IBM makes more money by destroying value

An article in today’s NY Times demonstrates how companies increase profit by destroying value instead of creating it:

[W]hen an upstart, Platform Solutions in Sunnyvale, Calif., developed software that turned standard servers into systems that mimicked I.B.M.’s expensive mainframes, Big Blue fought back. After legal action failed to fend off the pipsqueak, I.B.M. resorted to a bear hug: it bought Platform in July for $150 million. And then it promptly terminated the innovative product.

As you see, the goal of corporations is to make profit for themselves and not to benefit society in any way. Here we have a company that invented a less expensive way to provide the same product to customers, and IBM went and destroyed it in order to maintain its monopoly power. Monopoly power is a type of value transference because it allows the monopoly to charge higher price than the market price in a competitive market.

I hope this story demonstrates how company profits are not equal to the amount of value the company has created.

As I wrote before, Michael Porter understands our economy better than most economists.

Comments

[Fandingoatemybaby]

While on the surface I would agree with you, the answer (as usual) involves looking at the underlying political principles at play. IBM would not be able to do this (profitably) without a monopoly agency of force imposing strict intellectual property laws.

If you buy into the idea that an idea is property, then you will have those with resources removing ideas from the marketplace when it could hurt their competitive advantage.

Personally, I have a problem buying into that notion, since the concept of ownership arises when there is scarcity - we can't both use the same ax at the same time, hence ownership and property rights follow. An idea doesn't work that way - if I see you build an ax, and build my own based on your design, I am not preventing you from using your ax. What I am doing is hurting your chances of profiting from selling the ax to others, since you will not have an enforced monopoly on that design.

But I'm not sure "profit motive" is a justification for making something non-tangible and non-scarce, into property. And it certainly leads to things like the IBM case, where in fact non-market means (government support of IP) can make customers worse off.

[agnostic]

No aspect whatsoever of electronics, and computers especially, would exist without either a massive monopoly or government intervention into the market -- see Bell Labs, History of, 1940 - 1984, and Department of Defense.

Big-I innovation -- inventing information theory, cryptography, transistors, lasers, modems, fiber-optics, the internet, UNIX, C and C++, cell phones, etc. -- would never be produced by a firm in a highly competitive market. Too risky to pay a bunch of nerds to play around and hope that The Next Big Thing results.

Small-I innovation -- taking an existing complicated technology and making it a bit smaller or faster or cheaper -- can happen in a highly competitive market. You're not designing something new from scratch, just polishing it.

So, let 1000 monopolies bloom, if we want new technology. Look at how pathetic it's been since they shut down Bell Labs in 1984. All the cool stuff now was invented before then, and basically jackshit during the past quarter-century.

[Fred]

'A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns.'

Warren Buffet

[Shawn]

I agree with what you wrote HS but if a company really wanted to help with innovation, they would not apply for copyrights. But then businesses probably would not be in business.

[Turambar]

"As you see, the goal of corporations is to make profit for themselves and not to benefit society in any way."

Welcome to Ayn Rand 101.

" Here we have a company that invented a less expensive way to provide the same product to customers, and IBM went and destroyed it in order to maintain its monopoly power. Monopoly power is a type of value transference because it allows the monopoly to charge higher price than the market price in a competitive market. "

The patent system is a government enforced monopoly too. But without it the economy and innovation would be greatly retarded. I question how much of a first-mover advantage even exists any more, and given how easy it is to set up low cost manufacturing and knock off products can you imagine what would happen to investment capital going into innovations if there were *no* ability to defend a market segment?

In this particular case IBM is defending a technology in which it has probably long ago recouped its investment. But what do you lawyers say about tough cases making bad law? For ever situation like this there are probably dozens of
http://www.engadget.com/2008/02/06/keepin-it-real-fake-part-cix-c-002-hiphone-ups-the-ante/

Even if you looked at it from an investor's standpoint it can be justified- whats the value of a company who technology can be co-opted at any time. Who's large amortized capital investments are a liability verses cheaply available individual commodity components.

You advocate a system that would greatly retard innovation and investment and make all company competition based on price and marketing.

[sestamibi]

I don't buy your analysis at all. Platform Solutions created something worth $150 million to IBM, and Platform made a conscious decision that it was also worth $150 million to them to cease activity. As we used to say in New York "What's it to ya?"

A similar example might be the implementation of cap & trade. Under such a scheme, the American Lung Association could purchase credits and sit on them. The price they pay would be how much it would be worth to them to keep those "pollution rights" out of circulation.

[Healthy Markup]

If Platform Solutions actually produced something that valuable, then all their competitors now know it. And if IBM actually is sitting on the technology, then they're about to live in a world of regret as one of those competitors (or some other nerd-commune) produces similar stuff and makes all the money. This won't take long.

Maybe Google will give me a $200 million body slam! Oww!

[rob]

HS was not claiming that the owners of Platform Solutions or IBM lost value as a result of the transaction. They did not. If they would have, they would not have made the deal. The claim is that society as a whole lost more than IBM and Platform's owners gained.

Essentially he's arguing that granting protection to intellectual property that isn't used or was patented to prevent others from producing it creates a negative externality because the invention can't be used freely for ~20 years, the patent creates prior art for similar inventions, and even when the tech can be used, it's public domain, so risk-taking entreprenuers can be easily copied.

So yes, both parties to the deal benefit. But they benefit at the expense of everyone else. The Constitution allows patent monopolies because they are a social good. Patents that are not should be invalidated. Though that does lead to problems, like Amazon trying to have patents whose owners tried but failed to commercialize invalidated.

[sestamibi]

"So yes, both parties to the deal benefit. But they benefit at the expense of everyone else."

Um, why does "everyone else" have to be considered in this deal if there are no negative externalities that also have to be considered?

As I said before, what's it to ya? Or alternatively, it's none of your business.

[rob]

Sestamibi,

The negative externality is that technology under government-granted monopoloy can't be used by anyone else.

Maybe this scenario will make it clearer for you. You have cancer. I create a cure for that cancer, patent it, and sell it to Merck. Merck does not commercialize it. Merck and I are both happy. "What's it to ya?" You die. Would you then feel that it's some of your business.?

[sestamibi]

Rob--

No, it's still not my business, especially when the government monopoly is not granted UNTIL the technology is developed.

Private property is private property, to be used or NOT USED as the owner sees fit. That's what's it to me. When we violate that ground rule then there's no private property at all. Or maybe that's what you want.

[rob]

Oh, you're autistic. Oops, libertardian. Sorry I wasted my time.

[sestamibi]

Rob, you're an FA. And by the way, my son is autistic.

[rob]

What's it to me? Not my kid. It does run in families though.