Broken Symmetry

Hockey Helmets and Patent Markets

Years ago most hockey players did not wear helmets. Yet when privately polled, most hockey players said they would prefer to wear helmets for the extra safety that helmets would provide. Why the difference?

Economist Thomas Schelling pointed out the problem: when almost no player wears helmets, the player who does puts himself at a disadvantage in terms of peripheral vision. Although each player preferred the saftey of helmets, none was willing to accept the disadvantage in exchange for the extra safety. The answer: make helmets a league requirement. When everybody wears helmets, everyone is safer and everyone at the same disadvantage.

Patent buyers and sellers are in a similar position to hockey players right now. Although plenty of comparable patents are being licensed and assigned at any given moment, and public information about the terms of these licenses and assignments would make valuations considerably easier for everyone (saving some legal and expert witness fees at least), nobody alone would dream of doing so because of the advantage this would give competitors in terms of estimating costs of development and competition.

The soluton for patent buyers and sellers is as simple as the solution for hockey players -- require ALL patent license and assignment agreements to be disclosed. Everyone benefits from more accurate valuations. Nobody is at a competitive advantage in terms of disclosure.

Lemley and Myhrvold proposed this in an oped earlier this year.

Externalities and Semi-closed Platforms

Jason Calacanis warns companies away from the Facebook platform because of the uncertainties associated with how Facebook will share revenue with third-party application developers.

I don't disagree with many of the points he makes.  There is considerable uncertainty at this point as to how exactly revenue will be shared, what metrics will be used, and so on.  And there is no doubt that the companies that can successfully generate their own user base will monetize those users at higher margins than the companies that must rely on Facebook for customer acquisition and distribution.  That's the deal.

Rather I want to point out that Jason seems to ignore an important class of potential economic benefits for users that can be achieved by a semi-closed platform.  These benefts may enlarge the economic pie enough so that the deal is still better than what companies could achieve by monetizing at higher margins (with a smaller user base).

As I have eluded to in an earlier post, Facebook as a semi-closed platform promises to solve some of the collective action problems associated with user-generated content on the Internet.  Facebook is mostly spam free because it is a semi-closed platform.  An analogy is that Facebook:books what the open Internet:magazines.  We can expect to see a better valuable content/page ratio (and hence more users and more time-spent) on Facebook because it is a semi-closed platform.