Smartphone, Dumb Government

Google’s new Motorola unit had great ambitions to serve customers and keep dazzling us with ever more spectacular things that enhance our lives. After all, the smartphone is easily the greatest consumer innovation of our time, and maybe of all time. It accomplishes amazing feats in a tiny package and represents a greater achievement of the human mind than anything accomplished by government, ever.

The smartphone is really misnamed in so many ways. Depending on apps and extensions, it provides maps and global positioning, checks your blood pressure, becomes a musical instrument, allows you to buy and sell stocks from the middle of nowhere, to enjoy video chats with people from all over the world, to assemble friends and networks, and to keep up with and send messages to anyone.

It allows me to make my own movie on the fly and broadcast it out to billions in a matter of minutes. I can record a song. I can immediately make anything happening in front of me become a live stream to the whole world, and do this without paying any expensive fees. I can conduct an interview and archive it on my own channel, which I can create in a few seconds. Or of course, I can play one of thousands of games.

It’s a calculator, an email checker, a weather updater, a camera, a Web browser, a news reader, a complete stereo system, a book reader, a translator, a scanner, and a miniature everything all in a thing the size of a deck of cards that is half as thick. The innovations pour into this tiny miracle by the day, by the hour ,even. And it’s only begun: The app economy holds out the promise of astonishing innovation down the road.

I recall many times suggesting to people that they replace their old cell phone (which itself is a great gizmo, given that only the richest of the rich could afford such a thing in the 1980s) with a smartphone. They demure and refuse and finally give in, and only then do they realize what they’ve been missing. It’s a revelation, a childhood dream come true.

So what does Google plan to do with its new Motorola acquisition? Serve up some more wonderfulness to a public ready to be amazed again? Not yet. It’s first step was to file a massive lawsuit against iPhone. And why? You guessed it: patent infringement. Google claims that Apple has stolen some of Motorola’s technology.

Apple has systematically refused to enter into any reasonable licensing deals, which is exactly the same behavior that Samsung faced before. And Google is not stupid. The whole world was watching that lawsuit that Apple filed against Samsung, and saw how a tired, confused, and technologically dumbfounded jury, in a courtroom 10 miles from Apple’s headquarters, agreed to a $1 billion-plus judgement against Samsung.

Google won’t just take this lying down. It decided to act first rather than risk that kind of aggressive attack. It is asking the International Trade Commission to start blocking all imports of iPhones, iPads, and iPod Touch. Crazy, right? Does Google hate our guts that it would seek such a result? After all these years of desperately serving the Web-surfing world, giving us amazing tools for free and revolutionizing the world of advertising, has it now decided to spread misery to the American public?

Nope, it’s all about defending itself against aggressive attack. What the jury did in the case of Apple v. Samsung has set off a deadly arms race. An industry that became thrilling and gigantic, and has brought unprecedented progress, is now entering into a dangerous period in which dogs really do eat dogs, where one company’s win is another’s loss, and where the welfare of the consumer has to be put on hold for the battle of the titans.

The problem comes down to one word: patent. In the 1980s, patents were extended to cover software. This was the beginning of what would become a catastrophic regulatory thicket that would ensnare every producer and where the lawyers would make out like bandits no matter who won.

When patents first came along in history, they were monopoly privilege granted by the crown in exchange for political subservience. This was the age of mercantilism, and it gradually led to the age of capitalism, in which trade barriers, taxes, and regulations fell. The slogan was laissez faire, or, leave commerce alone to manage itself. Government can’t improve on the results of the market process.

The patent today is a holdover from the pre-capitalistic age. It was not very controversial before the digital age, because economic progress was relatively slow and patents expire and because the patents didn’t apply to most of the important consumer products we use every day. But the problem with them has always been the same: By granting a right of exclusive production to one firm, patents attack the competitive process as its very root.

The competitive process takes place over several phases, which constantly overlap. There is innovation (always an extension of what came before). Then with innovation can come a period of profitability. This profitability attracts other producers to the industry who innovate further and try to improve the good or service. The initial producer then has to scramble to maintain market share, and it does so through innovation and price cuts.

Note that the whole system is based on the ability to learn from others. Good companies emulate the successes of others, avoid their mistakes, and improve what exists at the margin. That’s the essence of economic progress. This is how competition results in the biggest conceivable boon for consumers.

As Steve Jobs said in 1994, “We have always been shameless about stealing great ideas.” So it has been for every great painter, poet, and entrepreneur. They build on what came before. I take issue only with the use of his word “steal.” When you copy an idea, there is not a thief and a victim, but two ideas. This idea-copying process extends to infinity.

Who in the business world likes the idea of competition? The startups like it. The innovators like it. Young companies seeking to change the world like it. Competition gives them an opportunity to make a difference and build wonderful things. But older companies do not like it. Once they get on top, they would much rather rest on their laurels.

In a market, they cannot rest. But with patents, they can sue. They can use the tools of government to clobber their competition. If it works, they can receive what amounts to a bailout. To win a patent suit against the competition is no different from getting a tariff erected against imports, having your insurance company get a huge cash infusion from the Department of the Treasury, or for a labor union to block low-price workers from entering the market.

The real story of Apple’s attack on Sumsung is told in the numbers. Apple has been dramatically losing market share to the competition. That’s no surprise: The first to market experiences a period of profitability above the average rate of return. But then others emulate and improve at the margin. Prices fall, service improves, and great things happen for everyone except the former industry leader.

Patents are an occasion of sin. They tempt business to go to government to smash their competition, instead of turning to more-innovative strategies to attract consumers. This is why industries without patents are so vibrant. Patents don’t apply to fashion, recipes of all your favorite meals, to plays in sports, and to most things we use and love.

I can hold up my Wal-Mart navy blazer and one from Burberrys and, from a distance of three feet, you couldn’t tell much difference. But both manage to exist side by side in peace, and everyone wins. But the jury in the Apple v. Sumsung case looked at the two phones and said: oh this are really too similar, so one has to go!

Patents established government-protected monopolies. Ironically, other divisions of government claim to intervene in markets to bust up monopolies and divide up market share. Either way, the government is doing central planning by picking winners and losers in the marketplace rather than let the competitive process play itself out.

What happened to Apple really amounts to a government-sponsored bailout, no different from that won by AGI in 2008. But do we recognize it as such? Probably not, because the whole racket is couched in the language of a law that few people understand or question.

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