offkey

For anyone who has wondered whether patents actually help the economy, take a look at Facebook’s recent $40 million dollar purchase of 18 patents on social networking.

Let’s take a look at this situation for a moment. To start with, we should remember that Friendster was sold just last year for $37 million dollars, three million less than the patents alone have now sold for. We should also recognize that these patents are themselves little particles of nonsense. They are government granted monopolies on people making friends because, for instance, they have a friend in common. Friendster patented that. Essentially they took someone’s notebook from an Intro to Sociology class, scribbled “with a computer” in the margins next to each main idea, and sent it to the patent office as 18 different “inventions”.

Most importantly, we need to realize what $40 million is worth. Friendster was in independent operation from 2002 to 2009. That means the patents ended up generating almost $6 million dollars a year, more than then the entire company’s revenue for 2005 (other year’s numbers are harder to find but I’d welcome any pointers in the comments).

Given these facts, what was the economically rational thing for Friendster to do: run a large internet company providing services to 1.5+ million users, with all the server farms, bandwidth deals, administrators, marketers, executives, and developers entailed in running such an operation, or pay people to sit around all day and figure out how to add “with a computer” to novel ideas like “making friends”? One of those activities is generally considered economically productive, but it is the other, the nonsense factory model that ended up making more money.

If patents had never existed, Friendster would still have run their business, had their successes and failures, and passed on their techniques to the next generation of social network companies. Facebook, as one of those more successful companies, would still have $40 million dollars available for doing actual work like paying engineers to improve the features and capabilities of today’s social networking technologies, rather than having to pay their profits backwards in time to avoid being sued over nonsense. I don’t think it is nonsense to say that, in that world, we’d all be better off.