The Intellectual Property Bubble – The Next Danger To The World Economy?

Do companies no longer compete on price and features? Is it all about competing with competitors in the courtroom rather than the marketplace? Is this an economic model economists understand? Do patent trolls contribute anything to the well being of anyone but themselves? Does Paul Allen suffer if someone copies one of ‘his’ ideas?

I am not an economist. From my naive perspective it works like this. I make more of something than I need but there are things I need that I do not have so I am quite happy to swap some butter for some honey. Sooner or later the swapping got a bit cumbersome as there were more and more articles that needed to be traded to get what you wanted. Hence money was invented. A brilliant labor saving invention (I believe the patent may have run out but don’t quote me).

Now people want money not for producing things but by thinking about a way to produce things. In other words, through the sweat of my brow, I make stuff that other people are prepared to pay me for and then part of my income has to go to people who provide me with nothing apart from ‘we thought of that also’. That last sentence didn’t come out right. I’m not personally paying patent trolls, we all are and what do we get in exchange? Nothing. They don’t actually make anything that we want!

Grrrr!

Every Time You Buy Something

Manufacturers include legal fees as part of their costs, so whenever you go to buy something, say the USB stick at your corner store, the cost of legal fees is included. I personally believe that if the USPTO was shut down, and all patents invalidated, that this would jump start the United States economy, and help get a lot of people back to work. In addition to the ‘Housing Bubble’, and the ‘Sub Prime Mortgage Bubble’, and the ‘Internet Bubble’ we are currently facing an ‘Intellectual Property Bubble’, and when it blows up, the United States is going to be hurt – badly.

The Intellectual Property Bubble

Sorry folks, but it’s definition time. A ‘Bubble’ happens when trade in an item exceeds it’s intrinsic value. A good basic indication that a bubble is occurring is when the words ‘market prices will continue to rise’ are heard. There are certain cases when this may not be an indication of a bubble. But generally when a majority think that prices will not come down, and there are no structural reasons for the price rise, a bubble is occurring.

Bubbles are destructive, i.e. they destroy wealth. If, at the height of the United States housing bubble you paid $500,000.00 for a house, and the house is now worth $300,000.00, the bubble would have destroyed $200,000.00 of your personal wealth. Destruction of wealth  on this sort of a scale is damaging not only to the person involved, it is also devastating to the economy as a whole, as the money you have lost would have most likely been used for other goods and/or services.

While I’ve said that Bubbles destroy wealth, this is not accurate. What Bubbles do is transfer wealth, but unlike in a normal transaction, the transfer is effected without the buyer gaining any value in return. In effect a Bubble is a legalized form of theft.

Let’s consider another example, the Dot Com Boom. During the Dot Com Boom, there was a huge run up in share prices for technology companies. In many cases the companies in question had no product or business plan. So why did anyone buy shares in them?

Simple – there was a huge push by investment banks, who earned fees for taking companies public. It didn’t matter to the investment bank if the investment was good or not, just as long as they earned their fees.

And of course there is an immense amount of money worldwide which is looking for a place to be invested. This money flowed into these companies, pushing up share prices, which attracted other investors, who bought from the initial investors. When the prices crashed as reality sank in, the later investors suffered catastrophic losses.

This also poisoned the market for new Initial Public Offerings, so the money flowed elsewhere. The 20th century suffered a series of bubbles, which culminated in real estate bubble.

So Where Is The Money Now?

That’s a damned good question, and one that I can’t answer for sure, however I can make some guesses. Let’s look at Intellectual Ventures. Intellectual Ventures is a patent holding company. From their website:

Intellectual Ventures is the global leader in the business of invention. We collaborate with leading inventors, partner with pioneering companies, and invest both expertise and capital in the development and monetization of inventions and patent portfolios. Our mission is to energize and streamline an invention economy that will drive innovation around the world.

Intellectual Ventures is one of many companies that is investing in Innovation according their their press releases. Another is Acacia Technologies. These companies are buying up patents, and attempting to license them.

If you check the business news pages, there have been a series of articles about patents, and their value to the economy. Articles that seem more like cheer leading, than rational thought.

But patents aren’t the only issue. There have been enormous pushes to strengthen copyright laws worldwide. There have also been attempts to push Trademark law into places where it has never been used before.

I believe that what we are seeing is money looking for a place to go, and finding it. And I think that when the immediate profits are made, the money will go somewhere else, and the move will once again pull value out of the system for everyone else.

Now I could be totally wrong. In effect this article is me thinking out loud, and looking for feedback. It’s based on things that I’ve been seeing over the last four or five years, which disturb me.

So if you have any comments, please leave them.

Regards

Wayne Borean

Tuesday January 18, 2011

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