Subject: Soul of a New Economic Idea?
From: Scott Michel <scottm@intime.intime.COM>
Date: Sun, 7 Feb 93 15:55:05 PST

Anyone in the "I hate patents at all costs" crowd care to comment on the
"The Analytical Economist" column of Sci. Am. (page 109)? It discusses
patents created by the Big Bad Collosus Companies from a pretty unique
viewpoint - patents can be treated as call options in the marketplace
of ideas. 

[A simple explanation of stock options is included in the tail end of
the message. There are probably some technical details and other fine
complexities that are omitted to keep things *simple* (flames > /dev/null
wrt explanation.)]

Essentially, from my POV, this is yet another good defence of patents
and why BBCCs have to hide behind lawyers when someone treads on the
patent (inertia of realizing they're going to lose in the marketplace
to developing the market that the patent covers.) It doesn't mean that
patents are bad, but the practices of BBCCs are suspect or at worst not
in their best interests.

If FSBs do manage to become successful in the marketplace (the beauty
of capitalism, despite the claim of being movtivated by "anarcho--
socialist" tendencies), patents will eventually be the undoing of the
FSB. But FS and FSBs are not the solution to the demise of patents;
FS and FSBs could leverage patents themselves. Given that copyrights
on software are not protective enough of intellectual property, what is?
One thing that keeps coming up is how vicious some companies are in
defending and testing the validity of their patents, but no one ever
mentions that it is the *responsibility* of the patent holder to enforce
the patent. Sure the XOR cursor and the AT&T backing store patents are
annoying, but the patent holder has to come after you (and patent disputes
hardly ever go to court, they generally get settled out of court.)

Even on the premise that the key to the success of a FSB is maintenance,
what software business doesn't depend on a large part of its revenue
coming from post-sales support? I'm in the process of writing another
business model of FSBs that starts from the objectivist POV which explores
another direction.

-scottm

Those who might not be familiar with stock options (put and call 
options): options basically allow the investor to buy a large package of 
stock and bet against the future of it within a finite amount of time,
usually a month to 12 months. If the bet is that the value of
the stock will go down, this is called a "put option"; the opposite is
called a "call option." The investor only has to put up a fraction of
the value of the entire package (generally 10%.) Given a "strike" price that
the stock must either go above or fall below, the trader can then exercise
the option and realize a profit. Technically, this is known as leveraging
stock.

For example, I elect to purchase a call option for XYZ of 100,000 shares
at $10 ($1,000,000 total valuation.) I have to put up $100,000 for this 
privilege. If the strike price is $12.00, and the price goes up to $15,
exercising the option (selling the shares) nets a profit of $5 x 100,000.
However, I severely hosed if the stock goes down in value, and I have to
make up the difference (i.e. goes down to $8; I have to make up $200,000).

To show how a put option works, assume the same example (100,000 shares
of XYZ at $10), with the strike price at $8. When the option is exercised 
at $8 per share, the shares are bought by me at the $8 price. Then I
sell them at the original option price, $10/share. I realize a net profit
of $200,000. Recall that for every action there is an equal and opposite
reaction - for me to buy them, someone has to sell them; and vice versa.
There had to be someone else who purchased the call option (another
investor or an invenstment bank who acts as the underwriter of the
option.)