Why Losers Litigate: It's Profitable!

from the sue-for-profitability dept

Economics is all about incentives -- and when you create incentives for bad activity, you can rest assured that you're going to get more bad activity. This has become especially troubling with respect to the belief that (a) ideas are more important than execution and (b) that you can "own" ideas. You cannot own ideas -- and even though, technically, intellectual property isn't supposed to let you own ideas, in many cases it's created either scenarios where that is what's happened -- or where enough people believe it's true that you can insist that ideas aren't ownable, but you'll still have a costly legal bill to pay.

So what does that have to do with incentives?

Well, we keep seeing scenarios where winners innovate, but losers litigate. That's because the market "losers" claim that they had the "idea" that allowed the winners to innovate and succeed in the market. But, of course, that overvalues the idea and greatly undervalues the actual execution. Anyone who's built a successful business recognizes that it's the process and execution that leads to success -- not the idea. But, with courts all too often rewarding the losers, it's simply too lucrative for marketplace losers not to sue.

In one such case, it seemed absolutely ridiculous that the founders of a competing social network, ConnectU that had briefly employed Mark Zuckerberg before he founded Facebook was suing him for "stealing" their idea. ConnectU had been a massive failure in the marketplace, while obviously Facebook has been much more successful. But, of course, the "idea" part was rather meaningless. There were already a bunch of similar social networks out there when both ConnectU and Facebook were getting started. Yet, rather than avoid a drawn out legal battle, Facebook eventually just agreed to settle -- though with the demands that the terms of the settlement remain confidential.

That worked... briefly. It turns out that the lawyers for ConnectU couldn't resist bragging, and accidentally advertised that they had won $65 million from Facebook. The number is not really accurate -- as the settlement was a mixture of cash and equity (whose value is really anybody's guess). However, it does show you why losers litigate so often. Imagine being handed millions for failing in the marketplace? Why wouldn't you litigate? But, if you believe in basic free market capitalism, you should recognize how this is rewarding exactly the wrong behavior. It punishes those who best served the market, and rewards those who couldn't serve the market.

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OLPC Discovers Economic Reality; Cuts Staff

from the but-the-dream-is-closer... dept

We've certainly been somewhat harsh on Nicholas Negroponte's OLPC program in the past -- not because we don't like the idea of helping underprivileged kids building technology skills, but because of the way Negroponte has run the project from the beginning. He's acted as if he were the only one who should be working towards that goal and any competition was seen as a betrayal. Also, he took a very top down Negroponte-knows-best approach to building the laptop, which has led to significant problems within the team and with the product not living up to expectations -- showing once again that ideas are easy, it's the execution that's difficult, and if you limit the execution to just one company, you're cutting off a lot of the opportunity.

So, it shouldn't come as much of a surprise that OLPC is now cutting its workforce in half, and slashing salaries for remaining employees. Negroponte blames the economy, but that seems like an especially weak excuse, given just how strongly small, inexpensive mini-laptops (netbooks) are selling these days. Clearly, there's tremendous demand out there for super cheap, small laptops. The problem is that Negroponte decided from the beginning that his product was only for kids in developing countries, and left a massive market underserved (the rather weak give one, get one program was hardly serving the market).

But, again, the point is clear: the overall market is doing a rather amazing job serving the market. They're providing all sorts of very cheap mini laptops at price points even below what the OLPC is going for. No, most netbooks don't have some of the bells and whistles of the OLPC that help it survive a rough environment, but it seems rather likely that used netbooks and newer cheaper netbooks will find their way into developing countries soon enough as well -- just as second hand mobile phones have made it. So, in the end, Negroponte's original vision may get served, but it will get served by the market and competition, rather than his own grand master plan.

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Will Nicholas Negroponte Ever Understand That Competition Isn't About Killing OLPC?

from the get-over-it dept

We've never quite understood Nicholas Negroponte's position when it comes to the $100 Laptop/OLPC/XO (whatever it's called these days). While the idea behind creating a super cheap, super durable useful computer for children in developing nations is good, Negroponte has always approached the idea as one where only he should be allowed to see that vision through. When other companies decided it might be a good idea and wanted to target that market themselves, Negroponte flipped out and started attacking them for trying to undermine his project.

Sorry, Nicholas, but competition isn't undermining.

In fact, competition is generally what drives all parties to be better at what they do, in order to fend off the competition. Yet, somehow, the UK's Times Online has bought into Negroponte's side of the story and written up an article bashing Microsoft and Intel for trying to "kill" the OLPC. The article is riddled with factual errors and opinion substituting as fact, but the worst is in the central point of the article. The author mistakes companies all aiming for the same market as a nefarious attempt to "kill off" Negroponte's pet project -- as if he has some universal right to the market that no one else can attempt to enter. It also brushes over some simple facts, like the one where many countries have looked at the OLPC and realized it doesn't really serve their needs just yet. That, if anything, should be even more reason why competition is necessary. It helps create better products that actually serve the needs of people in those markets, rather than just what Negroponte decides they must want in his top-down manner.

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OLPC Learning That Ideas Are Easy, Execution Is Hard

from the competition dept

Business Week has an in-depth write-up about the One Laptop Per Child project's first deployments in developing countries. The original plan called for building 150 million laptops by the end of 2008; it now looks like they'll be lucky to ship a million before the end of the year. It appears that a big part of the problem is that Nicholas Negroponte and his team underestimated the support requirements for the laptops. Getting laptops into the hands of poor children is good, but it's a lot better if the laptops come with training for teachers and support personnel on how to use them effectively. OLPC may have hoped to build a laptop that was so easy to use that little support was required, but the countries writing the checks don't appear to have bought the argument. Nigeria, for example, backed out of a previous commitment to buy a million laptops from OLPC, opting for Intel's Classmate PC instead. Intel's superior support was cited as the major reason for the decision.

This highlights what was so ridiculous about Negroponte's demand that other companies stop offering competing low-cost laptops. Negroponte deserves credit for pioneering the concept of producing cheap laptops for poor children, but coming up with the idea is, relatively speaking, the easy part. What's far more difficult is the execution. Technical wizardry is an important part of that, to be sure, but probably even more important are the logistical details: keeping the project on time and under budget and ensuring that the shipping project has adequate support. There are a million ways for things to go wrong, which is why it's a good to have a bunch of different organizations working on the problem in parallel. By his own admission, Negroponte is more a visionary than a strong manager, which is precisely why he should have welcomed the entry of a company with Intel's logistical prowess into the market. It may not be as personally satisfying for him to have a for-profit company finish the job he started, but if the goal is to help poor children, then he should be happy to see them being offered more options.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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When Ideas Are Easy And Execution Is Hard... It Makes Sense To Share Your Ideas

from the be-open,-be-good dept

We've been hitting on the theme that ideas are easy, while execution is hard for a while now -- and a friend pointed me to a worthwhile blog post by Brad Burnham, an experienced venture capitalist, now a partner with Union Square Ventures. Burnham muses that the successful entrepreneurs he's backed tended to be the ones who were the most open about their ideas, not just with him, but with everyone. What it really comes back to is this idea that ideas are easy and execution is difficult. The entrepreneur who is living and breathing the idea (and has probably already tested out a bunch of different related ideas) is likely to gain a lot more from the conversation with an outsider (even a potential competitor) than that other person is going to gain from talking to the entrepreneur. While there is an old-school mentality that you need to keep things secret, history has shown that that tends not to be the best way to grow a successful business. When you do that, you end up making all sorts of mistakes that a few conversations may have helped you avoid.

An interesting parallel to this debate is the discussion we had last year about noncompetes. What the research there has shown is that a big part of the reason for Silicon Valley's success is the fact that noncompete agreements are unenforceable in California. What happened, then, was much more job-hopping, and a much faster dispersion not just of ideas, but of problem solving and innovation across the industry. In AnnaLee Saxenian's book that kicked off this debate, she noted that Silicon Valley culture was such that many engineers here spent plenty of time discussing their biggest challenges with direct competitors, just to get better ideas -- believing that solving the big problems would work out better in the end for everyone, and that holding back ideas didn't solve anything. Amusingly, in that case, Burnham's partner at Union Square Ventures, Fred Wilson, took the other side: favoring noncompetes (though, I get the feeling Wilson's changing his mind as the evidence has been presented).

This also, by the way, goes completely against the theory (chiefly propagated by supporters of a stronger patent system) that without patents, the world would devolve into an innovation-free zone where trade secrecy ruled. That seems unlikely to happen, based on exactly what Burnham and others have noticed. Keeping an idea secret not only is unlikely to be effective, it can often stifle the necessary development. Thus, it will be the companies that are more open and free with their ideas that dominate the market. The key reason why, of course, goes back to what we talked about at the beginning. Ideas are certainly important, but it's execution that's the key to success -- and being more free in sharing your ideas will often help you execute better.

Burnham also asks about whether or not it's possible to "model" this openness -- and I think it is. In fact, in many ways it matches the infinite goods economic model we've been discussing, with the ideas representing the infinite goods, and the execution being the main scarcity. So, in the same way that freeing up music helps expand the opportunities for every other area of the music business, opening up your idea is likely to open up many huge new opportunities for the entrepreneur in how to execute successfully. If you really want to model it mathematically, you could probably build something based on the economic models that made Paul Romer famous (and should eventually net him a Nobel prize), but that might be overkill for what Burnham is looking for. However, if you're familiar with Romer's work, applying it to this scenario should make you see how much more powerful sharing ideas can be vs. keeping them secret. It's not just a small edge -- it can be a huge difference. I've been working on a few simpler models myself that I'm hoping to share (openly and freely!) soon enough, in the hopes that others can improve on them.

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Myhrvold's Myth: Invention Capital

from the cute-phrase,-dumb-idea dept

Nathan Myhrvold may have a way with words, but it doesn't mean that what he's doing with Intellectual Ventures makes any sense. At the D: conference yesterday, Myrhvold tried to position his company as being in the "invention capital" business, talking about how he's creating a model to fund inventions, and even comparing himself to Thomas Edison (while dancing around several questions that tried to get him to point out what the company has actually done other than hoard patents). This is a modification on the easily debunked claim he made a couple weeks ago about how owning a patent and not using it to build a product was the same as investing in a company and not working there.

But, the real problem goes right back to the core issue that was brought out in Malcolm Gladwell's profile of Myhrvold. Ideas are popping up everywhere. It's the execution that matters. Lots of folks are having similar ideas at about the same time, but those ideas are meaningless without the corresponding execution (at which point many people often realize the original idea wasn't that interesting in the first place). So, with ideas being plentiful and execution being scarce, it doesn't make sense to "invest" in ideas separate from the execution. The only way that it would make sense is if you then were taking those ideas and artificially trying to limit their usefulness -- which is exactly what Myhrvold is doing with IV. He's artificially trying to limit the use of ideas, and make it more expensive for anyone to execute on those ideas. The very concept of what he's doing is to hold back innovation and progress. That's the exact opposite of what the patent system was intended to do.

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Ideas Are Easy... Execution Is Difficult

from the so-why-do-we-protect-the-ideas? dept

It's an ongoing theme around here, but ideas are everywhere. The real trick to making something great often has extremely little to do with the idea, and much more to do with the execution. That's where the real innovation occurs -- in taking an idea and trying to figure out how to make it useful. It's that process that's important, much more than the original idea. As nearly anyone who has brought a product from conception to market will tell you, what eventually succeeds in the market is almost always radically different than the original "idea." That's part of the reason why patents are so often harmful to innovation. The patent is for that core idea, which is rarely the key in making something successful. But by limiting who can innovate off of the idea (or just by making it much more expensive) you're limiting that process of innovation.

Some people disagree with this, but the failure of Cambrian House, once again seems to demonstrate the vast gap between ideas and execution. Cambrian House was a well-hyped company that tried to "crowdsource" new companies and products. I've paid attention to them for a while, since their business model had some similarities to what we do with the Techdirt Insight Community. However, as the founder of Cambrian House admitted in explaining the company's changing plans, it wasn't difficult to get people to come up with all sorts of interesting and exciting ideas -- but where the company failed was in getting anyone to actually execute on any of those ideas. Ideas are a starting point -- but it's high time that we stopped worshipping the idea, and started recognizing how much more important execution is in driving innovation.

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You Succeed By Executing Well, Not By Gathering Patents

from the rembrants-in-the-garbage dept

Patent attorney Joe Root sent us a link to an interesting essay on how companies became way too focused on intellectual property over executing sound business strategy in the late 90's, thanks in large part to the book, Rembrandts In The Attic. Root points out that the poster-children in that book were companies that focused too much on patents alone, and failed to execute in the marketplace, leading to failures. At the same time, the company that was held up in the book as missing out on the patent train was Amazon.com, which the book predicted would lead to Amazon's downfall. Amazingly, the authors of the book even focused in on Amazon's failure to patent its "one-click" ordering system:

"Amazon's commercial fortunes would have been far better served had it patented technologies truly strategic to its business, such as the one-click ordering system that the company pioneered and that is used widely by on-line retailers today. That was a real business method choke point... that Amazon could have controlled to no small advantage. But as it is, without that proprietary advantage and with its brand strength eroding, companies like Virgin Records and PetSmart are unafraid to compete directly against the giant on-line retailer. Don't be surprised if Amazon's stock market fortunes head south when investors realize this fact."

Of course, as most everyone probably already knows, and as Root highlights in the essay, Amazon actually was in the process of patenting the one-click feature. Yet, rather than helping the company, that one patent (to this day, actually!) has become a symbol of just how screwed up the patent system has become. It also created tremendous ill-will towards Amazon until the company was forced to back down from attempts to enforce it.

The key realization that comes from Root's essay (which also dips into military strategy) is that, in the big rush to focus on the value of "IP" and patents in particular, many companies out there forgot that patents are rather meaningless if you can't actually execute on a business strategy providing something that the market actually values at a price they can afford.

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Just Copying Someone's Technology Isn't Enough

from the much-more-going-on dept

When discussing patent related stories, people often claim that without patents, copycat companies would simply copy everything and put the original creators out of business. There are a number of reasons why this isn't true (and plenty of historical evidence that it's not true at all), but for a good example of this at work, just take a look at Google. Google is by far the dominant search engine out there, and it's only been growing. It was first to market with a quality search engine, but many studies have pointed out that Yahoo and Microsoft have both caught up (and possibly passed) Google in terms of search quality. And yet, Google keeps growing. There are plenty of reasons for this, from Google's "celebrity" (as the article implies) to Google's clean interface to people generally trusting Google more than those other providers (to date, Google has done much less to piss off most people). None of those things have anything to do with the technology alone. There's this view among patent system supporters that the technology is everything, when it's really just a component in terms of what makes a business. Copying the technology is one thing, but there are advantages to being first to market, executing well, treating customers right and building a reputation. Just copying someone's technology won't get you very far on most of those other points, and shows that focusing solely on patents as a competitive advantage is unlikely to get you very far.

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