ 9

hardware from application programs effective in January 1970. This event
greatly expanded the business opportunities for independent software vendors.
By 1975, there were over 1,000 software firms in the United States offering
more than 3,000 products.
The introduction of the microcomputer in the mid- to late 1970s
dramatically changed the software industry. The proliferation of minicomputers
fostered the growth of ISVs and a shift away from custom programming and
support services toward pre-packaged software products. With relatively small
investments, computer programmers could develop software for the growing
numbers of microcomputer users. Beginning in the late 1970s, ISVs began
selling through retail and other channels pre-packaged (i.e., non-customized)
software products for use on microcomputers. Wordstar, Visicalc, and other
independently developed software products dominated the early microcomputer
software marketplace.
As noted in the discussion of computer hardware, Lotus Corporation
developed a version of the spreadsheet Visicalc to run on the IBM PC platform.
The powerful IBM trademark and the growing availability of software designed
to run on the IBM/MS-DOS platform catapulted IBM to a dominant position
in the early microcomputer marketplace and greatly encouraged the dissemination of microcomputers. These factors stimulated rapid growth in the
software industry.
By the late 1980s, Microsoft had emerged as a dominant force in the
computer industry. Its MS-DOS operating system was installed on the majority
of microcomputers and its Windows graphical user interface platform was
gaining acceptance in the higher end of the microcomputer marketplace. By
1991, Microsoft’s operating systems were installed on almost 90 percent of
microcomputers in the world. Building upon this success, Microsoft began
bundling its office software products into an office suite of products: Microsoft
Word word processing software, Microsoft Excel spreadsheet software,
Microsoft Access database software, and Microsoft PowerPoint presentation
software. This marketing strategy has enabled it to become the leading seller in
each of these product categories.

B. AN INTRODUCTION TO COMPUTER
TECHNOLOGY

Virtually unknown 50 years ago, computers literally surround most
Americans in their daily lives today. In their most easily recognized form,
mainframe and minicomputers can be found in most businesses, government
offices, and schools. Microcomputers can be found on most business and home
desktops for use in word processing, information storage, entertainment games,
and electronic shopping. Less commonly recognized, computers can also be

10

≡≡≡ Introduction

found in many home appliances, hand-held organizers, telecommunication
devices, automobile dashboards, and elevators, among other places.

1.

Computer Hardware

Computers use a binary base. By setting electrical switches to “on”
(electrical current is flowing) or “off ” (current is not flowing), early computers
could create a single “bit” of information. That piece of information is read as
either a 1 (“on”) or a 0 (“off ”). By translating information into a series of such
1s and 0s, computers could perform mathematical operations.
The first computing machines did not utilize computer “programs” in a
form that we would recognize today. These machines were in essence a series of
hard-wired circuits constructed to perform one particular computational task.
That is, the mathematical function performed by the computer was determined
by the physical arrangement and structure of the circuits. The computers had to
be rewired in order to perform a different function. These machines were
comprised solely of what we call today “hardware”—the physical circuits that
make up the machine.
During the late 1940s, scientists developed the first machines that could
store and use encoded instructions or programs. This set of innovations
dramatically increased the flexibility and usefulness of computers. Users could
perform a variety of computational tasks without having to rewire the basic
hardware of the computer. Instead, they could simply direct the computer to
perform one of the functions that it had stored in its memory. The actual
computer in these programmable or “universal” machines is the central
processing unit (CPU). The CPU has two principal components: an arithmetic
logic unit (ALU), which performs a basic set of primitive functions such as
addition and multiplication, and a control unit, which directs the flow of electric
signals within the computer. In essence, a computer processes data by performing controlled sequences of primitive functions. As computers grew more
powerful and the tasks they performed grew more complex, computer scientists
relied on increasingly complex sets of instructions that are executed automatically by the computer. These sets of instructions, known as computer
programs, are the focus of most of this book.
The basic hardware of a modern microcomputer system includes a CPU,
internal memory storage, disk drives or other devices for physically transferring
data and programs into and out of the internal memory, and telephone or
network interconnections for linking the computer with other computers. The
internal memory of the computer typically features three types of information
storage: random access memory (RAM), read-only memory (ROM), and data
storage memory (disk space). Data can be input into RAM, erased, or altered.
RAM chips serve two information storage functions: they act as temporary
storage devices for programs and data currently running on the computer, and
they also serve as permanent memory for data or programs. A ROM chip has
information permanently embedded in the architecture of the chip, and that

B. An Introduction to Computer Technology

≡≡≡ 11

information can only be read (not altered) by the computer. ROM chips are
used primarily to direct certain basic operating functions of the computer.
Computer engineers design the programming capability of a computer to
suit the user’s needs. By building more of the desired functions directly into the
wiring of the computer, they can achieve more efficient processing for certain
applications. Such pre-designed computers are known as “special purpose
computers” because they are designed to perform only certain specific tasks.
Their greater speed comes at a cost of less flexibility —that is, less ability to run
a wide range of programs. This technological trade-off harks back to the early
days of computer technology, when all programs were hard-wired into the
computer.
Advances in computer technology have made greater efficiencies of
processing possible without the need to hard-wire the computer. Most modern
computers, particularly personal computers, are “general-purpose computers”
that feature a high degree of programming flexibility. When a user has only a
few computing needs or desires high-speed processing, however, she may still
prefer to rely heavily on internal programming.
Besides the internal memory and processing chips, computers are
composed of input and output devices (sometimes referred to as I/O devices)
and peripherals. These devices control the transfer of information into and out
of a computer. Early programmers “input” information into a computer by
changing the physical structure of its circuits, or (in more sophisticated models)
by using “punch cards,” which allowed computer users to write data for the
computer in the form of holes punched in special note cards and then to feed
that data into the computer in the form of stacks of such cards. Most modern
computers use the typewriter keyboard as their primary input device, allowing
users to enter data into the computer by typing it. The typewriter keyboard has
been supplemented with other input devices, including the computer “mouse,”
the telephone line, and microphones coupled with voice recognition software.
The output devices of computers have also changed. Computers originally
communicated data to humans in the form of lights that turned on or off,
representing the bits of data produced by some computer operation. Advances
in computer outputs include the development of the printer, the introduction of
television-like computer monitors and screen displays, and telephone and cable
output that can “send” data to a remote location.

2.

Computer Software

Computer programs are the instructions that allow general-purpose
computers to be many different types of machines. When a computer is running
a video game, the computer is a video game machine. When it executes program
instructions to enable users to write letters or reports, the computer is a word
processing machine. When it carries out a programmed search for data in a large
repository of information, the computer is an information retrieval machine.
Programs can also be written for special-purpose hardware (e.g., the semi-

12

≡≡≡ Introduction

conductor chip that monitors the functioning of your toaster) when this will
best achieve the developer’s objectives.
Computer programs that operate on a single machine fall into two basic
categories: operating systems programs and applications programs. Operating
system programs manage the internal functions of the computer. They
coordinate the reading and writing of data between the internal memory, the
CPU, and the external devices (e.g., disk drives, keyboard, and printer); perform
basic housekeeping functions of the computer system; and facilitate use of
application programs. In essence, the operating system prepares the computer to
execute the application programs and serves as an intermediary between the
application program and the hardware of the computer. An applications program can order the deletion of a file, but, generally, the operating system
actually carries through the details of this function.
Every computer needs an operating system to direct its functions and to
manage other software that is run on the computer. Computers do not need,
and many do not have, more than one operating system. Because the operating
system controls the interactions between the user, the software, and the
computer itself, an applications program must be compatible with a particular
operating system if it is to interoperate with that program and run on a
computer using that operating system. This compatibility requirement means
that the designers of operating systems have some degree of control over the
applications programs that will work with that operating system. Although the
specifications of applications programming interfaces (APIs) are sometimes
published freely, often they are licensed from an operating system program
developer. Microsoft, for example, licenses its APIs for its operating system
programs to applications developers. An alternative way to get access to APIs is
through a laborious process of reverse engineering the program (about which
more in Chapter 2).
Operating systems may control the execution of instructions in the central
processing unit of the computer, but they generally do not perform specific tasks
of interest to end users. Applications programs enable users to accomplish
specific tasks with computers. Bookkeeping, statistical and financial analysis,
word processing, and video game programs are among the many types of
application programs available today.
Application programs are often developed to run on particular operating
systems. The task of adapting an application program designed to run on one
operating system to run on another operating system is often technically
complex, time-consuming, and costly. In recent years, software developers have
developed programs that run on more than one operating system. In addition,
translator programs have been developed to allow users to move files from one
application program to another. Nonetheless, the problem of compatibility
between applications programs and operating systems remains a major concern
in the computer software industry. There is some hope that the Java programming language (about which more in Section C) will enable programmers to
write a program once and have it run on many machines.

B. An Introduction to Computer Technology

≡≡≡ 13

The line between operating systems and application programs, while sharp
in particular instances, may blur when programs once distributed as applications
programs are integrated into an operating systems program. Microsoft, for
example, has integrated a number of “add-on” features (such as compression
software and even rudimentary word processing) into its operating system over
time. By selling a bundled product that includes both an operating system and
certain applications, Microsoft arguably provides more value to consumers but
also eliminates a competitive market for such add-on products. Microsoft’s
decision to make its Internet Explorer Web browsing software an integrated
part of the Windows operating system contributed to the U.S. Justice Department’s decision to charge Microsoft with antitrust violations in the late
1990s. (We discuss this suit in more detail in Chapter 7.)

3.

Computer Networks

Early computers were self-contained machines. Data could be input into
them (usually laboriously by punch card), and after the computer processed the
data, output would be produced. But the data never left the physical environs of
the single computer. To move data from one computer to another, one had to
take the output of one computer and transport it physically to and then input it
into the new computer. Even when input and output became somewhat more
efficient—for example, by use of magnetic storage media such as “floppy disks”
—the necessity for a physical transfer remained.
Computer engineers recognized early on that great benefits would flow
from the networking of computers. Networking has been around in specialized
computing environments since the late 1960s, but it was not until the 1990s
that the Internet afforded easy widespread access to large computer networks.
As of June 1999, more than 171 million people around the world had Internet
access and 37 percent of the U.S. population had Internet access at home or
at work.
Networking technology allows computers to communicate with each
other. This communication capability enables dispersed computer users to
exchange information—for example, by electronic mail (email). It also reduces
the time and cost of transferring information regardless of the physical location
of computers. Networked computing also allows computers —and people —to
work together to achieve certain tasks that would take much longer to do alone.
Networking computers requires some basic technologies. First, some form
of hardware must connect the two computers, either physically or virtually. If
the computers are physically close to one another, this can be accomplished by
stringing a cable between them. If the computers are physically separated by
great distances, networking requires that they be connected either via telephone
lines or by some form of wireless communication. Long-distance connections
require some form of hardware to convert digital computer data into a form that
can be transferred over the telephone lines or “narrowcast” over the airwaves.
One common type of hardware that enables telephone transmissions of digital

14

≡≡≡ Introduction

data is a modem. Modems take digital computer data, convert it to analog
(sound) form for transfer over telephone lines, and then reconvert it to digital
form. Networking software (and sometimes hardware components as well) is
required to enable computers to communicate with each other. When one
computer sends data, the other must be able to process it. Interoperability issues
thus arise in the context of computer networking design. The development of
standard protocols for exchanging information has fostered the growth of
networking.
Local Area Networks. Many organizations find it useful to develop local
area networks (LANs) to link a number of computers so that members of the
organization can share information and information resources. LANs provide all
of the communications advantages described above: they enable employees to
communicate by email, to send files to one another, and to share computing
resources. In addition, LANs have made possible a form of specialization or
division of labor among computers. Because the computers in a LAN are linked
together in real time, it is possible to store files in a single central location and
allow any computer to access them at any time. Rather than requiring each
computer to be self-sufficient, certain (generally more powerful) computers can
be designated as central “servers” where files or programs are located. Individual
“client” computers in the network can call up the files or programs on an asneeded basis. Because the server machines are generally faster and more
powerful than ordinary computers, LANs offer not only centralized access but
also quicker processing time.
LANs also facilitate group projects. “Workgroups” can add to or change
the same document simultaneously over the network. This is a particular
advantage for companies (e.g., sales companies, airlines, hotels) that rely on
large information databases that must be regularly updated. Documents or
databases that previously had to be changed by one central programmer can
now be altered instantaneously to reflect current information. Because the
workgroup is organized on the computer network rather than by the physical
sharing of documents, LAN workgroups also contribute to a more flexible
organizational structure.
The mass corporate movement towards LANs has important legal
implications as well. Information that used to reside on a single computer is
now accessible to dozens or hundreds of computers, many of them physically
remote from the actual location of the data. LAN administrators must worry
about limiting access to their networks, guaranteeing the security of their data,
implementing version control on revised documents, and monitoring access to
certain “controlled” data (particularly applications software licensed for limited
uses from third parties).
Other kinds of private networks also exist. Anyone with a computer and a
modem can connect to private dial-up networks. Such dial-up connections
normally take place over the telephone lines between individual computers and
one or more central “host” computers operated by the private network

B. An Introduction to Computer Technology

≡≡≡ 15

administrator. Some are operated by information providers who allow people to
sign on to the network and download information of particular interest to them.
Others may serve as communications forums for people interested in particular
topics. Individuals dial into the host computer and communicate with each
other through the host, either in real time or by leaving email messages.
Large-Scale Public Networks. In the mid-1960s, researchers working
for the Department of Defense’s Advanced Research Project Agency (ARPA)
began working on the problem of connecting its computers scattered around
the United States at various universities and research laboratories to enhance
memory storage and time-sharing capabilities. An important design objective of
this system was that it not be vulnerable to breaking down in the event of a
nuclear attack or other widespread disruption of telecommunications systems. It
was initially believed that this would require 136 separate communication lines
(17 computers × 16 ÷ 2). These lines would be expensive, and the cost would
grow geometrically as more computers were added to the network.
At about that time, researchers at Rand Corporation and the National
Physical Laboratory in England independently developed the concept of “storeand-forward packet switching” which avoided the problem of having to connect
independently each node of a network to each other node. Packet switching
technology, using techniques similar to those developed in the telegraph
industry, allows multiple messages to flow through a common “backbone” line
by transmitting information in smaller packets that contain the address of the
destination. Large messages are broken into streams of packets that are sent as
individual items into the network. Switching nodes pass the messages along and
the receiving computer reconstitutes the full message. Such a system minimizes
the risk that the entire system could crash by allowing information to travel
along a variety of paths.
In 1970, the ARPANET successfully implemented packet switching
technology in a four-node network. The ARPANET grew to more than 20 sites
by 1971 and to over 200 sites by 1981. The ARPANET paved the way for the
Internet, an international collection of interconnected computer networks based
on an open technical standard known as Transmission Control Protocol/Internet Protocol (TCP/IP). Computers implementing this protocol may connect to
the Internet.
By 1996, more that 9 million host computers were connected to the
Internet, and it is projected that this number will exceed 200 million by the year
2000. Computer users may gain access to the Internet through Internet service
providers (ISPs) such as America Online (AOL), Microsoft Network (MSN),
and Netcom; university and library connections; corporate and non-profit
portals; and government nodes. Thus, the Internet is a largely decentralized
system utilizing a common communication backbone.
Until recently, the Internet has been governed primarily by InterNIC
(NSFnet Internet Network Information Center), a consortium involving

16

≡≡≡ Introduction

the National Science Foundation, AT&T, General Atomics, and Network
Solutions, Inc. (NSI). NSI has had principal authority to register Internet
names and addresses, what have come to be known as “domain names.”
Domain names are represented in a hierarchical format: server.organization.type
—e.g., www.whitehouse.gov. In 1999, the assigning of domain names was
opened up to a range of entities operating under the authority of the Internet
Corporation for Assigned Names and Numbers (ICANN).
In 1990, Tim Berners-Lee, a researcher at CERN, a European particle
physics laboratory, developed the World Wide Web (WWW or Web), a widespread means by which users of the Internet could share databases. The WWW
makes accessible to Internet users hypertext documents residing on HTTP
(hypertext transfer protocol) servers throughout the world. These Web pages,
identified by uniform resource locators (URLs), such as www.whitehouse.gov,
are written in HTML (hypertext markup language). Codes embedded in Web
pages can instantly access other documents on the World Wide Web. They may
also activate embedded software programs and audiovisual images. The Web
became a mass media phenomenon with the development of “Web browser”
programs that permit personal computers to access a wide variety of files from
Web sites. The Web has also become the transaction medium for most
electronic commerce.
Users of the Internet can locate Web sites of interest in a number of ways.
They can often find on-line merchants, educational and government entities,
and companies by using trade and organization names, such as “Microsoft.com,” “law.berkeley.edu,” and “uspto.gov.” They can also “surf ” the Internet with the assistance of various “search engines,” such as Yahoo, Altavista, and
Infoseek. These search engines look for keywords in domain names, actual text
on Web pages, and metatags —HTML code created by a Web page developed
to attract search engines looking for particular keywords. Search engines will
then rank Web sites from all over the Web according to various algorithms
designed to arrange indexed materials. Web users may create “bookmarks” on
their computers in order to access their favorite Web sites quickly.
As computing has shifted in the 1990s from a stand-alone activity to one
conducted increasingly over networks, the way computers function has changed
as well. It no longer makes sense to talk about how a computer functions. Most
computers used in business, and many used in the home, do not operate in selfcontained fashion. Computer programs are distributed across LANs and over
the Internet, and over the Internet more and more programs are distributed in
pieces on an as-needed basis. We discuss this change and its implications for
computer law in more detail in the sections that follow.
The Internet has also changed the way commerce is conducted. Virtually
everyone was caught off guard by the speed with which the millions of people
using the Internet began to use it to buy things. The development of such
“ecommerce” poses important new challenges for the legal and technological framework of the Internet. We discuss those challenges in detail in
Chapter 9.

C. How Software Is Made

C.

≡≡≡ 17

HOW SOFTWARE IS MADE

Software development has evolved from a significantly hardwareconstrained activity to a highly flexible and sophisticated field of engineering.
This section briefly summarizes the principal methods involved in modern
software development. We note, however, that the proliferation of a wide range
of computers —from mainframes to desktop units to a host of embedded
systems —has spawned a great range of programming methods. Although
many of the stages can be found in other programming contexts, we focus here
upon the methods used in the development of relatively complex commercial
operating systems and application programs.
Software development is an inherently functional enterprise. Software
provides the instructions that enable a computer to perform tasks that serve the
users’ needs. Software can control anything from the relatively simple operation
of a clock to the highly complex operation of an airplane. Whereas the programs
that operate a wristwatch may have 1,000 instructions, modern spreadsheet and
word processing programs have well over a million lines of instructions or code.
In order to make computers more effective and easy to use, software can
become extraordinarily complex in design and implementation. To a large
extent, software engineering has become an applied science of mastering complexity. The engineering nature of the discipline is discussed in detail in
Pamela Samuelson, Randall Davis, Mitchell D. Kapor, & J.H. Reichman,
A Manifesto Concerning the Legal Protection of Computer Programs,
94 Colum. L. Rev. 2308, 2327-2329 (1994) [hereinafter Manifesto].
1.4.3

Constructing Programs Is an Industrial Design Process

Once one understands that programs are machines that happen to have been
constructed in the medium of text, it becomes easier to understand that writing
programs is an industrial design process akin to the design of physical machines.
Each stage of the development process requires industrial design work: from
identifying the constraints under which the program will operate, to listing the
tasks to be performed (i.e., determining what behavior it should have), to deciding
what component parts to utilize to bring about this behavior (which in the case of
software includes algorithms and data structures), to integrating the component
utilitarian elements in an efficient way.
A substantial amount of skilled effort of program development goes into the
design and implementation of behavior. Designing behavior involves a skilled
effort to decompose the overall, complex task (e.g., word processing) into a set of
simpler subtasks requiring simpler behaviors (e.g., deleting a character). Constructing the interaction of these subtasks to produce useful behaviors (e.g.,
deciding whether the “delete word” command should be implemented as a
sequence of delete character commands) also requires design skill. Knowing how
and where to break up a complicated task and how to get the simpler components
to work together is, in itself, an important form of the engineering design skill of
programmers.

18

≡≡≡ Introduction

The goal of a programmer designing software is to achieve functional results
in an efficient way. While there may be elements of individual style present in
program design, even those style elements concern issues of industrial design, e.g.,
the choice of one or another programming technique or the clarity (or obscurity)
of the functional purpose of a portion of the program. . . .

At the same time, others have characterized programming, particularly in
its earlier days, as akin to an art form. Certainly it is true that while the ultimate
goal of computer programming is the design of a functional work, programming
has historically been less routinized than most engineering disciplines, and
2
much computer programming has involved “reinventing the wheel.” We
discuss some of the reasons for that, and modern ways of dealing with it, in the
sections that follow.
Software development has traditionally been described as a multistage
3
process often analogized to a waterfall. See generally Stephen R. Schach,
Classical and Object-Oriented Software Engineering with UML and C++ (4th
ed. 1999); Ben Schneiderman, Designing the User Interface: Strategies for
Effective Human-Computer Interaction (3d ed. 1998); Grady Booch, ObjectOriented Analysis and Design with Applications (2d ed. 1994); Ian Somerville,
Software Engineering (4th ed. 1992). All software development processes begin
with a clear definition of the problem to be solved or task to be automated. The
process begins with the identification of the goals of the users and the constraints of the hardware system. This stage is followed by the development of a
system and software design. A user interface will also be designed to serve the
needs of the target audience for the software product. After the software has
been structured and an interface designed, programmers implement the design,
test its performance and reliability, and fine-tune the system. In addition, many
software products require ongoing maintenance and updating to correct errors
and enhance their capabilities.
Although the waterfall model implies a linear flow, modern software
engineering typically has an iterative quality with many feedback loops along the
development and use life cycle. That is, programming does not occur from the
top down, with ideas being turned into algorithms and thence into code.
Rather, the development of lower-level program components can influence the
design of higher-level components and can even cause the programmer to
rethink the goals of the program itself. One might think of this as bottom-up
programming. As the authors of the Manifesto note:
Innovation in software development is typically incremental. Programmers
commonly adopt software design elements— ideas about how to do particular
2. The Manifesto observes that “[t]ypically, a programmer writes every line of code afresh, no
matter how large the program is, or how common its tasks. To perceive the impact of this lack of
standard building blocks, imagine trying to design an entire car in complete detail, down to the last
fastener, without being able to assume the existence of any standard parts at all (not even nuts, bolts
or screws).” As its authors observe, “[t]his is not a desirable state of affairs.” Manifesto, supra at
2322.
3. Other programming paradigms include the rapid prototyping model, exploratory programming, formal transformation, and system assembly from reusable components.

C. How Software Is Made

≡≡≡ 19

things in software — by looking around for examples or remembering what worked
in other programs. These elements are sometimes adopted wholesale, but often
they are adapted to a new context or set of tasks. In this way, programmers both
contribute to and benefit from a cumulative innovation process. While innovation
in program design occasionally rises to the level of invention, most often it does
not. Rather, it is the product of the skilled use of know-how to solve industrial
design tasks. . . .
The technical community has recognized the cumulative and incremental
nature of software development, and has welcomed efforts to direct the process of
software development away from the custom-crafting that typified its early stages
and toward a more methodical, engineering approach. The creation of a software
engineering discipline reflects an awareness that program development requires
skilled effort and applied know-how comparable to other engineering disciplines.
The products of software engineering almost invariably contain admixtures of
old and new elements. The innovation in such programs may lie in the manner in
which the known elements have been combined in a new and efficient manner. Or
it may come from combining some new elements with well-known elements in
order to achieve the same result in a new way. When we speak of programs as
“industrial compilations of applied know-how,” it is in recognition of the
frequency with which software engineering involves the reuse of known elements.
Use of skilled efforts to construct programs brings about cumulative, incremental
innovation characteristic of engineering disciplines. A well-designed program is
thus akin to the work of a talented engineer whose skilled efforts in applying
know-how, accumulated from years of experience and training, yields a successful
design for a bridge or other useful product.

Manifesto at 2330-32.
However programs are designed and written, a fundamental fact about
computer programs is that they are functional. They are designed to carry out
certain tasks and bring about certain behaviors. Consequently, programs are
judged largely on how well they perform the tasks they have been programmed
to accomplish. Because the computer instructions serve no function other than
to accomplish the defined tasks, the overriding concern in designing a program
is to meet the users’ needs in the most efficient manner.
The concept of efficiency in this context is broad. “Efficiency” may mean
one or more of the following: (1) code efficiency —maximizing the processing
speed; (2) memory efficiency —using solution techniques and addressing
methods to minimize the amount of memory needed to accomplish the desired
tasks; (3) input/output efficiency —maximizing the quality and speed of
information transmission between the computer and the user or external
hardware devices (such as keyboards and printers); (4) stability —the program
must be easy to maintain, upgrade, and adapt to new hardware platforms; and
(5) usability —the ease of use by the intended audience. The software
engineering field strives to develop methods for improving the efficiency and
reliability of programs in a cost-effective manner.
The subsections that follow describe typical processes for designing
software at different levels of abstraction, from high-level ideas down through
the actual writing of program code.

20

1.

≡≡≡ Introduction
Requirements Analysis and Program Specification

At the conceptual level, software development is comprised of several tasks.
Of most importance, the design team must identify the goals of the design
process. For example, in developing software to provide banking services
through an automated teller machine (ATM), the design team will map out the
necessary data, the desired functionality, and hardware and security constraints.
They might develop tables or flowcharts to understand the flow of information
needed to accomplish the various transactions. As another example, in
developing software to run a law office, the designers must identify the various
tasks that the computer program should handle —for example, billing clients,
filing documents, ordering supplies, preparing budgets, and filing court
documents. The design team would typically interview the prospective users of
the software system about their needs and desires, study the way information
flows in a law office, and develop a schematic representation of the tasks to be
programmed. This abstract representation of tasks maps data inputs and outputs
and assesses the hardware requirements for possible systems.
Writing an application program is a complex and iterative process. While
some programs are small and relatively simple to write, most modern programs
involve thousands and even millions of lines of computer code. They may be
written not by a single person but by teams of programmers working together
over the course of months or years.
Partly to facilitate collaborative work within teams, programmers sometimes develop a flowchart to depict the logical structure of the program. This
will not just show what the program is supposed to do but also how it will carry
out the desired tasks. A sample flowchart for a computer program is reproduced
as Figure 1.
We should emphasize, however, that flow charts are merely conceptual
aids, and are by no means a necessary part of programming.

2.

Software Design

Processes for designing software systems have undergone significant
changes over the past four decades as computer hardware has become more
powerful and versatile and the problems sought to be addressed have become
more complex. Managing the complexity of large-scale software projects —for
example, computer operating systems, avionics (programs to fly large
commercial airplanes), robotics, spacecraft simulation, telecommunications, air
traffic control —entails significant technological creativity. Programmers have
traditionally sought to divide complex problems into component parts and to
solve each component separately. This procedure-oriented, “functional
decomposition,” or “top down” methodology served as the dominant paradigm
for software design through at least the mid-1980s, and it continues to be
widely used in solving some classes of problems. The programmer begins with
a general description of the functions that a program is to perform. The

C. How Software Is Made

FIGURE 1
Flowchart from a software patent drawing.

≡≡≡ 21

22

≡≡≡ Introduction

programmer then outlines the program, specifying data structures and
algorithms to be used. Such outlines are frequently expressed as flowcharts
showing the relationship among the various modules or subroutines of the
program. These modules are then separately further broken down until the full
logic of the program can be spelled out.
While conceptually logical, the classical design methodology has become
increasingly problematic as the complexity, scale, and need for updating of
software projects has grown. The many parts of very large software systems often
interact in a multitude of intricate and subtle ways. Classical top-down designs
often require significant redundancies and are difficult to evolve. Programmers
must typically build programs from scratch, often requiring re-invention of
many components. This contrasts with other engineering disciplines, which
typically reuse existing components. Such reuse can reduce design, testing, and
other costs. In addition, top-down procedural techniques typically define data
structures in one place. Various subroutines refer back to this single location.
While this approach offers some efficiencies, it can lead to problems when the
program is updated or revised. Whenever a data structure is revised, all
subroutines or modules drawing upon that data structure must be suitably
altered as well, which can cause a domino effect.
As a result of these limitations of classical programming methodologies,
which tend to become more acute as systems grow large, computer scientists
developed the “object-oriented” paradigm. Programmers using this paradigm
design software by structuring relationships among independent “objects,” each
of which represents a physical entity in the real world. Each object stores both
data representing attributes of the physical objects as well as procedures
representing actions that the physical object can perform. Whereas the traditional top-down program is structured around processing of data, objectoriented programs model a problem by actually simulating the interaction of
physical entities. Objects are grouped within hierarchical structures. Higherlevel classes “inherit” the attributes of subclasses. Object-oriented systems
simplify complexity by “encapsulating” the internal data structures and procedures within objects. The data structures and procedures of particular objects
can be altered without having to affect other aspects of the larger software
system.
Object-oriented programming reflects basic human learning processes.
Grady Booch, one of the pioneers of the object-oriented paradigm, offers the
following analogy:
[W]ith just a few minutes of orientation, an experienced pilot can step into a
multi-engine jet aircraft he or she has never flown before, and safely fly the vehicle.
Having recognized the properties common to all such aircraft, such as the
functioning of the rudder, ailerons, and throttle, the pilot primarily needs to learn
what properties are unique to that particular aircraft. If the pilot already knows
4
how to fly a given aircraft, it is far easier to know how to fly a similar one.

4. Grady Booch, Object-Oriented Design with Applications 12 (1991).

C. How Software Is Made

≡≡≡ 23

Thus, a programmer starting with an object-oriented program that simulates a
basic aircraft can simulate the behavior of a more sophisticated aircraft, such as a
fighter jet, by adding additional features, behaviors, and processes of the more
advanced plane. The programmer would not need to begin the software design
5
process from scratch.
The above example illustrates some of the ways in which object-oriented
design systems economize on programming time and cost. Such designs are
more readily adaptable to changes in data structures and new variables than are
the traditional top-down approaches. The adaptability of object-oriented
software programs substantially reduces the risk that a large investment in
software design will be lost if new parameters or features need to be added to a
program. Moreover, object-oriented designs tend to yield smaller systems
through the reuse of common mechanisms, which reduces the complexity of the
software design and the cost of writing code. See Mark A. Lemley & David W.
O’Brien, Encouraging Software Reuse, 49 Stan. L. Rev. 255, 259-268 (1997).
This reuse of “chunks” of computer code is not only valuable because it saves
the cost of rewriting the code, but because it permits a particular software
“object” to be refined and debugged and then reused in a variety of different
programs. This reuse of software objects by different firms may enhance software compatibility, decrease programming costs, and even improve the safety
and reliability of software (since mission-critical software will not have to be
written from scratch for each new product, but can use code that has already
been tested and proven to work). As a result of these advantages, objectoriented methodologies have increasingly become the norm in designing highly
complex computer programs.

3.

User Interface Design

As computers have become more versatile and available to a broader and
often less technically trained range of users, software development has
increasingly focused upon tailoring the program to the particular goals and
knowledge base of the intended users. See generally Ben Schneiderman,
Designing the User Interface: Strategies for Effective Human-Computer
Interaction (3d ed. 1998). The design of computer program user interfaces
draws upon the field of computer-human interaction (CHI), a sub-field of a
more general field of “human factors” analysis that aims to understand how
human beings process information so that products can be better designed to
enhance usability. Human factors analysis brings together insights from the
fields of education, graphic art, industrial design, industrial management,
computer science, mechanical engineering, psychology, artificial intelligence,
5. See Barkan, Software Litigation in the Year 2000: The Effect of Object-Oriented Design
Methodologies on Traditional Software Jurisprudence, 7 High Tech. L.J. 315 (1992); Smith,
Abstraction, Filtration, and Comparison in Computer Copyright Infringement: An Explanation and
Update for the Object-Oriented Paradigm, 26 AIPLA Q.J. 1 (1998).

24

≡≡≡ Introduction

linguistics, information science, and sociology. Recognizing the many ways that
the study of human factors can aid computer system design, the computer
industry has taken a particularly strong interest in the effort to synthesize and
expand this learning.
The field of computer-human interaction has profoundly changed the way
in which application programs are both conceptualized and written. The field
has identified five human factor goals that programmers should strive to achieve
in designing application programs: (1) minimize learning time, (2) maximize
speed of performance, (3) minimize rate of user errors, (4) maximize user
satisfaction, and (5) maximize users’ retention of knowledge over time.
Application programmers attempt to achieve these objectives in designing
computer-human interfaces. As a result, many of their design choices are guided
by principles of human factor analysis that have evolved over years of empirical
research. Among the design issues that have been studied are: the choice among
command-based programs, menu-driven programs, and natural language
programs; menu design; windowing versus scrolling; the choice of abbreviations
and command names; the layout and scheme of graphical interfaces; the color
and highlighting of video displays; the consistency of user interfaces; and the
design of direct manipulation interfaces. To aid in the implementation of these
ideas, many firms engaged in application program development have compiled
computer-interface guidelines and criteria to guide their programmers. Apple
Computer, which introduced the first commercially successful graphical user
interface, developed the following guidelines for user-friendly software design:
1. Metaphors— the interface should embody plain, simple metaphors for
accomplishing tasks with audio and visual effects to support the metaphor.
2. Direct Manipulation— the interface should allow users to directly
manipulate items or actions on the screen, rather than indirectly through abstract
commands.
3. See and Point — the interface should allow the user to effect action by a
see-and-point mechanism that is intuitive, rather than by a remember-and-type
mechanism that can be intimidating, too abstract or unnatural.
4. Consistency — the symbols and mechanisms for accomplishing tasks
should be consistent across all application programs through a consistent interface.
5. WYSIWYG (What You See Is What You Get) — the interface should
present the information on the screen to the user in exactly the form that it will
come out on the printer, removing the need to type in abstract formatting
commands or to make mental calculations to envision how the screen translates to
6
paper.

These principles —and the basic concept of graphical user interfaces —are in
widespread use in the software industry and can be seen in most application
programming and web-based user environments.

6. Written submission of Apple Computer, Inc., U.S. Copyright Office Public Hearing on
Registration and Deposit of Computer Screen Displays 5-6 (Sept. 4, 1987).

C. How Software Is Made

4.

≡≡≡ 25

Generating Computer Code

After designing computer systems, including the user interface, a software
engineer engages in a series of steps to translate the design into binary code
(representing open and closed circuits) that is actually “readable” by computers.
While it is possible to write programs directly into machine-level language, most
programming is done in higher-level languages that use abbreviations and short
words to convey the action the program will need to carry out. Well-known
programming languages include FORTRAN, COBOL, and PASCAL. Special
languages, such as C++, Ada, Smalltalk, Object Pascal, and Java, have been
developed more recently to implement object-oriented designs. These programming languages, which can be readily understood by skilled programmers, are
often referred to as “source code.”
Figure 2 contains the source code version of a simple program written in
PASCAL for determining and listing in five columns any number of prime
numbers. PASCAL is a high-level programming language, and, as you can see, it
is relatively easy to comprehend. For example, the statement “Go to 40”
instructs the computer to skip intervening steps and execute the instruction at
line 40. But it is a specialized language all the same, and (because the programmer is writing for a computer audience) its rules must be followed
precisely. “Execute line 40 now” may mean the same thing to a human reader as
“Go to 40,” but it may be incomprehensible to a computer.
Traditionally, source code was written by computer programmers who had
learned one of the specialized computer languages described above. Increasingly, however, the process of writing source code has itself become automated.
Computer programmers can now “write” code with the help of a computer
“wizard” that translates higher-level design concepts directly into code. Having
a computer help write source code can be faster and more efficient than writing
it by hand; it can also help prevent programmers from making mistakes that will
interfere with the program. As more and more code is written with computer
assistance, similarities in actual program code become less meaningful as
evidence of copying. This will become important when we consider copyright
law in Chapter 2.
In order to be executable by the central processing unit of a computer,
source code must be transformed into a machine-executable form. This is
generally accomplished by using a special purpose computer program known as
a “compiler” to process source code instructions into “object code,” the binary
code that is processed by the computer. In this machine language, a single 0 or
1 represents the absence or presence of an electrical charge. Each binary digit is
referred to as a “bit.” These electrical signals processed by a CPU will determine
which functions of the CPU will be executed in what order. Computers do not
process program instructions one bit at a time. Rather, they process standard
lengths of bits. A “word” is the set of characters that occupies one storage
location and is treated by the computer circuits as a unit and transported
as such. Until the mid-1980s, most computers acted upon words of eight bits,

26

≡≡≡ Introduction

FIGURE 2
Source code in PASCAL, by Vance Brown.

C. How Software Is Made

≡≡≡ 27

known as a “byte” (e.g., “01101001”). More recently computers have been
designed to act on words of 16, 32, or 64 bits. Figure 3 contains 24 of 1,674
lines of the object code derived from the PASCAL program in Figure 2.
Obviously, high-level programming languages are more compact than
machine language, as well as easier for humans to decipher. This results from the
fact that the representation of complex information as either a 1 or a 0 requires
an enormous number of 1s and 0s.
Because of the difficulty of using and deciphering object code, programmers developed an intermediate-level language referred to as “assembly
language” to facilitate the translation of higher-level languages to object code.
Assembly language uses abbreviated alphanumeric symbols such as “ADC,”
which means “add with carry.” For older models of Apple computers, ADC
translates to “01101001” in object code. An assembly program or assembler

11101001

01111001

00101100

10010000

10010000

11001101

10101011

01000011

01101111

01110000

01111001

01110010

01101001

01100111

01101000

01110100

00100000

00101000

01000011

00101001

00100000

00110001

00111001

00111000

00110101

00100000

01000010

01001111

01010010

01001100

01000001

01000100

01000100

00100000

01001001

01101110

01100011

00000010

00000100

00000000

10110001

01010111

00000000

00111100

00110011

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00000000

00010100

01000100

01100101

01100110

01100001

01110101

01101100

01110100

00100000

01100100

01101001

01110111

01110000

01101100

01100001

01111001

00100000

01101101

01101111

01100100

01100101

01010000

00011001

00000001

11111111

11111111

00001111

00000111

00000111

01110000

00001111

00000111

00000111

01110000

00001110

00000111

00000111

01001111

00101110

10001010

00100111

00001010

11100100

11111001

01110100

00001110

01000011

00101110

10001010

00000111

01010000

11101000

11011000

00001000

01011000

11111110

11001100

01110101

11110011

11111000

11000011

01111010

00000000

11111111

01111011

00001000

00000000

00011111

11000111

00000110

00010010

00000000

001101110

00000000

00101110

11000110

00000110

10010100

00000001

00000000

10111110

00100000

00000000

FIGURE 3
Object code in PASCAL, by Vance Brown.

28

≡≡≡ Introduction

translates assembly language into object code. Figure 4 contains 29 of 7,330
lines of assembly code produced by “disassembling” the object code. Like
object code and unlike higher-level languages, assembly language is specific to a
particular computer system.

5.

Software Validation and Maintenance

Although this discussion may suggest that programming is a linear process,
it is in fact typically an iterative process. Program design often occurs in a series
of “feedback loops” in which each stage of the process influences all of the
others. Thus, a software engineer may develop a design for a program and then
write some code to implement it, but in the process of writing the code, the
engineer may discover logical problems with the design that require rethinking
the program’s basic structure. Often, individual modules or components of a
software program will be tested and refined before integrating the various
components into a full working version.
Before a software program enters service or the marketplace, the software
design team runs the program through a suite of tests selected to ensure that the
program operates properly and achieves the objectives set out in the
requirement and specification stages of the process. After the various systems
within the program are operating properly, the team conducts alpha (acceptance) testing. “Alpha testing” involves running the software with actual data
(rather than simulated data) from the intended user. For products that are to be
marketed widely, software vendors typically run a further level of testing
(commonly referred to “beta testing”) in which the program is provided on a
limited basis to a range of target customers who agree to use the program and
report problems. Beta testing may also identify features that users desire that
were not initially included in the program. Based upon this input and further
internal testing, the vendor typically makes some further refinements before
releasing the product into the commercial marketplace.
All complex software programs have a range of errors (commonly referred
to as “bugs”), and the validation stage can be one of the more challenging
phases of the software life cycle. Because of the importance of reaching the
market quickly, the design team is often under tremendous pressure to complete
this phase.
Following the release of a product, software enters the last and what is
often the longest phase of its life cycle: maintenance. Computer software users
place great significance on a software vendor’s ability to correct, improve, and
adapt software products and services. Indeed, consumers are often wary of
buying the first version of a new software product because it may be “buggy.”
The planning for maintenance begins early in the process with the documentation of the computer program. Most companies put out a series of “updates”
or new releases of their programs to address maintenance problems and to
enhance the program’s functionality.
Some computer bugs may not manifest themselves until the product has
been in use for a long time. The year 2000 (Y2K) problem is to a large extent a

C. How Software Is Made

≡≡≡ 29

FIGURE 4
Assembly code, by Vance Brown.

massive and pervasive bug that will have repercussions for computer users well
into the future. Software vendors’ reputations depend significantly on their
ability to support their products and users once they are in the marketplace.

COMMENTS AND QUESTIONS
1. Compare the process of writing a computer program to the following
activities: writing a novel, writing a poem, writing a symphony, writing a
cookbook, preparing a map, designing a building, engineering a bridge, or
inventing a new process for manufacturing steel. In what ways is computer
programming similar to and different from these creative activities?
2. Is it possible to identify the “most significant” part of a computer
program? Is it the idea for the program? The flowchart that structures the
program? The source code that implements it? Which of these activities, if any,
can be called the “heart” of programming?

30

D.

≡≡≡ Introduction
THE ECONOMICS OF COMPUTER
SOFTWARE AND NETWORK MARKETS

The software industry produces a wide variety of services and products,
including operating systems, applications programs, custom programs,
embedded systems, and data processing services. Some hardware systems
manufacturers, such as Sun Microsystems, develop both operating systems and
application software for their systems. There are also many small, independent
firms that specialize in aspects of software services and product development. In
recent years, a few firms, most notably Microsoft Corporation, have emerged as
major forces in the computer software market. As its operating system platforms
have become widely adopted, Microsoft has vertically integrated its operations
through the development of application programs, and, more recently,
electronic commerce product lines. Other software vendors, such as Intuit and
Oracle, have concentrated on specific applications program markets, although
these companies sometimes extend their product lines as advances in technology
open up possibilities for new market niches that may be worth exploiting (e.g.,
money management software may become useful for managing personal
banking as the technology and other developments enable the evolution of this
online service). Another major market is for client-server and network
management software. Significant players in this market include Novell, Sun
Microsystems, and Microsoft.
Software markets evolve rapidly, driven in large part by the rapid pace of
technological innovation in computer hardware. New versions of a mass-market
software product often appear within a year after the initial release. Indeed,
some consumers deliberately delay their purchases of early products and wait for
more advanced (and more error-free) versions. Further, the rapid pace of
innovation in software products means that the entire structure of the market
can change in a very short period of time. At a broader level, new product
markets themselves are constantly being created and destroyed as new classes of
products become possible and as old software becomes useless or swallowed up
into an operating system or another application program.
The rapid pace of software innovation has at least two implications for the
law. First, software producers expect obsolescence. They must be prepared
either to recover their fixed costs early, before their product is overrun in the
marketplace, or to build some sort of long-term, multigeneration relationship
with consumers. In either case, they may not need intellectual property protection for their programs beyond the short to medium term (three to ten years).
Second, the legal system risks being behind the times unless it evolves rapidly in
response to market developments. This is particularly true in antitrust law,
where the often-ponderous machinery of antitrust enforcement may not swing
into operation until the competitive threat has passed or it is too late to remedy
the problem. For similar reasons, intellectual property protection that takes a
long time to acquire and enforce tends to provide little effective protection for
cutting-edge technologies.

D. The Economics of Computer Software and Network Markets

≡≡≡ 31

This section discusses two economic concepts of particular relevance to
computer software and Internet markets: (1) public goods; and (2) network
effects. We then illustrate the operation of the concepts in discussing business
strategy and platform competition in the microcomputer industry.

1.

Public Goods

All markets for products embodying intellectual property exhibit an
externality commonly referred to as the “public goods” problem. Public goods
have two distinguishing features: (1) nonexcludability (it is difficult to prevent
those who do not pay for the good from consuming it); and (2) nonrivalrous
competition (additional consumers of the good do not deplete the supply of the
good available to others). Military defense is a classic example of a public goods
—it benefits all who are defended, whether they pay for the privilege or not.
The result of the public goods problem is well-recognized: the private market
will undersupply public goods because producers cannot reap the marginal value
of their investment in providing such goods.
The computer software market presents an example of this public goods
problem. Given how easily and inexpensively computer users may copy computer programs in digital form, vendors have tremendous difficulty excluding
non-purchasers from the benefits of innovative computer programs once they
are made commercially available. Programs written in object code and stored in
ROM can be readily copied by inserting the chip into a laboratory device and
downloading the information onto another chip or printing it on paper. Moreover, one person’s use of the information does not detract from any other
person’s use of that same information, since the information can be copied
without affecting the original. Since the authors and creators of computer software cannot reap the marginal value of their efforts, economic theory suggests
that in the absence of other incentives to innovate, they will undersupply
technological advances in computer software.
The public goods problem is a familiar one to anyone who has studied
intellectual property, since it underlies the economic incentive theory of
intellectual property. For a more detailed discussion of public goods in the
context of intellectual property, see Peter S. Menell, Intellectual Property:
General Theories, in Encyclopedia of Law and Economics (forthcoming 2000).

2.

Network Effects

The second potential source of market failure in the computer software
market arises from the presence of network externalities. Network externalities
exist in markets for products for which the utility or satisfaction that a consumer
derives from the product increases with the number of other consumers of the
product. The telephone is a classic example of a product for which there are
network externalities. The benefits to a person from owning a telephone are a

32

≡≡≡ Introduction

function of the number of other people owning telephones connected to the
same telephone network; the more people on the network, the more people
each person can call and receive calls from. Another classic network externality
flows from standardization. In this case, the value of learning a particular
standard (say, how to use a certain word-processing program) depends on how
many other people use that standard. Consider the prevalence of a “normal”
typewriter keyboard. Because almost all English language typewriters feature the
same keyboard configuration, commonly referred to as “QWERTY,” typists
need learn only one keyboard system.
Network externalities also inhere in product standards that allow for the
interchangeability of complementary products. Examples of products for which
this type of network externality is important are video cassette recorders, CD
players, and computer operating systems. As discussed above, general-purpose
computer operating systems allow consumers to use a variety of application
software programs on the same system-unit hardware. The only requirement is
that the application program be coded to work on the operating system
embedded in the general computer system. Thus, the operating system serves as
a “compatibility nexus” for a particular computer network. Application software
producers will develop more programs for systems that are widely used;
hardware producers will develop more configurations of disk drives, memory,
and other features for popular operating systems. In general, the benefits of a
larger computer operating system network include a wider variety of application
software that can run on that operating system, lower search costs for consumers
seeking particular application programs that run on that operating system,
reduced retraining costs, greater labor mobility, and wider availability of
compatible hardware configurations and peripherals. See generally Peter S.
Menell, An Analysis of the Scope of Copyright Protection for Application
Programs, 41 Stan. L. Rev. 1045 (1989).
Similarly, the greater the standardization of computer-human interfaces for
particular application programs, such as word processing or spreadsheets, the
easier it will be for computer users to employ their skills in different working
environments. Computer users also want the computer-human interface to be as
easy to use as possible —that is, “user friendly.” In part, user friendliness is a
function of what the user has already learned: things that are familiar tend to be
easier to use. More generally, user friendliness is determined by the extent to
which the design is tailored to achieve human factor goals—such as maximizing
performance speed, minimizing learning time, minimizing rate of errors, and
maximizing retention over time.
Standardization can occur by way of market processes, whereby subsequent
entrants to a market adopt the standard of an existing firm. This has been
referred to as “bandwagon standardization.” See Joseph Farrell, Standardization
and Intellectual Property, 30 Jurimetrics J. 35, 41 (1989). In the computer
industry, firms often foster this process by freely licensing the use of a standard
and publishing design and interoperability specifications. The UNIX operating
system is an example of an open standard promoted by certain private
companies, such as Sun Microsystems. It suffers, however, from the lack of

D. The Economics of Computer Software and Network Markets

≡≡≡ 33

strong sponsorship. Various incompatible versions of UNIX have proliferated
over the years, eroding some of the network benefits.
Alternatively, standardization can occur through formal processes, such
as government standard-setting and joint development of industry standards
by a number of firms. This top-down approach to standard-setting has been
common in the telecommunications industry, at least until recently. Regulatory agencies, in consultation with the affected companies, set standards for
connecting peripheral devices (including computers) to telephone lines. Only
devices that comply with these publicly available standards will operate over the
telephone lines.
Finally, industries characterized by strong network externalities will
sometimes develop de facto standards, even though neither the companies in
the industry nor the government has made any effort to settle on a particular
standard or ensure interoperability. The Windows operating system offers a
prime example. Microsoft has not “opened” its operating system to competitors.
Nonetheless, once the Microsoft operating system reached a certain critical mass
of users, the size of its user base began to make it more attractive for other
developers to write programs for the Windows platforms. More applications
programmers wrote programs to run on Windows because of the large user
base; more users adopted the Microsoft system in part because of all the
programs being written for it. This positive feedback effect enabled Windows to
become the de facto industry standard. In 1999, Windows had close to a 90
percent share of the personal computer operating system market, despite the
closed nature of the system and despite the availability of several arguably
superior competing systems. For a discussion of these alternative forms of
standardization in network markets, see Mark A. Lemley, Antitrust and the
Internet Standardization Problem, 28 Conn. L. Rev. 1041 (1996).
An important economic consideration in markets with significant network
externalities is whether firms will have the correct incentives to adopt
compatible products, thereby enlarging existing networks. Economists have
demonstrated that firms might prefer to adopt noncompatible product standards
even though their adoption of compatible products would increase net social
welfare. See Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility, 75 Am. Econ. Rev. 424, 435 (May 1985). The explanation for this behavior is that by adopting a compatible standard, a firm
enlarges the size of a network that comprises both the adopter’s product and its
rivals’ products. This will have the effect of increasing the desirability of the
rivals’ products to consumers, thereby reducing the adopter’s market share
(although of a larger market) relative to what it would have been had the firm
adopted a non-compatible product standard. Although this effect by no means
implies that subsequent market entrants will never adopt a compatible operating
system or computer-user interface, it does suggest that incentives to adopt
compatible standards might be suboptimal.
While a widely adopted product standard can offer important benefits to
consumers and firms, it can also “trap” the industry in an obsolete or inferior
standard. In essence, the installed base built on the old standard—reflected in

34

≡≡≡ Introduction

durable goods and human capital (training) specific to the old standard—can
create an inertia that makes it much more difficult for any one producer to break
away from that standard by introducing a non-compatible product, even if the
new standard offers a significant technological improvement over the current
standard. See Joseph Farrell & Garth Saloner, Standardization, Compatibility,
and Innovation, 16 Rand J. Econ. 70 (1985). In this way, network externalities
can retard innovation and slow or prevent adoption of improved product
standards. This problem is particularly significant in industries that develop
rapidly, such as the computer industry. Rapid changes make the adoption of
standards (formal or informal) a hazardous enterprise.
A frequently cited example of standard stagnation is the persistence of the
standard QWERTY typewriter keyboard despite the availability of a better key
configuration. United States Navy studies and typing speed world records
indicated that the Dvorak Simplex Keyboard, a typewriter key configuration
patented in 1932 by August Dvorak and W.L. Dealey, was significantly more
efficient than the QWERTY system. Adoption of the better standard may have
been effectively stymied by “switching costs”—the costs of converting or
7
replacing QWERTY keyboards and retraining those who use this system.
Because of the fear that national standards would exacerbate the inertia
problem, the National Bureau of Standards declined to set interface standards
for computers in the early 1970s. Subsequent developments proved that a wise
decision.
Nonetheless, standards are essential in many contexts. While the U.S.
government did not adopt computer interface standards in the 1970s, the
hardware industry had to develop de facto standards in order to allow
computers and peripheral devices to communicate with each other. The
software industry faced similar problems in ensuring compatibility between
operating systems and applications programs in the 1980s, and the network
industry faces the same problem today. In each case, the problem goes away if
one company controls the market for both goods, as AT&T did in the
telephone industry until 1984. If AT&T is the only company to sell both
telephone services and telephones, there is unlikely to be a problem in ensuring
that your telephone works with your phone line. But this form of standardization comes at the expense of competition. Controlling standards and
compatibility in dynamic industries is one of the most vexing policy problems in
the computer and telecommunications industries. Yet sometimes advances in
technology can aid in solving these problems.
The economics of network markets suggests a range of business strategies
that take advantage of network effects. See generally Carl Shapiro & Hal R.
Varian, Information Rules (1999). Network markets are inherently “tippy.”
Given the large payoff to becoming a de facto industry standard, it behooves
firms to invest heavily in strategies to attract adopters. Once these customers
make investments in installing a product, learning its attributes, and developing
data bases, they become locked into the product. This affords the product
7. This story has been challenged on its factual merits, however. See S.J. Liebowitz & Stephen
E. Margolis, The Fable of the Keys, 33 J.L. & Econ. 1 (1990).

D. The Economics of Computer Software and Network Markets

≡≡≡ 35

sponsor substantial latitude to charge higher prices, bundle the platform with
other products, and exercise some degree of control over innovation and
competition in related markets. The history of the microcomputer illustrates the
importance of understanding these lessons and the challenges that network
markets pose for policymakers, judges, business decision-makers, and lawyers.
For a comprehensive discussion of the legal significance of network effects, see
Mark A. Lemley & David McGowan, Legal Implications of Network Economic
Effects, 86 Cal. L. Rev. 479 (1998).

3.

Platform Competition in the Computer Industry

Early entrants into the microcomputer market followed the “single
vendor” model of the mainframe and minicomputer markets. Osborne, Apple,
Kaypro, and others developed operating systems unique to their computers,
which they packaged with application software and marketed as complete
systems. These computer systems were not compatible. This enabled these
vendors to control markets for software and peripheral equipment for their
computer systems, but it had the disadvantage of segmenting the market for
application programs.
Similarly, IBM declined to license the leading operating system for Intel
8080 chips, Digital Research Incorporated’s CP/M (control program/monitor)
operating system. Instead, IBM licensed a new operating system (DOS) from
Microsoft Corporation, a young company that had attracted some attention for
having developed a version of the BASIC computer language for early
microcomputers. Even IBM’s use of Microsoft’s DOS platform, however, was
not completely open to the industry because IBM refused to license its BIOS
chip. Due to IBM’s strong trademark and marketing network, this decision led
to the rapid demise of the CP/M platform and hurt those OEMs that had built
their microcomputers upon the CP/M platform.
Building on the name recognition flowing from its association with the
IBM PC, Microsoft selected a business model aimed at developing and
promoting relationships with a broad range of microcomputer companies, the
OEM and ISVs. This model encouraged compatibility of hardware and software
products in the industry and enabled software vendors to reach a much larger
market for their products: the many computer systems operating on the MSDOS platform.
As its operating system market grew, Microsoft appreciated the fundamental importance of compatibility in microcomputer markets. In the words of
one of its senior executives,
[c]onsumers value compatibility. Compatibility makes computers easier to learn
and leads to a plethora of applications. Microsoft understood in the early 1980s
that the potential of personal computers would not be unleashed until the industry
provided a broad set of compatible hardware and software products. To help bring

36

≡≡≡ Introduction

that about, Microsoft developed and promoted an important part of the standard
8
personal computer architecture — a set of operating systems.

Microsoft’s business strategy came to encompass four principal elements all
directed toward promoting the widespread adoption of the Microsoft operating
system platform: (a) encouraging the development of application programs to
run on an evolving Microsoft platform; (b) building an intellectual property
portfolio to protect its operating system platform; (c) developing long-term
relationships with OEMs to promote Microsoft’s operating system platforms
while preventing direct competition in the platform market and discouraging
adoption of competing operating systems; and (d) evolving the operating system
platform in a way that was backward-compatible (so as not to strand the existing
base of computer users who had developed programs and data bases for prior
operating system) while incorporating enhanced functionality made possible by
advances in microprocessor, other hardware, and software technology. In
particular, Microsoft began developing a graphical user interface OS and various
network support products (LAN and Windows NT).
Microsoft understood well the lessons of network economics. It successfully registered its trademarks and invested heavily in advertising them and in
expanding its network. The company used pricing, contractual, and bundling
strategies to lock consumers into its products while discouraging adoption of
competing products. For example, it offered its operating system to OEMs at
relatively low prices in contracts that required the OEMs to pay a royalty for
every system sold, whether or not they actually installed a Microsoft operating
system. Because many microcomputer buyers preferred the Microsoft platform
in order to run the large stock of software that was available, OEMs had little
incentive to offer competing operating systems. These “per processor” agreements made the marginal cost of installing Microsoft’s operating system zero. In
the 1990s, Microsoft successfully leveraged its market power into other markets
as well. It bundled its application programs for office use (Word, Excel, Access,
Powerpoint) into its Office suite. As the World Wide Web became popular,
Microsoft integrated its Internet browser (Microsoft Explorer) directly into
Windows. These practices took effective advantage of the economics of network
markets and expanded Microsoft’s dominance throughout the software domain.
Although Microsoft’s dominance of the microcomputer industry remains
strong, technological developments continue to reshape the competitive landscape. In the mid-1990s, Sun Microsystems introduced Java, which Sun
describes as “a standardized application programming environment that affords
software developers the opportunity to create and distribute a single version of
programming code that is capable of operating on many different, otherwise
incompatible systems platforms.” See Mark A. Lemley & David McGowan,
Could Java Change Everything? The Competitive Propriety of a Proprietary
Standard, 43 Antitrust Bull. 715 (1998). Thus described, Java offers the promise
of platform-independent computing, the equivalent of a standardized “meta”8. Direct testimony of Paul Maritz, group vice president for platforms and applications, ¶127,
United States v. Microsoft Corp., No. 98-1232, U.S.D.C. DC (public version).

D. The Economics of Computer Software and Network Markets

≡≡≡ 37

operating system that would allow both consumers and programmers to choose
operating systems free of the constraints of network effects. Java may reduce the
opportunity cost incurred by those using platforms other than the market
standard, thereby facilitating transition among platforms and alleviating
concerns that Microsoft can exploit its installed base of users and programmers.
A “standardized application programming environment” sounds to many
like an operating system: a good for which applications may be written and that
coordinates the computer’s functions. The difference is in the meta-operating
system characteristic Sun ascribes to Java technology —it is billed as the
operating system whose job it is to allow any operating system to function with
applications written for any other operating system (or possibly without any
system other than Java in mind), so long as both the operating system and the
application are themselves compatible with Java. Java may represent the
realization of the long-sought platform-independent competitive horizon.
Ironically, this platform-independent world would be brought to us by a
proprietary program to which Sun owns the intellectual property rights.
Sun faced the problem all companies who want to compete in a network
market must deal with: its Java product is new and therefore lacks an installed
base. Java has achieved rapid, widespread, and growing acceptance in the
software community. Hundreds of thousands of programmers are writing Java
code, and some companies are even designing hardware products optimized for
Java. Like Microsoft, Sun has sought to follow the lessons of network economics
by promoting adoption of its product through advertising, education, competitive pricing, and widespread licensing.
In addition to the Java platform, a grassroots effort among programmers
has attracted attention to the open source Linux operating system. Linux was
developed from the UNIX operating system, an operating system platform
initially developed by AT&T that became fragmented as many companies
developed different, incompatible versions. What distinguishes the Linux code
from the many other versions of UNIX is that its principal developer and chief
promoter, Linus Torvalds, has committed to maintaining Linux as an open
standard. Linux has developed a loyal following within the academic world. The
size of its network has grown sufficiently large that some commercial software
vendors have begun writing programs that run on the Linux platform. At this
writing, it remains to be seen whether either Java or Linux will offer significant
competition to the Microsoft operating system.

COMMENTS AND QUESTIONS
1. Does intellectual property protection for products featuring network
externalities increase or decrease the likelihood that firms will seek to develop
proprietary standards? For an argument that the problem of market power is
exacerbated by the availability of intellectual property protection for many of the
potential standards in a network market, see Mark A. Lemley & David
McGowan, Could Java Change Everything? The Competitive Propriety of a
Proprietary Standard, 43 Antitrust Bull. 715 (1998).

38

≡≡≡ Introduction

2. How should the presence of network externalities with regard to
computer software affect the analysis of intellectual property protection? Of
what relevance are network externalities to the scope of copyright, patent, or
trademark protection? Should the network externalities of operating systems be
treated in the same manner as network externalities of user interfaces? See Peter
S. Menell, An Epitaph for Traditional Copyright Protection of Network
Features of Computer Software, 43 Antitrust Bull. 651 (1998).
3. The development of Java in particular blurs the line between computer
operating systems and Internet-related applications programs. In so doing, it
raises the possibility of private ownership of the protocols that govern the
Internet. Right now, the Internet is built on a fundamentally open architecture,
as Jane Winn explains:
The National Research Council has noted that the Internet is now “open” in
at least the following four senses. It is open to users because it does not force users
into closed groups or deny access to any sectors of society but instead permits
universal connectivity, like the telephone system. It is open to service providers because it provides an open and accessible environment for competing commercial
and intellectual interests. For example, competitive access for information providers is permitted. It is open to network providers because any network provider
can meet the necessary requirements to attach and become a part of the aggregate
of interconnected networks. It is open to change because it continually permits the
introduction to new applications and services. It is not limited to only one
application, as in television. It also permits the introduction of new technologies as
they become available.

Jane Kaufman Winn, Open Systems, Free Markets, and Regulation of Commerce, 72 Tul. L. Rev. 1177 (1998). It is certainly possible, however, to
imagine part or all of the Internet protocols being proprietary. Suppose
Microsoft develops a privately owned extension to HTML, the basic markup
language used to encode information on the Web. If that extension were to
become a standard among Web developers, Microsoft would control access to
the Internet—at least for anyone who wanted to use that protocol.
We discuss the long-running debate between open and closed systems in
several places throughout this book.

E.

OVERVIEW OF INTELLECTUAL
PROPERTY PROTECTION FOR
COMPUTER SOFTWARE

Information technology industries rely heavily on intellectual property law
to protect their products and other assets. For this reason, this book provides
considerable coverage of intellectual property issues. Chapter 1 demonstrates
how trade secrecy law can be used to protect some valuable aspects of software
and other information technologies. Chapter 2 considers the extent to which
copyright law provides protection to computer programs. Chapter 3 traces the

E. Intellectual Property Protection for Computer Software

≡≡≡ 39

evolution of patent protection for software innovations. Chapter 4 explores the
supplemental protection that may be available to information technology firms
from trademark law. In addition, Chapter 5 considers some sui generis forms of
legal protection that have been considered or adopted to protect certain
information technology products (e.g., semiconductor chip designs and
databases) for which existing intellectual property regimes may provide
inadequate protection. Chapter 8 also provides an overview of some differences
in the intellectual property rules applicable to computer software and other
information technology innovations in the international market.
While computer software may have been the first digital information
product to rely crucially on intellectual property laws, other digital information
products rely heavily on intellectual property protection as well. Hence, in Part
II, Chapters 10 and 11 will consider a range of digital intellectual property
issues that arise in the context of the Internet and the World Wide Web.
Because so much of this book emphasizes intellectual property law and
because information technology developers need to develop complex strategies
built up as multiple forms of legal protection, this chapter provides a brief
overview of the specific forms of intellectual property law. This may be helpful
before the reader delves into the book’s detailed consideration of how each
mode of protection may be used to protect some aspects of software or other
information technology products or services.
Intellectual property law comprises a diverse array of state and federal legal
regimes. Under state law, intellectual work can be protected through contract
law, trade secrecy protection, and trademark protection. Under federal law,
intellectual work can be protected by patent law, copyright law, and trademark/trade dress protection under the Lanham Act. These regimes interact in a
number of ways, and the subject matter of these various modes of legal
protection overlap. For example, both trade secret law and patent protection
cover technological advances. Although federal intellectual property protection
has primacy, federal law does not preempt state trade secret law, which leaves
9
both bodies of law to operate in tandem. By contrast, copyright protection does
not extend to “any idea, procedure, process, system, method of operation,
concept, principle, or discovery,” so as not to undermine the role of the patent
law (which erects a higher threshold for the protection of functional works). 17
U.S.C. §102(b).

1.

Trade Secret Law

Software developers and other information technology firms often rely on
trade secret law to protect valuable information. The source code forms of
9. See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974) (patent law does not preempt
trade secret law); H.R. Rep. No. 1476, 94th Cong., 2d Sess. 132 (1976) (legislative history of §301
of the Copyright Act stating that trade secret law would remain unaffected by the Act so long as it
contains elements different from copyright infringement); Warrington Assocs. v. Real-Time Eng’g
Sys., 522 F. Supp. 367, 368-369 (N.D. Ill. 1981) (trade secret not preempted by Copyright Act).

40

≡≡≡ Introduction

programs and other internal design documentation, for example, are often
locked up in secure places and held as trade secrets. Trade secret law protects
against the misappropriation of such commercially valuable secret information
by unfair or commercially unreasonable means, whether done by competitors or
anyone else.
Every state protects trade secrets through either common law or statutory
regimes. In 1979, the National Conference of Commissioners on Uniform State
Laws promulgated the Uniform Trade Secrets Act (UTSA), which has since
been enacted by 40 states and the District of Columbia. The Act prohibits the
actual or threatened misappropriation of a trade secret. The UTSA defines a
“trade secret” broadly as
information, including a formula, pattern, compilation, program, device,
method, technique, or process, that:
(i) derives independent economic value, actual or potential, from
not being generally known to, and not being readily ascertainable by
proper means by, other persons who can obtain economic value from its
disclosure or use, and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
U.T.S.A. §4. Trade secrets have potentially unlimited duration. As the law’s
name suggests, information must be a secret if it is to be protected by this law.
However, only relative and not absolute secrecy is required. The owner of a
trade secret must take reasonable steps to maintain this secrecy. Although trade
secrets are often licensed to other firms, the “reasonable steps to maintain
secrecy” requirement can generally be satisfied by provisions in the license
agreement requiring the licensee to limit access to and use of the trade secret
information. In addition, licensees will be under a nondisclosure obligation if
the circumstances of the disclosure of a secret give rise to an understanding that
the information must be carefully protected. Trade secrets have no definite term
of protection, but they will be protected only as long as they are secret. Once a
trade secret is disclosed, the legal protection dissipates.
Courts will generally find misappropriation of trade secrets in two
circumstances: (1) when a person uses theft or other improper means (e.g.,
bribery of employees) to acquire the secrets, or (2) where someone uses or
discloses the secrets in violation of a confidential relationship. Trade secret laws
do not protect against independent discovery or invention of the same
information. Nor do they prevent competitors from reverse engineering a
lawfully obtained product in order to discern the secrets it might contain.
Successful plaintiffs in trade secret cases are entitled to recover damages
attributable to the misappropriation of the secret and in some cases to an
injunction against use or further disclosure of the secret. However, injunctions
may be limited in duration to the time it would have taken a competitor to
independently develop the secret or otherwise discover it by fair means.

E. Intellectual Property Protection for Computer Software

2.

≡≡≡ 41

Copyright Law

Software developers and other information technology firms also routinely
rely on copyright law. Copyright law protects object code versions of computer
programs against exact copying. This law also provides significant protection to
other aspects of programs —for example, nonfunctional design elements of user
interfaces. There is some debate, as Chapter 2 illustrates, about how far copyright protection extends to the structure and organization of programs.
Unlike trade secrecy law, copyright protection is governed exclusively by
federal law, and infringement suits may only be brought in federal courts in the
United States. The Constitution provides Congress with the power to “promote
the progress of science and [the] useful arts, by securing for limited times to
authors . . . the exclusive right in their . . . writings.” Congress has used this
power to provide protection to “original works of authorship” that have been
“fixed in a tangible medium of expression,” including computer programs,
photographs, paintings, sculptures, musical compositions, dramatic plays, and
sound recordings. To qualify for copyright protection, a work must be
“original” in the sense that it represents an author’s intellectual creation, but it
need not be particularly inventive. Works made by employees in the course of
their employment are deemed the work of the employer for purposes of
copyright ownership.
Copyrights exist from the moment that a work is fixed in a tangible
medium of expression. Until legislation was passed in 1998 extending the
duration of copyrights by 20 years, protection existed upon the creation of the
work and lasted for the life of the author plus 50 years, or 75 years in the case of
entity authors. 17 U.S.C. §302. The owner of a copyright has the exclusive right
to make copies of his work, prepare derivative works, distribute his works, and
perform and display his works in public. 17 U.S.C. §106.
The “useful article” doctrine and the idea/expression dichotomy limit the
scope of copyright law so as not to undermine the patent law’s protection of
functional inventions. The useful article doctrine allows copyright protection for
expressive features of “pictorial, graphic, and sculptural works” only to the
extent that such features “can be identified separately from, and are capable of
existing independently of, the utilitarian aspects of the article.” 17 U.S.C. §101
(definition of pictorial, graphic, and sculptural works). The idea/expression
dichotomy excludes from copyright protection
any idea, procedure, process, system, method of operation, concept, principle, or
discovery regardless of the form in which it is described, explained, illustrated, or
embodied in such work.

17 U.S.C. §102(b). In Baker v. Selden, 101 U.S. 99 (1879), the holder of a
copyright in a book describing a particular system of bookkeeping sought to
prevent others from using that method (and the forms described). The Supreme
Court held that methods and forms needed to use such methods are not

42

≡≡≡ Introduction

copyrightable. The Court enunciated the idea/expression limitation on
copyright protection:
To give to the author of the book an exclusive property in the art described
therein, when no examination of its novelty has ever been officially made, would
be a surprise and a fraud upon the public. That is the province of letters-patent,
not of copyright. The claim to an invention or discovery of an art or manufacture
must be subjected to the examination of the Patent Office before an exclusive right
therein can be obtained; and it can only be secured by a patent from the government.

101 U.S. at 104.
The fundamental purpose underlying U.S. copyright law is to promote the
creation and dissemination of knowledge. Some authors and artists may be
unwilling to invest the time and effort involved in producing a new work of
authorship if they know that others can simply copy their work. The cheaper
and easier it is to make multiple copies, the greater the potential market failure.
Copyright law ameliorates this problem by allowing the copyright owner to
capture a significant part of the commercial value (if any) of her work for a
limited period of time. One way that copyright encourages the dissemination of
new works of authorship is to enable subsequent authors and artists to “build
on” the works of their predecessors, either by using the unprotectable ideas
conveyed in existing works or by drawing upon works in the public domain
(whether because the copyright term has expired, the work is ineligible for
copyright protection, or the author dedicated the work to the public domain).
Although not required to obtain copyright protection, software developers
may register a claim of copyright with the U.S. Copyright Office, and there are
some advantages to doing so. A registration certificate generally constitutes
prima facie evidence of the validity of the copyright and of the claim of the
registrant to be the owner of the copyright. Second, prompt registration is
necessary to qualify for an award of attorney fees or statutory damages under
U.S. law. Third, a registration certificate is a necessary precondition for U.S.
authors to bring infringement actions in U.S. courts. However, registration is
not a precondition for a work to be protected by copyright law. Instead,
copyright subsists automatically in original works of authorship from the time
they are first created. The duration of a copyright now extends for the life of an
individual author plus 70 years (or 95 years from first publication when works
are produced by corporations).
Unlike patent law, copyright law protects against only the copying of
works, and not making, using, or selling works. Hence, copyright law does not
prevent others who independently develop a work from competing with the first
inventor. In addition, copyright protection is moderated by the fair use
doctrine, which allows others to make limited use of a work for teaching,
research, and other purposes. 17 U.S.C. §107.

E. Intellectual Property Protection for Computer Software

3.

≡≡≡ 43

Patent Law

Patents have long been used to protect computer hardware systems and are
increasingly used to protect software innovations, such as algorithms and data
structures, as well as methods of doing business in the electronic environment.
Chapters 3 and 8 show that the United States and other nations differ in their
approaches to patent protections for computer software.
Patents are granted to inventors who meet several substantive and
procedural requirements. First, the invention must fall within the class of
patentable subject matter. Generally, this means it cannot be a purely mental
discovery or a law of nature. Second, the resulting product or process must be
useful. It must also be novel and be more than an obvious advance over the
prior art. A patent is awarded in the United States to the first to invent, not the
first to file, a patent claim, as is common in other countries. A patent gives the
patentee the exclusive right to use or license the patented product or process in
the United States for 20 years from the date the patent application was filed. A
patent is not automatically awarded. Rather, the Patent Office requires its
examiners to carefully scrutinize the application and make a judgment about
whether the patent should be issued. Many applications are disapproved, and
others are approved only after significant narrowing of the patent claims.
If the Patent Office grants an inventor a patent, the patent is published, so
that everyone else can learn what the inventor has made and how to make it.
The inventor gets the right to prevent anyone else in the United States from
making, using, or selling a product or process covered by the “claims” of the
patent (the portion of the patent defining the invention) while it is in force. If
another party does make, use, or sell the patented invention during the term of
this exclusive right, the patent owner (called the patentee) is entitled to sue
them for infringement of the patent. If the patentee proves that the defendant is
in fact infringing the patented invention, the patentee can obtain an injunction
against the infringer and damages for past infringement. A patentee can also
prevent others from importing infringing works into the United States.
Under 35 U.S.C. §§171-173, an inventor may obtain a design patent for
“any new, original and ornamental design for an article of manufacture.” In
order to receive protection, the inventor must establish that the design is novel,
nonobvious, and ornamental, which means reflecting aesthetic skill and artistic
conception. If a design is primarily functional rather than ornamental or is
dictated by functional considerations, then it is not eligible for a design patent.
Design patents are valid for a term of 14 years from the date of issuance.

4.

Trademark Law

Trademark law protects words, symbols, and other indicia that serve to
identify the source of goods or services against confusingly similar uses in

44

≡≡≡ Introduction

commerce. Examples of protectable trademarks include corporate and product
names (e.g., Apple Computer, Inc., and iMac as a name of a computer made by
Apple), logos (e.g., the cube-like shape that signifies Sun Microsystem’s
products), slogans (e.g., “Intel inside”), and product configurations (e.g.,
nonfunctional aspects of computer keyboard layouts) as long as the significance
of the symbol lies principally in designating the origin of goods or services. The
word, symbol, or indicia cannot be merely a description of the good itself, or a
10
generic term for a class of goods or services. Further, the identifying mark must
not be a functional element of the product itself, but must principally serve an
identifying purpose. Functionality in the context of trademark law means that
there is no competitive necessity for other market participants to use the same or
a very similar designation in order to compete effectively in the market. In
addition, trademark owners forfeit their rights by licensing their mark to others
without controlling and monitoring the nature and quality of the goods or
services with which the mark is used. Finally, trademark protection is directly
tied to the use of the mark to identify goods or services in commerce. Under
U.S. law, trademarks do not expire on any particular date; they continue in force
until “abandoned” by their owner. In some countries, however, as Chapter 8
explains, trademark rights arise by virtue of registration and may expire unless
renewed in a timely fashion.
While state common law and statutory law may offer significant protection
to trademarks in the United States, the most significant source of trademark
protection on a national basis is that conferred under the federal trademark law
known as the Lanham Act, 15 U.S.C. §§1051 et seq. This Act establishes a
procedure by which federal officials examine trademark registration applications
and issue trademark registrations that confer significant benefits upon the
registrants. However, federal trademark registration is not necessary to obtain
trademark protection. A trademark owner who believes that another is using the
same or a similar mark to identify competing goods can bring suit for trademark
infringement under state law. The ultimate question in trademark litigation is
whether consumers are likely to be confused if two different firms are using the
same or similar marks in the marketplace. If so, the trademark owner is entitled
to an injunction against the confusing use, damages for past infringement, and
in some cases the seizure and destruction of infringing goods.
In recent years, the Lanham Act has been amended to provide federal
protection to highly distinctive marks (generally those that are famous) against
“dilution” of the good will associated with the mark. A number of state trademark dilution laws also exist. Trademark dilution laws protect trademarks
against uses of trademarks even when consumers are unlikely to be confused by
the coexistence of the marks in commerce. Dilution laws protect against uses
that would cause a blurring of the distinctiveness of the mark (e.g., IBM for

10. “Genericide” occurs when consumers associate a trademark with a general product
category rather than a designation of source. Prominent examples of trademarks that became
generic include thermos, escalator, and linoleum. The “x86” designation has been deemed generic
as a way of denoting microprocessors, which explains in part why the latest version of the Intel
microprocessor was dubbed “Pentium” rather than “586.”

E. Intellectual Property Protection for Computer Software

≡≡≡ 45

automobiles) or tarnishment (e.g., Lotus as a name for a pornographic bookstore).

5.

Sui Generis Laws

Proposals for sui generis intellectual property legislation for software and
other information technology products have arisen periodically in legal and
policy circles. Generally, the rationale is that existing intellectual property
systems did not provide sufficient protection to promote adequate levels of
investment in the development of this technology. Sometimes the argument is
reversed—that existing intellectual property statutes provide too much
protection, or at least the wrong kind of protection.
Although sui generis proposals for software have not taken hold in the
United States, this country has adopted a sui generis form of legal protection for
semiconductor chip designs. As this book goes to press, the United States is also
considering adoption of a sui generis form of legal protection for collections of
information that may not meet copyright standards. The European Union has
already enacted such a law. Chapter 5 will discuss these laws and proposals.

6.

Contract Law

Traditional contract law provides an important framework for protecting
the intellectual work embodied in software products. Contract law establishes
the rules for enforcing the bargains of contracting parties. It can be used to
structure a wide range of software transactions and relationships, including
service contracts for the design and implementation of software systems or
programs on a client’s computer, sales of software products, and lease agreements. In general, the Uniform Commercial Code governs contracts for goods,
while common law and other state statutes govern service contracts. Contracts
governing the disclosure of information, rights to use technology, and rights to
make copies of a work fall into the latter category. At this writing, a proposed
statute (the Uniform Computer Information Transactions Act, or UCITA)
would govern transactions in “computer information” and would fundamentally
expand the role of contract in protecting software and digital information.