Living Economics

The beauty of the Internet is its open-source environment. You can pretty much tell how a web site was created by looking at its source code. More conveniently, you can download both the source code and the accompanying images for later reference. It is essentially hog heaven for eager learners.

But the open-source environment is also a curse to innovators who want to hold on to its early starter advantage. Whatever is online is potentially copyable by imitators at very little costs. If there is no way to keep out imitators, where is the incentive to innovate?

Hence the origin of business-process patents.

Among the better known of these business-process patents are Amazon.com's patent on a one-click system for online orders, and Priceline.com's name-your-price reverse-auction system.

The importance of business-process patents can be gauged by its explosive numerical growth and its favorable impact on stock values. Over the past three years, applications for business-process patents have tripled. Some of the hottest ecommerce stocks are propelled, at least in part, by the value of their patented business processes (Business Week 12/20/99).

The excessive concern about protecting business processes results not only from the ease of copying, but also from the huge first-mover advantage provided by the Internet. Because the marginal cost of serving additional customers is very small once a web site is set up, first movers who manage to develop brand recognition can quickly evolve into natural monopolies. But this advantage might quickly disappear if a new business process can be freely copied by competitors. Hence the disproportionate incentive to patent everything in sight (Business Week 12/20/99).

The original idea of granting patent rights to innovations was to encourage expensive and time-consuming research and development that would otherwise not having been undertaken. Would most of the business processes have been invented if they cannot be patented? The answer is a resounding yes, simply because most of these processes can be perfected in a few programming hours. To grant these business processes patent right is to deny access for 20 years to other users who might conceivably exploit these processes more efficiently than the first movers do.

Even Mr. Bezos of Amazon.com realizes that the current patent situation is untenable. He suggested reforms, including a software database that would help the patent office investigate who really invented something first, and a three-to-five year patent for software and business methods, instead of the normal 20 years (The Economist, 4/8/00).

But in Internet time, even three years sound like eternity. If patents are to be granted to business processes at all, patent holders must be obliged to license the processes nonexclusively to a predetermined number of highest bidders. This arrangement will prevent less efficient exploitation of business methods without totally diluting their value and without unnecessarily enriching the patent lawyers.¹