Innovation in the Online Economy

It is easy to be over-awed by the scale of change that has taken place in recent years with regard to the development of online services. There are plenty of statistics highlighting the present and likely future contribution of online commerce to the economy. Looked at from almost any angle, the news is not just good but great. That is not to say things are perfect, and ICOMP has written many blogposts reflecting how to make the online world even better.

This blogpost follows up on earlier discussions on the nature of innovation in the online economy. These have pointed out that innovation relies on a variety of circumstances in order to thrive. The most important of these is that the incentives to innovate must be protected. This is not just a question of protection for inventions and other fruits of intellectual labour, but also competitive markets where entry is possible and access to consumers is not blocked by incumbents.

Smaller companies are often amongst the most innovative and it is perfectly understandable, and efficient, that they may wish to cash in on early success by selling their inventions or by seeking investment in return for equity – even if that does not always lead to the most effective exploitation of the invention.

Similarly, owners of inventions such as patents may seek to extend their effectiveness and value by co-operating with other owners – for example by pooling their patents to create technical standards such as MPEG-2.

These sources of innovation can be hi-jacked in a number of ways. A leading example is taking other people’s content and refusing to pay for it, or forcing the owner into years of uncertain and expensive litigation to protect their rights. The online world is awash with complaints of this kind.

Another example is where a dominant undertaking exploits its power over a key part of the online infrastructure to increase the hurdles its smaller rivals have to get over to gain access to customers. Competition authorities around the world are investigating such practices and some of the complainants are ICOMP members.

A third source of ‘hi-jacking’ concerns patent royalties. In these cases, a patent owner agrees that its patents can and should be used to create a standard for others to use. In return, the owner is entitled to a reasonable royalty for the use of its patent. However, there are cases where the patent owner waits until the other users have become reliant on the patents in question, and then turns round and demands excessive and unfair royalty payments.

Although it casts itself as an innovative company (and to be fair its early inventions in the search and search advertising fields were inventive), the practices of Google are deeply hostile to the ability of others to innovate. It has persistently expropriated the content of others for the purposes of its own search advertising business. The proposed Google Book Settlement was but one example of this abusive practice and is ongoing! Google has also sought to discriminate against and penalise smaller competitors that it sees as a competitive threat. We have also seen in recent days Google using the patents it will acquire as part of its acquisition of Motorola to harm its competitors by attempting to charge excessive royalties for essential patents (and possibly using that as a threat to obtain advantageous deals from handset manufacturers to make Google’s search and search advertising products the default on those handsets).

Free and fair competition is at the hand of innovation. However, the practices described above are the very opposite of competition on the merits. They seek to use dominance to prevent others from competing and in turn undermine the incentives of others to innovate.

David Wood
ICOMP Legal Counsel