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I want to talk about Corporate Protectionism in general first, and then I’ll speak about industries in specific. Corporate Protectionism is the term I’m using to describe vendor lock in through long term contracts, through exclusivity agreements on products, and through business process patents.
We’re Americans. We’re brought up with the jingoism of freedom, capitalism, and of democracy in what it supposed to be the purest forms possible. We’ve allowed the reality of these to become severely distorted, however. We’ve done that by focusing so much on a lack of governmental action that we’ve ignored the corporations around us becoming destructive in their own policies. They’ve done this because the very definition and structure of a corporation requires that it always seek maximum advantage in a marketplace without regard to the overall society. A corporation must outperform its competitors. It cannot ignore that requirement even if the people running it know that the nature of that competition isn’t good for society. As long as the rules of the market remain what they are, it must continue to do its best to be better at manipulating those rules to its advantage than the competition.
Business Practice Patents
Business Practice patents are the most destructive and easiest to explain. Imagine a world where McDonalds invents the drive through in 2009, on the same week when Wal-Mart invents the self services food store with multiple checkout lanes. Both of these were invented at one time or another. Until these “new” inventions, you had to go in to a restaurant to get your food, and you had to ask a proprietor for the products you wanted, which were kept in his storage shelves somewhere you didn’t have access. Both improvements offered such huge advantages for some markets that they quickly became almost universal. If they’d been born in 2009, however, both companies would have no choice but to patent those processes. They would then be the only places allowed to do business that way for years. The Patent process was meant to encourage expensive innovation by allowing someone to invest the money and time inventing something and not have it immediately copied. Business process patents do not fit that profile. They are not expensive to invent relative to the near instant payback that results from their use. We, as a society, are better off without them.
Two cases of industry wide corporate protectionism come to mind that are negatively impacting us all right now. In both cases, the companies in their respective fields have fought tooth and nail to keep their own protectionist policies in place even though the marketplace would be much healthier without them. These companies would have to change to accommodate a more open marketplace, just like economies have to change to accommodate open borders. They’d rather spend fortunes through political influence to keep the status quo because they’re afraid they’ll be unable to compete. The two industries I have in mind are healthcare, and consumer telecommunications. Both are hurting the marketplace, and one – healthcare – is crippling our economy.
Protectionist Practices in Telecommunications
An easy way to illustrate the kind of corporate protectionism I’m talking about is to look at the cellular telephone industry in the United States. A cellular provider is really selling two distinct products. First, they’re selling their network. The coverage, performance, and services offered on that network including the rates charged are a specific area of competition. There are parts of the country where each of the three major carriers has significant advantages on their network. Second, they’re selling telephone handsets and other communication gear. This is a fierce market as well, with telephone manufacturers in what is probably the single most competitive product space today. By themselves, these are both good things. Competition for the network, coverage, price, and services is good. Competition for device capability and form factor is also good. So what’s the issue? Protectionism is reducing competition. By building incompatible networks, by forcing vendors to make multiple versions of their devices to meet exclusivity needs, and by closing networks to devices not purchased and managed entirely for their own networks, these companies have removed much of the competitive value in the marketplace. To meet the needs of Verizon, Sprint, AT&T, and T-Mobile; RIM is forced to create multiple models to compete in the same space. Consumers are also prevented from choosing from the best plan and network in a separate decision from which is the best phone or device. Both result in lower satisfaction and higher prices.
Is it helping these companies? For their network and services, as well as their pricing I’ve stayed with Verizon even though if I had a better choice in phones I’d have gone with products they don’t carry. I would still do this even if they opened their network. I would pick other phones, but I’d stay on their network. Verizon wouldn’t lose, and they might just gain. In other markets, the other vendors have better networks or offer pricing plans more appropriate to people. That’s a GOOD thing for the consumer. The electronics industry would even more competitive if I – along with millions of others could pick the phone we wanted for the network we wanted. The worlds leading manufacturer of devices is all but excluded from the US market, simply because their model doesn't support these protectionist policies. Consumers lose, and the service providers are selling less network time.
Why keep it locked then? Because by limiting the phones, they control access to the applications on those phones, which is a big money maker. Protectionism is the driving way these companies can make sure to own as much of the market add-on economy as possible. By controlling the phone, they create a mini-monopoly on the applications. These policies also serve to divide the market in which competition occurs. They use product exclusivity to divide the competitive market for network quality and rates for those users who value the tech as their highest priority. You want to Android, you have to go one vendor, and if you want an iPhone must choose another. They use closed networks to divide the competitive market for devices for those users who value network services, quality and price foremost. Either way, by the time you’ve picked based on these two; you barely notice the lack of competition for add-on application stores, accessories, and so on. In one set of policies, they’ve insulated themselves from the power of the marketplace to set price and function. That’s protectionism, and it’s bad for the consumer.
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