Thursday, June 06, 2013

Trolls in the Sandbox

A few days ago the US International Trade Commission issued an order prohibiting Apple from selling a couple of devices that, at this point in the technology cycle, have a very short shelf life.    You may not have heard about the ITC before.   It is one of those government creations designed to help improve competition.  The Commissioners on the ITC are people with little engineering expertise.  They are mostly lawyers.  They were asked, as a court in Europe had earlier been asked to do, to figure out whether Apple stole ideas from Samsung or vice versa.

For every beginning student in Economics or Public Policy - a must read has always been Garrett Hardin's "The Tragedy of the Commons" which was written not by an economist but by an environmentalist.   Hardin argued that the risk to common areas was overuse when there were not sufficient controls on use.  (Have an open field and if you allow citizens around the field to allow their sheep to over graze it, it will soon be degraded.)  Hardin's article (which was originally in Science) is widely discussed.   A couple of years ago another professor, this time one named Michael Heller (a Columbia Law Professor) , wrote something called The Gridlock Economy which presents the counterfactual to Hardin's thesis.   Heller argues that when there is too much ownership in an area we get something he calls the "Tragedy of the Anti-Commons" - where contending parties squabble over arcane points of ownership that are granted by this or that system.   I am not a big fan of Hardin's paper - because there are so many obvious alternatives to solve his problem.   But I think Heller has a point.  The patent system in the US is one such "Anti-Commons" - A good indicator of this trendline can be seen in the number of successful patents.   In 1963 there were about 49,000 successful patent applications, in 2012 there were 277,000.

The problem(s) with the patent system are numerous.   First and foremost, the existing system grants patents unevenly, so if you look at some of those 277,000 patents that have been granted some are very narrow and some are overly broad - it is a hodgepodge of rights that are beginning to cause companies to trip over each other.   Second, there are the "trolls" in the system; firms that go through those thousands of patents (many of which never have a commercial application) and scoop them up then harass legitimate businesses for infringement.   At this point, the most egregious story I have read about them is a company that has gone around to places that offer free WIFI and have asked for compensation for their technology (which they had no part in inventing).  But then third are places like the ITC which seems to be used more for defensive rent seeking than arbitrating legitimate cases of trade infringement.

Some recent data on the incident of rent seekers in patent matters can be seen in the number of lawsuits filed in relation to patents.  The chart at the left shows that the number of lawsuits has doubled in the last six years.   The President has expressed support to curb these kinds of abuses but the proof of whether his proposals are a good idea will be in the final draft of the legislation.   The remarkable thing about the graph is that the red part represents patent trolls. (PAE - Patent Assertion Entities)

In the tech realm all the smart phones and tablets that we have become addicted to operate with many similarities.   But what differentiates the devices is the operating systems.  It is pretty clear to me that a lot of the design of smart phones is evocative of earlier models. The ITC order affects Apple phones that are at the end of their cycle - for example the iPhone 4 which according to Piper Jaffrey accounts for about 1% of the company's revenue - which is likely to decline when the new round of iPhones is announced as early as next week in the Worldwide Developers Conference.  I've watched the evolution of the Windows and Android operating systems.   They have some interesting concepts incorporated in them.   Some, in my opinion, look a lot like the Apple IOS.   And indeed, some of the IOS features look like something first enabled on Android.   Even with those look alikes the market for these devices is not declining.

In earlier times, Apple made a joke of companies ripping off their stuff.  When Windows came out with the look and feel of the Apple Operating system, there was a lot of talk about "Windows, OS 7 (this is when Apple was first offering OS X or 10), implemented poorly."   I am not arguing that there are legitimate reasons why some inventions should be protected for a limited period of time.   But based on the iterations of the Apple/Samsung wars the real inventors of technology are not the engineers that produce these goods that we cannot live without but the lawyers who tie up innovation in arcane squabbles.  Their invention is obscure legal pleadings which often contradict each other and which add to the costs of producing those goods.  That seems a lot like a couple of three year olds throwing sand at each other.

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