Tim Lee

Competition is a Feature, not a Bug

Mark Blafkin sets the record straight on the Mac-vs-Windows story I told in my “iPatents” post:

Sure, the Mac OS was light years ahead of Windows 1.0, and it took Microsoft until Windows 3.1 or even Windows 95 to get to near feature parity. Did that translate into the immense marketshare and “big profits” for Apple Mr. Lee’s theory would predict? Funny enough, no it didn’t.

In fact, it took Apple nearly 7 years to sell its first 5 million Macs. On the other hand, Microsoft sold 10 million copies of Windows 3.0, “a usable, less expensive alternative to the Macintosh platform,” in less than 2 years!

Blafkin seems to regard this as evidence that the Mac (and its successor machines) weren’t profitable for Apple, but it proves nothing of the sort. Apple did, in fact, make a ton of money on Macs in the late 1980s and early 1990s, with prices of high-end models pushing ten grand and fat margins.

Blafkin continues…

Apple has long been stuck in the role of creating markets, while others come in later to dominate them. They spend millions in R&D innovating. They spend millions market testing each product. They take on all the risk that consumers might not even WANT a GUI-based operating system. In the end, their competitors take advantage of all their hard work and gobble up marketshare.

Apple tried using trade secrets and even copyrights to protect their innovations to no avail. In 1998, Apple sued Microsoft and HP to protect the “look and feel” of the Mac OS with copyright, but they failed in the courts. Many believe that if they had patented some of those concepts, Microsoft would not be the dominant player in computing today.

Blafkin seems to regard this as an argument for software patents, but it seems to me to cut in the opposite direction. The point is that Apple kept innovating despite their inability to prevent Microsoft and others from imitating their products. That was a boon to consumers, who got more innovative products at ever-lower prices. Indeed, as Luis pointed out in comments to the previous post, if anything Apple seems to innovate more when they have a competitor breathing down their necks.

Blafkin seems to believe that the Apple’s competitors are the primary beneficiaries of this competition, but that’s not true. Some of Apple’s imitators certainly made a healthy profit, but their profits are dwarfed by the benefits to consumers, who saw prices drop much faster than they would have if Apple had been given a monopoly.

Indeed, this phenomenon, which economists call consumer surplus, is one of the strongest arguments for capitalism. In a free market, the goal is never to maximize the revenues of innovators. Rather, the goal is simply to ensure that innovators reap a sufficient share of the profits from their innovative activities that they will continue to innovate, with the rest flowing to consumers. The fact that other firms quickly come along, imitate an innovative company, and drive down prices is one of the great strengths of free markets.

So while it might be true that software patents are good for Apple and the software companies Blafkin represents, I don’t think Blafkin has made a convincing case that software patents are good for consumers–who ought, in my opinion, to be the focus of public policy analysis. I’m sure Steve Jobs finds it frustrating when other companies “take advantage of all their hard work and gobble up marketshare,” but the millions of consumers who get better products at lower prices feel differently.

January 11, 2007 | Comments |

Viewing 17 Comments

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    Blafkin nails it IMHO.

    ***Apple seems to innovate more when they have a competitor breathing down their necks.***

    I highly doubt any firm refrains from patenting just so its employees stay motivated and its competitors get a leg up.

    ***The fact that other firms quickly come along, imitate an innovative company, and drive down prices is one of the great strengths of free markets.***

    Can you translate this, Tim? Saying that imitating breeds innovation is a bit shortsighted. Of course, you previously stated that "copying is imitation" so I don't know what to expect. However, in analyzing the industry, you don't want to focus so much on static efficiency as to drive toward marginal cost in a way that is uneconomical to long term innovation; and thus preventative of innovators recouping R&D; costs and investing in further ventures.
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    A caveat. R&D; "spillovers" is an important part of innovation; knowledge and information obtained in the R&D; process not subject to IP protection or shared with others through licensing/open exchange.
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    Good job countering the "deprogramming" efforts of the PR professional from ACT. I've seen a number of pro-software-patent comments showing up on Internet sites lately that position software patents as some sort of anti-Microsoft force. It's like the commenters are trying to leverage geeks' (alleged) innate dislike of all things Microsoft into support for software patents. I wonder how much of this stuff is really astroturf?
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    Mac vs. Windows doesn't actually have much to do with either "software patents" or "Microsoft imitating Apple." Both Apple and Microsoft imitated Xerox, and the process of doing so took lots of hardware, such as the mouse, the bit-mapped graphics controller, and a new generation of CPUs.

    But don't let me confuse you with facts when you've got a righteous jihad going.
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    It's the PR guy from ACT who's trying to link up Mac vs. Windows to the issue of software patents. Tim is only pointing out the fallacy of his arguments. I doubt the ACT guy is on a jihad, I think it's more likely about a paycheck.
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    The real fallacy is that the case of Apple vs. Xerox actually illustrates the necessity of patent protection for truly innovative advances in technology. Tim doesn't see it because he doesn't know who invented what.

    Xerox never made any money from the Star and the 1100 despite doing ground-breaking work because Apple and Microsoft cannibalized their R&D.; That's a real shame.
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    ***So while it might be true that software patents are good for Apple and the software companies Blafkin represents***

    At least Blafkin is in touch with the industry. I don't see why anyone in the industry (the legal, for profit and commanding of market share one) would talk to someone who thinks corporations should set aside their interests for various flavors of religious ideology.

    ***In a free market, the goal is never to maximize the revenues of innovators. Rather, the goal is simply to ensure that innovators reap a sufficient share of the profits from their innovative activities that they will continue to innovate, with the rest flowing to consumers.***

    Yes, and hence we have regulatory and commercial policies, unless of course, Tim, you think your ideology would do a better job.
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    Didn't Xerox PARC "cannibalize" work done at Doug Englebart's lab at Stanford in the 1960s?
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    Xerox PARC certainly built on Englebart's work with user interfaces, but it added significant work of its own (e.g., Alan Kay's stuff) and developed the first commercial products using bit-mapped displays, overlapping windows, and mice. Xerox PARC also had something to do with local area networking, which is why Apple hired Yogen Dalal from them to design Appletalk.

    Compared to Xerox, Apple and MS are both parasites, so get over it.
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    I'm puzzled by Mr. Bennett's tone here--I just don't see how MS and Apple ripping off Xerox (as opposed to MS ripping off Apple) proves much of anything. If anything, the lesson seems to be an anti-IP one--if *everyone* was ripping off Xerox (and each other) largely without legal consequences, but innovation was proceeding swiftly (and it certainly was), that's a nice example of why we don't need patents or strong copyright.

    Now Bennett claims that the moral is Xerox got ripped off and made nothing from its innovation, but so what? Our copyright/patent/trademark policy should not be about Doing Justice To Innovators, it should be about allowing a free market to produce innovation and 'promote arts and useful sciences'. If some corporations fail to adequately monetize their inventions, letting nimbler startups eat their lunch, that's a crying shame but Not Our Problem.

    We only have a problem if inadequate incentives lead to a suboptimal rate of innovation, but none of the arguments Bennett, Blafkin, or Le have adduced show this.
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    XT, Xerox didn't really patent its work, and thus left open the opportunity for other firms to basically rip it off.

    Xerox is a sad story. The firm undertook a lot of important R&D;, but if the resutling work didn't tie into its revenue chain, the company just ditched it rather than patenting and licensing it.

    I agree with you, XT, that its Xerox fault for not having a better strategy to appropriate its own work (actually, some scholars have written entire books about this), but the history Richard talks about highlights the importance of patents since you can't always rely on firms ripping each other off for sustained innovation.
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    A lot of people who point to Apple "ripping off" Xerox miss the point that Xerox management specifically arranged to show the technology to Apple. I don't recall the specific arrangement, but I seem to remember it having to do with Xerox getting favorable treatment in buying Apple stock (or some such securities). I could be mistaken about exactly what Xerox got from the deal, but the point is that the company's management got SOMEthing from the deal that it considered to be worth showing Apple's engineers the details of their technology. (It also shows that the Xerox "suits" didn't understand the importance of what the "t-shirts" at PARC had actually developed, but that's another story entirely.)
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    Tim Lee is trying to make a point about innovation and protection using Microsoft's alleged theft of the Mac UI as an example, so some of us pointed out that the real innovator was Xerox, who was indeed ripped-off by Apple. After Apple sued Microsoft for the "Look and Feel" of the Mac UI, Xerox sued Apple for the actual offense (the suit was thrown out for late filing.)

    Tim argues that millions of consumers get lower prices if parasites like Apple are able to steal ideas from innovators like Xerox with impunity. In the short run, this is of course correct. Apple was able to sell Macs cheaply because they had no research bills to pay off. Like a generic drug manufacturer, all they had to do was cover the costs of product development, marketing, and manufacturing.

    So the question really comes down to the long term. Are companies like Xerox willing to invest in basic research - or even applied research not immediately tied to a product - if there is no system in place to ensure they have a fair chance to market their discoveries without paying an "innovation tax" on their failed experiments?

    I think that's the interesting question here.
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    Yup, Richard, states it well.

    I'm waiting for Tim Lee to come back and say that absent patent protection, the kind of R&D; undertaken by Xerox can be picked up by "social production" entailing tinkering in the garage basement.
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    It probably cannot, Noel. The problem is that the patent system right now allows for patents that are way too long. Even for the sort of ground-breaking research that they did, they should probably be limited to a time frame of around 5 years with an extension of maybe 2 years beyond that. Just enough to reap some benefit, but not enough to get fat, dumb and sassy on it. I could easily see a situation where they took their research into Smalltalk and turned it into a series of patents that would end up holding Java and .NET back by trying to lock down a lot of object-oriented programming ideas. You've gotta be careful that you don't end up giving them a big ticket that they can suck off of for life without constantly adding new value to the economy through more work.
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    Also, call me crazy, but Apple's biggest problem was their pricing. With the sort of mark ups that they did on their systems, they were bound to be trashed in a price war, even though Windows 3.0 was definitely inferior to MacOS at the time. Some of those babies cost a significant amount more than the average Windows PC. It was no contest. It's like screaming about the Acura TL not holding its own against the Toyota Corolla.
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    ...you don't want to focus so much on static efficiency as to drive toward marginal cost in a way that is uneconomical to long term innovation; and thus preventative of innovators recouping R&D; costs and investing in further ventures.

    Noel, it would seem to me that you would want to translate First-Mover advantage into a monopoly.

    It is precisely the transitory nature of First-Mover advantage that breeds the continuing innovation imperative, as in innovate or die.

    Now producers never like to hear that, but consumers do. You see Noel, it is precisely the facts that you cite about how difficult life is for the producers that convince me more and more of the fundamental importance of functioning, authentic market forces...

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