• John Storella

Biotech and the Music Industry: More In Common Than You Think

Meet The Beatles

I remember the day my dad brought home “Meet The Beatles!” I was so excited! My siblings and I had pestered him for weeks to get it, and the record was expensive -- $5.98 ($43 adjusted for inflation). We put the record on our record player and danced to “I Want To Hold Your Hand” over and over again.

I also remember the day the Federal Circuit issued its decision in Amgen v. Chugai. I was so excited! It took Amgen two years and tens of millions of dollars to clone the erythropoietin gene. But the court held that Amgen’s patent on this human gene was valid and that Genetics Institute infringed it. To me, it was clear that intellectual property would protect the new and growing biotechnology industry.

How Times Have Changed!

Today, I can buy “I Want to Hold Your Hand” from the iTunes store for $1.29 and, for $99, 23andMe will analyze one million SNPs in my genome.

What happened?

The Distribution-IP Rights Diad

The ability to control intangible content depends on two factors: (1) The ability to control distribution of the content and (2) the ability to meaningfully enforce intellectual property rights on the content. As long as one factor in the diad holds, owners can control content. But when both are gone, control over content fails, and creators of content need to find other ways to monetize the value of their content.

The Old Days

In the days of vinyl, record labels had both the ability to control distribution of content, and the ability to enforce intellectual property rights (in this case, copyright). Consumers could not copy records because they had no access to record presses. Other record labels could not press and sell copies of competitor’s records because the copyright owner could enforce its copyright in court. As long as it had either control over content distribution or the ability to enforce IP rights, record labels could control the price of records, and make a profit by selling content.

In the days of Sanger sequencing, biotechnology companies had the ability to control distribution of content and the ability to enforce intellectual property. Consumers could not determine if they bore a disease-causing gene because they did not have access to DNA sequencing equipment. The cost to sequence DNA was high even for competitive laboratories. And if they did sequence genes for customers, the patent owner could enforce its patent in court. Again, as long as it had either control over content distribution or the ability to enforce IP rights, a biotech company could profit from the sale of content.

Loss of Control Over Content Distribution

Technological advances in both industries significantly cheapened the cost to copy, and therefore to distribute, content. This knocked out the first factor in the diad.

In the music industry, electronic music formats, such as MP3, made copying music virtually free to both competitors and customers. File sharing applications, such as Napster, made it possible for anyone to possess any performance they wanted.

In the biotech industry, the development of next generation sequencing caused the cost of DNA sequencing to plummet. Now competitive labs now had the ability (if not the right) to perform cheap genetic testing.

Loss of Ability to Enforce IP Rights

But what about the other factor in the diad, meaningful IP enforcement?

Record labels still had the ability to enforce copyrights against large competitors – they shut down Napster. But the labels could not enforce their copyrights against the myriad of individual consumers who were copying their music.

In the biotech industry, owners of DNA sequences lost their ability to enforce their patent rights on genes and on many diagnostic tests when the Supreme Court decided the Myriad and Mayo cases. Now there was no barrier to competitors to offer competitive tests.

In music and biotech, once content creators had lost both the ability to control distribution and the ability to meaningfully enforce IP rights, they had effectively lost control of their content.

Now what?

The response of both industries to this challenge was remarkably similar – companies found ways to aggregate content and add extra value, so consumers would be willing to pay for the “something extra.”

The music industry first saw the rise of iTunes. Consumers were willing to pay 99₵ for a recording because iTunes gave them something extra – access to a wide range of music, an easy way to organize the music, and attractive displays of information about the recording.

Biotech saw the rise of companies performing multiplex DNA sequencing. Companies such as 23andMe, Counsyl and Guardant Health (disclaimer – they’re a client) companies have aggregated many genes in a single product, and provide value added information about the meaning of the results that consumers are willing to pay a premium for.

In both industries, aggregation also allows sellers to take advantage of the “long tail” phenomenon. This is the ability to make a profit on items for which demand would otherwise be too small to justify keeping it in stock; in this case, back catalog songs or genes for rare diseases. (Shout out to Balaji Srinivasan for this insight.)

Now, of course, music has entered the age of streaming. Because providers, such as Spotify, function as distributors, records labels can assert some degree of control through copyright – You can’t stream “I Want To Hold Your Hand” (or Taylor Swift) on Spotify.

As for biotech, companies will only gain some control over content if the courts soften their stance on diagnostic-type inventions. Watch Ariosa v. Sequenom.

Biotech and music may seem like industries with nothing in common. But, as industries dealing in intangible content, they are subject to similar disruptions. The loss of control over content need not be a bad thing – Musicians are still writing music and scientists are still discovering SNPs, and the cost of both has come down for the consumer. But to monetize the value of content, such industries have to find creative ways to adapt to changing technological and legal realities.

Thanks to John Gargani for our discussions on the distribution-rights diad.