Why Would Companies Ignore Empirical Evidence Of An Opportunity?

from the change-is-hard dept

James Boyle continues to write fascinating articles for the Financial Times looking more deeply at issues involving intellectual property -- the type of issues that most in the press cover very simply as a battle of companies against "theft," when the reality is much more complex (and, in many ways, much more interesting). His latest piece is no exception. Boing Boing covers one aspect of his article, concerning a new study done by the European Commission, comparing intellectual property rights over databases in the US and Europe. The US has made a policy of saying you cannot copyright facts, and databases made up of facts are no exception. Europe, on the other hand, grants intellectual property rights to whoever compiles a database first. Some in the US have made efforts recently to make the US laws similar to the EU ones, granting intellectual property control over databases in order to (they say) generate incentives to create such databases. Unfortunately for those who support that point of view, the EC study found that the database industry in the US (without that protection) has done much better than the one in the EU. In fact, since the law in the EU was originally put in place to help "close the gap" with US database firms, it's worth noting that the gap has actually widened considerably.

That, by itself, is quite interesting, but it's worth reading further into Boyle's article, because that's where he explains the most fascinating part: the EC tried to "balance" out these results with another "study" that was simply them asking the EU database companies what they thought of the law. Those firms, not surprisingly, said they loved the law and that it needed to be kept for their own protection. This, of course, is not very different from the big record labels repeatedly ignoring detailed research suggesting that there are opportunities to make more money by embracing file sharing of free music. In both cases, it may seem odd to see companies effectively saying that evidence showing they can make more money should be ignored in favor of overly protective rules or actions that they simply "believe" are needed to protect their business. However, the real issue is that these laws protect an existing business model -- and changing business models can be quite difficult. So, while there may very well be a much bigger opportunity with less restrictive intellectual property laws, it would open the door for competitors or more innovative firms to come into the market and capture that opportunity. It's not about protecting the overall market, but protecting some risk-averse incumbents. Of course, that can be bad public policy. Generally, you would think, politicians should be facilitating policies that generate the largest overall benefit -- which is why these incumbents have to spin the story to suggest that their way of doing business is the only way of doing business. One of these days, perhaps politicians will learn that protecting big incumbents isn't the same as helping the economy -- in fact, it can often make things worse.



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  1.  
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    Jose G, Jan 3rd, 2006 @ 7:02am

    Same thing that happens with Software Patents

    This is exactly the same thing that happens with software patents. The software industry would be far ahead of where it is now if software patents didn't exist. If developers could just innovate without worrying about what someone else previously did.

     

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  2.  
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    Andrew Strasser, Jan 3rd, 2006 @ 9:26am

    Slow technology....

    Unfortunantly this is all it results in and all it is really is a bunch of 5 year olds fighting over who gets the bigger piece of the pie.

     

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  3.  
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    Chris Wuestefeld, Jan 3rd, 2006 @ 11:41am

    Rent seeking

    it may seem odd to see companies effectively saying that evidence showing they can make more money should be ignored in favor of overly protective rules or actions

    It's not odd at all. This is what's commonly called "rent seeking" by economists. It makes good business (if not ethical) sense.

    What it comes down to is that risk and profit potential are tradeoffs. The "value" of two endeavors, one with low risk but only a moderate payoff, and another with high risk but a lucrative payoff if successful, are equivalent. This is precisely the reason that an FDIC-insured bank account, mutual funds, and derivative investments can all exist in the same marketplace. The bank account is quite safe, but offers only a small return. The derivatives are very risky but may pay off big time, and the mutual funds are in between.

    The businesses that this article is taking aim at are choosing the easier option of low payoff with high confidence. There's a legitimate business case to be made for this -- plenty of investors prefer for a variety of reasons to take less risk.

    Whether it's ethical of them to use the barrel of the government's gun to enforce the success of this model is another question entirely.

     

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  4.  
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    Fazookus, Jan 3rd, 2006 @ 4:33pm

    Re: Rent seeking

    The businesses that this article is taking aim at are choosing the easier option of low payoff with high confidence.

    Isn't that the sort of decision that investors make, not businesses? I can see how it's the easier option for the business, but from an investor's standpoint it seems like they're not getting the option to choose between business plans once one business has the data locked up.

     

    reply to this | link to this | view in thread ]

  5.  
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    Chris Wuestefeld, Jan 4th, 2006 @ 7:26am

    Re: Rent seeking

    Isn't that the sort of decision that investors make, not businesses?

    Ummmm... Exactly how do you think that the investors are going to make this decision?

    The process is normally that people see some potential for an investment, and buy stock in it. This gives us the right to vote for a Bord of Directors (and maybe other policy stuff). That Board hires the corporate officers (CEO, etc.), and these are the guys who make the practical decisions about what the company will do.

    So, the investors are making the decision by deciding to purchase the stock, and then voting for a Board that will steer the corporation in the direction that the investor believes is correct. This is very mucy analogous to a citizen voting for a Senator or Representative who will champion legislation to create, say, an Environmental Protection Agency which will promulgate regulations to protect the environment in the ways that the citizen envisioned.

    So how can you say that the investors aren't making the choice?

     

    reply to this | link to this | view in thread ]


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