1

Intellectual Property: The Hard Asset of the 21st Century Presentation to RPI’s MBA-Modernization Program, May 19, 2008

James Stodder, (Ph.D., Economics, Yale 1990)Lally School of Management & Technology

Rensselaer Polytechnic Institute at HartfordHartford, Connecticut, USA

2

Business Methods Patents

The Economist, March 8, 2008: “America's patent system: Methods and madness”

3

Tailoring for New Patent Suits

The Economist, March 8, 2008: “America's patent system: Methods and madness”

“Josh Lerner of Harvard Business School found that patents on financial innovations were 27 times more likely than average to

result in litigation. …. The most frequent plaintiffs … are patent-holding companies

whose only line of business is the litigation of patent suits.”

4

The EU Microsoft Ruling

The Economist, Sep. 20, 2007: “A Matter of Sovereignty”

5

Peter Drucker (1909-2005)The “Knowledge Society”

The Economist, “The Next Society,” November 2001

• Agriculture => Manor, Plantation • Feudalism

• Industry => Family Firm, Corporation• Capitalism

• Research => Scientific Circles, Universities, Firms• New System?

6

Ronald Coase (Nobel - Economics, 1991)Founder of “Law and Economics”

“The Nature of the Firm,” Economica, 1937- Firms exist to minimize “transaction costs”

“The Problem of Social Cost,” Journal of Law and Economics, 1960

- Property Rights evolve to allocate property when transaction costs are too high

7

Open Source Projects• Wikipedia• Apache WebServer• MIT Open CourseWare

Private Companies Using Open Source• Google• EBay• Apple

• Firefox• Linux• EBay

• Amazon• MySQL (Sun)• Travelocity

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Ronald Coase, Journal of Law & Economics, “The Problem of Social Cost” (1960)

Coase: Property Rights and Spillover

Smoke 0.00.51.01.52.02.53.0TotalValue to B 0  30  50  60Marginal Value to

B  30  20  10 Total Value to N 35  30  20  0Marginal Value to

N  5  10  20 

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The ‘Nice’ Convex Coasian Case

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Not ‘Nice,’ Non-Convex Case

Smoke 0 0.5 1 1.5 2 2.5 3

TotalVal-B 0  30  50  60MargVal-

B  30  20  10 TotalVal_N 80  30  20  0MargDam

-N  50  10  20 

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‘Not Nice’ Non-Convex Case

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Coase: Flexible Property Rights

The Economist, Sep. 20, 2007: “A Matter of Sovereignty”

The Common Law is “an attempt to increase the value of the resource by assigning property rights to those parties … in whose hands the rights are most valuable.”

- Richard Posner, The Economic Analysis of the Law, 1972

Without flexible property rights, “the only way we thought we could test out the value of the pollution was by the only liability law we thought we had.”

- Guido Calabresi and Douglas Melamed, “Property Rules, Liability Rules, and Inalienability”, Harvard Law Review, 1972

13

Creative Commons Spectrum

http://creativecommons.org/

Copyright Creative Commons Public Domain

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Is it just “Copyleft”?

http://en.wikipedia.org/wiki/Copyleft

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Ways of Profiting on “Free”

• Dual Licensing (MySQL)

• Attribution (96% of licenses)

• Attribution + No-Derivatives

CC

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Open Source Projects• Wikipedia• Apache WebServer• MIT Open CourseWare

Private Companies Using Open Source• Google• EBay• Apple

• Firefox• Linux• EBay

• Amazon• MySQL (Sun)• Travelocity

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Neither Private nor Public: A Community Member• Producers’ access to:

• Timely Review of Contributions• Recognition of Peers• Potential Customers

• Users’ access to:• Tech-support and Updates

• Custom Applications• User community

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Neither Private nor Public: A Community Member• Private Company gets access to:

• Development & Testing of New Ideas• New “Eyeballs” for Error-Checking• Potential Experienced Employees

• Potential Clients for Customization• “Darwinian Flexibility” - Incremental, User-

Tested Growth

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Poor Countries: 84% of World Population

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Increasing Share of Global Spending Power

http://www.worldbank.org/data/databytopic/GDP_PPP.pdf

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But Most GDP in 3rd World Countriesis in the Informal Sector

Informal Sector, 80%

Formal Economy, 20%

Hernando DeSoto, “The Mystery of Capital,” 2002

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Grameen Inspired Micro-Finance* Pierre Omidyar (founder of EBay)

$100 Million Tufts Micro Finance Center

* Gates, Dell, & Google Foundations - Large Micro Finance initiatives

“Millions for Millions”, Connie Bruck, New Yorker, 10/20/06http://www.newyorker.com/fact/content/articles/061030fa_fact1

* Compartamos (Citigroup $70 Million) - 500,000 Customers

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Darwinian Flexibility• Apple vs. Microsoft• US vs. Europe• Guerillas vs. Traditional Armies

Military historians have an amusing rule of thumb for determining which army is most likely to win a war, the "Sukhomlinov Effect." Named after

General Vladimir Sukhomlinov, the Russian Minister of War at the start of WWI, this rule holds that in any given conflict the loser is most likely to be

the side whose generals wear the prettiest uniforms. Sukhomlinov himself was perhaps the most splendidly outfitted general of the war, with

gold braid embroidery down to his knees. - “Senior”, www.snopes.com

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Warfare and Darwinian Flexibility“As the flow of water is determined by the earth, so the victory of military

force is determined by the opponent. Military force has no constant formation, as water has no constant shape. To gain victory by changing and adapting to

the opponent is called genius.

“Therefore the consummation of forming an army is to arrive at formlessness. When you have no form, undercover espionage cannot find out anything,

intelligence cannot form a strategy.”- Sun-Tzu, The Art of War, 500 B.C.

“The Law of Requisite Variety [relates] the number of control states .. to the number … necessary for effective response. This allows us to formalize … the

limitations of hierarchical control …, e.g., the military, healthcare, and education systems.”

- Yaneer Bar-Yam, www.necsi.org (2004)