Two trends that could crush innovation

I was out with a few friends the other night and we got to talking about the problems of the patent system (the problems that the 2011 America Invents Act failed to address) and how it’s already making a serious impact. This got me thinking, what are the current trends that could damage the rapid pace of innovation we’re experiencing in the Bay Area and elsewhere? It’s clear that both the growth in patent litigation and the erosion of Net Neutrality are already having a serious impact on the environment of rapid innovation.

1. Growth in Patent Litigation

With large tech companies in an arms race to gather as many patents as possible while at the same time spending hundreds of millions on lawyers to file as many new software patents as possible, it’s clear that the current patent system is still ill-equipped to handle the current innovation environment.

First, a little background on the state of the patent system. Before the America Invents act, the last major update to the patent system was in…1952. I don’t need to tell anyone that that’s even before most of the current patents being filed could even be dreamed up. Clearly, a few things have changed since then. The America Invests Act was supposed to bring US Patent law into the 21st century. Unfortunately, it did nothing to address the biggest problem of all: the proliferation of overly broad, ambiguous software patents. These are the patents that some of the biggest trolls out there: Intellectual Ventures and others, use to both settle or take (mainly software) companies to court with. For a great overview of patent trolling I highly recommend this two part “This American Life”, When Patents Attack! The below graph shows the rapid rise of patent litigation over the past decade:

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via PwC

It’s clear that patent litigation is a growth industry. And as this trolling has grown more profitable it’s expanded the reach of the market. A tactic that was once only reserved for the largest companies with large patent portfolios and numeous products who have the resources to defend against these attacks, it’s now being used to go after small business and individuals. And that’s what’s frighting. There’s no doubt that many of the highest growth potential technology start-ups are infringing on hundreds, if not thousands of already-issued, overly-broad patents. And as the second part of the “This American Life” story explains, it’s already discouraging innovation before it can happen. If the potential for patent infringement is already discouraging those in this state of rapid innovation, it will only get worse as the market for patent litigation increases. A 21st century overhaul of the US patent system is the only way we’ll reverse the growth and increasing profitability of patent trolling, enabling the pace of innovation to continue unhindered. Luckily, there is a bill that passed the US House in December that would stop the most egregious tactics currently used by these trolls.

2. The Erosion of Net Neutrality

This trend is as potentially harmful (if not more so) as the growth in patent legislation. After a Federal Appeals court ruled that Verizon could charge internet companies to deliver content at higher speeds under the current rules outlined by the FCC, the internet was ablaze.

It’s clear that both the growth in patent litigation and the erosion of Net Neutrality are already having a serious impact on the environment of rapid innovation.

Comcast didn’t wait long to start taking advantage of the ruling, striking a deal with Netflix for “faster and more reliable access to Comcast’s subscribers”. Netflix has not yet passed these higher costs on to its customers, but higher costs for existing services is not the biggest threat of the erosion of Net Neutrality. Guan, in a post right after the decision, said it best when explaining that it’s going to cause the most harm to what he calls the environment of “permissionless innovation”. In other words, if it becomes standard operating procedure for ISPs to charge companies (both small and large) for access to deliver content to consumers it will effectively be a tax on innovation. Taxes tend to dissuade growth, and this “tax” will dissuade potential internet entrepreneurs from going to market.

Luckily again, we may actually get a response from the Federal government. The most important aspect of the decision was that it still granted the FCC the jurisdiction over Net Neutrality. The FCC has said that, while it won’t appeal the decision, it is working on drafting new rules that will (hopefully) rebuild the idea of a free and open internet. An internet that will continue to enable “permissionless innovation”.

I also thought about including the currently frothy market valuations as one of the trends, but it’s unclear whether this is currently a threat or a catalyst for innovation. To a certain point, higher valuations act as an added incentive to innovate (capital is easier to raise, and the payouts are bigger). But if these higher valuations lead to a bubble, a burst could have the opposite effect on innovation.

In the age of Washington gridlock it’s a relief to see some bi-partisan support for patent legislation, as well as a Federal agency actually taking some action. It would really be a shame if either of these trends continue and start have a real, measured effect on the current pace of innovation that’s creating jobs and adding value to the economy.

Comments or questions? Send them to me @jeremysjacob

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