A friend of ours is living in Shanghai and has learned Mandarin, to read Chinese, and to manage young Chinese computer science graduates. A bunch of us were kicking around ideas for starting businesses that would exploit this resource. One of my suggestions was a tutoring service that would enable yuppie parents in the U.S. to hire a Chinese tutor/coach to work with their children via video conference, helping with math and keeping track of homework goals, etc. A Silicon Valley friend, let’s call him UberNerd, heaped scorn on this idea. “Where’s your intellectual property protection? If you don’t have a patent you can’t make any money.”
Having flown out to California on JetBlue, which is profitable despite not being able to patent “being nice” and “free wireless Internet at the gates in JFK and Long Beach” (not in Logan, presumably thanks to Massport’s having handed out a monopoly to Comcast), and driving around in a car from Hertz, which is profitable despite not being able to patent “cars that aren’t decrepit”, my gut feeling was that he was wrong. There were at least some companies that were profitable without extracting rents from intellectual property. After more consideration I’m beginning to think that intellectual property is actually bad for long-term profitability.
Checking the top 10 out of the Fortune 500 companies, for example, we find Walmart right on top, followed by Exxon Mobil. Except for IBM none of the companies feels like one based on intellectual property and even IBM these days gets most of its revenue from service. Certainly it is tough to see how an insurance company such as AIG (#10) and a bank such as Citigroup (#8) are living large from patents.
Perhaps intellectual property for a corporation is like oil for a Third World nation. The government of an Arab or African country need not worry about being efficient nor about the education of its subjects as long as it can just dig a hole and money comes out of the ground. By analogy the management of a company such as Disney can rest assured that quite a bit of revenue will continue to flow from movies and characters developed many decades ago. Disney’s management can concentrate on transferring money into their personal checking accounts while Walmart’s management has to worry every day about beating Target, Kmart, and Sears.
Drug companies would seem to be an exception. Most of their profits indeed comes from a handful of blockbuster patented drugs. Yet perhaps they are not exceptional if we remember that the proposition includes “long-term profitability” and if we adjust for investment and risk. Walmart has crawled to the top of the Fortune 500 without ever taking the kinds of risk that hit-or-miss businesses take. And except for Walmart all of the Top 10 companies were very successful 70 or more years ago whereas drug companies tend to rise and fall.
Which gets us back to the question of… what kind of business should one start given that one already has a person on the ground in Shanghai?
You should start a firm that, rather than doing commodity IT outsourcing, generates solutions to hard problems using a high-volume competition model. The goal is to drive creativity through competition: a customer provides a high-level challenge (I need to improve the efficiency of our widget manufacturing process), and you bring many different minds to bear on that challenge.
This is contrary to the conventional wisdom that Chinese offshoring is for uncreative work, but I think that (1) it has a chance of actually working, and if does work it will be huge and (2) it can exploit the population size advantage. The key is the competition model. In a nation as populous yet per-capita poor as China, those who get as far as technical school have made the cut over and over again. They are ruthlessly competitive, expert in doing things exactly right.
This has the unfortunate consequence of making them somewhat less creative, focusing on efficiency and correctness of product rather than originality. Still, out of a hundred top Chinese programmers, there must be a handful of already creative ones. In the right environment, others around them can learn to appreciate creativity. And if you want to motivate those others to learn faster, why not use the same motivator that has pushed them through years of difficult schooling? You can even recruit by inviting solutions to open research problems and offering a cash prize. Within the corporation, give the most creative employees a higher status (but do not stratify too much within these ranks in order to encourage mixing, freeform discussion, and serendipity).
Think of it as the marriage of Silicon Valley risk-taking and Chinese labor costs.
Slashdot recently did a poll where something like 45% of respondants claimed the Patent and Copyrights would one day kill the internet. A friend of mine responded, it will be the internet that kills Patent and Copyrights. He might be right.
I think your Chinese Tutoring service might have a few flaws, mostly that Americans probably don’t really want to learn foreign languages.
Instead, you’d probably more likely turn a profit offering tutoring to a few high end business professionals rather than mass market middle class families. Of course, with that, its not so necessary to build an online service as much as it is to speak Chinese, which disqualifies you.
I think the argument could be made that securing an exclusive intellectual property right is neither a necessary nor sufficient condition for ensuring business success.
Unfortunately, the media prefer to cover stories dealing with what I would euphemistically call “outlier business methods,” like trying to corner a market by purchasing a portfolio of intellectual property rights and generating revenue solely from rents, whether voluntarily paid or obtained through coercion (i.e. lawsuit).
While these strategies make for some interesting and inflammatory reading (think “SCO”), I cannot think of a company that enjoyed a long run of success solely due to revenue from its IP portfolio.
Also, it is easy to think of companies (as Philip has) that have enjoyed long periods of business success without any appreciable intellectual property.
So securing IP rights must be neither necessary nor sufficient to ensuring business success.
Rent-seeking from IP is nice if you can do it, but Americans and particularly American nerds tend to overvalue it, I think. We’re taught that if we get a patent then we can sit back and collect royalty checks. Many people pay thousands of dollars to patent attorneys and “invention submission” scams and get a patent that is worthless.
You may have hit one of the elements that blocks smart engineers from becoming as wealthy as their high school classmates who skipped college to started RV dealerships. The former generate IP, the latter “just make money.”
There are many elements of “franchise value.” Techies grow up thinking patents, but patents have limited term, are easily infringed and, or, most importantly, often replicable. Given $2 million, which project would be more likely to succeed:
A) “Let’s build a worldwide car rental system (fleet, reservation system, airport counter leases, operating procedures, name recognition, and frequent-flyer tie-ins) that competes with Hertz”
B) “Let’s hire a team of engineers to design something like the Acme Wonder Widget without infringing on Acme’s patent #x”.”
Anyway, the Monkees were obviously *not* the Beatles (who, of course, did benefit from copyrights), the XFL was obviously *not* the NFL (no “secret formula” there: the rules are published, and the product is televised worldwide!), but few buyers care whether their car’s AWD system is a Haldex or Torsen differential.
Of course, I’m still hoping to create some rewarding copyrights someday (despite having read your authoring experiences).
On the subject of JetBlue: Their Web site brags that they raised massive funding and bought brand-new planes. Can they be really profitable a few years from now when their planes are not brand-new need maintenance? And I mean in terms of real profits, not “EBTDA.”
Ian: I think that you missed the point of my tutoring service. Our Chinese staff will not teach American kids to speak and read Chinese. They will teach American kids to read and write English, learn American history, learn math, and all of the rest of the stuff that our public schools are supposed to teach (but usually don’t). There are plenty of well-educated Chinese adults who speak English and can work for the new enterprise and one of our skills will be to figure out whom to hire based on our evaluation of their English skills.
K: One thing that makes JetBlue profitable is that their airplane leases are supposedly set up so that they don’t have to pay much of anything for the first three years. And I guess as long as they keep expanding they will be in a situation where they aren’t bleeding much cash per seat-mile to pay for aircraft.
Is the unemployment situation for “well-educated Chinese adults who speak English” really so dire that they will take jobs which require them to work all night long while being paid slightly less than an American teacher? Yeah, yeah, I know that the salary goes farther in China – but wouldn’t these folks still prefer to compete with American programmers, tax accountants, or paralegals – you know, people who are actually paid, and whose jobs can be done largely offline or through email?
Is the demand for medical transcriptionists so low in China that they turning people away? Aren’t there still some stock analysts whose jobs are ripe for plucking?
If I had a supply of educated Chinese folks with good teaching skills, it would seem like a waste to aim them at American yuppies. Perhaps it would be better to employ them to teach accounting and tax law to class after class of Chinese people, so that I could form the Chinese Arthur Andersen and take over the world.
Good point on IP law, I went off on a bit of a rant about it:
http://www.tallent.us/blog/CommentView.aspx?guid=00cec4db-87c1-4335-81c6-446c8612b528
Philip, as a photographer, why would the same principle not be true of professional photography as an industry? I’m not suggesting that every photographer release their work as PD, but surely there are lessons to be learned in that community about balancing strict IP-based profit models with other modes of growth?
The vast majority of professional photographers get very little benefit from copyright law and certainly none from patent law. Professionals occasionally make some money from selling an old image that without copyright law could have been used without a fee but we’re talking $50-$250 in most cases and you have the cost of dealing with the clients and they expect to be invoiced!
Most professional photographers are hired to take photos of something their client cares about, e.g., a wedding, illustrations for a magazine article, or pictures of a newsworthy event. In theory this group of people could get paid slightly less if there were no copyright law but in practice most magazines and newspapers already pay so little that their employees could not subsist on less than they are currently paid.
This discussion reminds me of an idea from one of Philip’s old books:
> Internet commerce appeals deceptives to a particularly male fantasy.
> Guys like the idea that after a short initial period of programming,
> a computer will tirelessly slave away for them, making them money
> 24 hours a day. Set up the site, walk away, and watch the money pile
> up in your bank account.
I think in some ways companies based on intellectual property are similarly appealing.
Big companies that don’t own IP like Exxon and Walmart seem to stay afloat on inertia. They have a big market share in a profitable industry, but they don’t own any ideas that really separate them from the opposition. On the other hand, Microsoft is clearly an IP company (despite the fact that most of the early R&D was done by purchasing startups). It’s hard to imagine how Microsoft could maintain their monopoly on desktop operating systems without owning all the IP in Windows and also keeping the source code closed.
It’s interesting that you mention intellectual property in connection with China. I’ve never visited any country where IP is treated with such complete disregard. I find it hard to believe that the Chinese government would enforce any private IP at all through their ‘legal system’.
Write consumer software, and loads of it.
There are loads of small one-man software writers that make good money on almost trivial software that solves real world problems, selling them for $10-25 a license.
If you have almost unlimitted code monkeys, why not keep writing? One in 10 products will prove to be popular and your portfolio will just keep growing and growing.
Re the photography IP, I think you’re wrong, Philip. My sister’s boyfriend is a very successful photographer who is over 50 now. He used to do all kinds of assignment work for ABC, National Geographic, Life, Outdoor you name it, when he was young enough to hack the physical work. (he’s still very fit, but you start to slow down when your work was olymic and youy’re now over 50) Back then selling his photos after the assignment (as stock or copyrighter material) was less than 5% of his business. Now it’s more than 60%, and he’s still very busy doing assignment work (he’s still on assignment 100+ days a year).
I’ve always wanted a complex machine printer. Send it some drawings, and have a built to spec prototype on it’s way to my door in a couple weeks. I now imagine it as an industrial facility with metal working (forge, spin, stamp, punch, cut, roll, machine) capabilities, electronic technicians (solder, board construction, mechatronic expertise), and with the engineering talent to back it up by checking the design, sourcing parts, coordinating the one off construction, etc. My own maquiladora…
Offer the service to small companies everywhere. Affording that level of infrastructure might be possible in Shanghai, and cheap enough to cover the shipping costs back to the USA.
As far as the tutoring idea goes, how would you ensure you aren’t doubling the public schools efforts and actually extending what the child learns? Also I can hear kids now saying: “Great, more school.” Maybe video-conferenced home schooling, instead of a tutoring service.
Does your friend like it that you are working to “exploit this resource?” What do they want to do/suggest?
Best idea I have heard from my friends with Indian connections is to go into surveillance via internet-enabled security cameras. Has the advantage of finding benefit in both cheap labor and timezone differences. I expect some competitors will develop, but you could even find an obvious-but-patentable angle to patent if you decide IP is necessary.
Analogy with oil is excellent. Ad to this that at the higher level (the whole economy rather than individual companies) there is very little evidence that patents are all that good at doing what they are supposed to: i.e. encourage people to spend on R & D. Software R & D spend did not rise suddenly when a court decided software was patentable. Pharmaceutical companies spend more on marketing than R & D and only a small proportion of the higher price they charge for patented drugs is spent on R & D – pharmaceutical aptents work but are an inefficent way of getting money into research.
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