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Part 1: To regulate or not to regulate industries?

This isn’t going to be a political discussion. It could be, but we aren’t going to take today’s topic in that direction. Nothing about this topic is or should be about political parties, or political ideology, or culture wars. It’s about jobs, and the economy, and the need, occasional as it may be, for independent regulators to set up lanes and rules for industries in order to prevent abuses and economic catastrophes. Let’s jump right into it: Does the business world need regulations and regulators?

Some people might answer “no, let the free market regulate itself.”

Most, however, will say “yes, because without regulations, there is nothing to stop bad actors from defrauding the public, dumping toxic chemicals in rivers, gambling with investors’ money,” and so on.

I happen to fall into the second category, but within reason: Do I think that industries can be over-regulated? Absolutely. Do I think that sometimes, regulations can be excessive, counterproductive, and overly burdensome? You bet. But those are examples of imbalances, of excesses, not of properly applied regulatory power. As with all disciplines and topics, I believe in striking the right balance between the pros and cons of achieving anything in order to make things work properly. When it comes to business, that means granting business owners and leaders the freedom to run their affairs as they please, but also making sure that they don’t cause irreparable harm to the public, or their industry, or to the economy, or to the environment. Specifically, clear lanes have to be established to limit the potential damage that can be caused by incompetence, negligence, greed, and malice.

This isn’t a “socialist” viewpoint any more than it is a “law-and-order” viewpoint. It’s a people-and-systems-need-intelligent-rules-for-things-to-function-properly viewpoint. For better and for worse, civilization is built on a system of rules and laws that keep chaos and anarchy in check. Industries are part of that system. And as much as I would love for people to always be honest, decent, responsible, and competent, the fact is that people are flawed, and so companies too are flawed, and we must have rules and authorities to act as checks against unwanted behaviors. The challenge, as I see it, lies in determining how much protection is needed. Too much of it, and businesses are no longer incentivized to innovate, take risks, and grow. Too little, and you can end up with ecological catastrophes, massive frauds, and economic crises.

This is why conversations about regulators and “government regulations” should never be ideological or political. They should be about how best to achieve the outcomes we want. One of these outcomes should be to allow businesses and industries to flourish. But because no business is an island, another should be to allow them to do so while maintaining some degree of symbiosis with the ecosystems they are an integral part of. Here are some basic rules:

• Don’t break laws.
• Don’t steal intellectual property.
• Don’t employ slave labor.
• Don’t defraud your customers.
• Don’t embezzle billions of dollars.
• Don’t discriminate against vulnerable populations and protected groups.
• Don’t engage in money laundering schemes.
• Don’t engage in corruption.
• Don’t engage in anti-competitive behaviors either.
• Don’t crash the economy.

And so on.

The short of it: Win if you want to, but do it right. This isn’t a conversation about abstracts or absolutes. It’s a conversation about understanding how things work and don’t work, and grasping both well enough to figure out how to maximize opportunity, limit risk, and avoid as much chaos and collateral damage as possible. That requires rules, rule-makers, and arbitrators.

So here we are: Some regulation is good. The right type of regulation, and in the right amount, helps keep companies honest and responsible. As always, though, the devil is in the details: None of this is about theory or political ideals. It is mostly about execution and outcomes, and that’s always the hardest part.

Part 2: The Importance of IP to the US Economy, and why IP law must be fiercely protected from abuse and erosion.

Now that we’ve gotten that art out of the way, what I really want to talk about is intellectual property (or IP for short). Patents, mostly, but also trademarks and copyrights, since they are part of the IP world too. Why? Because for all the ink spilled about job creation, and automation, and immigration, and globalization, not much has been written about the importance of IP when it comes to job creation and economic growth. We’re going to remedy that here today with some handy data points. (What does that have to do with regulation, I hear you ask? Don’t worry, I’ll get to that.)

Let’s talk about how important a healthy IP ecosystem is to the economy:

1. Jobs

• IP-intensive industries directly accounted for over 28 million US jobs in 2015. That is almost 1/5th of US employment. [1]
• In addition, IP-intensive industries also indirectly supported 17.6 million more supply chain jobs throughout the economy in 2014.[2]
• In total, IP-intensive industries directly and indirectly supported 45.5 million jobs, or nearly 1/3 of all US employment going into 2015.[3]

2. GDP

• IP-intensive industries accounted for $6.6 trillion in value added to the US economy in 2014, up more than $1.5 trillion (30%) from $5.06 trillion in 2010. [4]
• The share of total U.S. GDP attributable to IP-intensive industries increased from 34.8% in 2010 to 38.2% in 2014. [5]
• Total merchandise exports of IP-intensive industries increased to $842 billion in 2014 from $775 billion in 2010. [6]
• Exports of service-providing IP-intensive industries totaled about $81 billion in 2012 and accounted for approximately 12.3% of total U.S. private services exported in 2012. [7]

3. Wages

• Private wage and salary workers in IP-intensive industries continue to earn significantly more than those in non-IP-intensive industries. In 2014, workers in IP-intensive industries earned an average weekly wage of $1,312, 46% higher than the $896 average weekly wages in non-IP-intensive industries in the private sector. This wage premium has largely grown over time from 22% in 1990 to 42% in 2010 and 46% in 2014. Patent- and copyright-intensive industries have seen particularly fast wage growth in recent years, with the wage premium reaching 74% and 90%, respectively, in 2014. [8]

4. Business Opportunity

• Revenue specific to the licensing of IP rights totaled $115.2 billion in 2012, with 28 industries deriving revenues from licensing. [9]

I could have stopped at “IP-intensive industries directly and indirectly support 1/3 of US jobs,” but I wanted you to see the bigger picture too. Bear in mind that these figures are from 2014 and 2015. IP-related industries have grown even more since then, especially in the tech sector. Take a minute to digest those numbers, and think about what would happen to all of those jobs and all of that share of GDP were suddenly threatened by bad actors, poorly written laws, or ineffective arbitration. More to the point, what would happen to that economic engine if IP protections were suddenly lifted or weakened or severely eroded. What would the economic impact of that be?

Part 3: What happens when healthy IP ecosystems come under attack?

When I mention the term “economic engine,” I paint with broad strokes. On the whole, I am talking about more than just the tech sector. I am also talking about agriculture, manufacturing, petrochemicals, pharma, entertainment, retail, energy. Pages 25 to 29, and 33-52 of this 2016 USPTO.gov will give you a pretty decent breakdown of how this all parses out. (Lots of software, technology, and media.) We’re talking Hollywood, New York, Houston, Raleigh, and Detroit, sure, but on this channel, I am primarily talking about Silicon Valley, Redmond, Boston, San Bernardino, San Diego, and Austin.

What happens when regulators cave to political pressure, or misunderstand an issue, or see their authority diminished in some way? What happens when IP protections begin to erode, and companies with monopolistic tendencies and/or a penchant for illegally using other companies’ IP no longer have to worry about being sanctioned? What happens to all of those jobs?

Say you’re a startup or a small business, and you have spent years and millions of dollars developing an app or a platform that will revolutionize the smartphone industry, or car safety, or education, or cybersecurity, and another company, much bigger and with deep political connections, decides to steal your IP, put it in some of its products, and claim that it doesn’t belong to you. If you were that startup or small business, you would file a complaint and take that larger company to court, and show how it broke the rules. But what if those rules were changed, and your rights to protect your own IP weren’t so black-and-white anymore? Or what if the process by which you expect to seek recourse could keep you tied up in court for years and cost your company hundreds of millions of dollars? What then? What would stop a multi-billion dollar competitor from shutting down any smaller, more vulnerable company it sees as a threat?

What would stop a multi-billion dollar company from stealing not only “ideas” but actual IP it may have discovered, say, during a sales pitch or a demo, or while had access to it for a short time, when it still agreed to pay for it? What then?

What would this do to the investment pipeline that fuels the sort of innovation that has made the US into a technology powerhouse over the last few decades? As an investor, why would you ever put money into a startup again?

Five things will happen if IP protections ever begin to erode in the US, and patent holders can no longer protect their inventions from theft:

1. Companies with the most cash will have the power to simply bankrupt smaller companies and take what they want.
2. Investments in US startups will come to an abrupt end.
3. As the innovation pipeline shrivels up and dies, innovation as we know it will experience a dramatic slowdown. Large tech companies will still be able to innovate, but mostly in-house, which comes with severe limitations. As a whole, the tech balloon will deflate.
4. A significant percentage of 1/3 of US jobs will find themselves in jeopardy inside of 24 months.
5. A significant portion of the innovation capital and talent currently in the US will move to other parts of the world, but a) it will be years before the tech industry recovers, and b) US-based tech companies will have a hard time remaining globally competitive.

We’ve discussed certain aspects of this before, but let’s do a quick recap: A chunk of the IP that goes into smartphones, TVs, laptops, tablets, VR goggles, AR headsets, smart speakers, drones, vehicles and home appliances wasn’t developed by the company whose logo is printed on the product you just bought. Some of that IP (and in some cases, a lot of it) is licensed from other companies. Someone else came up with it. Someone else invested in R&D, and painstakingly developed it, then made it available for use. The reality of the tech world is that the company whose logo appears on a device probably couldn’t have built that device if other companies hadn’t developed many of the technologies that went into it. It doesn’t matter of you’re Apple, Sony, Ford or Cisco. Regardless of the company, pretty much every tech product I can think of is a patchwork of proprietary and non-proprietary IP, and that’s a good thing. That’s why technology tends to work pretty well nowadays, and why we have a lot of interoperability between systems and networks, from uniformity in power supply and user interfaces to predictable performance around applications and connectivity.

There’s a rich and complex ecosystem out there of small, medium, and large companies whose innovations feed the technological advances we all take for granted. They supply the Googles and Samsungs and Apples of the world with buckets of essential (and non-essential) patents and technologies that subsequently allow said Googles and Samsungs and Apples of the world to create amazing products and services. It’s a lot like creeks feeding into rivers, if you need to visualize this: Without all the the creeks, you might still have a river, but it will be smaller, slower, anemic-looking. For the river to be healthy, it needs its ecosystem of creeks. The IP ecosystem is a lot like that: Large tech companies require a healthy stream of innovation from a rich and diverse IP pipeline, and so the health of that pipeline is a good indicator of the future health of large tech companies, and subsequently of the entire tech industry.

Ergo: Legislation, regulations, and court decisions that ultimately weaken the health of that pipeline, by weakening IP protections, for example, spell trouble for the entire industry.

Over the next few months, I will be diving a little deeper into some potential threats emerging in this space in the US and around the world. Some are driven by ideology, others by incorrect interpretations of IP-related economic mechanisms, and a few appear to be sponsored by companies basically looking to game the system in their favor, even if it harms the innovation ecosystem as a whole. Things are about to get pretty interesting around here.

Stay tuned and watch this space.

Cheers,

Olivier