Monday, August 27, 2012

Patent Law versus Anti-Trust

I've thought for some time that intellectual property law generally was in trouble, and as an artificial construct that requires positive law to support it, the lack of universal application certainly gives cause for concern.  In essence, the Internet allows the publication of all intellectual property, instantly, to almost everyone in the world.

Ownership of intellectual property is intangible; ideas, inventions, innovations are nebulous concepts, and to award the official title of ownership to the first person or company who has either the wit or resources to go through the registration process first (or, as kids would say, "baggsies!!") seems arbitrary.  We are social beings, and operate within a social construct.  If you invent something, say, in the shower, should the shower owner own a piece of it?  If your thought process is triggered by a movie, should the studio claim a piece?

The Chinese are famously loose in their adherence to such law, most prominently in electronics and automotive industries.  Yet it is in China that so much of the world's manufacturing takes place, it almost seems ridiculous.  By manufacturing patented goods in China, Western companies expose themselves to the risk of having their goods copied - to the certainty of having their goods copied.  They persist because the cost of manufacturing remains low there, and their belief in the strength of their control of the commercial infrastructure in western markets where the margins and revenues are most significant.  The majority of fake goods manufactured in China are consumed in growth markets rather than in mature markets; the true market for Western luxury goods in growth markets tends to be beyond the reach of the vast majority of the populations there in any case, and therefore the buyers will themselves go to extreme lengths to verify authenticity.  Such is the nature of the luxury goods market - it's less about the product, and more about the statement it makes about the person; and who wants to be known as a fake?

But there's a deeper problem here.  The software market is being completely restructured as a result of the industry's failure to establish a universal intellectual property regime, and it is transforming instead to a services business.  Installation, maintenance and integration costs on enterprise software already massively exceed revenues generated by software licensing.  Every single software start-up in Silicon Valley now sells software as a service.  Manufacturers of electronics and cars and all sorts of goods are looking to establish services businesses in order to offset the risk of absolute commoditisation.  Apple is making more and more of its revenues from iTunes and Apps.  The value of the services provided in the Apple Store is only available to those with verified Apple products.  Car manufacturers are integrating communications devices and diagnostics and navigation tools, and machine to machine businesses are developing in every white goods company.

Intellectual property is becoming more and more difficult to defend.  The Samsung -Apple case on the one hand extends the protection  at least in the US.  Apple's shares have gone up in pre-market trading by about the same dollar amount as Samsung's have fallen overnight - around $12bn - as the biggest company in the world gets just a little bigger.  Should Samsung be blocked from selling some of its key innovations in the US, Apple would get bigger still, and extend its dominance in the Smart phone and tablet space. But just as we are prtecting one law - intellectual property, which is necessary to foster and reward innovation - we are compromising another - anti-trust.  Apple is getting so big that it is unbalancing the consumer electronics market in the US, it has enormous cash reserves, and it may soon find itself subject to anti-trust proceedings.

Is Apple really that innovative?  Should the system provide such rewards to innovation that not only does the innovator receive massive riches, but all other competitors are crushed as a result?  The one saving grace is that Apple operates in categories that have alternates.  While they dominate - monopolise - the smart phone and tablet categories, people can still go and buy dumb phones and laptops, which are really cheap these days.  It seems inevitable that if this decision indeed heralds the demise of Apple's largest competitor, and Apples ascent into the stratosphere in its domestic market, the company will become less innovative, and more profitable.  That does not seem to me to be a good thing for the American people, who need more innovation, and a more equitable distribution of value.

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