The general gist of most responses – to paraphrase – has been, “patent protection is important to protect small businesses and inventors from greedy thieving big businesses.”

We’re paraphrasing, so no-one actually wrote that. But some weren’t far off it.

However, we won’t tackle this subject again today, as we’d like to do more rummaging around first.

Until then we’ll throw this question out there: Doesn’t patent protection benefit big businesses more than small businesses and inventors?

Right now, we don’t know the answer for sure. But our inclination is to think that big businesses love patent protection because they’re the ones that derive most benefit. And the ones that derive least benefit are the consumers.

But as I say, we’ll cover this topic again some other time – maybe next week. Until the, feel free to make any comments on this thought and any opinions you have on the subject here.

For today’s subject, we’ll look at something a little different. A subject that could alienate at least half of the Money Morning readers.

It’s always dangerous broaching a subject when we know you may not like what we write, but as you’ll be aware that rarely puts us off.

This morning a couple of news stories caught our eye:

“Gender pay gap shows no sign of abating” – news.com.au

“Bosses to fund parental leave” – news.com.au

Our initial response to these stories is: why would anyone want to lose their competitive advantage in the workforce?

That’s right, if it’s true – and statistics suggest it is true – that female employees are generally paid less than male employees then attempts to ‘close’ the gender pay gap have the potential to rob female workers of one of their competitive advantages – that they are prepared to work for lower pay than male employees.

Whichever way you look at it, whether it’s employers ‘exploiting’ female employees or female employees having little choice but to accept lower wages, the statistics suggest that female employees as a whole do accept lower rates of pay than male employees.

Again, that’s the stats talking.

Therefore it’s reasonable to argue that this is a competitive advantage for a potential female employee. That she can undercut a potential male employee by implicitly or explicitly offering her labour services at a lower cost than a potential male employee.

Let’s take a look at a chart showing the male and female employment numbers since 1978:

As you can see, employment numbers for both have risen over this time. The number of male employers has climbed by around 50%, however, the number of female employees has more than doubled.

What’s the reason for this? Is it due to pay equalisation? Or is it due to fewer restrictions on women entering the workforce?

Or, is it because employers are able to pay female employees less than male employees? Giving female employees a competitive advantage over their male counterparts.

The problem with the idea of forcing pay equalisation on employers is that it’s more likely to create a greater inequality of pay or cause a shift of employment.

Let’s think about it this way. What does an employer want from his or her workforce? Well, they want their employees to produce as many products or sales for them as possible in return for paying as low a wage as possible.

At some point an employer will discover an equilibrium rate of pay at which he or she knows that employees will be happy with. In all probability this will entail different rates of pay for male and female employees – the numbers say that’s true.

But make no mistake, the employer doesn’t set these rates because they are an evil capitalist, they do so based on experience. And it’s likely – as the statistics show – that female employees are prepared to accept lower wages in return for their labour.

It’s fair to argue then, that as more females have made themselves available to enter the workforce in the last thirty years, employers have hired more females based on the ability to pay them a lower wage than they would pay for a male employee who is doing the same job.

Again, that’s not us saying that, the statistics say it is so.

Now, here’s the problem with pay equalisation and paid maternity leave. It robs the female employee of their competitive advantage.

When a female is applying for a job, whether we like it or not, one thought process going through an employer’s mind is whether the potential employee could leave to have a family. And as you know, when a child is born, overwhelmingly it’s the mother not the father that forgoes employment to care for the child.

Of course, it’s against the law for the employer to ask if the female candidate is planning to have a child, so they have to guess. And because they don’t know for certain they may choose to take out an insurance policy by offering the female candidate a lower rate of pay.

If the employer can get away with paying a female job applicant a lower wage than a comparable male applicant then maybe the employer may take the risk. But what if there is now pay equalisation?

Will the employer still take the risk if he or she believes there’s a chance the female employee could ask for time off to look after a new family? Prior to pay equalisation, the employer could have factored that in to the lower wage, but with equal pay the employer can’t do that unless the wage rate of male employees is lowered to the same level as female employees.

And that creates another problem. Our guess is that it qualifies as a social problem.

Again, whether you like it or not, many male employees are likely to think it ‘unfair’ if they’re getting paid the same wage as a female employee who takes six month’s maternity leave, or is away once a fortnight to take care of a sick child.

Or if you want more stereotypes – doesn’t work on the weekend, or in the evenings, or has to pick the kids up from school, etc…

We all know that’s a stereotypical view of the female employee, but the fact remains that the majority of male employees are likely to have those thoughts, even if they’re new age metrosexuals.

The consequent knock-on effect of pay equalisation is that it could harm the employment prospects for prospective female employees. How so?

For a start it could mean fewer females employees are employed by businesses. If there is still the perception that male employees expect a higher rate of pay to female employees then it’s possible that employers will be less inclined to employ females on the same wage.

The other potential knock-on effect is that male employees shift employment to workplaces that offer higher wages, pushing out higher paid female employees.

We note an article from The Age newspaper last year, “Male teachers shifting schools.”

According to the article:

“Educators were perplexed about the drift of male teachers to non-government schools… Australian Education Union president Angelo Gavrielatos was equally puzzled…”

Reasons they give is that perhaps male teachers are being enticed to private schools at the expense of public schools.

Again, we have no idea whether that’s true or not. The article quotes Independent Schools Council executive director Bill Daniels, “It’s not a concerted effort by us and I can’t imagine why the figures would be that way.”

Well, one potential reason is the phenomenon we’ve mentioned above. That male employees are conditioned to expect a higher wage than female employees. If the state schools system mandates equal pay for male and female teachers, and male teachers consider it to be ‘unfair’ then surely there’s a greater chance that male teachers will seek higher paying jobs.

One way of doing that is to seek employment in the private education sector where wages are usually higher.

In other words, pay equalisation in one industry – public schools – has a knock-on effect of increasing the number of male employees in another industry – private schools.

Therefore we can also suggest that a further effect is fewer higher paying jobs for female teachers in the private sector as they are facing increased competition from male teachers.

Look, we don’t have enough space to cover off every scenario here. Naturally, there would also be circumstances where employers prefer to employ more women and fewer men, and are therefore able to set the equal pay level closer to the level acceptable by female employees rather than male employees.

But either way, the overall effect isn’t a bumper payday for women employees.

The fact is, like every other attempt at market manipulation by governments, at the initial point of impact the appearance is that the policy has been successful. Yet as soon as you look at the collateral damage it becomes apparent that many others have suffered as a consequence.

Quite possibly, this could be the most unpopular article we’ve ever written for Money Morning – although that comment itself could be seen as patronising! – but the reality is that pay equalisation and paid maternity has to be paid for from somewhere.

One way is an attempt by businesses to charge higher prices. But this is difficult, as businesses would already charge higher prices if they thought they could get away with it. The fact businesses haven’t raised their prices already suggests their ability to do so is limited.

Therefore the cost has to be born elsewhere. And the only other ‘elsewhere’ is in job losses or a net cut in wages.

There’s little doubt that pay equalisation and paid maternity leave won’t create a new dawn for women in the workforce. Odds are it will do nothing more than lower the overall job opportunities for women in the higher paid jobs, and consequently lower the pay in the lower paid jobs.

We could be wrong, but it’s worth thinking about.

Cheers.
Kris.

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.