Why don’t inexperienced entrepreneurs with high tech business ideas sell those ideas to existing companies with the knowhow and resources to exploit them successfully? Since companies like Apple and Cisco have shown their skill at bringing new products to market successfully, having them exploit entrepreneurs’ new product ideas should leave everyone better off.
Nobel Prize-winning economist Kenneth Arrow explained why entrepreneurs rarely sell their new product ideas to established companies better able to exploit them.
His answer has become known as “Arrow’s Information Paradox” and goes like this: If you try to sell someone a piece of knowledge, like an idea for a new product, they won’t buy it unless you also provide evidence that the idea will work. Otherwise, the buyer risks wasting money on ideas that go nowhere. Therefore, to sell an idea to someone else, an entrepreneur needs to disclose information about it.
That’s the problem. Ideas cannot be taken back once they are revealed. However, once someone has been told an idea, any incentive to pay for the idea evaporates since the information the information just provided for free cannot be rescinded.
This is the paradox: Ideas cannot be sold if they aren’t disclosed, but once they are disclosed no one will pay for them.
Professor Arrow explained that the patent system helps to solve this paradox. If you have a patented technology, you can disclose it to see if a buyer is interested. If the disclosure peaks the buyer’s interest then he or she will have to pay to use it. As long as the patent cannot easily be worked around, this legal protection precludes others from pursuing your idea without paying for it.
Companies are getting much better at avoiding Arrow’s Paradox than they use to be. While markets for technology remain a very tiny share of all economic activity – the World International Patent Organization (WIPO) reports that they totaled approximately 1/3 of 1 percent of world GDP in 2009 – they are growing very rapidly. The WIPO found that when measured in constant (2009) dollars, the total spent on royalties on licensing was $15.5 billion in 1970, $44.3 billion in 1990 and $180 billion in 2009.
Alongside the rise in the magnitude of markets for technology, a variety of organizations that help match buyers and sellers have emerged, including IP clearing houses, technology licensing offices at universities and government agencies, IP brokerages, and auction houses, WIPO reports. Moreover, big, established companies have become more active at soliciting technologies developed by independent entrepreneurs and academic institutions. And more companies are forming to make money solely from the development and sale of intellectual property, letting others use their IP to make and sell products.
In short, in high tech, more businesses are selling ideas as companies are using the patent system to get around Arrow’s paradox.
High Tech Concept Photo via Shutterstock
I would also have to add that costs to implement ‘idea’s’ has also been a barrier that isn’t easy to overcome. Filing a Patent is definitely the first step to protecting oneself.
Scott-Great article.
My business provides turnkey loyalty programs for small and mid-sized business to help them drive repeat business. We had similar considerations to make when developing our software(we had a paranoia of others stealing some of our IP). Before seeking large customers and large certified partners we built a satisfied base of customers that was generating referrals. It is easy to develop a great concept but until you take it to the market and generate sales you have nothing.
Sincerely-
Dave Gee
CEO – Bungee Loyalty Programs
well said – they won’t buy it unless you also provide evidence that the idea will work
Scott, Interesting topic. I kicked of my idea back in 1997, which was really just a spin-off of what the airlines were already doing. The variation was to take loyalty program technology (or loyalty marketing) and wrap the marketing concepts and capabilities into a DIY software program that could be sold to small businesses, at an affordable cost, allowing them to compete with the larger players. At that time, only the larger players could afford loyalty progam technology. The thought of a patent seemed improbable and definitely unattainable from an expense perspective. Well, to shorten the story, today, 16 years later, my company, Preferred Market Solutions, is still successfullly selling that concept, called Preferred Patron. The Loyalty Program concept has taken off big time, but unfortunately, with no patent protection in place, a proliferation of companies have surfaced attempting to do the same. Many copiers think they are unique or have a unique twist and some have even filed patents, which we have had to dispute in many cases, as we have already been doing it. Lessons definitely learned here.
Brett Perlman
Preferred Market Solutions, LLC