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For the last few years now, the kinds of patent protections that have made digital technologies like wireless mobility, modern computing, the Cloud, AI, IoT and VR possible, have been under attack around the world. Equal parts propaganda, obfuscation, and questionable lobbying, the effort to weaken IP and consumer protections seems to have picked up steam since 2015. I can’t pinpoint the exact trigger point, but those efforts have been far more aggressive and conspicuous in 2016 and 2017 than in the last twenty years, and it’s time we started talking about it.
The first thing to note is that those efforts aren’t linear or easy to track. They manifest themselves along asymmetrical and seemingly unrelated fronts. They aren’t the same in the US, Europe, and China, for instance. The type of global strategy I am talking about is, by its very nature, designed to be slippery and nebulous, and difficult to map. Why? Because if it were simple and obvious to everyone, it would have zero chance of actually working. Too much is at stake for consumers (and investors). The way this type of attack works is by seeming to be as boring and as opaque as possible. Well, I guess we will just have to try and make it interesting and transparent. Over the course of the next few weeks, that is exactly what I aim to do.
1) Understanding the innovation ecosystem.
A good place to start is with the innovation ecosystem. What does it look like? What are its moving parts? Who are the players? How do innovation, value creation, and IP flow through it? Visualizing that ecosystem will help us understand how innovation actually works versus how some companies sometimes pretend that it works. (Yes, this diagram is oversimplified.That’s the point. Simplicity = clarity.)
Note that inventors come in all shapes and sizes. You have large tech companies like Amazon, IBM, Samsung, Apple, Microsoft and Google that productize innovation and market it to consumers. You also have critical innovation hubs like Qualcomm, Intel, ARM, and Dassault Systemes that help drive, organize, and amplify innovation across the tech ecosystem, including for those large tech companies. (To make matters even more complicated, some large tech companies also function as innovation hubs for the ecosystem – like Samsung, IBM, Amazon, and Google.) And you have the massive community of startups that builds on and contributes to the IP portfolios of large tech companies and innovation hubs and other startups. The short of it: innovation breeds innovation, and that innovation scales across the entire ecosystem.
If you follow the white arrows, you will see that every category of business in the ecosystem relies on the other categories of business to fill-in their innovation gaps: Startups use large companies’ IP to develop their own products, for instance. One example of that would be UBER: Where would UBER be today if it hadn’t been able to access Cloud services, APIs, and layer upon layer of IP they didn’t develop themselves? GPS and real-time location tracking aren’t UBER inventions. Map layering isn’t either. So UBER took advantage of IP licensing models that gave them the ability to bundle technologies developed by other companies to create a pretty amazing product. At the same time, you have startups developing new IP that, in turn, gets acquired or licensed by large companies to create new products and services. One obvious example of that would be VR pioneer Oculus, now a division of Facebook. It isn’t until you start digging into the technologies and components that go into an iPhone, a Chromebook, a car’s dashboard, or a smart speaker that you really appreciate the extent to which the entire ecosystem contributes to the development and production of every single device and app we use every day.
If you think of ecosystems running on the flow and transfer of energy between organisms, you can do the same for technology ecosystems: Instead of energy passing through the system, it’s invention. And the primary vehicle by which invention spreads through the tech ecosystem is licensing. This is roughly expressed by the white arrows in the above diagram. The yellow arrows reference the transformation of innovation into consumer products like smart speakers, smartphones, autonomous vehicles, apps, services, and so on.
The diagram may seem a little chaotic at first, but that’s just complexity and diversity for you. All of that activity creates a maelstrom of ideas, investment, experimentation, and learning. This in turn creates a tsunami of opportunity, progress, and value creation. And without an open licensing model that allows companies to use each other’s IP for a small fee, the mechanism that allows the transfer of ideas and invention across the ecosystem can’t exist. Companies like UBER could not do what they do. Oculus and Facebook, and the startup community as a whole probably would not exist. Goodbye smartphones. Goodbye apps. Goodbye smart speakers, and IP cameras, and drones, and AI, and big data. Goodbye online shopping, and Facebook and Youtube, and Instagram. That model may not look pretty, but it works.
Not surprisingly, what makes that licensing mechanism possible is a core framework of strong, fair, predictable IP protection laws. In case you’re new around here, IP is short for Intellectual Property. It’s a term used to describe things like trademarks and patents. For the purpose of our discussion, let’s focus on patents. What is a patent? The simplest way to explain it is to say that a patent is a set of exclusive rights granted to an inventor (or assignee) either by a sovereign state or an agency, and usually for a limited period of time, in exchange for a detailed public disclosure of an invention. It’s a bit of a long-winded definition, but it’s also accurate. Pa particular attention to the last part. The exclusive rights part is important, but so is the public disclosure part. You will understand why in a moment.
Let’s say that you invent a brand new type of ultra-slim phone battery that lasts an entire week without needing to be charged. You would apply for (and hopefully be granted) a patent for that invention. This patent, once granted, would give you the exclusive right to monetize that invention, or do with it what you want (including nothing at all). That patent would allow you, for instance, to sign an exclusive contract with one phone manufacturer, and tie your fortunes to its success. You could also decide to make it available to every phone manufacturer, and tie your fortunes to the mobile industry as a whole. Moving from sales to production decisions, you could also decide to manufacture your batteries yourself, or you could decide to license out your design to contract manufacturers. You would have these kinds of options, and many more. The choice would be yours… but whatever you decided to do with that patent, the other piece you have to bear in mind is that everyone would be able to see it, learn from it, and understand its value. That is an integral part of a patent’s value.
2) Why do patents protections and healthy licensing mechanisms matter? Three reasons:
- Monetization: As an inventor, you probably spent years working on turning your idea into a product. You may have invested enormous amounts of personal time and massive amounts of money, and even sacrificed everything to turn your vision into a reality. In addition to those investments, you took a risk that no one else took. Having the ability to monetize that invention and, at the very least, pay yourself back for that risk and investment, is only fair. Inventors should be rewarded for their work. It isn’t greed. It’s just an economic quid pro quo: Create value, and get value in return. It’s what movie studios, recording artists, authors, car designers, software developers and entrepreneurs do the world over every single day. Inventors are no different. Create something new and original, patent it, and monetize it by sharing it with users.
- Continuity/Progress: Every innovation project that bears fruit and manages to be successfully monetized generates revenue. That revenue (or some portion of it) can then be reinvested into other research projects that will generate additional inventions. As long as the revenue from licensing and royalties from commercially successful patents keeps coming in, it can be used to fund additional innovation. These could be improvements on the original, or they could be something entirely new. The point is that innovation is a game of continuous improvement. It never stops. The pursuit of better, faster, stronger never ends. It doesn’t matter if we are talking about smartphones or jetliners, computers or medical imaging devices, cameras or power plants, smart speakers or wireless infrastructure. Success funds more success. Discovery funds more discovery. Interrupt the flow of funding to innovation, and you interrupt innovation.
- Education: The innovation built into a patent isn’t hidden in a black box or a safe. It isn’t a secret. Engineers, researchers, designers, and product managers everywhere around the world can learn from patents and begin to develop new and innovative products around them. Even if most researchers, engineering students, and inventors never need to enter into a licensing agreement with a single patent holder, they can learn from their patents. They can learn how to solve problems by just looking at them. They can build more innovation on top of those patents. This open access to patents facilitates, accelerates, and democratizes innovation.
This third point often gets overlooked, but it is at the core of the wave of innovation that is driving mobility today, and the IoT, and AR/VR, and pretty much everything we touch, from smartphones and satellite radio in cars to 4G and Gigabit LTE and (soon) 5G. What makes mass market innovation possible, especially at the pace at which we are enjoying it today, is a system that, incentivizes and rewards inventors, and makes the magic behind their inventions available to everyone. If you enjoy the interoperability of technology (the thing that makes different devices work with each other and on every network almost seamlessly), you want this system to go on the way it has. Without it, you can kiss the kind of practical simplicity of ubiquitous technologies like WiFi, Bluetooth and USB, and common features like “airplane mode,” calendar syncing, and brand-agnostic mobile payment systems … You get the picture.
A healthy innovation ecosystem is a rich, diverse, dynamic ecosystem of large companies and small companies solving problems and monetizing their solutions, and licensing them out to whomever wants to use them. Licensing revenue funds new waves of innovation, IP laws protect that innovation, competition keeps prices low, and everyone benefits. Add competent, independent, trustworthy regulators into that ecosystem to keep things running smoothly and drop the hammer on anti-competitive behaviors, and you have yourself the kind of healthy ecosystem that creates jobs, economic opportunity, and unlocks our planet’s still mostly untapped technological and scientific potential. It is the kind of ecosystem that will, in time, cure cancer and Alzheimer’s, restore complete mobility to victims of spinal injuries, allow us to colonize the oceans and the solar system. If there’s a problem we are trying to solve, or a dream we aim to achieve, this is the system that will allow us to get there. Should it evolve over time, and adapt to change? Sure. But there’s a difference between natural adaptation and hostile takeovers. Try to force massive change in that ecosystem, upset it in any way, and all of its massive potential can become compromised.
3) Why would anyone want to bring massive change to a healthy innovation ecosystem?
Control. It’s that simple.
Think of innovation as a resource. Some see the value in keeping that resource open, healthy, and fueled by diversity and new ideas. Others feel that having more control over it would give them a market advantage. (And they would be right.) If they can control it, they can steer it in directions that benefit them rather than their competitors. Second, they can keep competitors and potential threats from catching up or overtaking them.
It’s important to understand that no one in the tech industry is trying to stifle innovation for the sake of it. There are no scheming, mustache-twirling anti-innovation villains behind any of this. What you have, however, are people whose priorities fall more into the self-interest and path of least resistance buckets than the big ideas and big thinking buckets. Gaining a market advantage without necessarily having to be more innovative or better at building cool new things is just simpler and less risky. If achieving that objective means causing an innovation slowdown and a decimation of the ecosystem all around you, so be it. The logic is this: If you can’t be faster and better than the rest of the field, maybe the right strategy is to either slow down the field or change the rules of the race in ways that will benefit you.
People working to weaken IP protections aren’t necessarily evil or morally deficient, or even ideologically-driven. Some are primarily motivated by ambition, which, in and of itself, isn’t a bad thing. Others are motivated by self-interest: They just have a job to do. And so whatever is best for their company, investors, and/or career takes precedence over the health of the ecosystem or the future of innovation as a whole. Altruism and stewardship quickly become abstract notions when compared to hitting quarterly financial targets and KPIs that will determine whether or not you will still have a job six months from now.
Say you’re the CEO of a big tech company, and you want to make your company even bigger and more profitable than it already is. You’re ambitious, sure, but your board and your investors are counting on you to take your company to the next level, and if you can’t deliver, they will find someone who will. There’s nothing evil about it. It’s just your job to deliver growth and profitability. Alternatively, say you’re CEO of a company that’s either stalled or struggling to hold on to its dominant position, and you need to find a way of turning that situation around. Either way, here you are, trying to figure out how you are going to do this when your markets and products are mature, and taking big risks isn’t something that naturally fills you with excitement because you aren’t a visionary CEO. You aren’t a dreamer, an inventor, a mad genius like Jobs, Branson, Bezos, or Musk. You’re a numbers CEO. A COO or CFO at heart, elevated to the CEO’s chair, and who now has to figure out how to make that work. So here’s a short list of objectives you now find yourself likely to need to deliver on:
- Generate more revenue.
- Gain market share.
- Enter new verticals.
- Increase profitability.
- Pursue market dominance.
- Make your investors and shareholders happy.
Easier said than done when very little really separates you from your competitors anymore. Feature for feature, your products are comparable to your rivals’ products. Gaining market share at this juncture, when your main product categories are fairly well established, is a game of inches, and inches won’t deliver the kinds of numbers you need. So what do you do?
If you were Jobs, or Branson, or Bezos, or Musk, you would hunt down the coolest innovation in the ecosystem and build cool new revolutionary, disruptive products. You would make your mark on the future and challenge everyone else to try and keep up. But if you aren’t, you probably take a different approach: A more defensive, risk-averse, iterative approach. Big bets are too risky. Protecting your cash cows and makes a lot more sense. But if out-innovating your competitors isn’t your strategy anymore, what’s Plan B?
If you are that type of CEO, you start looking at your competitors, and your supply chain, and how complex and open the innovation ecosystem is. And if you do that for longer than a couple of minutes, you start realizing that you don’t have enough exclusive control over all the important bits and pieces that go into making and developing your products. Maybe a chunk of the IP you depend on to make these products doesn’t belong to you. On a financial front, maybe you realize that if you could cut your spend on royalties and licensing fees, you could start making your numbers look really good for the next few quarters, and that will be a good start.
Looking beyond cost-cutting strategies, maybe you come to the realization that too much of the IP you depend on is also used by your rivals, and that makes it increasingly difficult for you to differentiate yourself from the rest of the market anymore. If everyone has access to the same technology, how on Earth are you expected to blow the doors off your industry with radically new (and exclusive) features, right? So what do you do? You could try to bring that IP in-house, but that’s easier said than done. A lot of it isn’t for sale. A lot of it also requires investments in very big long term bets that aren’t your company’s style.
So here you are, unable to control access to that IP, and unable to lower your licensing costs as much as you would like. But you know that lower prices, a little bit more IP exclusivity, and being able to limit (or control) access to certain batches of non-essential patents across the ecosystem could help solve those headaches for you, so you have to figure out a way to get there, one way or another.
If you are already a leader in your industry, one with either very deep pockets or a high install base (or both), you have leverage. You know that you can exert pressure on IP holders, distributors, even contract manufacturers. And by applying the right amount of pressure on key players in that ecosystem,there is a good chance that you can bend it to your will. For instance: Put critical IP holders in enough of a bind, and they might agree to negotiate lower fees with you. If that works, you win on two fronts: 1) you lower your costs. 2) You send a signal to the entire ecosystem that not agreeing to your demands has consequences. If they don’t fold, and you turn the screws, you are still sending a message. And while some companies you apply pressure to are big enough to call your bluff and withstand that pressure until they have their day in court, many can’t, and that fear of being targeted in that way can ripple across the innovation ecosystem, starting with investors, and create unwanted effects.
This is a game of very high level back-room chess, not headline checkers: Lots of smoke and mirrors, mind tricks, and endless series of feints and expensive bluffs to sift through. The sheer volume of seemingly disconnected tactics happening simultaneously is too much for most consumers and investors to keep track of. But there’s a method to it, like in every game. And once you know what that method is, you can see past all of the stratagems, and turn the opaque transparent. If you have ever wondered what it is that analysts do, that’s part of it.
4) How understanding the most commonly used strategies to accomplish this helps us figure out what to look for.
We’ve talked about applying pressure, but what does that look like, exactly? What types of activities can large companies engage in to apply pressure on rivals and the ecosystem as a whole? Here are a few options:
- If your pockets are deep enough, you can hit the companies you want to weaken, push out of the way, or bend to your will with an avalanche of frivolous litigation meant to harass and demoralize them.
- If you are a patent licensee, you can engage in a holdout strategy, where you simply stop making royalty payments or paying licensing fees to the SEP (SEP = Standard Essential Patents) holders you aim to shake down, and force them to take you to court in order to get paid. As cases like these can take years to be resolved, you are essentially cutting off a chunk of those companies’ revenue for several years while you still enjoy the use their IP for free. Assuming that you enjoy significant market share or high install base, that financial pressure could be immense, which is why the practice is becoming more common. (We will address this topic in more detail in a follow-up.)
- You can lobby regulatory agencies and lawmakers around the world to “investigate” those companies’ business practices, and at the very least cast them in a dubious light to damage their reputation.
- You can also lobby those same agencies and lawmakers to weaken IP protection laws to help you consolidate power. Depending on the country, that could involve providing various forms of incentives to influence decision-makers, but not necessarily. One common method is to fund mercenary think tanks and non-profit organizations to create dubious research and policy products that will advance your narrative before your intended audience. Supporting the appointment of individuals friendly to your cause to positions of legislative, judicial, or regulatory authority is also an option if your company is large enough to exert political influence in the right circles.
- Lastly, you can leverage PR firms, digital news outlets with loose editorial standards, and social media channels to push out content whose aim is to confuse the public, manipulate their opinion, and influence a grassroots shift in legislative or regulatory policy. A few well-timed memes and blog posts with enough paid reach behind them can be enough to steer a percentage of the population for or against an issue. If we have learned anything from the past few years, it is that people can be easily influenced by simple but well-crafted propaganda products shared via social media channels. In the context of our discussion, painting patent holders as greedy knowledge gatekeepers would be a good example of the sort of shift that type of media campaign might try to deliver.
Those are all methods that have proven effective in the past, and continue to be effective today. Using them simultaneously tends to improve their effectiveness. The same tactics are used to impact scores of other regulatory issues, from environmental and consumer protections to civil rights and net neutrality, so it isn’t like any of this is new. Assuming that enough journalists and industry analysts don’t catch on, or don’t do their due diligence, they can work without consumers or investors ever really understanding exactly what is happening or what side of an issue they should be on. Look at the current debate over Net Neutrality in the US, for example. It’s very similar to this.
More often than not, regulatory agencies, legislators, and the courts are the last line of defense… and while that often works out for the best, positive outcomes are not a guarantee. We can do better. We have to do better. All of us. Collectively. And it all starts with education and vigilance.
5) What happens if IP protections begin to weaken?
When IP protections start to weaken, it becomes easier for large companies to bully, weaken, and crush smaller companies, and disincentivize investment in startups and innovation hubs. Without clear and enforceable protections, large companies can leverage that lack of clarity or enforcement, and keep smaller companies tied up in onerous litigation for years. (Holdout has been especially effective in that regard.) Create enough confusion around IP laws, change public opinion by even one degree, convince a handful of key judges that IP-related issues are one thing and not another, and you can completely change the dynamics of IP protections.
By doing this, very large companies can begin consolidating control over their chosen industries by crushing companies that don’t accept their terms. This allows them to essentially pick winners and losers in the tech world. Before long, the rich and diverse tech ecosystem we enjoy today (represented in the earlier diagram) gets replaced by a more linear and vertically-integrated set of innovation stacks. (See below.) At first glance, that model looks cleaner, more organized, and easier to understand. Instead of a massive churn of innovation and ideas, what you have is a neatly-integrated supply chain model of innovation, where a few large tech companies essentially control their own innovation pipelines: Their own streamlined innovation hubs, their own internal startups, and their own captive contract manufacturers, all focused on delivering incremental improvement cycles to their key product lines. But as neat as it may look, it also destroys the pace and scale of innovation that consumers and the global economy need to keep moving forward.
As orderly as that model seems, it squeezes the innovation ecosystem into a streamlined supply chain for a very small number of companies whose own interests now drive where innovation goes and doesn’t go. This siloed, consolidated model of innovation translates into fewer choices for consumers, less competition, higher prices, less interoperability between devices, formats, and systems, a much slower pace of improvement to existing products and systems, and ultimately a lot less value to consumers. It’s unhealthy and only rewards a very small number of companies as opposed to the scale of opportunity we see in the innovation ecosystem today.
This kind of model would kill the next Facebook, the next Tesla, the next Amazon, Google, Uber, and Netflix before they ever had a chance to be funded. It would establish the dominance of today’s largest tech companies by making it almost impossible for any startup or innovative small company to compete with and/or disrupt them. The independent research labs that might collectively cure cancer, design fast new propulsion systems for Mars-bound rockets, develop $20 smartphones for underdeveloped regions, build affordable solar-powered portable water purification plants for disaster zones, or develop intelligent home care systems for elderly patients might not ever be launched at all. And should they be launched by the companies controlling this new consolidated ecosystem, their progress might be held back by the limited scope of linear product strategies or a focus on short term profitability over long term potential.
What’s key here is that there is only so much innovation a handful of companies can realistically fund and properly deliver on. Simpler logistics and linear value pathways shouldn’t be the primary objectives of an innovation ecosystem. The scale, pace, and openness of innovation should be. If we become more focused on streamlining logistics than on generating more ideas and being able to test them faster, we’re no longer focused on the right objectives or ideal outcomes. Oligopolies aren’t necessarily bad on the product marketing side of technology, but they don’t work on the innovation side of it.
All of that being said, put yourself in the shoes of a CEO tasked with securing YoY growth and longevity for a very successful incumbent. Imagine that your company is part of an industry so dynamic that in just five years, a startup launched in 2015 could bite into 25% of your market share, and threaten to render you obsolete inside of ten. Further imagine how that risk scales when every day, five new startups that could grow to be the one to wipe you out secure their first rounds of funding. Your natural reflex might be to try and minimize that risk any way that you can, and you wouldn’t be wrong to consider that option. If out-innovating the field weren’t in the cards for you, you might want to clear the board instead, build walls, eliminate small threats before they had a chance to grow into big threats. You might be tempted to reshape the whole ecosystem to give you more control over who wins and who loses, where and how funding flows, and who ultimately controls the real lifeblood of the tech industry: IP. All other considerations would become secondary. The cure for cancer, sending humans to Mars, feeding the poor, delivering mobile internet access and education to everyone in the world… all great things but not on your priority list. And so here we are.
Over the course of the next few weeks, I will be outlining how IP protections around the world are being attacked and undermined, and how that effort to transform the innovation ecosystem is already starting to impact every aspect of our lives, including how our favorite gadgets are made. I will also show you what is being done around the world to protect the innovation ecosystem and make IP laws fair and reasonable, so watch this space. Things are about to get interesting around here.