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Making IP Worth Protecting
By Eric de Fontenay (Founder & Publisher)
(more articles from this author)
2003-04-10
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"If our objective is to maximize economic growth, are we striking the right balance in our protection of intellectual property rights? Are the protections sufficiently broad to encourage innovation but not so broad as to shut down follow-on innovation? Are such protections so vague that they produce uncertainties that raise risk premiums and the cost of capital?"

I have not always been in agreement with Fed Chairman Alan Greenspan, especially since his conversion from a believer in deficit-cutting to a tax-cutting hawk. But he usually provides one of the more coherent economic analyses and arguments of any public official today, as illustrated by the above quote from a speech made at the 2003 Financial Markets Conference.

But what happens to that innovation, how it spreads through a market and its impact on economic growth, depends intrinsically on the market structure in which it is occurring. Some fundamental innovations simply sweep the old market structure, reshaping it, the final product and how we consume it. This was particularly true at the beginning of the last century with the emergence of the railway, automobile, phonograph and photography (later to evolve into the 'moving pictures'),...

But innovation can also be held captive by an over-rigid, non-competitive market that favors the status quo (I/we control the market) over innovation (the market is out of my/our control). Much of what we take for granted today, from the fax to the fiber that powers the Net, would not have been possible without the break-up of Ma Bell, which was otherwise fearful that such innovations might loosen its monopolistic grip. And AT&T was right! It lost 40% of the market in less than a decade to competing fiber networks from MCI & Sprint, while consumer electronics companies cornered the devices market for everything from faxes to modems and cordless phones.

While the music industry is far from being a monopoly, few would describe it as competitive. As such, those same instincts towards maintaining the status quo - a stable oligopoly of five major labels - inhibits risk-taking, the inevitable by-product of innovation. Instead of discovering new trends in music, a risky 'trial-&-error' process, they rely on formulas that are likely to yield the biggest bang for the least risk, whether it's re-engineering the dead (Elvis) or simply reviving the retired. And if someone is successful in establishing a new trend, such as then indie label Zomba Records' teen pop formula, the current oligopoly quickly rushes their own cookie cutter versions of that trend in order to maintain their valuable market share. The same is true of radio as the few large groups cannot afford to 'experiment' with new formats or independent music for fear of losing 'points' to the competing groups in major markets.

In these cases, overly concentrated markets discourage invention while replacing "follow-on innovation" with cheap imitation. This is important as "follow-on innovation" can be a key ingredient in creating competitive opportunities. While Henry Ford 'invented' the modern automobile, it is companies like Toyota & Hyundai that helped shape today's market through innovations in fuel efficiency & quality. American car makers had little choice but to abandon the complacency of imitation & market share swapping, and engage in a true re-engineering of their businesses, from the corporate boardroom down to the assembly line. Just imagine the car industry if these new players had been prevented from innovating and competing in the US.

Yes Mr. Greenspan, let's make sure Congress strikes that vital balance in protecting intellectual property (IP) while promoting innovation. But if the same concern is not given to ensuring competition in the production and distribution of that IP, whether by the SEC/EU in reviewing mergers or the FCC in reviewing media ownership rules, we may find the resulting product not worth protecting in the end.

Related News from Mi2N:
» "Market Economies And Rule Of Law" - Remarks By Chairman Alan Greenspan


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