Apple vs. Microsoft: Which Benefits more from Intellectual Property?

In a recent email discussion with some fellow libertarians, including Sheldon Richman, Tennyson McCalla, Kevin Carson, and others, the issue arose as to how much Microsoft and Apple have benefited from and are dependent on intellectual property for their business model and success. The issue with Microsoft arose when libertarian and IP opponent Tom Palmer,¹ in a recent Atlas Foundation video on The Morality of Profit, held out Bill Gates as an example to illustrate the morality of profit. As Richman wrote:

Some people who applaud the principle discussed in the Atlas video nevertheless think that Bill Gates is a poor example for illustrating the morality of profit because his fortune hinges on “intellectual property” and he uses IP laws to throttle competitors. Here’s a very good video response.

The Palmer video, and the response by one Nielsio, follow:

I agree with Sheldon and my other discussants that Gates is a bad example to use here since, as I wrote in Against Intellectual Property (first published in 2001), Bill Gates’s “fortune has largely been built based on the government-granted monopoly inherent in copyright.” (n. 29) As François-René Rideau notes,

Microsoft has always lived on a particular kind of Government-granted privilege called “Intellectual Property”. Consider in the early history of Microsoft the article that first made Bill Gates famous, An Open Letter to Hobbyists, published in February 1976 to threaten with prosecution people who were freely exchanging copies of Microsoft BASIC. Since the beginning, Microsoft claims a right to revenue not just from services it actually renders, but from those it prevents competitors from rendering. According to their argument, people should not copy, use, modify, enhance, adapt or redistribute software upon which Microsoft lays a claim of “Intellectual Property”, without acquiring a “license” by paying a tribute to Microsoft at Microsoft’s conditions. [Rideau, Government and Microsoft: A Libertarian View on Monopolies]

On his Facebook repost of the video, Palmer defended his choice:

I don’t think that IP is really so economically significant, outside of chemical and pharmaceutical industries. Much protection of ideal objects in software comes from quality control, freedom from viruses, upgrades, toll-free service numbers, etc. I do not consider Gates’s fortune to be even remotely similar to the fortunes of, say, lobbyists for government subsidies, producers of negative pollution externalities, etc.²

Now I agree that Gates and Microsoft are not as bad as lobbyists for government subsidies, and Microsoft does provide valuable services. It’s just that the price is wildly inflated due to copyright. On the free market there would be no copyright monopoly. And thus Microsoft would not have the monopoly it does in operating systems, and it would not be able to charge monopoly prices.

And Gates is also a hypocrite: his company depends on copyright (witness the aforementioned An Open Letter to Hobbyists), yet he has railed against patents, when they posed a threat to Microsoft (see my post Bill Gates’ 1991 Comments on Patents). As Richman said in our discussion, “As to the importance of IP to Microsoft: Would Gates push the button and abolish it if he could? I suspect not.”

Worse, now Microsoft is acquiring a dominant patent position by leveraging its copyright-gained monopoly profits (see my post Microsoft Copyrights –> Patent Dominance). And Microsoft has the chutzpah to object to Google’s acquisition of 6000 Nortel patents because then Google would be able to defend itself from a patent attack by Microsoft. Microsoft is clearly schizo on the patent issue: first criticizing them (while going after copyright infringers); then acquiring a patent arsenal using copyright profits; then objecting to others’ acquiring patent portfolios that might immunize them from a patent attack by Microsoft; in the meantime losing a $300M patent suit to i4i and arguing that patents should be slightly weakened (see Supreme Court Keeps High Standard for Invalidating Patents).

In any case, even though Microsoft does provide useful services, Gates is still a bad example to use in a video about the morality of profit on the free market.

But here the agreement among the discussants ended, when we turned our focus to Apple, in response to a recent blog post by Lew Rockwell:

Proper Patriotism

Posted by Lew Rockwell on June 9, 2011 09:06 AM

Now I agreed with Lew, and not, I hope, because I’m both an Apple and Lew Rockwell fanboi. My argument was that Apple and Microsoft are different. I am not saying Apple is lily-white; what company today is? I am not saying Apple does not use IP and has not benefitted from it. In the case of Microsoft it seems clear that the great bulk of its profits, and its market dominance, and its business model, are heavily dependent on copyright (and, increasingly, patent). But my view is that this is not true for Apple. If you get rid of IP, Apple’s model would no doubt change somewhat, but I see no reason that its basic business model could not continue, or that its success would not continue. It would lose some IP leverage, but then it would also be freed up in many ways too. I think for Apple, it would be roughly a wash. For Microsoft, the loss of IP would be a huge blow. Absence of IP would force Apple to be a bit more standardized and open, and maybe more competitive, but who knows. It could still design and sell premium products at a high price and high profit margin, similar in some ways to how luxury car makers like Mercedes prosper in a world with Toyotas and Fords. Think of it like this: IP law provides, say, 75% of Microsoft’s profits, and maybe 10% of Apple’s (of course, this is not scientific or rigorous, just a guess; such are the perils of counterfactual analysis).

Kevin Carson agrees that Microsoft benefits more from IP than Apple does, but thinks it’s significant for both companies. Sheldon, by contrast, thought that “Apple’s closed architecture in all its products suggests it has benefited more” from IP than Microsoft has. I don’t see this. As I responded:

Microsoft can charge a lot more for software because IP outlaws copies of it, and a lot of competition.

But Apple could sell more expensive, up-brand hardware, wihtout patents or copyright, just as Mercedes sells luxury cars now. They basically give their Mac OS software away now, to lure people to their hardware. I don’t see that you need IP to have their kind of products. Sure, they would be unable to stop knockoff competitors who sell cheaper “Apple-like” hardware that runs the Apple OS, but that is true now of Mercedes, and it still rocks along–sometimes you want a real Mercedes not a fancy Buick for half the price. Same reason people buy a Chanel watch for $15k even though it looks similar to a $100 watch from some less prestigious source. I think Apple would be more innovative and responsive to customers if it faced such competition, but it seems to me they could still prosper with their OS and hardware and related products that interoperate well with each other, by just having high quality products.

But it is hard to say. I think Jobs is worth $5B and Gates maybe 10-15 times that. Maybe Gates would be worth 1/10 what Jobs is worth on the free market.

Tennyson McCalla responded:

I agree with that. Microsoft is a software company, Apple is a hardware company with software to match. I imagine that in a world without IP protections that after Gates sold a few hundred or a few thousand copies of his Windows OS that would’ve been the end of his income from that business. Copies of Windows would be freely traded among people who wanted to use it. Microsoft would’ve had to rely on customer service and constant innovation in order to continue making it as a viable organization. Instead they were able to get by on lock-in/lock-out after they made a big splash in the market.

Apple on the other hand has transformed themselves into a hardware company that sells on style and ease of use. The concept that they promote is “hand in glove,” the software and hardware made by the same people. With a limitation on the varieties of hardware that they offer they vastly cut down on the amount of support that they have to perform (and they consistently come out on top for customer service in annual surveys). Some people find the ease of use and reliability of Apple’s model to be more than worth the cost of not having the latest and greatest CPUs, GPUs, and RAM. Besides, their trend setting hardware designs are esthetically pleasing and maturely subtle.

Even if other people got a hold of their software in an IP free world, their “hand in glove” model would almost certainly still work out for them. Perhaps even better. I’m an Apple booster, so I might be biased.

My reply:

Not only did copyright help them make a big splash, it helped them establish a dominant monopoly, thus forcing people to use their software (at inflated prices) to have a computer. IP also causes a proliferation of non-interoperable standards, so that a Canon laser cartridge doesn’t work with HP, and so on, so that there is a tendency for some firm to dominate (see my discussion of Printer Cartridge Patents in my post Leveraging IP). I think  absent IP you would have more interoperability–and thus more competition: so Microsoft (and Apple too) would have to continually innovate to prove their worth to customers.

Tennyson:

Yes to all of that.

I feel like Apple sees themselves as being in the position that Microsoft was in when they began their meteoric rise. They’re making absurd suits to protect their inchoate position of dominance, rather than out innovate their competitors. It seems things have gotten to a point where they have so much clout that they were able to leverage Nokia into accepting an oligopoly position (the recent licensing issue). [Note from SK: see my post Patent Cross-Licensing Creates Barriers to Entry.]

The trouble with Samsung might end that same way, but we’ll see what Samsung does in the next few quarters. Apple is determined to take advantage of the fact that their iOS devices are going to become independent entities soon. At that point Apple may begin to treat the iPhone, iPad, iPod touch, AppleTV, and perhaps the updated Time Capsule, the same way that they treat the Mac OS devices, which would mean a fight for innovation more than a fight for IP.

I’m also a bit worried about the direction that Mac OS devices are taking though. If Apple really goes whole hog into the iOSification of the Mac then the openness of all of their devices might be in jeopardy. Apple will see the simplicity of unified development platforms as a big plus. Not only as a chance to cut down on internal team numbers, but to shoot up the number of Mac OS developers as well. It’s going to be an interesting few years.

Kevin Carson argued that without patents it would be easy to knockoff Apple’s hardware and undercut the patent premium and thus seriously cut into Apple’s and Jobs’s billions.

Tennyson’s reply to this:

I don’t think this is certain at all.

I feel like the paradigmatic model for an industry without IP is the fashion industry. Sure, there are knockoffs of the stuff that big producers make, but reputation and primacy make the moulds.

This would be Apple’s thing. Consumers might look at knock-offs like people who flatter but aren’t to be considered as in the same league. Prices would be lower all around, but Apple could charge a premium.

In a free society it’s true that high prices would tend to attract competition that would wear the high prices down, but higher prices are still going to arise occasionally when things are new and are highly anticipated.

Me:

I don’t think the fashion model is an exact parallel either. The fashion case goes by cachet, prestige, etc. That is less the case for computers, which are functional devices, though it plays a part. I think mostly though people pay a premium for Apple–say, a 100% premium, roughly double–because of perceived qualitative differences: better OS, the ecosystem, elegance, aesthetic design, reliability, whatever. That is not easy to duplicate with a knockoff–so it seems to me.

My friend Rob Wicks, commenting on this issue to me, wrote:

I’m starting to see your point about Apple’s comparative benefit regarding IP. Microsoft benefits from IP far more than Apple. I think the main IP that Apple really extracts benefit from is trademark law. But everyone does that. In a world without IP, you’d probably have a bunch of relatively crappy knockoffs and Apple. It would be like the clothing industry, but with more demonstrable benefits in going with the genuine article. After all, there are cases where lower priced goods actually deliver the same or even better quality than higher priced ones when it comes to fitness for clothing and such, but I think Apple would actually make computers which lasted longer and worked better than any of the knockoff folk could manage, just like a Geely GE is nothing compared to a Rolls Royce Phantom.

Bottom line: in my view, Microsoft’s success and Bill Gates’s fortune is largely a creature of copyright; while Apple’s success is not nearly as dependent on either patent or copyright.

Let me emphasize that my purpose here has not primarily been to argue that left-libertarian IP abolitionists are wrong about Apple and IP, but rather to explore the fascinating and difficult issue of analyzing the real world effect of IP law–it’s insidious and significant, but counterfactual analysis is difficult.

[mises]

1. See Palmer’s “Intellectual Property: A Non-Posnerian Law and Economics Approach” and  “Are Patents and Copyrights Morally Justified? The Philosophy of Property Rights and Ideal Objects”. [↩]
2. Here Palmer implies Gates’s fortune is not due to IP, because “I don’t think that IP is really so economically significant, outside of chemical and pharmaceutical industries.” I think he’s mixing things together here. The argument among some IP skeptics is that most patents are not necessary, other than for chemical and pharmaceutical patents. But Microsoft’s fortune has rested on copyright, not patent. Further, even if only chemical and pharma patents are “necessary,” it does not mean that other types of patents, or other types of IP (such as copyright), are “not economically significant.” Lots of patents outside chemical and pharmaceutical areas are economically significant, of course, even if you can’t argue they are “necessary” by utilitarian standards. Microsoft just lost a $300M case to i4i outside these areas (see Supreme Court Keeps High Standard for Invalidating Patents). And of course copyright is “economically significant”–to Microsoft and Bill Gates. [↩]