Weak IP helps big tech – ensures backlash on any proposal that breaks the decade of IP gridlock.

At the same time, intellectual property (IP) has been under attack in the United States for decades. Just a few years ago in 2018, the Global IP Index, which ranks countries based on their strength of IP enforcement, showed the United States sliding down below its peers to 13th place, tied with Hungary. Narratives about patent trolls, patent thickets, and weak patents have fueled legislative proposals for years, making protection of ideas through patents harder and harder. Many from the university, start-up, and inventor communities raised their voices and appealed to Congress about their reliance on IP rights. But the strongest proponents of such legislative proposals were the Big Tech firms of Silicon Valley.

The economic framework for understanding why weak IP rights are beneficial for large, vertically integrated firms is simple. Today’s economy is knowledge based, with intangible assets (ideas) constituting the majority of the value of any firm, and tangible assets (labor and capital) constituting a diminishing proportion of their value. Firms and individuals invest in developing ideas—for innovative services or products—and need to monetize them to get a return on their investments. This requires a protection of those ideas, lest the ideas are stolen by others before any return is possible. The IP system is a public institution that enables the protection of ideas and inventions. The fundamental tenet of the patent system, for example, is for the government to grant an inventor an exclusive right to make, use, and sell their ideas for a fixed period of time, in exchange for disclosing those ideas to the public and giving them up for free for everyone to use after that period. Without a public institution providing this service, firms and individuals will do what they have always done—private provisioning of public goods—if they have the necessary means. Large and vertically integrated firms have the means to protect their ideas, while small inventors, start-ups, or other unknown sources—which pose the constant threat of disruptive innovation for larger companies—do not.

Why does a company need to be large and vertically integrated to protect its ideas without the IP system? There are two main reasons. First, whichever company first has an idea and also manufactures it (i.e., creates a large-scale product or service around it) gains an incumbent position, making the barrier to entry higher for its competitors. For others to succeed competitively, they will have to catch up on the incumbent company’s know-how and the efficiency that its large-scale production provides. This economy of scale works particularly well for markets where there is a benefit from everyone using a common service, such as a social media network. Once users are locked in, switching to another platform is costly. Second, if a company has an idea that it cannot monetize in one market immediately, it can come up with creative ways to monetize it in an adjacent market—that is, if it is a large enough firm with an adjacent market under its control. One such example is Google’s Android operating system for smartphones: it’s given away for “free,” but once everyone is locked into it, the company monetizes its investments through applications downloaded and used on the Android platform.