Why Big Tech Likes Weak IP: Big tech benefits from weak intellectual property rights while small innovator firms struggle.

• Author: Barnett, Jonathan M.

Intellectual property (IP) rights in general and patents in particular are commonly characterized as, at best, a necessary "monopoly" granted to correct weak private incentives to invest in generating innovations that can be easily imitated by others. In recent history, this second-best characterization has dominated academic and policy commentary. It commonly supports widely asserted views that patent issuance and litigation have increased excessively, purportedly burdening technology markets with litigation and licensing costs that impede innovation and inflate prices for end-users. These views have translated into action: since approximately the mid-2000s, both the Supreme Court and Congress have erected significant obstacles to enforcing and applying for patents, and those barriers have increasingly threatened the economic viability of patent-based monetization strategies.

In my new book, Innovators, Firms, and Markets: The Organizational Logic of Intellectual Property, I draw on an intellectual toolbox consisting of economic theory, economic and legal history, and political economy to show that significant reductions in the strength of patent protection are likely to have unwelcome consequences as a matter of innovation and competition policy. Counterintuitively, weakening patents can raise entry barriers and shelter incumbents by disadvantaging firms that are rich in ideas but poor in the capital and expertise required to convert ideas into commercially viable products and services. The result is an innovation ecosystem in which research and development, and the commercialization of R&D, tend to take place within integrated financing, production, and distribution environments that can only be feasibly maintained by a small handful of large firms. By contrast, robust IP protections enable innovation ecosystems that support a variety of more- and less-integrated structures for funding and extracting value from R&D investments. That, in turn, multiplies the viable points of entry and promotes the formation of licensing and other secondary markets in intangible assets.

WHEN PATENTS ARE AND ARE NOT CRITICAL

To appreciate the relative importance of patents for firms that specialize mostly in R&D, it is necessary to appreciate the relative unimportance of patents for firms that specialize in mostly everything else that is required to convert R&D into products and services that deliver value to end-users. For large, integrated firms with established market positions, various types of evidence indicate that, outside the biopharmaceutical and related life sciences industries, patents are generally not the leading tool used to capture value on innovation. This is not to say that these types of firms do not value patents; rather, they place less value on patents relative to other strategies by which to earn returns on intangible assets.

Does this mean that the conventional free-rider justification for IP rights is unjustified? No, it means that larger firms outside the life sciences industries tend to have internal financing, production, distribution, and other non-IP-dependent capacities that are difficult for most other firms to replicate, which in turn may confer a competitive advantage even if the underlying technology is not...