In order for IP to possess value, it needs to be made concrete in a physical medium. I've categorized IP into two basic types, based partly on how the IP ultimately derives its value when it takes physical shape. The two types are:
- IP that has value, regardless of - w/ithin reason - how it takes physical expression. If you purchase an mp3 tune, you can put it on your PC, laptop, iPod, car sterio, etc. and it will maintain it's utility for you (assuming you bought a song you liked). This is what we've spent most of our class on; basically, anything that can be considered "content." You can think of this like cash: stored value. Trademarks belong here too.
- IP that requires specific physical steps before deriving value. Patents belong here. You'll need, for example, to follow specific manufacturing steps in order to derive value from my newly patented cell phone design. I know that you can simply resell the design - for a profit, possibly - but here we're talking about how the IP ultimately derives value; at some point someone will have to actullay make the damn thing in order to realize a gain.
Most of our discussion has been focused on the first type. Both are important, however, but I believe the second type will eventually stand out as the most impornt for us in the upcoming decades. My thought experiment is of the second type:
Suppose I have recently discovered a method to cheaply manufacture Lipitor, a chelosterol lowering medication,and one of the best selling prescription drugs on the market today. All the equipment and base compounds needed are readily available at any scientific supply shop. The equipment will cost $100 initially and the base compounds will cost $10 the first month and very month thereafter. Currently, Lipitor will cost you between $140 to $240 a bottle, even at a discount Canadian online pharmacy. I start with the same base chemicals, a different process, and end up with the identical active ingredient (which is patented, as well as their own process). Also, the process is unbelievably simple!
Pleased with myself, I post detailed instructions on how to do duplicate this proess, along w/ links to sites where the necessary equipment can be found. I only ask that they affix a sticker on their device that says, "Peter's Home Lipitor Kit!" (Please ignore any other legal issues here, such as FDA regulations and the like; this experiment is meant only to to focus on IP issues.). My kit is such a hit that virtully all Lipitor user switches over to "Peter's Home Lipitor Kit." Lipitor brought in $2.36 billion for Pfizer, accounting for 19% of revenue in Q2 FY'04. Due directly to my success, Q3 and Q4 of FY'04, saw Lipitor generate only $20 million in revenue. Moreover, my success has inspired many amateur scientests to experiment on their own home drug making kits with other popular drugs. So far, home manufacturing methods have been found for Viagra and Prozac, with similarly devastating losses.
Industry leaders focus all their efforts on combatting this new threat. Some want to step up the effort and sue more sites that host directions while others, fearing that most P2P networks already have millions of copies available, want to take a more aggressive tactic: lawsuits against individual manufacturers. The best in Madison Ave. is enlisted to educate the public on how much home drug manufacturing hurts the industry. Smart and well meaning Law Professors at top institutions write law review articles arguing that the solution is "Medical Socialism." Scientific research institutions, private and public, protest that taxing things like beakers, flasks, and pipettes - very common items for chemistry - unfairly burdens them. The more conspiracy-minded suspect the HMO's are conducting the reserach behind the scenes and leaking the results. All the while, middle-aged men with high chelostrol hold hands in solidarity, proclaiming, "
Yu-shen-ko! Yu-shen-ko!""information wants to be free," and "Down w/ith big pharma and corporate greed!" All are in agreement that "this is the future of medicine."
Most people would agree this type of home manufacturing, independent of safety concerns, should be illegal. If not, at least you agree that not many of these Lipitor examples could happen in real life w/o big pharma going under and/or the FDA reducing testing standards to near nil. I argue that this hypo is similar to illegal file sharing in the most important way: Someone is unfairly gaining without payment from the profit-driven efforts of another. It doesn't matter that the good here is non-rivalrous - the "but for" reason the drug exists is the expectation of profit. The average cost to take a drug to market is $800 million. Seven out of ten don't recover their average cost. If this Lipitor hypo hit the top 20 drugs on market, there would soon be nothing left to copy as R&D funding pipeline dries up.
The content industry and pharmaceutical companies are not identical, but in the hypo, I've removed the biggest difference; making your own Lipitor is only slightly harder than burning your own CD. Here, all the same logic applies: I own all the equipment, I'm not dispossessing anyone of anything so there's no theft, it's non-rivalrous so no problem of wasting, plus, less people with high cholesterol. But this ignores the tens of millions of dollars invested in human trials necessary for approval so that when someone (correctly) "pirates" an existing drug, they can take it knowing they won't simply drop dead. They have essentially gained all the benefits of hundreds of millions of dollars invested in research and testing, as well as the institutional approval of the FDA for free.
But maybe the big difference is that musicians will make music anyway, because they're artists and will derive personal utility while pharmaceutical companies lack something analogous. While it's true that there will always be people who make music simply for personal utility, there will be, by definition, less musicians overall, and our access will likely be more limited. For the most part, the CD's available at Tower Records and the songs available on iTunes primarily represent the effort of the record label. This is because the majority of the value is derived from making potential buyers aware of the product and making it available for purchase. Record labels must provide some value add, or bands wouldn't keep signing with them when they can start their own. Three notable musicans: P. Diddy, Master P, and Jay-Z all started their own labels and have an average worth of about $300 million each. Big pimpin' indeed. But they are the exception, not the rule. The ability to make music and the ability to make money from music are two different skills and the reward structure properly reflects this.