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?
Full post, including comments