There once was a time when industrial organizations relied heavily on producing their own innovations. One thinks of Bell Labs and the pre-divestiture AT&T telephone network, or of the automobile manufacturers.
Increasingly, enterprises are adopting a different model, one that relies on innovations from the outside. They recognize they cannot rely solely on their own personnel to produce all the innovations they need in order to run their core business, or all the innovations they can profitably integrate with that core business. These enterprises must be able to draw on the creativity of other firms, individuals, and academic institutions.
Several considerations trigger this more catholic approach, including the unpredictable nature of innovation that has forced manufacturers to recognize they cannot consistently rely on in-house production. Ideas and creativity are also seen as a new form of capital, and the creators must be treated as capital rather than as labor.
Thus, many manufacturers are re-conceiving themselves as “platform” providers. The term “platform” implies a business plan of providing a product or suite of products to which others can add innovations. In addition to providing value in and of themselves, these innovations also add value to the platform and the platform provider’s market strength. The genre includes enterprises as diverse as:
- Telecom companies that provide basic connectivity while relying on others for the content carried and for innovative ways of improving the carrying capacity and quality of the network. Hence we hear talk of “wireless platforms” and “fiber-to-the-home” platforms.
- In computing, operating systems (OSs) are platforms that rely upon outside developers to produce applications that enhance the value of the OS. Examples are Microsoft Windows, or the open source Linux OS, supported by IBM, Sun, HP, Red Hat, and others.
- eBay, with its auction network, around which many have built businesses.
- FedEx and UPS, which allow others to establish businesses in reliance upon guaranteed delivery.
A successful platform draws more innovations. Other companies, individuals, and universities choose to align with platform companies, knowing the platform company is better positioned to develop, market, and integrate the innovation into an overall system.
And, of course, because the platform companies exist and seek innovation, it is possible for innovators to develop business plans that depend on the existence of the platforms and that allow the innovators to focus on what they can do best, secure in the knowledge that development, integration, and marketing can be done elsewhere.
In a further twist, platform companies sometimes produce innovations that do not fit with the core business or expertise, and which they cannot exploit efficiently. They need to hand off these innovations–either to other platform companies, which are better able to use a particular innovation, or to innovation companies, which are equipped to take the idea and build on it.
Both IBM and Microsoft, for example, are paying great attention to licensing inventions that they themselves cannot efficiently exploit.
IPR as the New Capital
These changes in the organization of innovation are enhancing attention to the interdependence of firms and the need for interconnectedness. In particular, they are creating a growing demand for interoperability–the capability of information technology products and services produced by different firms to operate together seamlessly (to the consumer) to produce a result.
The changes are also related to changes in how people think about “capital.” Capital is not just financing that can be traded for fungible physical assets or labor. Capital also consists of ideas and creative capacity, and the people who possess these ideas are capitalists of a new kind. Institutional mechanisms that foster interaction among platform companies and innovators must recognize the capital contribution of the latter and enable them to monetize it.
The system of Intellectual Property Rights (IPR) is the primary institutional mechanism to enable the development of these important and fascinating changes in industrial organization. Many regulators and jurists, especially in Europe but also in the U.S., believe aggressive enforcement of IPR stands in the way of innovations and, in particular, interoperability. The danger is that some prosecutors will define interoperability too broadly (see story page X).
Interoperability is not synonymous with interchangability. Any situation that demands platform suppliers give away underlying intellectual property in order to allow a competitor to create what is essentially a generic duplicate, undermines the value of the intellectual capital used to create the platform and any products or services that use it.
Without IPR, innovators have no way to deal with platform companies, who could simply take any ideas revealed and implement them. And even if the platforms wanted to compensate the innovators, they would be unable to, because any competitor could copy the innovation without payment.
The platform companies know it is in their interest to have innovators protected by strong IPR, because without these, people would not be willing to invest in innovative companies.
The mechanisms for using IPR to meet the needs of all parties, of both producers and users of innovation, are being worked out by the players, in the form of standard-setting and licensing, including the use of reasonable and non-discriminatory (RAND) and RAND-Zero Royalty terms.
As an interesting aside, many of the issues that arise in this context of guaranteeing the good faith of all parties are similar to the problems addressed by Japanese managers through their pioneering work in lean production techniques that require very high levels of trust and cooperation among primary platform companies and suppliers.
Those who regard the destruction of IPR as the key to promoting interoperability and cooperation among firms have the situation exactly backward. To the contrary, the road to effective cooperation and interoperability is through IPR.
James V. DeLong ([email protected]) is a senior fellow and director of the Center for the Study of Digital Property (IPCentral) at the Progress & Freedom Foundation.
