Why tech innovation needs a level playing field

America used to be the world's premier technology innovator and China its best duplicator. But the roles are shifting, as has been shown by two major business stories of 2020: the signing of phase one of a US-China trade agreement, and the battle between Google and the wireless speaker maker Sonos.

The administration of US president Donald Trump touted the former as a major concession by China, which has vowed to strengthen its intellectual property protection. In fact, the deal merely repackages changes that China has already made over the past two years, strengthening court jurisdiction over IP cases and making it easier for US companies to collect damages.

It is telling that American chipmaker Qualcomm was able to win its multi-continental lawsuits against Apple for non-essential patent infringement in part because it decided to pursue the case in Germany and China rather than the United States. It was easier to get injunctive relief in those countries. The fact that China was quicker to enforce Qualcomm's patents than the US is a sign of the changing times.

No surprise

History shows it is no surprise that China has been strengthening patent protection. Countries always do as they move up the economic ladder and have more intellectual property of their own to protect. Of course, the enforcement of court rulings can be speeded up or slowed down by Beijing.

IBM working on cleaner, faster batteries for cars

---

Using analytics to deploy data science more effectively

---

Sports technology company aims to prevent knee injuries

---

The Nightjet: Travellers spurning fast flights for slow train to Venice

---

But it’s worth noting that Chinese intellectual property payments to foreigners have grown on average 20 per cent per year since 2000. I have spoken to numerous venture capitalists, IP lawyers and consultants who say that, in terms of the legal system at least, China has actually become a very good place to protect innovation.

The US, on the other hand, seems to be going in the opposite direction. I’ve written previously about the way in which the American patent system was reshaped under the second term of President Barack Obama’s administration to favour the interests of Big Tech over those of smaller companies – those whose viability depends not on the network effect, but on protecting discrete bits of innovation. This shift threatens entrepreneurship in many areas, from life sciences and artificial intelligence to quantum computing.

The battles between Sonos and both Google and Amazon are a case in point. Sonos advertises its speakers on Google and sells them via Amazon. While developing its business over the past several years, it has worked closely with both companies, building its own products around theirs.

Google and Amazon then turned around and launched their own cut-price smart speakers, eating into Sonos’s business in a white-hot market (smart speaker sales increased over 18 per cent in the six months leading up to the 2019 holiday season). In the process, Sonos claims, Google infringed on multiple patents.

Sonos could only afford to take on one Big Tech company at a time, so it chose Google, with which it claims to have reached a standstill. One of the problems in such David-and-Goliath battles is that the smaller companies not only have fewer lawyers, they can go out of business waiting for legal battles to be resolved.

Monopoly scrutiny

This is basically what happened to Foundem, the UK search firm that eventually won an EU antitrust case against Google, for algorithmically burying the smaller company's position in search results, after fighting in and out of court for 12 years. Those sorts of cases are one reason that EU antitrust chief Margrethe Vestager wants to put the burden of proof in such instances on the Big Tech companies themselves.

Creating an even playing field will require both monopoly scrutiny and a close examination of whether the pendulum in the patent system has swung too far towards benefiting tech companies that depend more on data and networks than patents, or have an interest in making it tougher to obtain patents.

Because their own products (for example, smartphones) require so many different bits of technology, the companies have an interest in keeping these inputs as cheap as possible. They can deploy legions of lawyers to protect any crucial IP of their own while “efficiently infringing” on the patents that belong to others (that’s the term for violations done knowingly by big companies as a cost of doing business).

The US, in particular, has work to do there. "Our leadership on the global stage depends on our ability to promote and protect the innovations of American creators, engineers, and scientists," said Democratic senator Chris Coons, who has sponsored bipartisan legislation to strengthen America's own IP protection. "I'm concerned that while our competitors – like China – strengthen their intellectual property regimes, we have been weakening our own innovation ecosystem."

But the US has another problem – that of trying to compete with a state-run economy like China's when it has no national innovation strategy. While large American companies are busy fighting each other in expensive legal battles to see who gets to set standards for smart speakers (or 5G, or AI, or a host of other areas), China is using its Belt and Road Initiative to roll out its own equipment, technology standards and interests across nations from Asia to southern Europe. That's not duplication. It's just smart.

– Copyright The Financial Times Limited 2020