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Apple the Monopolist

January 28, 2010

Apple's products seem light years ahead of the competition. By the time the competition starts getting vaguely close to making a product that approximates its excellence and elegance, Apple announces the new thing that is more astonishing than ever, and the whole thing starts again.

This came home to me this last week when I once again tried the Sony Reader, only to realize (once again) that it is nowhere close to being as good a reader as the iPhone itself, which is a product miles and miles ahead of the hundreds of phones you see lined up at Wal-Mart or Verizon. The same is true in laptops.

Now of course we have the iPad, which not only bests every ebook reader on the market but seems like it could smash the laptop market too. Whatever the future is, it seems to belong to Apple.

How can one company be so consistently amazing and yet be so consistently alone in this regard? One part of the answer is obvious: it is a great and innovative company. It deserves all credit for being so.

However, in free enterprise, entrepreneurs make money by emulating successful producers and improving on them in a way that will threaten the market share of the dominant players. In this way, profitability can only be assured by constant innovation and cost cutting, all to the benefit of consumers.

We see this process at work in the design industry — whether fashion, architecture, or home products. The rich pay high dollar for unique products, only to have knockoffs appear at discount stores, at very low prices, a few years later.

Why doesn't it work this way with Apple? Why is the competitive process of emulative rivalry not working as it might? Well, it's the patent, the government-granted monopoly for this sector of innovation. Apple has a massive patent war chest that grows by the day, and is open about its desire to retain it. Apple's Tim Cook said last year, "We like competition as long as they don't rip off our IP. And if they do, we will go after anyone who does."

Of course this blows away a central point of market theory, namely that successful firms teach and inspire other entrepreneurs to change their production plans, drifting away from less profitable paths toward more profitable paths, to adopt the new process that consumers have suggested is the most socially desirable path. This cannot happen if the winning company is working with the government to short-circuit the process.

And sure enough, the U.S. Patent Office granted Apple a number of patents on the eve of the launch of iPad. One covers a proximity detector in handled devices. PCMag further reports that Apple gained patents for "the management of wireless channel bandwidth, with applications in video conferencing; color management, so that colors are accurately represented across a range of devices; an image-rotation patent, that orients the image to the same orientation as to when the image was originally captured; and two other patents, covering switching IC ports to card slots, and timeline-based manipulation of audio and video tracks."

There is something very wrong here. Innovations are supposed to advance the social order, not merely cause everyone to cling to a single company as the savior of mankind. I asked an Apple fan why it is that Microsoft gets such a bum rap for its patents but the same crowd rarely blasts Apple for the same activity. The answer: because Apple's products are so good.

Yes, that's right. It's products are great, great enough to be profitable without the artificial subsidy. As Bastiat said, all innovation goes through three stages:

  1. one firm possesses unique knowledge and profits from it;
  2. others imitate and share in profits;
  3. the knowledge is widely shared and no longer profitable on its own, which thereby inspires new knowledge.

What Apple's patents do is artificially prolong the first stage — to the detriment of all. But, one might say, Apple would not be so innovative were it not for the patent office. Actually, that line doesn't make any sense. The patent office is open to all. Apple seems to be the company with all the greatest hardware innovations. In other words, what is unique about this company is not its patenting ability but its innovating ability — herein we find its value added to the world. Would that it could add that value without having recourse to the state to prevent others from emulating its success.

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