Two Models of Innovation

A blog about business and economics.
Aug. 28 2012 8:19 AM

Apple/Samsung and Two Models of Innovation

I did a column on the winners and losers in the Apple vs. Samsung verdict. I tried not to do a ton of policy in the column, and just play it as straight analysis. Here on the blog, though, I think we can understand the case as highlighting a disagreement between two models of how innovation happens and what stands in the way. But let's start with the winners and losers. A key point is that Microsoft is a winner since a blow to Android gives their platform a new chance to get off the ground. Beyond that:

Nokia, Microsoft’s key partner on Windows Phone, is a double winner. Nokia benefits from the boost to the Windows ecosystem and also from the fact that as a mobile phone pioneer, it owns a lot of potentially relevant patents. Blackberry maker Research in Motion is also a winner on these same grounds, which is why both companies’ shares started Monday sharply up. The verdict was essentially confirmation that under contemporary conditions, if you want to get in the technology game, a product people want to buy isn’t good enough. You’ll also need an arsenal of patents that you can use in countersuits to force a cross-licensing agreement with the incumbents you’re trying to challenge. Consequently, Samsung’s loss is a huge gain for a product-poor, patent-rich firm like RIM.

Now it seems to me that rewarding patent-rich, product-poor companies is a bad thing. But you might think it's a good thing. In particular, I could see thinking it's a good thing if your model of innovation says that the primary barrier to innovation is that it's expensive. On this view, almost any large organization could make fantastic new things if it was willing to invest the resources. The problem is that it's really difficult to internalize all the benefits of innovation. So it's important to erect lots of very strong patent protections. Part of the genius of these protections is that their value means that a company like RIM retains some financial value even when it stops making products that people like. The key thing is that the investments have to pay off.

The alternative view of innovation is that the primary barrier to great new ideas coming to the fore is that innovation is hard. Most ideas are bad. Most consumers are moderately change averse and don't really want to try janky new products. Large organizations are necessarily run by people who've had success in the past and are now super-busy and perhaps not attuned to the new new thing. In this view, when incumbents fail to innovate it's not generally because they lack adequate financial incentives. It's because for one reason or another they actually can't. They don't have any better ideas. Sony executives aren't sitting around saying "meh, awesome new products just aren't what they once were." They'd love to invest in the next Walkman or PlayStation, but they don't have the products.

On the first view, shoring up incumbents is good because the main risk is that copycats will bleed away the financial returns to innovation. On the second view, shoring up incumbents is bad for two reasons. One is that the new entrants with the good new ideas may simply be locked out of the marketplace. A second is that we may not be able to recombine ideas. What if pinch-to-zoom (iPhone) is a good idea, but so are Android-style widgets that display live information? Well if nobody can copy each other's ideas, then nobody will ever be able to buy a phone that has them both. And that's a huge shame, precisely because good ideas aren't so much expensive as they are straight-up scarce.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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