Saturday, December 9, 2017

The Role of Patents in Monopolies

One of the lesser-known reasons behind M&A and consolidation of markets (aka less competition) is the role of patents. Even if a small company has great ideas, at some point, to get access to the broader market, they will need licenses. Over time, the cost of such licenses may become prohibitive, encouraging consolidation. This is why open source is so important, but it's also why governments have lost credibility over time.

Rather than address the causes of needlessly prohibitive barriers, governments have attempted to deal only with the results of an increasingly unwieldy legal framework, which merely adds to its complexity--and which generates even more contempt for the elites who benefit from it. 

Let's take a couple of recent examples: Uber/Waymo and Fitbit/Jawbone. They've sued each other, a process that is supposed to create a check and balance protecting innovation. Problematically, it's impossible to know whether any party actually committed legal violations or trade secret theft without each side spending millions of dollars in legal fees that do nothing to promote innovation. In some cases, companies have spent hundreds of thousands of dollars arguing about superficial similarities in mobile phone design, down to the curves and grooves in a mobile phone's case (e.g., Apple vs. Samsung). 

If you are a small company threatening the market share of a larger company, the larger company has an asymmetrical payoff in suing you early and often--even if its case has little merit. The smaller company then has to raise funding for non-innovative purposes or become more dependent on outsiders to survive. As such, the status quo biases winners and losers based on which innovators have access to the best or most powerful venture capitalists and lawyers, many of whom are connected to the existing political establishment, especially in states where judges run for election. 

Worse, governments cannot unilaterally reform the patent development or certification process, partly because the procedures are often based on subjective interpretation and therefore the random assignment of a particular government employee. (e.g., is Amazon's "one-click" technology truly deserving of a patent? If so, which parts?) 

Meanwhile, laws and regulations relating to interpretation continue to expand to resolve increasingly complex or new issues, frustrating even sincere government employees who may not have recent technological expertise or who may be receiving such expertise secondhand from biased experts. Absent wholesale removal of patent application screeners who disagree with the executive branch's interpretation of truly non-innovative or innovative patents--a definition that may change every four years--lawyers once again take the helm. Compounding problems, as law school tuition has increased, legal fees have risen, making experienced (and even inexperienced) lawyers less accessible for smaller companies.

Conclusion: every system of any kind, once it achieves stability (often misconstrued for success), has three choices: bar newcomers, which increases social tension, reduces consumer choice, and renders diversity impossible; make competition outside the established system affordable and feasible, which often increases segregation while creating more entrenched interests; or adapt and suffer sacrifice. The primary cause of almost all problems in the developed world today is the inability of all parties--both public and private--to choose the third option.

Bonus: from Peter Thiel's From Zero to One

Bonus II: Much of globalization's discontents is merely new or freshly made capital moving from developed countries (that have not chosen to adequately reform existing legal systems) and into developing countries which lack similar barriers--exactly as one would expect new capital to behave in a rigged system.

Bonus III: Peter Thiel's ideas are not entirely new. See Elliott Sclar's words from 2001. 

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