Techlaw by Adam S. Feinsilver, Esquire

Critical information for any active business or startup on the Net. The Techlaw podcast is an educational, edgy and tongue-in-cheek look at the tech industry and techlaw. This isn't your typical lawyers talking to lawyers. We don't do "boring!" Visit the blog at TheTechAttorney.com/blog

Sue Everybody!
When someone steals from your business or breaches a contract, you sue them. Let the lawyers take action. If you let the bad guys get away with it, the world know that it’s safe to plunder your gold. After all, it’s an open and shut case. File a claim. Get a default judgment. You’ll recoup some of the money you lost and deter people from stealing your stuff. Right??? Well, maybe the music industry isn’t exactly the best example.

Lawyers Gone Wild
For shame, RIAA. Beating up on teenagers and single Mommies? It’s hard to figure out if the lawyers created the business model or if corporate management is just in death-roll with technology. If common sense didn’t lead the RIAA to a revelation, someone should have realized something was awry when the legal department started operating in the black!

The RIAA loves to tell us that it’s protecting artists. If you visit its website (RIAA.com), you’ll see that the RIAA is comprised of a huge number of members representing about 90% of all music manufacturers, creators, and distributors. Most artists aren’t making big bucks from their recording agreements. I’ve been on the both sides of the negotiation table. As a lawyer, recording agreements are fun to work with from both points of view. There are tons of variables to play with. Unfortunately, that’s also the one of the reasons we often hear about unrepresented artists getting bad record deals.

Music Business Basics
Running a label is a risky business. Where 100,000 records would be a good run for an indie, it could be a write-off to a big label. It used to be said that record labels run at about a 20% success rate, meaning that 20% of the artists carry the other 80%. Labels front a tremendous amount of money for products, displays, recording fees, mastering, distribution, producer fees, payola (of course, that doesn’t exist any more, does it?), etc.. A band can sell music on its own, but aside from exceptions like the Grateful Dead, really making it big, particularly today, requires money and promotion. From my days doing production, I realized that just about any track can be huge with enough money and promotion behind it. Of course, the more money that goes into promotion, the more labels want control over the “product” (wouldn’t you like to be referred to as a product?)

On the flip side, artists generally make most of their money from touring, shows, royalties, and possibly related products. (Does anybody besides me remember Debbie Gibson’s “Electric Youth” perfume?). An artist usually earns 10-13 “points” (percentage points) on album sales. But it gets worse. That percentage is on the net and “net” in the recording industry can be spewed over pages of a recording contract. Weird deductions come into play such as payment on only 90% of product (a practice that started in the old-days when a certain amount of vinyl records would break in manufacturing and shipping). Then, there are delays in payments while the recording company waits to see how much returned product comes in. We haven’t even gotten to the seedy side of creative accounting, uneven bargaining power, and the struggling artist’s lack of funds to go after a label.

Considering that the record labels are making somewhere around 85% on sales and taking almost every cost imaginable from the artist, it’s hard to imagine that your average artist is raking in profits from RIAA lawsuit proceeds.

Owning the Sharks Doesn’t Make it Safe to Swim in the Water
The RIAA’s war on piracy shows the signs litigators set loose. As a lawyer, it demeans our profession a bit every time a big corporation goes after a little guy (figuratively; after all, these are often kids under legal attack) for downloading music. Holding the legal cards doesn’t always make it a good idea to play the hand.

Of course, the recording industry would claim that the suits are a deterrent. We would expect that the industry would see a turn-around in sales then, right? According to the Wall Street Journal, music sales in the first 3 months of 2007 were down another 20% from the previous year! Why am I not surprised that 13 year-olds aren’t deterred by the threat of a lawsuit? Maybe if the RIAA ran around with a paddle we’d see some improvement. If lawsuits were the answer, parents would send their kids cease and desist e-mails for misbehaving.

“Getting” Your Demographic
The RIAA’s actions are a foreboding teller of the music industry’s future. Lawsuits where you’re suing kids, single Mom’s, grandparents, or estates of the deceased are about as ugly as they come. The RIAA has created a public relations nightmare. However, it’s given us a great example of why they need some fresh faces who understand today’s marketplace.

While EMI and Apple appear to be on the right track with $1.29 non-DRM downloads, the infrastructure should have been in place ten years ago. Now, it could be too late. The music industry has been turned upside down with the advent of digital technology.

Today’s consumer doesn’t fit within the business model of the entertainment conglomerate. The consumer buys tracks, not albums. The consumers are kids and young adults. They want to be able to move their music from one electronic device to another. The young adults generally do things the right way. They buy their music. It’s not worth the scavenging and guilty conscience. As for kids, any parent knows what happens when you threaten a kid. I’d be willing to bet that your teen isn’t quivering with fear that the RIAA is going to show up on their doorstep. P2P clients are only one way to move files around. The RIAA’s efforts to stamp out piracy today are doing more damage to the recording industry and to the artists it claims to protect than the kids who are doing the downloading. (Recently, I heard someone comment that the RIAA is doing more damage to the recording industry than Sanjaya.) It all comes down to tempering legal action with business advice and knowing your demographic.

The big labels need to learn how to cope with technology. The inability of these behemoth corporations to stay on the cutting edge, listen to their customers, and endure the ever-turbulent music market amazes me. Are we witnessing bureaucracy at its worst? Possibly, but, at least for now, it looks like lawyers are at the helm of this sinking Titanic.

As for the rest of the entertainment industry: stay tuned! The RIAA’s foul balls won’t keep you from your turn at bat.

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Every corporate buyout these days involves tech contracts. In fact, the tech deals could be the biggest asset of the target corporation! Will your mergers and acquisitions (M&A) counsel conduct proper due diligence on the tech contracts in a corporate buyout? Will they even understand those web development, software development, outsourcing, MLAs, SLAs, IP licenses, etc?

 

 Techlaw Podcast Episode 004: Mergers, Acquisitions & Tech: Play Now | Play in Popup | Download

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What’s behind those lawsuit threats from Intellectual Property attorneys? Are they all on the up & up? Could some IP attorneys be using the law as a weapon to threaten businesses into settling cases when there are no damages? It can cost you a ton of hard-earned money to defend a suit. Could this all be some kind of “legalized blackmail?”

 

 Techlaw Podcast Episode 003: Intellectual Property Lawsuit Threats: Play Now | Play in Popup | Download

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Oversensitive Documents
Back in my pre-mp3 days, a cassette (plastic object containing analog audio recordings) with prank phone calls was circulating through college campuses. On one of the calls, a prankster dialed up a local lawyer and claimed that he had been hurt on the job. The lawyer naturally targeted his questions to find some kind of tangible injury (payday). When asked how he got hurt, the prankster told the attorney “he said mean, awful things to me…and I was very hurt about this!” It took the attorney a while longer to catch on. Oh yes, the oversensitive client might as well be wearing a big red flag when they walk in for an initial consultation with a personal injury attorney. PI lawyers can’t quite put a dollar value on “words” alone. Well, that’s why there are lawyers that write corporate documents (transactional attorneys) and lawyers that litigate them (commercial litigators). We love words.

As a lawyer who writes and reviews documents for businesses on a regular basis, I find that composing a corporate document is an art form. Every sentence has a reason for being there. Your corporation is oversensitive to the careful craftsmanship underlying every document used in transacting business. Having non-legal staff or officers handle what the corporation considers “business” paperwork can, and often does, cause serious damage. The language in that paperwork really can hurt you…or at least your bottom line…big time!

Enter the “Letter of Intent”
One of the first documents a company drafts following preliminary negotiations is a “Letter of Intent” (alias “Memoranda of Understanding”, “Memoranda of Agreement, etc.). While not “necessary,” they are often used in the business world as precursor to a formal contract. When properly used, a Letter of Intent pinpoints the key factors and mutual understandings behind entering an actual contract. You can think of it as an overview, or a roadmap, of the deal you’re getting ready to make. Businesses often use them to show a commitment to each other (possibly for others to see), to put a timeline in order, or as a green flag for investing resources and beginning due diligence. Many companies have their sales staff draft the “Letter” because they consider it a “non-legal” document. Don’t make that mistake! Although the sales team sees letters of intent as precursors to a new deal, making bonus, and corporate growth, most lawyers don’t like them because they are self-contradicting. Poorly written LOIs have been known to change their spots!

On one hand, Letters of Intent are supposed to be legally worthless. It is not intended to bind the parties. On the other, it often has essential elements of a contract and prompts parties to act “in anticipation of” a future agreement. In the lawyer’s world, they’re they can change from “non-binding” to “binding.” Translated to “normal-speak”: letters of intent can cost your business a ton of money if they’re not written properly.

If the deal goes south, either party may argue that the points in the letter constitute an enforceable agreement. (Why is “south” the direction for things that go bad?) Treading on LOI territory is dangerous. If not written very carefully, an LOI can turn into a massive breach of contract action. Despite the legal implications, the LOI is often that “first document” I mentioned above, that corporations allow sales managers to draft.

The Guidelines
Regardless of who drafts your letter of intent, there are two general rules to keep in mind: keep it clear and keep it concise. You’ll want to be sure to overtly express in the LOI that neither party intends to be bound by the letter. If not clearly stated, chances are that the courts would rule that your letter of intent is a binding, enforceable agreement.

Keeping the letter of intent concise means that you want to limit your legal wording and briefly disclose the most prevalent points in closing the deal. Often, representatives from two companies sit down at the negotiating table. One or both sides are eager to put the basic terms down into a LOI for their attorneys refine and draw up into a final agreement later. Either through pressure, an effort to show sincerity, or just excitement in putting the deal together, someone will look at the dry legal statement in the LOI expressing the desire not to be bound by the terms discussed as a big negative. From a business perspective, it’s easy to understand. “We don’t want it to look like we’re not serious with this ‘we don’t intend to be bound’ language.”

Unfortunately, the legal language in the deal just can’t always reflect the electricity in the air. One company found out the hard, expensive way. Their letter of intent stated in part “[T]his LOI is not intended to create, nor do you or we presently have any binding legal obligation. . .” The next paragraph tried throwing a positive spin on the downer with “. . .however, it is our intention, and we understand, your intention immediately to proceed in good faith in the negotiation of such binding definitive agreement. . .” Well, the court decided that second statement countered the dry, legal disclaimer and formed a contractual requirement to move forward and close the deal!

Probably the biggest cases involving an LOI-gone-bad involved Getty Oil and Pennzoil in 1984. It is a textbook case (really, it was in our contracts textbook back in law school). Getty Oil and Pennzoil put together an LOI (theirs was called a “Memorandum of Agreement”) for a very large transaction where Pennzoil would purchase stock from Getty Oil. The parties later issued press releases where they agreed “in principle” to the terms of the Memorandum. Getty Oil ended up accepting a better stock offer from Texaco. The court went into an analysis of not only the Memorandum, but the press releases and other materials before determining that Getty Oil breached the Memorandum of Agreement. Hence, a supposedly non-binding LOI became binding. Texaco ended up with a three billion dollar settlement against Texaco for interfering with the “contract.”

Last Letters on Letters of Intent
Even though certain elements are required to form a contract, it is very easy for the elements to “fall into place.” You don’t want to be in a situation where the court gets to decide if the pieces of your letter of intent are sufficient to establish that a contract exists. If the deal falls apart, your company’s pockets could end up patching the fallout.

Suffice it to say that commercial litigators keep quite busy hashing out disputes between parties who don’t understand their own contracts or, as in the cases above, don’t realize they’ve formed contracts. If a dispute arises later, a well-drafted LOI or agreement can be your legal fire extinguisher. It will cost your business a lot less in legal fees for prevention than it will for calling in the fireman.

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Once again, the scanners are detecting more trouble sector nine. No doubt, it’s the work of that nefarious company, the sworn enemy of the Planet Apple; the evil overlord Microsoft! Does the news of Microsoft’s bid to take over Yahoo! have the Internet in a tizzy? Ayee, maytee, of this ye can be sure. However, we can’t be so certain that the whole of the two companies will be worth the sum of the parts.

If it’s true that success takes risk and embracing your failures, Microsoft certainly has a lot to work with. WinCE, MSN TV (WebTV), Windows 98, WMA, Passport and V-I-S-T-A are among a laundry list of Microsoft initiatives that didn’t impress the marketplace (is that subtle enough?). How many of your friends are using MSN Messenger for IM? Have you bought any new tracks for your Zune lately? Oh, you don’t have one? When was the last time you ran to MSN.com to “google” something or get the latest news? How about LiveSearch? Well, that’s where Yahoo! comes into the picture.

How Did We Get Here?
When those of us old enough to remember the dawn of the Internet all the way back in the early 90s began dialing in, Yahoo! was the holy grail of websites. It was the clear leader in search engine popularity. Only the geekiest of us used the oddball, Google, for its superior search algorithm. Back then, we were also using Netscape, the king of browsers, to get to Yahoo!. From there we could find all of the sites with the latest gossip about Beverly Hills 90210 and Melrose Place. Well, unlike Netscape, Yahoo! didn’t get worse. It actually improved….a lot.

Today, Yahoo! has some big talent and some very good tools. The layout and usability are excellent. Yahoo!’s Finance and Flickr are recognized as two of its greatest assets. So, what went wrong?

To start, Google just happened to have the better plan. Google Earth, Google Maps, Gmail, YouTube, and Desktop Search integrated to any major browser have that “cool factor” that sets Google above the fray so that gets it noticed. Google’s innovation and implementation does what few tech companies can. It impresses the tech and pop culture communities.

Is Number Two Good for You?
So, now we’ve got Microsoft in a situation where it can’t gain any ground against Google. Outside of mice, Windows Office, and the not-so-profitable XBox, Microsoft seems to be struggling with its products lately. It seems to have that “I just got out of the pool” syndrome. It’s coming up very short on impressive products and services.

Yahoo!, on the other hand…let’s call it as it is. Yahoo! just hasn’t been able to get its act together. Back in December, 2006, Yahoo! announced that it was reorganizing the company’s structure and management to focus on its key customers and foreseeable Internet growth opportunities. (I know, it sounds like a bunch of rhetoric.) Yahoo! decided not to open the door when Microsoft was knocking last February. Well, as Steve Ballmer pointed out in his letter yesterday to Yahoo’s Board of Directors, a “year has gone by, and the competitive situation has not improved.” The management has been unable to pull Yahoo! out of the hole. It’s an unfortunate situation. We’ve seen great tech come and go because of management and marketing problems (any Commodore fans out there?).

Can Microsoft Handle Yahoo!?
Microsoft is certainly right about one thing. It needs Yahoo! to compete with Google. I just hope that Yahoo! doesn’t get leveled in the process.

Unfortunately, Microsoft has a history of trying to do more than it can. The most recent example is Vista. Here’s a tip. It’s bad when a CEO says “[w]e tried to incubate too many new innovations and integrate them simultaneously,” particularly when you’re talking about your companies most hyped and anticipated product! That was way back in mid-2006. Vista’s out now. It’s a huge success in the alternate reality where people bashing your product is a positive. Microsoft is known for focusing on too many products at the same time, with none of them being outstanding.

Moving back, the Zune was supposed to be the unit that brought down the iPod. The new software update made a step forward. Unfortunately, releasing a product that looks ten years outdated doesn’t work well when you’re not shooting for “retro.” LiveSearch was pretty much D.O.A.. WMA is DRM done worse. Windows 98 (well, that’s a statement in itself).

Steve Ballmer seems to feel that combining Microsoft and Yahoo!’s engineering talent (which they both have) on R&D priorities (which are questionable) will result, among other things, in “new levels of innovation, enhanced user experiences, breakthroughs in search, and new advertising platform capabilities.” Oh, that “among other things” that I slipped in. Yes, that would clearly include “competition for Google” at the top of the list.

Both Yahoo! and Microsoft were supposedly going to focus on their core strengths. Were the plans scrapped? Microsoft’s huge staff of engineers and developers team couldn’t get the Xbox 360′s ring of death under control; deliver Vista on time (or with the features originally promised); get a decent media player out of the door; or get a competitive search engine in place. Somehow, Microsoft feels that it can afford to share its talent to improve on Yahoo!? The latest news from Microsoft tells us that it will take 3 years to get Windows 7 out the door? Maybe they should outsource it to Apple. It wasn’t so long ago that Microsoft told us that its decision on Vista original concept was “incredibly strategic and brilliant and wise — and was not implementable. . .”

Bottom Line
I’d like to see the combo work. Consumers want it to work (well, those who aren’t waiting in line for the lackluster MacBook Air) at the very least to keep Google in check. We don’t like monopolies on this side of the pond (they make us nervous). Competition in the tech sector fuels growth and innovation. More importantly, it gets us more cool gadgets.

It could be a great benefit to consumers if Microsoft and Yahoo! could make one plus one equal more than two. Microsoft’s history tells us that’s not what will happen. Judging from some early Net rumblings, the techie universe doesn’t see anything good in the cards for this likely merger. I agree. I hope that when Yahoo! comes out of its hole next Groundhog’s Day, its shadow won’t be even smaller. We like Yahoo! and don’t want to see what it does have get whittled away. Even Google would benefit if had someone in the rear view mirror to think about.

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With the stock price up and expectations high, Steve Jobs walked onto the stage to announce “something is in the air” today. With one window open on Macrumors.com, another on Engadget and a third on Geekbrief.tv, I had my hopes up high for several eagerly-anticipated announcements. Unfortunately, coveritlive.com wasn’t quite able to to let Cali Lewis…cover it…live, but I stuck in there and kept trying to see if the blogging would happen. Nonetheless, the show went on.

Apple’s magic lies in its ability to turn geeky new technology into exciting and attractive hardware that works very well. A magical company has a big problem when it forgets to bring enough fairy dust to its keynotes. Today, even with a room full of happy thoughts, nothing really was able to fly. Let’s run through the “big four” announcements.

First we had Time Capsule, a fusion of an external backup drive and an 802.11n base station (router). At first glance, this may not have much glowy-aura, but it has plenty of practicality. I can see the infomercial now…”At a dollar-short of $300, you can have your very own 500GB Time Capsule. But wait! For just $499, you can have 1TB Time Capsule…and if you call NOW, you’ll also get…” told that the product won’t ship until February? Huh? Nonetheless, without getting into the the security of your backed-up data, this is an intelligent, easy way to back up all of your Macs simultaneously and wirelessly 24/7. What happens if that drive fails? You have a meltdown and wonder why you didn’t go with Drobo.

Second, we learned about the new features in the iPhone and iPod touch software update. News about new features has been leaking for a while. The free iPhone upgrade includes an ability to find your location automatically with a Maps upgrade; the option to text multiple people with a single message; “Web Clips” bookmarks for websites; home screen customization (a la “background”); and the ability to watch movies from a new iTunes Movie Rentals. The iPod Touch update adds Mail, Maps, Stocks, Weather, and Notes, the new Web Clips feature, home screen customization, and iTunes Movie Rentals playback. Of course, you’ll want these cool updates, so you’re a soft target if you’re an iPhone Touch owner. Unlike the iPhone update, Apple hits you up for $19.99 (can’t we say $20?) for the update. So, now Apple has a third revenue stream from iPod owners (movies, music AND updates!).

Third on the Jobs list was the iTunes Movie Rentals and the AppleTV software update. Here’s where Apple goes all-Microsoft on us. iTunes now offers movie rentals. The catch, or should we say catches, are: old movies are $2.99; new movies are $3.99, but aren’t new since they follow the DVD releases by 30 days; Hi-Def movies are $4.99; and movies expire the earlier of 24 hours after you start watching them or 30 days (sounding like a contract yet?). As a techie, the 24 hour time-bomb seemed ridiculous, but I ran it by my non-techie wife who would love an easy way to rent movies. The 24-hour stress was enough to even get her riled up. She had a story about never making it through a movie in 24 hours with her friends, but just that part was enough to make me realize that it’s not just “me.” We rarely get through a movie in 24 hours these days! Apple’s servers shouldn’t be overloaded with “new” movies since people who are anxious to see a new release will get it from Netflix, Blockbuster, or some other, more nefarious means. However, it will be interesting to see what kind of luck people have with streaming HD content over “DSL light” or its equivalent.

That brings me to the AppleTV update. Bigger Hard Drive? No. Internal DVD player? No. This is a software update only. So, maybe Apple has given us something else that we’ve been asking for? Maybe it’s given us what we’ve held off buying the AppleTV for (you know…more codec compatibility so we don’t have to convert all of our files or do an SSH login and hack the box in hopes of getting DivX, XviD, AVI, or even DVD images to work). Nope! Instead, now you can use AppleTV without a computer! “So what?” you ask? Exactly the point. That’s not what we needed. It’s not what we care about. You’ve made a great pitch for going with an XBox 360, Apple! It plays DivX, XviD, DVDs and games. With the 360 and Zune updates we’ve seen lately, Microsoft appears to be delivering just what consumers want. Remember when Apple had that focus?

Finally, we’re at number four. It’s almost like there was some kind of Freaky Friday thing happening at D5 conference. Microsoft is thinking about the “feel” of its products while Apple is working on engineering feats. Macbook Air is that device that everyone knew was coming. It’s the thinnest laptop alive! Now, that’s really cool! We’ll all love to see it. Then we can walk away thinking “hmphhh….for $1800, I only get a 13.3 inch screen? I can’t burn DVDs on it? It’s only 1.6GHz?” Well, you can access a DVD or CD player on a “[n]earby Mac or Windows PC. It’s perfect for installing software and retrieving files” (quoted from Apple’s website). Wow! So now, instead of having an internal DVD drive or using an external drive, Apple suggests using a whole second computer! Now, that’s brilliant…isn’t it? I’ll be able to stick my new, ultra portable laptop in my inter-office envelope so that my hands are free to lug along another computer! Why am I thinking “Sega 32X…PC Jr….Sinclair 1000? The one big feature on this machine is the multi-touch trackpad. Isn’t it a little strange that Apple didn’t put multi-touch on the other MacBooks today? This Apple is all about the green.

It’s almost insulting. We’re being asked to drink the Apple juice once again. Obviously, multi-touch is coming to at least the MacBook Pro line. It’s been a given since the iPhone appeared. Since the the MacBook Air is way too overpriced for the screen size and lack of power (not to mention convenience), we’ll have to wait even longer to buy that new laptop. The techies will know not to go near a MacBook Pro until multi-touch shows up. The people who do buy them will feel like they were fooled by the Old Hag. Maybe Prince Charming will pull another $100 gift card out of the Apple shopping bag so that buyers can put it toward an external trackpad with multi-touch capability. Caveat emptor.

Yes, something was indeed in the air today. However, by the end of the much-anticipated keynote, we learned that it was just a little Apple-flatulence and the air of 4,000 bursted bubbles. As someone who usually likes Apple products, I’m very disappointed with what we’re seeing. Remember how fast Sony fell from grace? A company’s complacency can be its competitor’s greatest asset.

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Two in one day? Yes. Here’s number 2.

 

 Techlaw Podcast Episode 002: Top 5 Website Development Contract Pitfalls: Play Now | Play in Popup | Download

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See it here.

 

 Techlaw Podcast Episode 001: Is Your Lawyer Padding Your Legal Bill?: Play Now | Play in Popup | Download

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Publicity is Publicity
We’ve all heard the saying “bad publicity is good publicity.” Interesting theory. Well, bad publicity is controversial. Controversial gets your business’s name out there. So, good or bad, publicity is good!

Remember that great bad publicity Walt Disney World got from “groping Tigger”? Wasn’t that fantastic? Maybe that’s a poor example. How about when the press learned about Sony’s rootkit CD-”protection” scheme/scandal? No, that doesn’t seem to work either. Hmmm….Perhaps there’s a flaw in this “bad publicity is good” theory.

In the real tech-world, two high-profile tech companies just got a bit of bad publicity. One shows us how to turn bad publicity into good publicity. The other showed us how to take publicity that was already bad and make it abysmal (by throwing what appears to be a minor temper tantrum).

Apple’s Great Bad Publicity
Let’s start with the setting. I was behind my computer monitor with three tabs open: Gizmodo, Engadget, and Cali’s live Geekbrief.tv broadcast. Steve Jobs was giving his September 5, 2007 “The Beat Goes On” keynote. Slowly, or so it seemed at the time, the announcements trickled in. Nano…iTouch…$200 price drop on the iPhone 8GB model and discontinuing the 4 GB model?!? What? A major price drop after only ten weeks? My first thought was that someone was just stirring up trouble in the Geekbrief comments. Then, I saw the same info on Gizmodo. This obviously was not going to go over lightly with recent iPhone purchasers (the accused “Apple-fanboys/fangirls”). The complaints started flying in. Macrumors had over 1,000 negative responses to the announcement. Of course, Macrumors typically would attract the technology “early-adopters,” so the negative comments would be higher on Macrumors.com. Nonetheless, the exciting revamp of the iPod line, including the long-anticipated and rumored iTouch, got sidelined with news about the uproar in the Mac community. The next morning I saw the “that’s technology” response from Steve Jobs when USA Today asked the CEO about his thoughts about iPhone owners who were outraged about the quick price drop. Understandably, the iPhone owners who rushed out, waited in lines, and took the chance on a brand new, untested product (a pricey one at that) felt sucker-punched. Who would ever rush out and buy a new Mac product on day one again?

That morning, it occurred to me that $200 was probably a big enough drop to buy Apple some wiggle room. If Apple would give early adopters a $100 credit toward other Apple hardware (maybe computers), the problem would fade and Apple would look like a big hero. (I know, I know…it sounds ridiculous to say I had the idea now, but I really did!) Well, Apple went further and just made it an easy $100 credit to the Apple Store. The famous “Apology Letter to iPhone Owners” was sent out and the iPhone owners were happy. The news rang through the media. Everyone loves Steve again.

It all appears in retrospect to have been incredibly well planned. Pre-planned, one might say. In the end, Apple released a ton of new products, made their iPhone more affordable (and a possible threat to other cell phone manufacturers) and made itself out to be the savior of consumer confidence. The newspapers ate it up. Free publicity. Tuesday’s product announcements made it into newspapers on Wednesday and again, with the “apology” on Thursday. I’m willing to bet that even Donnie Deutsch got a kick out of that one!

Factor 5
Someone other than Apple was facing bad publicity during the first week of September. Factor 5 has been on my “watch list” for a long time. When the small videogame developer released its first game (with Lucasarts), Star Wars: Rogue Squadron, for the Nintendo 64 in December 1998, it was spectacular. Nothing to date put the player in the Star Wars space battles as well. Then, when I compared the sequel for the Nintendo Gamecube to Starfighter on the XBox 360, I realized how special Factor 5 was. The artwork and the gameplay were far superior, despite the “less powerful” components that the developer had at its disposal in the Gamecube. The company worked hard on mastering its knowledge of the console that the game would run on. Factor 5 team members explained in interviews where other developers were falling short and where improvement was needed. The company demonstrated a true concern for the art of game design and implementation and the hope that other developers would deliver games of the same callibur as the Rogue Squadron II.

The comany’s newest product is Lair, a game where the player experiences flying on a dragon’s back during battle. The game has been heralded by some as the game that will bring the (severely) market-challenged Playstation 3 into the limelight. Well, in a way, it has.

The game has received dismal reviews, largely due to the inaccurate and unresponsive controls (we’ll leave the discussion about motion-sensing controls for another time). Factor 5′s reputation and the expectations for the game made the reviews perfect news-fodder. Despite the uphill battle, Factor 5, like Apple, had the opportunity to turn the negative publicity into a great marketing tool. Instead, the company appears to have taken the wrong prong of the fork in the road.

MTV’s GameFile reported on September 5th that the Factor 5 Lair development team is pointing fingers at Sony, reviewers, and even “ghosts” (problems that have supposedly plagued the development of the game from its inception). The team is reportedly claiming that the PS3 is difficult to develop for (the same was said of the super-successful Playstation 2 at the beginning of its life cycle). According to Lair’s director, Julian Eggebrecht, reviewers generally are hard-core gamers who “have a hate for all things motion.” The team claims that the motion controls are more suited to “casual players” and points to the Nintendo Wii, the early and strong leader in this generation’s console sales, which is marketed based on its motion controls. Eggbrecht also discussed the difficulty in developing a good first generation title (early release) for a console. The finger pointing was reported in IGN, Aeropause, and other gaming sites.

Knowing Your Consumer
The Factor 5 debacle is a great lesson in turning bad publicity rotten and mis-reading your consumers. Videogamers generally are 1) techies and 2) finicky when it comes to gameplay (go figure). Excuses for a dragon that turns 2 seconds after turning the controls simply don’t “fly.” Factor 5 wanted Lair players to be forced into, and enjoy using, the motion-sensing control scheme. Bottomline-it didn’t work.

As a techie and and as counsel to tech clients, resolving the dispute seemed very clear. Turn the situation around. Make a patch available for download that offers a standard control scheme to players immediately and create a forum where Lair owners could suggest further improvements and extras that Factor 5 could later implement. Factor 5 would then be able to show its concern for its product and consumers by giving them both what they wanted and a voice, avoid ruffling feathers of reviewers (who will be waiting to rip into the next Factor 5 title), and avoid insulting its loyal consumers with excuses.

While it amazes me that the game had to get into the hands of the reviewers for the excuses to start flying in the first place, Lair had so much hype that it could have used the attention resulting from the bad reviews to throw up its hands and say “the patch will be out in 2 days!”

Working Your Publicity
Factor 5 focused on the downside. Eggebrecht discussed the technical and personal problems that plagued Lair, quashing the perfect opportunity to focus on how the problem will be rectified.

A move like this does not only create bad will and cause customers to hesitate before buying your product on the next go-round (as would have happened to Apple, had it not offered the $100 store credits to its loyal base), but also shows an irreverence for delivering what the customer wants. When you’re lucky enough to have the hype, you have got to deliver the goods or take a hit on sales.

Remember to think as a consumer before taking action. Consumers don’t like excuses and finger pointing. You’ve got bad publicity, but it’s free publicity. When you’re business is at the center of attention, take advantage of the opportunity and turn it into a positive. Lastly, remember to tap into your team when bad publicity looms. Lawyers spend a good amount of time resolving bitter disputes. If your legal counsel has a good handle on your product, industry and your customer, you’ll certainly have someone to look to for business advice when a little bad press starts flying around!

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Startups have enough on their plate without thinking about hiring lawyers. As a businessman, it feels like taking the seed money you’ve put together and dumping it into the Sarlacc pit (at least that pit would take 1,000 years to digest the capital). Buying the “invisible” is a tough purchase for a new company. You want to get something tangible such as artwork or a website for your money. After all, you don’t have contracts to review yet. So, you give these lawyer-people a big fat retainer just to sit around until a deal comes up? Not exactly.

Yesterday, we had a meeting with a potential new client. As both a lifetime techie and as a tech attorney, I see lots of screwy ideas. This time, I was presented with one of the really cool exceptions. It’s a product that has a solid demographic and good potential. I spilled out at least 6 or 7 ideas in our first meeting. Your lawyer should be engaged and pushing from the start. The stiff lawyer-type that only handles contracts is a thing of the past. You’re paying the big bucks for ideas, enthusiasm, the lawyer’s network, and the lawyer’s knowledge of your industry and demographic. If your business is selling medical supplies to hospitals, I’m not your guy, but there’s an attorney out there who loves the medical field.

As for pop and tech, I’m the exception to many attorneys…probably like a more refined “Big” exec. I was in the midnight line at Walmart when the Gamecube was released (just for Rogue Squadron II). I tracked down a Wii from Electronics Boutique when they were flying off shelves. The 360? Yes, that’s on my list (I’m waiting for Divx streaming from the Mac). How many attorneys know about Gears of War, mini r/c helicopters, virtual instruments, hoverboards, and LazyTown? Yep, I’m a lawyer who can steer you through Hoth or any theme Park at Disney World while talking about next week’s rumored Mac products and counting in binary (that doesn’t impress the wife so much). Who wants that in a lawyer? If you’re into cutting edge tech or pop culture, you do! The point is, you want your attorney dialed in to your business and what your customers will want…just like any other member on your team. You want enthusiasm from your employees, insist on it from your attorney!

The ideas I proposed to the startup weren’t out of left field. They came with an understanding of the marketplace for the startup, tech and pop cultures, and of course, the intellectual property, corporate, and tech law concerns that would come up in negotiations and drafting complex transactions to make the magic happen. Companies are always looking for the “right fit” for their board, management, and employees. Its critical to growth, harmony and, ultimately, your bottom line. Your attorney should fit your corporation’s culture too.

You’re going to have a lot of business decisions coming at you quickly. Having an attorney on speed dial who is part of the culture will pay for itself many times over. It’s a team player with connections whose telling everyone about your cool new startup and watching your back. What better “invisibility” is there (Susan Storm and Harry Potter’s cloak aside)?

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