Understanding Intellectual Property and Network Barriers to Entry in the New Economy: a Guide for Startups

I. Introduction

In it is indisputable that we are entering into a new age of economic life. Both the promulgation of the Internet and accelerating technological progress have now confirmed the transition from the post-industrial service based economy to an innovation and digital economy. Three particular instances of this larger transformation are the focus of this paper. First, as a replacement for the industrial worker-capitalist binary of social relations, global economic life is being increasingly understood in terms of the startup-investor relation. This relation is characterized by intellectual labor supported by equity investments, as opposed to the manual labor and interest based hegemony of the traditional capitalist. Second, consistent with this new idea-centric social relation, the institution of property is being increasingly defined in intellectual terms as a contract between inventor and state, rather than in John Locke's labor mixing paradigm. Third, market transactions between uniform consumers and suppliers engaged in neoclassical price and quantity competition are being steadily replaced with multi-sided markets connecting content producing users with applications and advertising – where platforms are replaced in violent and disruptive gales of “creative destruction.”

This paper will attempt to integrate these three themes by discussing how startups may forgo the protection of intellectual property (“IP”) if they are able to benefit from the network barriers to entry that platform markets provide. In contrast to their industrial counterparts – the massive factory-centric firms of old – firms in the new economy do not necessarily require intensive fixed capital investments to succeed, and scale can be achieved quickly within the networked apparatus the Internet provides. To make this point, this paper will interweave the necessary economic analysis with discussions of real world companies such as Microsoft and Google, culminating with...