One of the reasons people love the Internet is because so much of it is free. From browsers to search engines, Wikipedia to Facebook and YouTube, you can surf the Web all day without paying a cent. Hardware and connectivity are getting cheaper, too. Mobile broadband providers give away smart phones and hotspots to their subscribers. Google Fiber will bring free internet service to many cities in the U.S.
But while we’re enjoying all that free stuff, we might stop to wonder whether the bill will someday come due.
Free information technology is at the pinnacle of a global Internet economy that is driving more than one-fifth of recent growth in advanced economies worldwide. This global economy isn’t monolithic; it actually has many layers of products and companies with many different business models.
At the bottom of the stack, there’s what I’ll call the “deep-tech” companies, which develop and supply advanced technologies such as semiconductor materials and fabrication, batteries and fuel cells, flat-screen display components, and image sensors. These companies spend many years and many billions of dollars on the R&D that produces such fundamental innovations.
Without those deep-tech inventions, there’s no Xbox, no iPhone, no Jumbotron, no driverless car; and no Netflix, Twitter, Facebook, or Uber, either. Yet we tend to take deep technologies for granted, because they are buried inside our favorite devices, not flashy and conspicuous like the services and devices themselves.
At the other end of the spectrum are the more high-profile Internet-based companies that make most of their money from online advertising. These companies invent, too, but mostly in software: the least expensive and most malleable medium of innovation. To survive, the ad-supported Internet company doesn’t need a big fabrication plant or even a physical product. It just needs lots of users: the more eyeballs, clicks, and customers, the better.
In fact, the data ad-based companies collect from users is so valuable to advertisers that it’s worth giving stuff away just to get more hits on their sites. That’s where the free stuff comes from. Most famously, ad-based Internet companies give away content. They also give away advanced technologies such as smart phones, cameras, televisions, and the software and hardware that connect them all.
There’s a catch, of course. Users must agree to share certain details about their identities and online activities—a deal some users are increasingly unwilling to make.
And there’s a hidden cost as well. By buying the things they give away in bulk and at deep discounts, ad-based Internet companies drive the rapid commoditization of information technology. That’s bad news for the deep-tech companies, which have billions of dollars in investment to recoup on each of their innovations. These companies count on their products’ selling at a premium for a certain period of time.
It’s true that all new technologies eventually become commodities. But giveaways make commoditization happen much faster. And while many tech companies higher up in the stack are compensating for rapid commoditization by introducing their own ad-based Internet services, deep-tech companies don’t have that option. They invent and build actual, not virtual, stuff. They rely on profits from the sale of that stuff.
Giveaways might be harmless if deep-tech companies were otherwise compensated for the use of their products—if, for example, they received a percentage of the ad-based revenue their components helped to generate. But ad-based Internet companies, like all companies everywhere, are reluctant to share their profits unless forced to do so. And so far, the legal system is on their side.
U.S. courts have taken an increasingly narrow view of what counts as a “reasonable royalty” for the use of an invention. This stance is reflected in the rules that govern damages awards for patent infringement. These rules do acknowledge that, if the feature in dispute was essential to a sale, you can get damages based on the value of the sale, not just the value of the feature. But in the past decade, the bar for proving that a feature is “essential” has become much higher.
Nowadays, courts tend to disregard claims on derivative revenue. So the value of an invention that may supply the cornerstone for hundreds of billions of dollars in ad sales annually gets reduced to its shelf price.
I’m not a kill-joy trying to deny Internet users their free stuff. I’m advocating for a damages theory that recognizes the actual value of the technologies that patents are supposed to protect. Current damages theory ignores the contributions of the pioneers of the Internet age. It favors a small group of companies that give away products over a vast ecology of companies that do the long-term, intensive, and expensive innovation necessary to make those products.
That’s a formula for economic disaster. Restricting the rights of inventors to profit from their ideas destroys the incentives for innovation. It will also diminish the productive diversity of deep-tech development in the Internet ecosystem. The erosion of incentive and diversity in IT innovation could cost tens of thousands of jobs and ultimately make the U.S. economy as a whole much less competitive.
Invention doesn’t just happen: it takes hard work, an appetite for risk, a willingness to fail, and sizeable, long-term investments. Our investments in R&D have produced inventions that are the envy of the rest of the world. We cannot undermine those investments and expect to hold our place in the global economy. If you take away the ability of deep-tech companies to profit from their long-term bets, those companies must and will stop making them.
Information may want to be free, but the core inventions of the digital age most certainly are not.