Thursday, March 29, 2007

Charity of the Intellectual Variety

The gentle art of rehabilitating "orphan" patents

IT is generally assumed that companies amass patents with the intention of putting to business use the intellectual advances that those patents protect. However, this belief contrasts rather starkly with the reality, which is that a very large number of patents (by some estimates, upto 95%) lie unused. These idle patents have come to be christened by a rather quaint, if faintly inappropriate, name: orphan patents.

Given the not insignificant cost of earning (and maintaining) a patent, one would correctly be surprised that businesses could be so obtuse as to put them to so little use. How does one explain behavior so apparently wasteful as to be almost apalling? One way would be to realize that patents are often obtained purely for defensive reasons, or simply to prevent a competitor from claiming ownership of whatever intellectual content the patent protects. Thus, even in idleness the patents serve a legitimate business purpose - that of staking out intellectual territory*.

Be that as it may, many companies rightly chafe at the idling of wealth that orphan patents represents. It is thus that a novel form of knowledge transfer has emerged in recent years - that of patent donation. Since the US government also allowed tax deductions for such donations, the practice had become widespread by the 1990s.

And it was a marriage made in heaven - since the patent was unused anyway, the cost to the patent giver was low, and the benefits for the recipient could potentially be very high. And the tax breaks helped. Some companies even took equity in the recipient companies, so that they would benefit if the recipient - typically a startup - made it big. A true win-win.

Why am I speaking of this in the past tense? Because a change in US tax laws in 2004 effectively removed the tax breaks, thus putting the brakes on this practice. The reason for removing the tax concession was apparently misuse by many companies, by inflating the value of patents donated. Such overuse of the donation tax concessions was even systematic, with many consulting companies springing up to "help" make this happen better.

In any case, the practice has clearly dwindled to a trickle. The only major such act of donation in the past couple of years appears to be IBM's initiative, where it threw 500 patents primarily in Open Source technologies, into the public domain.

Should patent donations continue? Obviously they are a good thing, as in addition to the benefits to both donor and recipient outlined above, they help mobilize knowledge that may otherwise lie essentially idle.

Will they? The answer appears to hinge substantially on whether the tax breaks will be reinstated. A Duke Law school paper argues eloquently for changing tax policy to help this practice.

And any right thinking person with an interest in freeing up knowledge and seeing it mobilized in the service of humanity can scarcely disagree: any move that spurs the rehabilitation of orphan patents is welcome.

* in this respect, we in modern society specializing in intellectual wealth generation are not much different from wild animals or primitive humans staking out terrritory. A sobering thought.

Saturday, March 24, 2007

That Tiny Screen just got Tinier

Your cellphone is set to be assailed by ads very soon

Advertising is a wonderful industry. It employs some of the most creative folks on earth. It makes us aware of lots of useful products and services we may otherwise not know about. And without it, newspapers, magazines, and TV shows wouldn't exist as we know them. And it is often very entertaining too.

But most people will also agree that advertising can be an irritant at times. That is why I am somewhat disconcerted by the prospect of advertising on cell phones taking off in a big way, as it appears set to do. Yahoo, Google have both shown extreme keenness to cash in on this new form of revenue generation.

Why is this a bad idea? Because displaying an ad on a small cellphone screen will shrink the effective display area to an even smaller size. Although I use a Blackberry, which has one of the larger screens around, I would hate to have any more clutter on that screen than there absolutely needs to be. And I can only sympathize with people who have regular cellphone screens. But it is bad for an even more insidious reason: while print ads can be ignored, and TV ads can generally be sidestepped by changing channels or using recording technologies such as TiVo, it will be well nigh impossible to escape the ads being pushed to your cellphone screen.

If proof were needed that people don't welcome cellphone ads, a survey found that 64 percent of Europeans polled said they had "zero tolerance" for mobile phone advertising in any form.

Here's the horse sense view on this: Pushing ads in this manner helps the interests of cellphone services providers (a new revenue stream), cellphone makers (increased demand for cell phones with larger screens), and advertisers (presumably, increased revenues). Given this formidable alignment of interests, sheer commercial pressure will ensure that this phenomenon will grow. Expect lots of irrated cellphone users. Over time, things will improve as advertisers get smarter, and cellphone screens get bigger. And users will just learn to live with a feature that derives its legitimacy not from genuine user need, but from the commercial compulsions of the various entities that exist to serve that user need.

Friday, March 02, 2007

The Long Arm of the Laws of Economics

Risk is being underpriced. Can this last?

Since prehistoric times, a simple principle has held true: if you lent money to somebody, you would demand a return high enough to justify the risk of that person defaulting on the loan. As financial systems evolved, this fundamental truth has continued to hold - lending rates are always closely calibrated to the borrower's credit-worthiness.

This principle is so fundamental to the way we think about lending and borrowing that it's disquieting to learn that in the past decade or so, this link appears to have weakened. One measure of this "risk premium" is the spread, or difference in yield, between US treasury securities (generally regarded as the safest kind of debt to invest in), and "junk" bonds, issued by sub-investment grade issuers, and so called because most people don't want the risk of owning them.

There is evidence that the risk premium on junk bonds has sunk to its lowest in 10 years. Last month, investors demanded only an extra 2.69 percentage points in yield on average to own junk bonds instead of U.S. Treasury securities.

There are many reasons for this, including the fact that interest rates in general have fallen world over. However, it does add strong credence to a belief that has been growing in recent times, that risk is being underpriced in the world economy. To be sure, there is a heartening angle to this: financial innovations have thrown up instruments that truly enable risk to be treated in a sophisticated way. But these instruments have also introduced a great deal of complexity, and hence opacity, in the way risk is being priced.

To hear The Economist say it,

"..slicing and dicing of risk using sophisticated instruments such as
collateralised debt obligations and credit default swaps. Banks have used these
to shed credit risk, but it is not clear where all that risk now lies".

Business Week echoes this, saying,

"many are depending on instruments that are highly leveraged, numbingly complex,
and untested by a market downturn".

While underpriced (Cheap) risk is good for borrowers in the short term, in the long term it can undermine the health of the entire financial system. Thus there are good grounds for apprehension as to the robustness of the world's financial markets.

Many subprime mortgage lenders in the US, who have been lending to the riskiest borrowers, are already going belly up.

And there is evidence that world financial markets are jittery. Last tuesday the Dow Jones Industrial average had it's biggest fall since September 11, 2001. This was accompanied by similarly large drops on most of the world's stock exchanges.

That drop was driven by many factors, including a meltdown on the Shanghai stock exchange. But it may just go to show that if you try to defy the laws of economics, the law of gravity may catch up with you.