Opinions and Editorials

Jan. 24, 2021

IP Watchdog: How Patents Enable Mavericks and Challenge Incumbents by Jonathan Barnett

Advocates for “patent reform” have long argued that reducing patent protection will open up markets and accelerate innovation by lowering entry barriers and expanding access to existing technologies. Yet, over 15 years of patent reform since the landmark 2006 decision in eBay, Inc. v. MercExchange LLC, followed by enactment of the America Invents Act in 2011, we have witnessed the rise of a technology ecosystem led by a handful of dominant platforms. In my recently published book, Innovators, Firms and Markets: The Organizational Logic of Intellectual Property, I show that this outcome should not be surprising. Almost 120 years of U.S. patent and antitrust history (1890-2006) indicate that reducing patent protection can often shield incumbents against the entry threats posed by smaller firms that have strong capacities to innovate but insufficient resources to transform innovations into commercially viable products and services.

Patents and the Inventor Entrepreneur

A secure patent portfolio enables a startup to monetize its innovation through relationships with investors, producers and distributors, rather than having to set up an independent technology supply chain to reach the target market. Edwin Armstrong, the inventor of FM radio technology, earned returns on his patented invention through licenses to equipment manufacturers. The same strategy was pursued by Ray Dolby, the inventor of the ubiquitous audio system technology in theatrical exhibition and consumer electronics markets. The same is true of the founders of Qualcomm, who elected to focus on chip design and monetize their innovations in 3G and 4G communications through licensing relationships with device producers. When patent protection is weak (as it was from the late 1930s through the 1970s), these contractual monetization strategies are foreclosed and innovation retreats to the research labs of industry leaders that can earn returns on R&D within an integrated corporate infrastructure (think GE, RCA or AT&T’s Bell Labs).

Of course, Bell Labs and other corporate labs were responsible (although often assisted by abundant federal funding) for fundamental technological innovations during the postwar decades. However, new product launches at AT&T were infrequent, product diversity was limited, and the firm enjoyed a near-monopoly over the telephone equipment and service markets. That might explain why Bell Labs’ scientists invented some of the fundamentals of cellular telephone communications, but AT&T management failed to bring a successful product to market. The explosion of new communications products and services and the proliferation of new firms following AT&T’s breakup, which coincided with the restoration of a robust patent regime in the early 1980s, contrasts with the delayed commercialization and slow turnover in market leadership under the weak patent policies of the postwar decades.

Contrary to conventional wisdom, over a century’s worth of economic history suggests that patents tend to lower entry barriers and enhance competition by facilitating entry by entrepreneurs who would otherwise have difficulty attracting the outside investments and business partnerships that accelerate progress on the commercialization pathway.