Will algorithm patents replace economies of scale as the most critical barrier to entry?

Manufacturing scale matters less as we pivot to a knowledge economy

Economies of scale as a barrier to entry have been a fundamental precept taught for years in economics classes worldwide. Capital had to be invested ahead of being able to create value, and then people could be hired to staff the capital equipment to produce goods. Having both capital assets and existing volume gave companies a distinct competitive advantage. It drove both vertically integrated companies as well as horizontal holding company models, with the latter made famous by Jack Welch’s oversight of U.S. blue chip company General Electric.

Technology today has greatly reduced scale as a competitive advantage. Virtualization and abstraction have led to business theorists talking increasingly about asset-lite business models and asymmetric competition. Clouding this pivot is the emerging discussion around consumer scale. This is a competitive edge gained not necessarily from capital scale, but by capturing consumer brand loyalty that generates the scale. This concept is often discussed as the “force multiplier” or the network effect of the ecosystem. It is giving rise to additional new terminology, such as multi-enterprise business networks, in which partnering and the joining of complementary assets enable all participants to benefit from the aggregation of intellectual property, which is fed to the entire ecosystem of loyal customers.

Humans have the big ideas; curating those ideas into scalable advantage requires technical skills, automation and patent protection

When consumer loyalty generates cash, that cash can be deployed to fund projects, such as small-scale, smaller-dollar-volume projects akin to becoming an internal venture capital (VC) arm for any future product and service innovations. This concept manifests itself in the notion of fast failure and rapid iterations that are anathema to scaled manufacturing best practices. Being successful requires having people who are insightful about what businesses or consumers want and how to turn those wants into an automated piece of software — in short, algorithms.

As virtualization and software abstraction move the economy ever closer to utility computing, first discussed in the late 1980s by technology futurists, and as quantum nears economic advantage, the mission-critical business competency will be writing algorithms to apply against the ubiquitous data traffic being generated and stored throughout the computing utility network. Faster compute leads to faster exploration and discovery. Faster discovery leads to shorter product and service cycles and therefore shorter competitive advantage windows.

As such, algorithms that generate these new insights will increasingly become the way enterprises generate wealth, as well-skilled individuals push the limits of conventional wisdom and then deliver these new insights. Preserving that ever-shortening advantage will come from increased vigilance in protecting intellectual property. Thinking and creativity provide the advantage. We hear time and again at analyst conferences about how skills are in short supply and how people are a firm’s greatest asset. TBR expects to hear more frequently about the patent protections around these automated ideas.

Clean blockchain data fed to quantum will accelerate the value of algorithm patents

Accurate data will be available in real time for these algorithms to run against to generate real-time decision-making guidance. As automation removes more and more human toil from the economy, only individuals at the point of creation or the point of consumption will be critical to the business, with the algorithms mining the consumer demand to test against the next big idea to come from well-skilled humans and converted into competitive advantage through an automated algorithm run against real-time, accurate data.

As explored further in TBR’s Quantum Computing Market Landscape, in the quantum computing realm, where insights and actions can be obtained exponentially faster, the IP advantage is also exponentially greater. Think of the traveling salesman example that comes up regularly in quantum conversations: If a delivery company can patent an algorithm that speeds up delivery rounds and makes deliveries more efficient overall, that could swiftly create extinction events in the delivery market. If we extrapolate this, emerging technology has the potential to fundamentally alter competitive landscapes by generating faster and more accurate insights.

TBR analysts will be attending the Quantum.Tech conference Sept. 10-11 in Boston. Please contact your account executive to coordinate a conversation with TBR analysts at the event.