The AI Boom May Be Too Good to Be True

"Investors rushing to capitalize on artificial intelligence have focused on the technology -- the capabilities of new models, the potential of generative tools, and the scale of processing power to sustain it all. What too many ignore is the evolving legal structure surrounding the technology, which will ultimately shape the economics of AI. 

The core question is: Who controls the value that AI produces? The answer depends on whether AI companies must compensate rights holders for using their data to train AI models and whether AI creations can themselves enjoy copyright or patent protections.

The current landscape of AI law is rife with uncertainty. The New York Times, Getty Images and individual artists have challenged AI companies over their use of copyrighted material in training data sets. How these cases are decided will determine whether AI developers can harvest publicly available data or must license the content used to train their models. Should courts decide in favor of rights holders, AI companies will face increased costs that could reduce profit margins and put many current valuations into question. Investors shouldn't underestimate the risks.

Equally significant are the questions surrounding intellectual-property rights for AI-generated creations. Can a novel invented by AI be copyrighted? Can a discovery guided by an AI model be patented? Recent rulings have denied such protections, emphasizing that only human creators can claim IP rights under current laws. This creates ambiguity for companies using AI in creative or inventive processes. Without clarity on whether AI-generated works can be defended as proprietary, what those companies produce may lack the legal protection necessary to secure a competitive advantage, undermining a key element of investor confidence.

Critics argue the legal framework will catch up with technology, and that lawmakers will adapt to accommodate AI's evolving role in society. They also claim the value of AI lies primarily in its functional capability -- its ability to analyze, generate and innovate -- and that legal questions around copyrights and patents are a secondary concern. Those arguments underestimate the complexity and the slow-moving nature of legal systems, especially in areas involving fundamental shifts in technology and human rights.

Media giants and global artists looking to protect their IP rights have deep pockets and a vested interest in ensuring they aren't left behind by AI's march. The results of these disputes will shape AI's economic potential, from cost models to go-to-market strategies. Investors can't afford to dismiss these risks as merely bureaucratic obstacles that will be sorted out eventually.

A historical analogy offers a stark warning. In the 1990s, the music encoded on compact discs wasn't encrypted, leading to a piracy crisis in the music industry. The movie industry learned from those mistakes and pursued a strategy to protect its IP that was primarily legal rather than purely technological. The Motion Picture Association of America pushed for a provision in the Digital Millennium Copyright Act of 1998 that made it unlawful for hardware or software developers to circumvent copyright-protection systems. This legal threat created far more protection from piracy for owners of movie rights than technological innovation alone could have provided.

AI investors take note: Technological strength alone doesn't suffice when the regulatory and legal environment is left unattended.

For investors paying attention to the legal battles around AI, opportunities will abound. If the New York Times and Getty Images win their copyright-infringement lawsuits, AI companies will be required to pay for access to training data. 

Companies with large libraries of hard-to-obtain data and content -- such as high-definition video, medical information, financial and legal datasets, and geospatial information -- could see significant increases in the value of their assets. Some may become gatekeepers in the future AI ecosystem. Entrepreneurs and investors are already buying up licensing rights to training data and content, positioning themselves to profit from a potential surge in demand.

The excitement surrounding AI is understandable, but investors must pay close attention to how courts rule on cases involving copyright infringement in training data, and to legislative developments around AI-created intellectual property. These decisions will ultimately determine who profits and who loses in the AI age.

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Mr. Harlan is founder and managing partner of Harlan Capital Partners." [1]

1.  The AI Boom May Be Too Good to Be True. Harlan, Josh.  Wall Street Journal, Eastern edition; New York, N.Y.. 27 Dec 2024: A15.