by: Patrick Anderson | March 22, 2017
Much (digital) ink is spilt these days over the state of the patent system and debate rages over the human and economic effects of patent assertions. Amongst academics and economists, this query adopts sophisticated and fanciful sounding terms like “the tragedy of the anti-commons” or, more often, “patent thickets”. In a cursory definition (economists, please cover your ears), the tragedy of the anti-commons refers to a breakdown in markets where the number of different actors all holding rights to the same resource becomes so large that it becomes impossible to actually use the resource. Several researchers and government agencies, including the FTC, have made these claims with respect to the smartphone market.
Of course, any honest observer can easily tell you that there is absolutely no such problem. The practice of efficient infringement alone is probably sufficient to “overcome” any “coordination breakdown” that attempts to threaten the smartphone market. Unfortunately, this leaves the inventor out in the cold. Anti-patent activists would have you believe that the inventor’s sacrifice is absolutely necessary to deliver these essential products to the public (and god forbid middle-class millennials be unable to Instagram their breakfast or tweet their workout routine). Economists Alexander Galetovic, Stephen Haber, and Lew Zaretzki, however, maybe have been surprised to learn that this well-accepted narrative had nevertheless “seldom been tested against systematic evidence,” as they noted in a recent paper on the subject. Surely, as often as these claims about the smartphone anti-commons tragedy are repeated, someone must have examined the royalty stacking and determined exactly what percentage of every smartphone purchase goes toward patent holders.
Alas, they had not and the task fell to Galetovic, Haber, and Zaretzki themselves. The paper itself is worth a read, but the story to be told ought to be their rather startling results. The team determined that the predictive cumulative royalty yield of patent licensors in the smartphone space should be nearly 80%. The authors note, “four out of every five dollars paid for a smartphone should be transferred to the patent holders.” They also calculated the predicted royalty if all of those patent rights were consolidated by a single entity, and found that the resulting royalty would equal approximately 67%.
So, the question becomes ‘what, then, do these patent licensors actually generate as a percentage of smartphone value?’ How, and in what way, are these entities increasing prices on our smartphones? Based on their data, the actual, cumulative royalty yield turns out to be a paltry 3.4% of the average selling price of a smartphone. Thus, the authors suggest “that patent holders do not exercise any meaningful monopoly power to increase prices in the world smartphone market, much less that there is an anti-commons tragedy in the smartphone industry.”
Unfortunately, this actual data contradicts popular, and very fake, narrative and risks being entirely swept under the rug. So, I encourage everyone to read the paper and share it far and wide to make sure that doesn’t happen.
Picture courtesy: Williams Law Firm