Patents and the lessons learned from Web 2.0

Patents and the lessons learned from Web 2.0

With reduced natural barriers to entry, entrepreneurs should consider artificial barriers to entry such as patents

When Netscape went public in the fall of 1995, few of us understood that we were entering an era of constant and accelerating change. Since then, 16 years of Moore's Law has given us powerful and cheap hardware. The open-source software movement has made software that's worth millions of dollars freely available to anyone who can click a mouse. As one can see, reducing these natural barriers to entry has made it easier to start a Web services business. These same trends have had an interesting effect on intellectual property strategy.

Back in the days of Web 1.0, expensive hardware and software meant that large venture-funding rounds were needed to get a company off the ground. To protect these large investments, venture capitalists would insist that their Web 1.0 portfolio companies invest heavily in patents and other intellectual property rights. As the size of those venture rounds shrunk on the way to Web 2.0, the incentives and budget for intellectual property protection became smaller as well. Open hostility toward patents from the open-source community and 10 years of judicial infighting over the patentability of "business methods" and other Web 2.0 technologies didn't help matters. Many Web 2.0 companies underinvested in patents, when they should have increased their efforts to secure legal barriers to entry to offset the reduction in natural barriers to entry.

As Web 2.0 companies have started to enter the public markets, we now have enough information to compare Web 2.0 patent strategy against Web 1.0 patent strategy and come to some conclusions. First, the decreased costs of hardware and software have made it easy to create a Web services company, including copycat companies. How many times have we seen this scenario play out in the past five years: (1) Startup company emerges to become the leader in a Web services niche; (2) "me-too" companies enter the niche, copying the leader; (3) the leader spends large amounts of money on sales and marketing to maintain its lead; and (4) the leader spends even more money acquiring "me-too" companies, encouraging even more "me-too" companies to enter the niche.

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