"The winner takes it all" (or at least most), productivity and frontier companies: how does IP fit in?

The Economist magazine recently discussed (“The great divergence’, November 12th) an (unnamed) research report carried out by three researchers at OECD (Dan Andrews, Chiara Criscuolo and Peter Gal), which suggests that the Schumpeterian notion of “creative destruction” may be stuck in neutral. Leading companies seem more and more to be enjoying a continuing lead in their industries, with less and less challenges from scrappy newcomers.

In particular, the report found a major distinction in productivity between the top 5% companies surveyed. These so-called “frontier” companies show productivity gains of 2.6% per year, while the remaining 95% have managed only 0.6% productivity gains. The difference in productivity is even more stark when comes to services: 3.6% for the frontier companies as compared to only 0.4% for the stragglers. Two major themes relating to IP emerge from The Economist article: (i) the role of patents and know-how; and (ii) the transmission mechanism for innovation.

The role of patents and know-how—Regarding patents, the report states that frontier companies “[u]nsurprisingly …are ahead of the pack in technological terms, and they make much intensive use of patents.” No more explanation is provided, which is a shame, because the statement as provided is not entirely clear. How does one measure “intensive use of patents”; is it a quantitative or qualitative analysis? Is it really the case that a major indicium that distinguishes between the frontier companies and the laggards is patent activity? One need only think of the large patent portfolios that were sold several years ago by failing companies such as Kodak and Nortel. It is a pity that the article does not elaborate.

Of equal interest is the role of know-how. The article writes that “…frontier firms (the 5%) have each discovered their own secret sauce”, going on to describe the know-how that has enabled companies such as 3G Capital (a successful, Brazilian-based private equity firm), Amazon, and BMW to dominate. The linkages between the patent position and the development of special know-how tailored to each of these companies’ activities suggest that the two work in tandem.

If so, even the most sophisticated patent analytics may be missing a crucial component in seeking to explain the success of technology-based companies. What may be needed is a metric measuring the contribution of know-how, which can then be applied together with patent analytics to provide a more robust picture of the IP position of these companies, and whether any generalizable insights can be obtained.

The transmission mechanism for innovation-- Here, the article focuses on how technology spreads horizontally between companies that are members of the top 5% as well as vertically within a given economy. The suggestion is made that with respect to frontier companies—

“…technological innovations from the frontier are spreading more rapidly across countries than they are within them. The gap between an elite British firm and an elite Chinese firm is narrowing even as the gap between an elite British firm and its laggardly compatriots is expanding.”

The upshot is that—

“…technological diffusion has stalled: cutting-edge ideas are not spreading through the economy in the way that they used to, leaving productivity-improving ideas stuck at the frontier.”

The result is what has been termed a “winner takes all (or at least most)” position in the relevant market. Schumpeterian notions of “creative destruction” are less likely to apply because not only do the frontier companies better exploit their patent/know-how mix, but they are able to attract the most talented persons in their industry. In such a scenario, continuing incumbency as an industry leader becomes more of the norm.

The causal direction of this relationship is not entirely clear, i.e., do more talented people lead to a continued stream of better patents and know-how, or is it the reverse, or are they merely coincident factors in connection with productivity and market dominance? Of perhaps greater concern is the suggestion that useful IP, particularly patents, will be increasingly the purview of only the top layer of companies, with less and less vertical transmission within the relevant industry. When leavened together with unique know-how, this combination gives rise to the increasingly expressed concern that IP, particularly patents, are more an instrument for maintaining market power than a facilitator of broad-based innovation.

Brands and innovation: the case of health-related apps

This blogger has for some time been considering the question of how trademarks and brands are connected to innovation. From WIPO on down, the mantra has been that the connection between the two is robust. But in this blogger’s view, the relationship between them is far from self-evident. In particular, we have suggested that the kinds of innovation fostered by brands are found only in a narrow range of circumstances, where a strong brand may be leveraged to support a product

extension or, less frequently, a new product line, that rises to the level of an innovation. Moreover, this tends to occur most frequently in the consumer products space, leaving a broad swathe of product categories unaffected. If this be true, the role played by brands in innovation may be of less importance than often stated.

Against this background, this blogger was fascinated by a piece that appeared in The Economist on March 12, 2016 (“Things are looking app”). The upshot is that the relationship between brands and innovation may be more promising, at least when medical apps are involved. In terms of raw numbers, the medical apps world is exploding. According to the piece, there are now over 165,000 health-related apps that run on either IOS or Android. PwC foresees that by 2017, health-related apps will have been downloaded over 1.7 billion times. Despite these impressive numbers, the reality is that few such apps are ever used. The interesting question that arises is how an app developer in the health field can gain market traction.

One might be tempted to believe that new actors will emerge as the purveyors of successful health-related apps run on either smartphones and wearables. More likely, however, the surest way to commercial success will be through the leveraging of well-positioned health brands into the health-app business. In the words of The Economist,

“The fragmented, nascent m-health market seems likely to consolidate in time, with its most promising startups perhaps being bought by, or entering alliances with, trusted health brands. That would help it to realise its substantial potential to help patients, doctors, health insurers and researchers alike.”

The upshot is that the big health-related brands will get bigger through their health-related apps, while newcomers seeking to market an innovative health-related app will have a substantial battle in doing so. Stated otherwise, health apps are different from smartphone entertainment apps in the form of Angry Birds and Candy Crush Saga. There are at least two reasons for this.

First, the role of trust in the brand is inextricably intertwined with the health function offered by the app. True, brand gurus speak of consumer trust in the context of the strength of any brand, but when health is at issue, the role of trust is magnified. A customer losing trust in his breakfast cereal brand may have negative consequences for the brand owner as the consumer switches to a competing product, but it does not involve a consideration of health and safety. When these concerns are front and center, the strength of a trusted brand becomes more important for all concerned.

Second, the role of the strong brand may be a partial substitute for administrative regulation of health-related apps, at least in the short term, As the article itself recognizes, such regulation is still in the formative stage. As long as this is so, a strong brand can provide a degree of security for the consumer about the reliability of the product.

None of this detracts from this blogger’s s work-in-progress thesis that brands and innovation may be less important than often believed. But the potential role of strong brands in fostering innovation in the health-app business shows that the subject is more nuanced than he may have once thought.

A Coda to "Patent Data and Innovation: Once Again, So Much and Yet So Little"

It is rare that I add a Coda to an IPFinance blog post -- but this is one those exceptions. Last week I commented in a blog post ("Patent Data and Innovation: Once Again, So Much and Yet So Little" here) about the effort by The Economist magazine to reach conclusions about the nature of innovation in Asia in particular, and in China, in particular, on the basis of selected data filing and registration data. Interesting comments were made by several readers and on other blogs, including by our colleague Ken Jarboe at Athena Alliance.

The last word, however, belongs ironically to The Economist itself. Appearing at the bottom of the Business section of the October 9th issue of the magazine is the following:

"Correction: "In "Trading Places" (October 2nd) we incorrectly said that in 2008-2009 the Japanese filed 12% fewer international patents and the Chinese 18% more than the previous year. In fact, the Japanese filed 4% more international patents and the Chinese filed 29% more. Also, America has 1.4 million patents in force, not 14m. Sorry."

1. No problem with the typo that misreported 1.4 million as 14 million, although one wonders how, through how stages of proofreading, the error passed without editorial comment. If it passed several layers of editorial review, and no question was raised why the figure for the U.S. was 10 times greater than Japan, then one wonders about degree of understanding about the content of the entire article.

2. More interesting are the revised figures about Japanese and Chinese patent filings, inasmuch as the original (and apparently incorrect) data were attributed in the October 2nd issue "to a recent report by the World Intellectual Property Organization (WIPO) ...." The Correction does not indicate the source of the error--The Economist, WIPO, or otherwise? Similarly, it does not indicate the source for the correct information.

3. Perhaps even more interesting is the absence of any further comment about the Correction. I know that The Economist seldom offers any comment to a correction of fact. Here, however, since patent filing and registration data were the foundation of the article, is the reader not entitled to know whether the corrections had any material affect on the substance of the article? Unless, of course, there anyway was less to these data than met the magazine's editorial eye.

Patent Data and Innovation: Once Again, So Much and Yet So Little

Can there be a body of IP data that is more analyzed than patent filings and registations? The avalability of this data, and the large number of information fields that can be examined, seem to have made patents an irresistible source of attraction for quantitative analysis. More challenging, however, is the drawing of meaningful conclusions from this wealth of information.

A good example of this gap between the qualitative abundancy and qualitative
scarcity in analyzing patent data was underscored in the article that appeared in the October 2 issue of The Economist entitled "Trading Places: Innovation in Asia." Permit me to summarize points made in the article (more or less in the order of the article itself). The starting point is the statement that "[p]atents are a crude but useful measure of innovation". Based on the opaque disclaimer, of sorts, the article notes as follows:

1. Japan's dominance of Asian technology has been eroded by its neighbours. Consider, for example, the provenance of most of the major components of the Apple IPad (South Korea and Taiwan), but nearly none from Japan.

2. Between 2006-2009, patent filings in Japan have notably declined while those in China have soared. Based on the filing trends of these past years, filings in China may surpass those in Japan in 2010, "putting China in striking distance of America."

3. In 2008-2009, the Japanese filed 11% fewer PCT applications, while the Chinese filed 18% more. That said, the Japanese have a much better success rate in granted patents and enjoy a higher patent citation rate.

4. While Japanese companies are cutting back on R&D, Chinese companies are accelerating their R&D activities. Indeed, China may soon surpass Japan in domestic-spending R&D, "on purchasing-power terms."

5. China is not alone on this. Moving to South Korea, Samsung plans to double its research spending this year. Not by accident, perhaps, Samsung enjoyed profits last year that were greater than the largest nine Japanese electronic firms combined.

6. This push by China in the patent arena is attributed in large part to governmental policy. For example, China wants to wean itself off reliance on foreign patents (Chinese companies pay more than $10 billion to foreign in companies in licensing fees annually). Increasing Chinese patents will (i) avoid some of the need to pay royalties to foreigners: (ii) force foreign companies to take a license of Chinese technology and (iii) improve the position of Chinese companies in negotiating licences.

7. Japan is woefully behind other countries in patents that list a foreign co-inventor (4% for Japanese applications, compared with 40% for American filings).

8. Japan still has the most patents in force (1.9 million, compared to 1.4 million for America and 134,000 for China).

So what are we to make of the article?


First, the article does not really address the connection between patents and innovation. Is it really the case that increased patent filings in China and by Chinese points to increased innovation? Maybe yes, maybe no--the article does not really explain. In this regard, it is curious for The Economist to focus so much on the point given that the cover story of the same issue, entitled, "How India's Growth Will Outpace China's," seems to suggest that, over the long run, India will be a better bet than China with respect to innovation. The place of India in connection with Asian innovation, however, is not addressed in the article.

Second, why the scant attention to South Korea in the article? Given the so-called "lost decade" in Japan, data about patent doom and gloom is not very surprising. The more interesting comparison would be between China and South Korea. Alas, on this, there is nary a word.

Third, the observation that licensing fees are seemingly a major reason for the Chinese government push into patents is quite amazing, if true. Patents are filed for a variety of reasons, of which patent royalties (and the ability to extract cross-licences) is only one of them. If patent licensing has been identified as a major driver of patent activity in China, this seems to me to be a big deal. Sadly, the point is not pursued.

What stands out in the article is yet another effort to gather diverse bits and pieces of patent filing and registration information without either bringing them together into a coherent narrative or analyzing the points in any depth. That is too bad.

Is IP Being Overloved?

I am a two minds about how to position IP in the larger business context. Does the fact that I engage in IP for mylivelihood skew my view of the role that IP plays in the business world, or do I have a distorted view of its commercial and business importance? No matter how objective one tries to be, the day-by-day exposure to a wide variety of IP matters cannot help but influence the way that I think about it. After all, who does not want to think that he is in the middle of it all (consider what Copernicus went through to disabuse earthlings of this in the cosmological sense).

Encouraged by this sense of importance, I have keenly noted that my weekly magazine of choice, The Economist, seems to giving an increasing emphasis to IP-related matters, particularly in its Business section. I observed this, not for the first time, in its August 29 issue, where all but one of the articles had some IP angle (for those of you who like to count, that means two copyright/digital articles, one patent/pharma piece, and two articles, one on US trustbusting and one on solar power in Japan, both of which demonstrably included IP as part of the analysis.) Take that, Copernicus! Whatever you had to say about the earth, moon and sun, there can be little doubt--when it comes to business and commerce, we IP types really are in the centre of the universe.

IP In the Middle?

And yet, something gnaws at me. Can it really be that, when distilling weekly the world's leading business issues into 6-8, as The Economist does, IP is so central, almost omnipresent? I recognize that this observation is a bit of an admission against interest. Still, it seems that we are now supposedly coming out the worst recession in a half-century, a perfect storm where the real economy tanked in parallel with the world financial system, and IP seems to dominate the discussion. Perhaps it is due to background of journalists who trend to write for the the quality press. After all, IP has an attraction that writing about supply chains and Baltic Dry shipping data do not. Moreover, there are readers to worry about, and the same can be said about them as well.

If I am right, then permit me to offer three thoughts.

1. The media's skewing of the role of IP filters down (or up) to the business setting. What a business person reads in the popular press can have a material effect on their decision-making. Lest you think I am being flippant here, I would love to have a $1,000 for each client that comes to me and announces that "we have to develop more IP" to improve our competitive position. If the media view IP as an elixir, then one better jump on its bandwagon. This is dysfunctional both for the company and for those of us who provide professional services.

2. If we are to be effective in our IP work, then it is no better to more-appreciated than under-appreciated. A sense of perspective is essential, if for no other reason than that a major part of any professional endeavour is to manage expectations. A failure to satisfy unrealistic expectations about what IP can, and cannot do, ultimately will come redound to the detriment of the field and the profession.

3. Oddly, both under-appreciation and over-appreciation seem to be at work at the moment. If one asks WIPO, it appears that the view is that IP is under attack. Consider also the cover story in the most recent issue of Intellectual Asset Magazine--"Brand Broken--How and Why IP Needs to Rebuild its Shattered Image." Maybe it is the case that the view of IP from inside the field is so at odds with the popular perception. If so, there is a lot work to be done on -- on both sides.

Branded Generics; did The Economist Get It Right?

Once again the quality press seems uncertain about intellectual property, and in particular the role of trade marks in the drug business. This time it is The Economist. In an article from its August 8 issue, entitled “Friends for Life: Big Drugs Firms Embrace Generics”, the magazine described the intertwining of Big Pharma with generic manufacturers as the impending expiry of blockbuster-protected patents and apparently thin patent pipeline for drugs are forcing both sides to rethink the nature of their relationship/interrelationship.

What caught my attention was the discussion in the article about the issue of “branded” versions of drug products that are being sold by Big Pharma after patent protection has expired. So is this a good or bad thing? It is a difficult to fathom from the article. Let’s consider how the issue is treated. First, the article observes as follows: In order to combat the expected decline in revenues, Big Pharma is “peddling “branded” (but not patented) versions of their original drugs for higher prices than unbranded equivalents. Illogical though it may seem, such is the power of brand loyalty and inertia among doctors and patients ….”

Here we find Big Pharma as “peddlers” of generic brands, and both doctors and patients as acting in an “illogical” manner. Nothing is seemingly new about the negative tone given to the role of trade marks. From the debates in Parliament 150 years ago at the dawn of the first English trade mark law, through the skepticism towards trade marks expressed by the US Justice Department and others prior to the enactment of the Lanham Act in the 1940s, and up to Naomi Klein's polemic No Logo here, there has been a view that trade marks have the power to compel people to buy at a premium what they rationally would not purchase, i.e. a branded product.

But the article then seems to change direction. Moving on, it later observes that “[t]he real action now is in branded generics, which command a premium in many emerging markets due in part to the fear that unknown products might be fake or of dubious quality.” Note that here trade marks serve a potentially useful purpose for “emerging markets” (not the developed world, who presumably know better) in assuring that the drug products are genuine. I must confess that I don’t quite understand the point here. If I want to sell a counterfeit drug product, it seems to me that I will simply imitate the proprietary brand. As a policy matter, if I want to prevent the counterfeiting of drugs, it seems that the better way is to ban the use of the mark after the expiry of the patent protection period. In this way, the counterfeiter cannot exploit the name recognition and goodwill developed in connection with the drug during its proprietary period.

But all is not lost for Big Pharma, even in developed countries. The article concludes by referring to Charles-Andre Brouwers of the Boston Consulting Group, who notes as follows: “[B]rand loyalty laziness--or laziness--is something drug marketers can tap to keep a premium in their prices." As he puts it: ‘The secret about this industry is that patients taking a red pill don’t really like switching to a blue pill’. “While consumers are no longer “illogical”, they are “lazy”, and this consumer slothfulness can be exploited to the commercial advantage of Big Pharma.

Not too much doubt here: except for developing countries (even the basis for the argument is questionable), branded generics [read: trade marks] are cast in a negative light. However, before we condemn “branded” generics” to the Dark Side, we might consider the following observation by Nassim Nicholas Taleb in his irreverent best-seller, Fooled by Randomness here (fooled you if you were expecting The Black Swan).

In discussing what he calls “the path dependence of beliefs”, and what economists call, in a somewhat different context, the "endowment effect”, Taleb observes “[t]hat there are reasons to believe, for evolutionary purposes, we may be programmed to build a loyalty to ideas in which we have invested time…. Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdale that blocks the emotions of attachment, meaning the subject is, literally, a psychopath.”

If these observations can be applied to trade marks, perhaps “branded” generics are an expression of evolutionary make-up. Instead of being "illogical", a sign of "laziness", or worse, the relationship of doctors and consumers to branded generics reaches deep into our human psyche. At the least, it suggests that the issue of trademarks in connection with branded generics is far more textured than the article suggests. In truth, when one thinks about trade marks, that is not such a surprising, or radical conclusion--is it?

Patent Trolls: Public Business Enemy No. 1?

One of the most distinctive and well-regarded parts of The Economist magazine is its periodic surveys. For those of you who do not read The Economist, a Survey is an in-depth analysis of 15-20 pages in length on a specific topic. I eagerly look forward to reading them. Given that build-up, and the anticipation that awaits tackling each new Survey that is published, I was extraordinarily disappointed by a paragraph that appeared in the May 30th issue entitled "Business in America.' Under the section entitled "Red Tape and Scissors," in which the Survey discussed some of the difficulties posed for business by "crazy rules, convoluted taxes and rampant lawyers, " the following paragraph appeared:

"" 'Patent trolls' pose another problem. These are firms that buy up patents, not to turn them into products but solely to sue firms that may have infringed them. Since the United States Patent Office grants patents freely and courts enforce them zealously, every inventive company lies in fear of trolls. If one cannot convince a court that a billion-dollar product incorporating hundreds of patents infringes only one of his, he can an injunction to stop it being sold. The victim typically settles. Michale Heller, author of "The Gridlock Economy", argues that vaguely defined property rights stifle innovation and cost lives."

Let me see if I have this right. Within the heart of the most thicket of the most regulatory issues facing American business, e.g., the tax system, products liability, the drug approval process, byzantine financial regulation, lies the patent troll. It is true that patent trolls were apparently viewed as a significant enough issue to warrant a decision several years ago by the U.S. Supreme Court in the eBay case, here. But in that judgment, the Supreme Court significantly cut back on the ability of a so-called patent troll to obtain an injunction.

Contrary to what is asserted in the Survey, a party that sues on a patent that he purchased and of which it does not make any commercial will now have a difficult time if it seeks to obtain an injunction. Moreover, in the post-eBay world, courts are reluctant to grant an injunction if the patent in question covers only a small portion of the overall product. In a word, the account in The Economist does not reflect the current legal position regrading patent trolls, and patent trolls do not constant a systemic threat to the well-being of US business.

Moreover, it is unclear what the reference to the Heller book has to do with patent trolls. mystery. In particular, it is not clear "what vaguely defined" rights are intended in the Survey, and how this relates to patent trolls. There is no evidence that the patents owned by patent trolls are less clearly defined that other patents. Heller's concern is in another direction, namely the threat posed by what he has called "the tragedy of the anticommons", where the transaction costs to reconcile multiple property rights becomes prohibitively expensive. But that, as noted, is a different issue from the claims made against patent trolls. Someone seems to have conflated the two issues, with the result that neither of them is properly dealt with in the Survey.

Find the patent troll