[credit provider=”Illustration: Ellis Hamburger”]
An online debate has exploded around Google’s complaint that patent-owners are attempting to limit Google’s ability to innovate by unfairly limiting Google’s use of other companies’ intellectual property. Google does not appear to be disputing who owns the patents, but appears to be arguing that these patents, and the patent system more broadly, may be harming innovation and therefore harming consumers beyond any value that the patent system creates.The debate began with an opening salvo, a blistering attack by David Drummond, Google’s Senior Vice President of Corporate Development and Chief Legal Officer, that patent owners are ganging up against Google. If this patent bullying is successful, Drummond alleges, patents will limit Google’s ability to innovate, which will ultimately harm consumers by limiting what Google can offer, thereby limiting consumer choice or forcing Google to pay for licenses and forcing consumers to pay more.
Origins — How did this Happen to Google?
The record suggests that Google could have bid for some of the disputed patents and chose not to; in other cases it did bid but did not bid enough. So Google does not own and has not licensed some of the material it now wishes to use.
The record also suggests that on previous occasions Google has felt comfortable just using what it wanted regardless of patent protections, and risking perhaps making enemies along the way.
It doesn’t really make sense for Google to pay for patents and licenses if management believes that their public relations team and their legal team can win access without expense.
The Short Term Cost of Actually Paying Your Way —
Costs to Consumers if Google has to Pay for Use of Patents?
Over the short term, Google consumers may be harmed, especially if Google removes offending products from the marketplace or increases their prices to cover their own increased costs. It’s always better, over the short term, for consumers to get something for nothing.
Don’t We All Win When Google Does Stuff Free?
We all know that some stuff cannot be used if you don’t own it.
I’m pretty sure that Mr. Drummond would not expect me to hold press release parties at his home, raiding his fridge or his wine cellar, or less personally, at Google headquarters, enjoying the famous Google free lunches and sharing them with journalists. I’m pretty sure that he would not expect to issue press releases at my home, or in my office, sharing the (much more humble) Wharton free coffee attendees.
But that’s real stuff. Physical stuff. We know we can’t trespass or steal real stuff. But who gets hurt when you just copy someone else’s intellectual property? And is this real IP, or are these bogus patents, now being used by patent trolls, as Drummond suggests, simply to block innovation at Google?
Oracle, Apple, and Microsoft as Patent Trolls?
It’s hard to argue that Oracle, Apple, and Microsoft are patent trolls, aggressively and opportunistically exploiting patents, blocking others from introducing products and services when they have “no intention to market or manufacture the invention” themselves. Apple and Microsoft do provide software, and do market smart phones for this product, and patents for it provoked Drummond’s initial attack. Apple is also involved in a dispute with Google over its best selling iPad, and has obtained an injunction that blocks the importation of Samsung’s (Google-based) tablet into the EU.
Hardly trolls, then. These patents are being used by their owners to protect their own innovations.
Still, Google argues that these patents, if they stand, will harm Google, and they are possibly right. What would happen if Google had to pay licensing fees as high as $15 on every Google-based tablet computer sold? Either they would earn less on each machine now, or sales of Google-based phones and tablets would decrease. Since these devices are the basis of their future strategy they surely do not wish slow sales and reduced future profits. Google clearly is better off if it can use other companies’ IP without paying for it. As an argument, though, that lacks a certain persuasive power; we’ve already established that I cannot hold my meetings in Google headquarters or do what I wish with their physical resources.
They further argue that if they pass the costs through to consumers, consumers will be hurt. They are turning this into an attack on the patent system, suggesting that the cost of the system is now too high for consumers, both in terms of lost opportunities for innovation, reduced competition, and higher prices.
This sounds more persuasive. But how real is this? Is it really time to scrap patent protection and intellectual property rights more generally?
What do patents offer consumers in the long term?
The Role of Patents in Protecting Innovation
And Providing Long Term Consumer Protection
The debate on patents and the protection of intellectual property goes back a long way. Ben Franklin, America’s first renaissance man, opposed them because he thought that society would benefit from the free and widest possible sharing of innovation.
“As we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by the invention of ours, and this we should do freely and generously.”
But he believed that inventions could be produced pretty easily by one person sitting back and thinking for a while. This may have been true then. The framers of the US Constitution disagreed even then, and granted Congress the right “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” The first American Patent Act followed a year later. Whatever you think of patents in the time of Franklin, his argument was less true by the time of Edison; innovation was not easy. And it is certainly not true now. Innovation is no longer the result of one individual thinking for a while; innovation is a team effort, over time, requiring massive commitment of resources.
Innovation is expensive, and requires some expectation that the investment in innovation can be recovered. Innovation is not certain or risk free — many research efforts simply fail. Those that do succeed must ensure some period in which the innovators have protected access to their creations, and a protected period in which to profit from them. Protecting innovation has been essential to the success of a wide range of American industries, from biotech to computer science and aviation. Patents protect the process of innovation by protecting the investments of innovators, without which the entire process would be too risky.
Some patents do last too long, especially in computer science. Most copyrights are too long to be optimal for consumer protection, given today’s technology. But patents and copyrights remain justified and are still needed to encourage true innovation.
Most really profitable businesses are based either on preferred or even unique access to some physical resource, which Teece called complementary assets, or on preferred or protected access to some intellectual property that cannot be readily imitated. The importance of intellectual property is even more true in businesses based on information or information technology, since it is extremely difficult to corner the market in chips or in programmers. Sometimes the critical resource has been developed over time, and sometimes it is the result of a brilliant insight. But today most of the critical resources upon which businesses are based must be created, and mostly these resources should be protected.
Google’s Historical Attitude towards the Intellectual Property of Others
What does history show us about Google’s view of the intellectual property of others? It feels free to distribute content owned by newspapers and the intellectual property of journalists, film-makers, reviewing sites, and musicians. It feels free to extract freely from the content of websites it views as competition, in order to jumpstart its own competing services. It feels free to distribute the entire contents of libraries. It feels free to punish those who bring suit against them, offering newspapers and reviewing sites the choice of continuing to have their content borrowed, or being dropped from web search altogether. Oddly, for a technology company, it is even willing to knowingly infringe upon the technology of other high tech innovators, as is alleged in the development of Android.
Google is in a unique position because it is one of a small set of companies whose business success and enormous profitability seem almost unrelated to unique intellectual property or to unique possession of resources. Success for companies in this group is based on unique access to customers, which can be monetized through sale of access. That includes Google in search, Sabre and Travelport in Air Travel Reservations, and a few other players. The largest, like Google, Sabre, and Travelport, are actively engaged in multiple lawsuits.
The most powerful forms of this business model actually pay the searcher, using money extracted from the firms that must be found by these customers. By paying the searcher, the search provider ensures that it has a happy audience, which in turn ensures that it can continue to extract large payments from firms that need to be found. Sabre and Travelport subsidise travel agencies to increase their own bargaining power with airlines. Google subsidizes consumers, through its promotional pricing of Android, for similar business reasons.
It is always cheapest to subsidise searchers using materials copied from or taken from others. That would include content, like Google Books and YouTube, and software, like some of the code in Google’s Android, or the basic design of Google Office.
It may be good business, but it is hardly innovation; to a much larger extent it is based upon using the innovations of others. The business model based on taking property without paying for it, and then redistributing some of it, was followed by Caribbean pirates and British Privateers. It was allegedly the business model for Robin Hood. It has a certain charm when you can get away with it. But sharing the content of other creators is not innovation. At worst it’s piracy. At best it’s copying.
Much of what Google does it does very well. However, its core business model is hardly innovative. I wrote about businesses based on providing access to companies that want to be found through search, over-charging the companies that must be found, and subsidizing the searchers, in 1991, when it was the business model of Sabre and Apollo. The business model is still very much alive today, and still the subject of litigation in air travel.
The recent attack on patents suggests that misuse of the patent system will destroy Android and limit consumer choice, and suggests that “this anti-competitive strategy is also escalating the cost of patents way beyond what they’re really worth.” The attack runs counter to the defence that Google uses to defend the price of its own keywords; Google’s Chief Economist argues the price of keywords must be fair because they are set by a public auction, just as the price of patents was set. The attack also appears to be disingenuous, in that Google misrepresents the record of what it could have acquired legally. It’s not that Google didn’t value the patents enough to bid; they simply were not willing to bid enough. And the attack is certainly self-serving. Google can afford to acquire anything it wants legally. It subsidizes other offerings; it can subsidise its phones and tablets more if it wishes to do so.
Google’s Kent Walker argues that “a patent isn’t innovation”, which is true; patents are rewards for previous innovation. Mr. Walker argues that a patent is “the right to block someone else from innovating”, which is both false and, more importantly, irrelevant in this dispute. Google does not base its profitable businesses on innovation. It does base its profitable businesses in part on the distribution of other parties’ IP.
The misappropriation and widespread free distribution of the technology and artistic works of others probably stifles creativity, rather than advancing it, by reducing the incentives of true creators. Again, it’s hardly innovation.
For obvious economic reasons, Google prefers to protect everything that it owns, and to pilfer anything it can get away with pilfering. For obvious reasons, both fair competition and fair compensation to innovators suggests that the legal protections in place not be scrapped quickly for the benefit of Google or any other individual corporation.
Update in Light of the Planned Motorola Acquisition
The recently announced proposed acquisition of Motorola Mobility by Google is too complex to handle in a paragraph or two here and will be the subject of an additional post. As with everything that Google does, it has many possible interpretations. It may be a bold attempt to switch gears, pay to play, and counter the patents of its rivals. It may be an even more audacious move into vertical integration.