As you may have noticed, we’re not very formulaic with Money Morning. We don’t have a system where we write about one thing one day and then switch to something else the next.

Sometimes we may harp on about something for days on end. Hopefully that won’t try your patience too much, but we do like to wring as much as we can from a subject before moving on to something else.

And right now we think we’ve wrung that one pretty dry… For now!

So today we’ll take you back in time by a couple of months. You may recall that in January our colleague, Chris Mayer editor of the US investment advisory Capital & Crisis was in Australia on an investor’s tour.

He asked us to turn up as a guest speaker, which we did, where we blabbed on for 45 minutes or so about the Australian market. Seeing as what we spoke about was a concise version of what we write in Money Morning, I won’t bore you with the details.

Instead, I’ll take you through what some of the other guest speakers had to say.

In summary, there was a US based technology company, a New Zealand agricultural investment trust, and two Aussie small-caps.

Actually, the small caps were more like micro-caps. Too small and illiquid for us to consider as a tip in Australian Small-Cap Investigator, but interesting nonetheless. I won’t reveal them today as there isn’t the space, but you’ll read about them in Money Morning next week.

Today let’s take a look at the US based technology company. And unfortunately it isn’t yet listed. It’s in what they call the pre-IPO stage. In other words you can’t buy shares in the company on the stock market, all you can do – if you’ve got a big enough wallet – is buy a stake in the firm while it’s still private.

Obviously, there’s a lot of risk in that as you may either find it hard to sell your investment, or you may have to take a pretty big ‘haircut’ on the price if you need to sell your holding before it goes public.

But the hope pre-IPO investors have is that the company will turn into the next Microsoft or Google. That they can turn a USD$100,000 investment into $1 million, $2 million or $10 million when the company does eventually list its shares.

The downside of course, is that it never goes public and you’re left licking your wounds thinking about what could have been.

But the plus side for this company is that it’s already built up a pretty good list of paying clients such as AT&T, British Telecom, The Los Angeles County Bar Association, and lots more – including Australia’s own Macquarie Group.

And the firm’s representatives were out here for scheduled talks with Australia Post as well.

So, who is this company, and what does it do? Well, its name is RPost. In a nutshell – I won’t go into all the details – it provides a registered post service and electronic signature service for email.

Now, you may think, “Hang on, I can use the ’send receipt’ facility in Microsoft Outlook, and scan my signature into the PC already.”

While that’s true, based on what the guys at RPost say the Outlook system is neither foolproof and nor is it good enough, particularly when it comes to legal documents.

Take the Registered Email service. This provides an automatic record of when an email has been opened without the receiver of the email having to do anything. It means there is an instant ‘paper trail’ for anyone who sends important emails.

Because not only will you have proof that you’ve sent the email, you’ll also have proof that the email has been delivered and opened.

Look, for most people this level of ‘paper trail’ isn’t important. But you can certainly see how it could be applied for certain corporate or legal email use. The good thing about it is that it’s an opt-in choice for the sender. They can choose to just send a normal unregistered email if it’s not important to have a paper trail, or click the RPost button if a paper trail is required.

And as for the electronic signature, it allows legal documents to be sent across the country in an instant, signed with a legal enforceable electronic signature and then sent straight back. It can turn a 2 or 3 day turnaround time into a matter of minutes.

However, there was one aspect of the presentation that didn’t sit well with your editor. Don’t get me wrong, I like the product and I can see a pretty big market for it. But, it was when they explained how RPost had worldwide patents that prevented competitors from providing the same or similar service.

As we recall from the presentation – we didn’t take a note on this bit – RPost has taken out legal action against around half a dozen companies for possible patent infringements.

Again, as we recall, most of those have been settled out of court, with the remainder still being negotiated.

As you know, we like competition. But we can also appreciate that if you have the law on your side, you’ll do all you can to prevent competition from entering the market. In this case – as with many others, particularly in pharmaceuticals – patent protection provides many favours to those that hold the patent.

That means it can use its privileged government sanctioned position to lock in a monopoly on this line of business. If anyone else tries to offer a similar service they can be sure they’ll get a visit from RPost’s lawyers.

As we say, if that’s the law regarding patents, any company would be mad not to use it for their advantage.

But the way we look at it, patent protection is terrible for consumers.

The argument is always put forward that without patent protection companies wouldn’t bother to innovate because they would know another firm could just copy their product and potentially release it to the market first.

Therefore patent protection is necessary so that it gives the ‘inventor’ enough time to work on and develop their product. And as a reward for all the effort it’s only fair they should have the first crack at the market, unhindered by competition.

On the surface that seems reasonable. Why would you think of great new ideas if you knew someone else could instantly copy your idea?

The reality is that when you consider it properly, the argument doesn’t make sense.

There’s little difference between being the first to market and being fourth to market in terms of the risk you’re taking as a business. Does that make sense? Let me try and explain…

When you’re first to market with a new product you’ve either invented something that’s completely new that no-one else has previously thought of, or you’ve taken an existing method and improved it.

There could be others, but we’d think that covers the two main ones.

But when you’re second, third or fourth to market then you are either providing something similar to what’s already available, or maybe you’ve made some improvements to an existing product.

The point is, as the fourth company that enters the market, you’re still taking a huge risk. In fact you could argue that the late mover in the market is taking an even bigger risk than the first mover.

The first mover had the benefit of patent protection and a head start. The first mover was able to build up market share while the fourth mover had to wait on the sidelines.

Granted, the fourth mover could gain some of the benefits by having a ready made market to enter, but it still runs the risk of business failure just like any other business. Perhaps even more so as it doesn’t have the same ‘leg-up’ that the patent holder had.

So, how would it work if there weren’t patents? As we’ve mentioned, the argument is that people or firms wouldn’t innovate unless they were given protection over their invention.

Without patents, inventions could be lost forever as inventors would maintain complete secrecy for fear of their idea being exposed and exploited by someone else.

Those are pretty strong arguments to try and counter. But we’ll try.

The alternative way of looking at it is that without patent protection, there would be greater urgency by firms and individuals to bring their idea to market.

Rather than spending a considerable amount of time and resources on launching legal action to prevent another firm from offering the same product to a waiting public, firms would scramble to be the first to market.

For the consumer that would have to be good news. More firms competing to provide a brand new product from day one would likely lead to lower prices much sooner. Rather than waiting five or ten years for the cost of a product to decline as more competition emerges, perhaps costs will not be high to begin with. Or maybe prices would drop after just months rather than years.

The pharmaceutical industry is probably the biggest abuser of patents. Years and years, millions and millions of dollars in development costs and legal fees to prevent competing drugs from being released to the market.

But would pharmaceutical companies still look to develop new drugs without protection? After all, the costs to develop a drug that may never make it to the market is huge.

Well, we’re sure much smarter people than your editor have already done a bunch of research on this. But we’d be prepared to say that investors would still invest, and companies would still innovate.

It’s human nature, not patent protection that makes us all want to work less, or do things easier, or have medicinal drugs that will make us better. The demand from consumers will still be there even without patents.

And just as importantly, the desire by entrepreneurs and business men and women to seek out new ways to make profits will also still exist. Whether they end up actually making a profit or not is irrelevant. Some businesses will and some won’t.

Drug companies would still look for a cure for cancer or AIDS. They would do so because of the massive potential reward if they unlock the secret. Sure, under a patent they could potentially end up with bigger profits in the short term, but even without a patent, if they produce the same result, they’ll still make handsome profits.

And those profits would arrive sooner due to the urgency to be first to market under a non-patent system. Their urgency to act now would increase five or ten-fold.

In the case of RPost, governments have granted it the right to provide a registered email service to the exclusion of all other potential competitors. Competitors that may have invested an equal amount of capital and risk into their inventions.

Yet because RPost – and other patent holders – secure a government favour, consumers are prevented from enjoying and utilising the services of others that may not only be better but could also be provided for a lower cost.

In our view patent protection should be kicked into touch. Market forces and innovation by entrepreneurs would ultimately ensure consumers gained access to the best new products in a more timely fashion.

Cheers.
Kris.