>The reality is that technology has flipped the entire argument for patents — that they spur innovation — completely on its head. The very nature of technology — that costs are fixed and best maximized over huge user-bases, along with the presence of network effects — mean there are greater returns to innovation than ever before.
This is a silly argument that only really favors large incumbent tech companies of a certain kind, internet businesses. It basically eliminates anyone that doesn't derive their moat from network effects or high capital intensity or any business that focuses on a specific part of the value chain away from the final good or end user, such as ARM or Qualcomm. The world is better off because ARM's business model exists. The world is even better off with Qualcomm. There's large antitrust issues with Qualcomm that's being litigated by regulators and Apple, but that doesn't mean they shouldn't be able to patent their technology.
I would tend to agree. There's two built-in protections for hardware: patents, and the massive costs of the means of production. If there are no patents, then means of production is the only barrier to essentially all available technology. Any minor player that brings technology to market will be vaporized by the marketplace dominance of the big players. We'd be back to trade secrets for all hardware technology (bye bye open standards)
It would certainly be better for technology in the short run, but the outcomes for human civilization could be catastrophic since competition is so damaged any time big players have so much control that they can undermine the free market.
No, the solution isn't to eliminate patents. It's to reduce the term of patents and copyright in general to more reasonable lengths of time. 20 years is at least 5 generations in most technology fields. If we want to stimulate tech, then we should reduce a hardware patent to 7-10 years, and a software copyright to 14-25 years. We should not reward rent-seeking behavior that does not provide any value to the economy.
14 years for software copyright? thats way too long especially since patents tend to be super broad these days.
It very well may be, but I would tend towards being conservative with a first attempt at correction, and the current term is 120 years.
Keep in mind, too, that copyright is what backs the GPL and other free software licences. You thought Tivoization was bad? If we set the expiration date to 5 years, then the 4.0 Linux kernel would be eligible for proprietary use by 2020.
Give both a max time limit of 10 years. 25 years for an algorithm is absurd
How about patents and copyrights have an automatic 10 year 'automatic' copyright/copyright (similar to now for at least copyrights).
Then, after that, an entity must actively pay an exponentially increasing rate of fees to retain the copyright.
Trademarks, as a consumer protection, should just have a low, flat fee, on a fixed basis (with early renewal allowed).
this increases regulations and favors the big players who have no issue footing the bills.
Username undercuts argument.
Irony is the spice of life!
> The removal of most technology patents would not reduce the incentive to innovate;
Software patents are different beast than other patents. In the realm of hardware patents and IP are enable profits for fabless R&D.
It's true that patent system requires overhaul:
* A some form of compulsory licensing for all patents after 5 years. Pricing trough auctions or arbitration. IP owners can't decline to license but they can still enjoy license fees.
* Software patents with much stricter requirements and very low priced compulsory licensing (discourages patenting when profits are low). No license fees for open source software.
Copyright still covers silicon designs in any case. Patents limit fair competition, such as ISA compatibity.
> The very nature of technology -- that costs are fixed and best maximized over huge user-bases, along with the presence of network effects -- mean there are greater returns to innovation than ever before.
Patents are a mechanism for rewarding useful inventions.
The definition of "useful invention" is difficult to get right, and the current US patent system is quite a ways off from a reasonable definition.
However, I'm pretty sure the most societally beneficial definition of "useful invention" is not "perfect fodder for the ideal VC-funded startup" (aka fixed costs with exponential user base growth).
The author is correct that if an invention is perfect VC fodder, then patents aren't necessary. But the author is incorrect in the implicit assumption that any "useful invention" is necessarily perfect VC fodder.
patents are a complete mess. Useful invention is a problematic term to begin with since there is a clear lack of prior art check, and improper definitions for what should be considered obvious vs non obvious. It just only works in favor of whoever has the largest team of IP lawyers in the end which is the antithesis of promoting inventions from every actor in the first place.
As I said,
>> the current US patent system is quite a ways off from a reasonable definition.
But the road to effective IP law in the United States starts with understanding how invention happens. And "all useful inventions are VC-backed product-oriented B2C internet companies" is not a good model for how invention happens for the vast majority of useful inventions. Even in the past decade.
I don't recall too many cases of government admitting that some problem was its fault and deciding to repeal the regulations or legislation that caused the problem. Rather, taking action to "move forward" shows initiative, even if it's just piling new rules on top of the old ones. Bonus points if you can blame capitalism, "the market," or your political opponents for the mess.
Intellectual Property and patents are capitalism. Capitalism has always required exclusionary property rights to function, and these property rights have always been allocated and enforced by the government, starting right at the Enclosure of the Commons. Without government intervention, capitalism cannot exist.
Without IP and the artificial scarcity enforced by it, capitalism simply cannot function for digital goods. In particular, "digital capital" cannot be accumulated, because all digital goods can be replicated infinitely.
I don't understand how you can reconcile the notion of capitalism with artificial scarcity.
I understand property law as a means of dealing with real scarcity but it seems so antithetical to capitalism to conjure up some laws to create scarcity.
> it seems so antithetical to capitalism to conjure up some laws to create scarcity.
That is precisely what Enclosure(pretty much the birth of capitalism) was. Land was made artificially scarce by concentrating it into the hands of the few, creating a landless working class that had to move to the cities and work in the factories to earn their living. At the time Britain also had something akin to an internal passport system, so that movement of labor between parishes was also restricted.
For a bigger, well researched exposition of this, see Kevin Carson's essay "The Iron Fist behind the Invisible Hand".
"Capitalism" isn't synonymous with "free enterprise". After all, a countryside full of hardworking farmers and craftsmen might exemplify free enterprise, even if no one got rich. Capitalism on the other hand is primarily concerned with capital and its returns. Those returns require a certain level of scarcity. Thus every capitalist society has instituted "artificial" scarcity. E.g. in USA, how many different occupations require licensure?
No patents go into the category of crony capitalism. Lets not pretend they are the same thing as pure capitalism since patents prevent free market mechanisms.
I think his argument is competely backwards here. The R&D vs dividend decision is largely independent from the decision about what to do with their patent portfolio.
The R&D vs dividend decision is just about the expected ROI and risk of R&D vs Qualcomm's cost of capital. (Like any other investment decision). Note that the decision is a spectrum from "raise money and do R&D" to "pay a huge dividend and do no R&D".
The disagreement between Qualcomm execs and Jana (or Broadcom) is that the former say they can deliver returns over their cost of capital by investing in R&D, while the latter don't think so.
Patent reform (assuming it makes patents less attractive), would only bolster the investor case, as it would make new investment in R&D less attractive. (Ignoring 2nd and 3rd order effects)
: Once you figure out how much R&D to do, the licensing vs selling vs spinning off is largely a financing question. If you need more cash to invest today, selling some patents replaces issuing stock. If you need cash to pay a dividend, you can give shareholders your patents directly (i.e., do a spin off) or sell the patents and give them cash.
Also, software patents are a relatively new abomination, especially in overseas jurisdictions.
Interesting to say he doesn't care about Qualcomm given it's in the title?
I agree he clearly points towards patents as being an issue, but it's not clear to me he doesn't care about Qualcomm --- he clearly knows a lot about them.
HN readers regularly miss the point of Ben's posts. I admit I'm a bit of a fanboy but sometimes I wonder if this audience just doesn't "get" Stratechery. Ben doesn't really care about Qualcomm here. It's just a poster child for what in his view is actually wrong: technology patents. Let me quote for those who skimmed:
"There is a certain amount of irony here: the government is intervening in the private market to stop the sale of a company that is being bought because of government-granted monopolies. Sadly, I doubt it will occur to anyone in government to fix the problem at its root, and Qualcomm would be the first to fight against the precise measures — patent overhaul — that would do more than anything to ensure the company remains independent and incentivized to spend even more on innovation, because its future would depend on innovation to a much greater degree than it does now.
The reality is that technology has flipped the entire argument for patents — that they spur innovation — completely on its head. The very nature of technology — that costs are fixed and best maximized over huge user-bases, along with the presence of network effects — mean there are greater returns to innovation than ever before. The removal of most technology patents would not reduce the incentive to innovate; indeed, given that a huge number of software patents in particular are violated on accident (unsurprising, given that software is ultimately math), their removal would spur more. And, as Qualcomm demonstrates, one could even argue such a shift would be good for national security."
IMO this is the more controversial claim he makes and nobody discusses it. I think I am in favor but I'm no legal expert. We just take it on faith that the patent system is the way the world works, but what if it's only the way the world -used to- work?
Trade policy is one of the few areas where I agreed with Trump. I still couldn't vote for him because of his narcissism and his racism, but now that he's president I do hope that he pushes back against China.
Our trade policies with China are grossly unfair and I agree that they are effectively self-sacrificial. China is extremely protectionist and economically nationalistic, and is benefiting greatly by playing this off against America's openness and globalism. We keep expecting them to come around and play our game, but as has become apparently with recent political shifts in China (no more term limits, etc.) they aren't and they won't. They're not playing the globalist game. They're playing for their own national interests.
I'd have done the same if Broadcom were an American company. I oppose it because I pretty much reflexively oppose all mergers of huge companies leading to more consolidation: the evidence is overwhelming that this is harming competition and increasing prices across a variety of business sectors. As for the national security aspect, I don't give a shit. Trump did the right thing for the wrong reason.
And this is a private equity play - buy the company. Strip it of its assets, ignore any future R&D opportunities and move on as soon as all revenues are exhausted.
Hate these type of moves.
>And this is a private equity play - buy the company. Strip it of its assets, ignore any future R&D opportunities and move on as soon as all revenues are exhausted.
How have you established that this is the most likely outcome?
Private equity? Both of the companies are publicly listed in the US.
Yes, but the acquisition was to be financed with $106 billion in debt https://www.bloomberg.com/news/articles/2018-02-12/broadcom-...
That should be called a locust merger
Would you mind linking to the evidence and explaining how it applies to this specific case?
I think The Netherlands and Singapore are an Apples to Orange comparison. Given that The Netherlands has been one of our closest allies for decades and was an original founding member of NATO, them deciding to halt a US takeover on "national security reasons" would be shocking. I'd also argue that this deal would probably have gone through if Broadcom was a dutch entity.
Singapore and the US also have a very longstanding relationship.
True, I'm not saying Singapore isn't an ally. They just have much more hedged relationships with the US than a country like The Netherlands, who we've managed to fight two World Wars with.
Since Singapore came into existence in 1965, I'm not sure any countries relationships to Singapore are very longstanding (well, maybe Malaysia's).
> It's interesting to imagine their reactions when foreign governments intervene to block American companies acquiring their native companies.
1. There's too much damn consolidation going on, and any barrier to more is good, IMHO. Preventing consolidation is pro-competitive, and I support that.
2. While this decision isn't directly about China, that country has long been pretty egregious in blocking acquisition of its domestic companies (IIRC, a 50-50 partnership is the best you're permitted as a foreigner). It makes no sense to be open to acquisitions by countries who aren't willing to extend the same rights to you.
3. National security is a thing that shouldn't be sacrificed for high-roller business deals. I'm all for preserving American capabilities in these areas for that reason.
4. I don't really give AF about any American corporate whining about acquisitions getting blocked and other stuff like that.
Why does every second comment on this topic reference China? An (effectively) American company domiciled in Singapore has no relation whatsoever to China, but yet it's one of the salient points in half the posts I'm reading on this topic?
Well, I only referenced it because it was a handy example of a case where "foreign governments [already] intervene to block American companies acquiring their native companies" to respond to the grandparent comment.
As for your question, my understanding is a Broadcom acquisition of Qualcomm would change the market such that Chinese competitors would be able to force themselves deeper into the American market. So it's more about the second-order effects of the deal rather than the first-order ones.
Looks like most of the US tech community is welcoming this decision.
Even a broken clock (current WH admin) is still right twice a day.
It's good you added that parenthetical; one might have suspected "most of the US tech community".
It's a reference to Trump as White House (WH) admin.
It's interesting to imagine their reactions when foreign governments intervene to block American companies acquiring their native companies.
Eg. the Dutch government blocking Qualcomm's takeover of NXP.
(EU stalling the acquisition to investigate antitrust issues is different.)
"It is actually in Broadcom interest to stay at the top of the standard setting committees"
Broadcom is doing a leveraged buy-out via debt. So they need some sort of quick cash to avoid being swamped by debt. With that sort of debt load, the short term trumps the long term because if you don't deal with the debt in the short term, there is no long term to worry about.
"How would they force Qualcomm to continue its R&D for 6G even if they stay on their own?"
They don't, but Qualcomm has a good history of ignoring activist investors who call for them to split their chip-making and patent trolling arms.
"How would they know, even if Qualcomm continue its R&D, those tech will be made into 6G standard, and not any Chinese competitors?"
They don't, but they do know that Qualcomm has successfully done so in the past, and that it won't happen if they don't even try.
> "patent trolling"
Qualcomm generates a lot of IP, but don't they also implement that IP in their chipsets? Does "patent trolling" now just mean enforcing their IP rights?
Agreed: Qualcomm is not a "patent troll", they're a normal company with a very sizable IP portfolio they rightfully innovated and use in their own products, as well as licensing to other companies. Whether they abuse their market position is its own question, but they have nothing to do with companies that were founded solely to buy vague "shopping cart" patents and make money only via lawsuit settlements.
Disagree strongly. Qualcomm agreed to license their patents in a fair, reasonable and non-discriminatory (FRAND) manner in return for having those patents included in wireless standards, and then turned around and broke those agreements.
And that's really only the tip of the iceberg for the shenanigans that Qualcomm has engaged in. By spreading FUD, they were instrumental in ensuring that the US used their CDMA standard rather than the (arguably superior) European GSM standards which they didn't have any patents on.
IOW, patent trolling is legal. Qualcomm's patent trolling was so egregious that they've paid billions in antitrust fines and lost lawsuits.
While I dont like Qualcomm and think they are charging too much. I dont think this comment paints the whole picture.
Qualcomm doesn't licensee ONLY the wireless FRAND patents, they licenses everything from CPU to software design , battery, antenna etc patents.
Now the problem is they dont allow you to choose which one parts to license. They lump it together, and they say you are guarantee to be using one of our CPU / Antenna / Battery patents we have "invented". So just paid for the whole thing.
While you can put a price on FRAND patents, you cant fairly price the other patents which is not part of it.
And, just on the defence of Qualcomm, they do actually do R&D and invent these stuff, so patents trolling isn't exactly a fair word to them.
According to Apple CEO Tim Cook spoken on record, for every 6 dollars of wireless patents, 1 dollars goes to 5 companies that is Huawei, Ericsson, Nokia, etc, and 5 dollars goes to Qualcomm.
Personally I think they are charging too much. But we dont really have a way to solve this pricing problem. So legal becomes the only choice.
It's got nothing to do with re domiciling, it's that structuring the deal by financing it with debt makes it pretty obvious this is a debt for cash flow deal. R&D costs consume cash flow, and so reduce the value of the debt payday, hence the belief that it would be chopped. On it's own Qualcomm doesn't have all that debt to pay off, so can easily fund R&D from their unencumbered cash flow.
Question one: QCOM is incentivized to continue r&d (chip-making) b/c it yields patents which generates more cash than the actual chips themselves. Nobody would force them. QCOM's focus is on sustaining the company rather than maximization of profits in the short-term.
No insight into standards adoption so I can't help you on point 2.
This article doesn't make any sense to me. They are assuming, if Broadcom moves back to US, and bought Qualcomm, they would reduce its R&D and future contribution of 6G, hence all other gibberish. ( It is actually in Broadcom interest to stay at the top of the standard setting committees )
How would they force Qualcomm to continue its R&D for 6G even if they stay on their own?
How would they know, even if Qualcomm continue its R&D, those tech will be made into 6G standard, and not any Chinese competitors? Or any European Allies, like Ericsson or Nokia.
Perhaps, but if that's the case, isn't it better for a democratic nation to be a risk to a dictatorship's national security rather than the other way around? Better America be dominant than China or Russia.
If you're from a country that is not allied with the United States, I'm certain they would agree with that. There's a reason the Russians and Iranians aren't clamoring to buy our products.
Interestingly, the rationale put forth by QCOM and the gov't is not that foreign governments would control the technology. It's that Broadcom has a habit of executing cost cutting measures. I think they may have even made public claims about spinning off QCOM's licensing business if acquired.
The claim is that this would effectively reduce investment in wireless tech innovation by US companies. This would make foreign investment more effective/more likely to dominate.
Yes. Countries like the US, China and Russia don't just divide up the pie evenly and agree to play nice. At least this move is relatively out in the open.
I don't know enough about this domain to really judge the article's reasoning (though it was certainly an interesting read), but as a US citizen, if our government held the interests of foreign powers equal to our own in its decision-making process, I'd be very concerned. Actually, something along these lines has been in the news a lot since Trump took office.
Microwave technology has some applications outside of communications. The issue is a Qualcomm buyer will likely move the R&D and hence the trained engineers to their shores.
> Given well-known U.S. national security concerns about Huawei and other Chinese telecommunications companies, a shift to Chinese dominance in 5G would have substantial negative national security consequences for the United States.
I have a question about this. If the US government believes Chinese dominance in standard would be a threat to US national security would it not be fair to assume the opposite is true? Would US dominance in standard setting would pose a threat to other countries' national security?
Because as the stories derived from the Snowden leaks show, nation-states hold vast troves of exploits and tricks up their sleeves to break and bypass security.
Imagine a card game with the object of getting the best hand. Three communal cards are placed on a table face up. China and U.S. each hold their own cards which they don't show each other.
Now imagine that China, the U.S., and a set of international researchers acting in good faith all interact to decide which communal cards are placed on the table face up.
The researchers can give whatever constraints they want-- maybe they want all face cards, or all the same number or suit. The U.S. and China can "play along" while at the same time making choices within that set of the researcher's constraints to maximize the chance that they have the winning hand.
U.S. and China can even guide the researchers away from one set of constraints to a different set if it improves their odds of winning.
So if U.S. gets to guide the constraints exclusively they greatly increase their chances of winning.
My economics teacher in high school (not a great source, I know) said that no country has ever been permanently conquered through military might alone. But countries have been by economics.
If you believe this (or a variation of this idea) then it's reasonable to consider the possibility that China is using, or could possibly use, economics as a weapon.
China is definitely doing this already, more effectively than any other country they view economics and other alternative forms of warfare as the bread and butter of diplomatic policy and they are very good at mixing it with realpolitik when for example building islands or offering foreign aid.
I agree, they're very clearly doing that already. Fortunately there's not much new about it however. Japan was supposed to conquer the world with its economy in the 1980s. Every headline breathlessly touted that fact. It was seemingly universally believed. They had a vast trade surplus, their market was hyper restricted to outsiders, they were rapidly generating wealth and had a higher GDP per capita than the US. The Japanese were conquering one industry after another, whether traditional industrial or electronics, and frequently accused of dumping as they went. Sound familiar?
US GDP per capita: $60,000
If China does everything right, somehow avoids any recessions or depressions, sees no major consequences from dictator Xi, magically stops accumulating debt at a torrid pace - in about 20 years they'll finally catch up to the US economy in size.
Given their population base, maybe it is inevitable; it won't be easy however. The US has been a comparatively very well oiled economic juggernaut for 150 years, and it's still rolling, commonly outpacing far smaller economies in growth. No country in world history has put together an economic stretch like the US has since the Civil War. China has a lot to prove about being able to manage something like that, especially under a power hungry dictatorship and utilizing a command & control tilted model. Filling in economic slack is the easiest part of growing an economy, that's where all the talking heads got Japan so wrong. Today all the talking heads are extrapolating China's easy fill-in-the-slack growth forward perpetually. They're going to be wrong again, the question is to what degree.
I thought it was rather obvious China has been doing this and doing it for a long time, since joining the WTO.
"America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we sold ourselves to the lowest bidder"
"to the lowest bidder"?
Yes, we are selling our freedoms and economic security to the lowest priced supplier of cheap goods to fill our consumerist nature
I don't think it's about the standard. It's about Qualcomm making most modems and about who owns Qualcomm. The US government worries that 90% of the modems will be produced by China (Broadcom/Qualcomm + Huawei + ZTE).
I think this should absolutely be a concern for US national security. But I also think there's something they're not telling us here. A lot of this sounds like the US government may already have its own backdoors in Qualcomm modems, and they don't want to give that up.
Whether that's real or not, the #1 concern is still that China would be able to backdoor any wireless equipment in the US from factory.
I don't see any reason why that shouldn't be taken seriously, especially when China requires by law backdoors in Chinese products and services.
> The US government worries that 90% of the modems will be produced by China (Broadcom/Qualcomm + Huawei + ZTE).
Broadcom wants to kill this part of QCOM's business allowing for Chinese companies to fill the void.
The article makes it clear that the problem is not what Broadcom will do, but what they won't do.
I suspect USG’s real concern is that the Broadcom CEO will tell them to bring lots of money or screw off when USG comes a-knockin’ for special favors.
Could anybody explain why would a Chinese dominance in the 6G standard-setting process would be to the detriment of US national security? Economic strategy, I get, but national security? It's not like only Chinese companies would be able to manufacture 6G chips once they'd set the standard... is it?
I guess relying on capitalism to build a country would fail if foreign countries could just buy out your most important companies.
The premise under Capitalism would be that the state-sponsored / state-owned corporations were acting as conquering agents and should be treated as a form of invasion in terms of national defense. The theory is that it'd be defending the rights of the people to not be brought under the heel of a conquering foreign government. Such trade would be regarded as a military action on behalf of the foreign country, since under Capitalism the government has no role to play in the economy in terms of owning & operating economic assets.
This has been false from the beginning though, you are referring to an imaginary capitalism that never existed.
It's too late for Europe. Open a VDSL FTTC cabinet or look at CPE and OLTs and ONTs and it's all Huawei/ZTE crap.
A very clever move by Trump indeed. Something that I wasn't expecting at all. This will surely delay China's streak of Domination in the Telecom sector.
This is an enlightening post. That the USA see influence on technical standards as a threat to national _security_ shows what they are using their own influence for.
Can somebody please correct this to ’Qualcomm’?
Make no mistake: "national security" means "we must be able to strong arm the company into giving us private keys for HW trust domain".
 Excuse the Obamaism
Please explain how our crumbling school system, declining public universities, mass child poverty, student debt crisis, for profit prison industry, and mass incarceration impact national security.
The way I read his argument was-
"It is ironic that the US is concerned about the patents. Patents only have weight because governments give them weight - They could declare the patents public domain at any time."
No, he's saying fix the patent system.
from the article -
> There is a certain amount of irony here: the government is intervening in the private market to stop the sale of a company that is being bought because of government-granted monopolies.
wait, what the author expect the US government to do? To give the deal green light so bigger monopolies can be created by such merges? Maybe Qualcomm should learn something and start talking to banks to acquire Intel. Just borrow a couple hundred billion from banks, like what Broadcom did, what can possibly go wrong?