Martin is wrong about many other facts in that post—copyrights do not need to be defended to be maintained, that's trademark—but he is gloriously wrong about Lovecraft. Indeed, he is so gloriously wrong that I must once again recycle my favorite publishing joke.
Q. Who knows less about publishing than a midlist author?
A. A best-selling author!
Leaving aside the "issue" of fan fiction in general, Martin's most egregious errors deal with Lovecraft. I'm sure other people will flense Martin about the tangled mess of his various claims, but I'll step up for the old man. Martin's tubthumping is bad enough without grabbing Lovecraft's corpse by the ankles, giving it a shake and going, "Boogah boogah! Every time you write a Harry Potter fan fiction, God starves a racist to death!" (If only!) Martin's errors are three:
a. Lovecraft did not "lose control" of his copyrights because he allowed other writers to make reference to characters in his stories.
b. Lovecraft did not die in poverty because of this loss of copyrights.
c. If anything, the unclear provenance of Lovecraft's copyrights after his death (when they would have done him little good anyway) is what kept Lovecraft's work in print and vital to this day.
First, the issue of Lovecraft's copyrights is complicated—the single best bit of research on the topic is Chris Karr's The Black Seas of Copyright. This isn't just my opinion by the way; when I was researching Lovecraft's copyrights several years ago, everyone I talked to including such figures as Robert Weinberg directed me to this essay. It is as definitive as it gets.
It's also too complex to do much more than summarize, but here are the key bits—a number of Lovecraft copyrights, particularly those for stories first published in Weird Tales, were owned by the magazine itself. This sort of rights assignment was not unusual during this era. For other tales, Lovecraft had assigned R.H. Barlow to be his literary executor. Annie Gamwell, the surviving aunt, owned the rights and worked with Barlow. Barlow wasn't much of an executor, being a young fellow and a bit of a mliquetoast, honestly. August Derleth was more knowledgeable, more ambitious, and ultimately more ruthless. Through force of personality and, this must be said, a practical know-how that Barlow and Gamwell lacked, he gained control (if perhaps not exactly true ownership) of many of Lovecraft's copyrights and exploited them handily and to positive effect for Lovecraft's continued publication. He also created many derivative works which for years obscured where Lovecraft ended and Derleth began.
Regardless of the ethics of Derleth's decisions, the important points are that Lovecraft did not lose control of his copyrights due to his encouragement of other writers to add to the so-called "Cthulhu Mythos" and further, Lovecraft did exactly what an author should do—he made his wishes clear to his next of kin and assigned an executor. The chaos to come happened after Lovecraft's death and has much to do with the personalities of the parties involved and a bit to do with the always slippery world of American copyrights, renewals, and the essential truth that possession is nine tenths of the law. It has nothing to do with a number of other writers putting words like "Cthulhu" and "Necronomicon" in their stories with Lovecraft's permission, which would not lead to a dilution or disruption of copyright at any rate—not anymore than George R.R. Martin giving HBO permission to make films of his books would lead to a dilution of Martin's copyrights!
Incidentally, when Derleth claimed the copyrights for Lovecraft's work, he was quite protective of them. He threatened Weird Tales and writer C. Hall Thompson when the magazine published some of Thompson's Lovecraft pastiches, and it worked! Thompson's fledgling career as a weird fiction author was over. Copyright worked just fine.
Two, Lovecraft died in poverty for two major reasons: the Great Depression led to the near-collapse of capitalism, leading to many people dying in poverty, and Lovecraft was a mental defective. He was essentially incapable of caring for himself in the way many adults would be. He couldn't hold a real job for any length of time, and hardly had any idea how to apply for one. (One method he used was to write long and self-deprecating letters to potential employers.) Were Lovecraft not an adult during the Great Depression, he may have lucked out and ended up caught by the social safety net. Or perhaps he would have managed to get some alimony from his brief and unsuccessful marriage.
If Lovecraft hadn't such a goddamned basketcase, perhaps he would have stayed married or maybe he could have gotten it together enough to get involved with the WPA Writers Project—his wide general knowledge of New England architecture, history, and folkways would have made him an asset to the program and his long essay on Quebec demonstrates sufficient essayistic skill. Heck, when Putnam rejected Lovecraft's short story collection in 1931—collections were hard to publish then as well—he could have responded by submitting The Dream Quest of Unknown Kadath as a novel instead. (Kadath was written in 1927 and remained unpublished in Lovecraft's lifetime.) Had Lovecraft been less of a psychological wreck, he may have become a published novelist and even a small advance could have extended his life for years.
So, basically, Lovecraft was too batty to hold a day job and even too batty to really market his own creative work. That's a large part of why he was poor—the rest is simply that he was an adult during the Great Depression. During his lifetime, Lovecraft published one slim volume (200 copies of The Shadow over Innsmouth) and a relative handful of stories—sixty-five over the course of twenty-one years. (By way of contrast, I published my first short story in 2000—the one I sold earlier this week will be my sixty-fourth. I am not especially prolific.)
Lovecraft wasn't nearly as productive as Robert Howard and certainly wasn't a prolific novelist like Edgar Rice Burroughs. To suggest that copyrights are "all that separates" HPL from ERB is sheer gibbering lunacy. Lovecraft was publishing in second-tier pulps like Weird Tales when he wasn't publishing in amateur publications that didn't pay at all or paid, as Homebrew did for "Herbert West: Re-animator", five bucks a chapter (six chapters total). He broke into Astounding Science Fiction a year prior to his death. Edgar Rice Burroughs, on the other hand, published dozens of novels during his lifetime. Even had Burroughs been unable to draw a cent from those copyrights after initial publication, the comparison to Lovecraft would not be a fair one.
And that rather leaves out the fact that Lovecraft's stories—many of which involve some insane person recounting some indescribable horror from another dimension he remembers reading about someone else seeing—is rather less Hollywood-ready than, you know, Tarzan.
Finally, had copyrights worked out the way Martin would have had them, we probably wouldn't be talking about Lovecraft very much today. Derleth, for all his faults, was able to keep interest in Lovecraft alive and as he aged he encouraged writers such as Ramsey Campbell and Brian Lumley (see, Derleth was half-right!) to write "Mythos" stories. Colin Wilson's brilliant The Mind Parasites was written on a dare from Derleth. And it was the later underground comics and "acid rock" songs referencing Lovecraft that allowed the man's work to find a whole new audience. The loose leash built the audience, it did not dilute the audience. Part of Lovecraft's popularity is due to the fact that his work can be found in the Science Fiction Book Club (whose 2001 edition was produced with the cooperation of Arkham House) and edited by Joyce Carol Oates for the upmarket Ecco imprint (which did not cooperate with Arkham House). Lovecraft's copyrights could have easily ended up orphaned after Barlow committed suicide, or if Derleth had actually been compelled to show his paperwork to a court. That means nobody would have gotten to read the later stuff except for pulp magazine collectors. Orphaned copyrights can mean the end of a literary reputation.
Martin seems to think copyright is a magical deed to the "land" of a story rather than a government-granted monopoly that, among other things, expires. He wonders aloud if the Lovecraft estate got anything from various movie versions of Lovecraft's work without asking the equally important question—if it did, should it have as at least some of that work (e.g. 1921's "Herbert West: Re-animator") has probably been in the public domain for a while.
A large number of writers, many of whom have happily oinked away at the trough of the public domain and fair use in their professional careers and who certainly did so as readers, suffer from the delusion when it comes to their own stuff that owning a copyright is the same as owning a house. It ain't. Of course, companies do this all time—fair use ain't nothing but me using what I'm allowed to. When you do the same to my stuff though, well that's stealing! And you know what, that's fine. Writers can have all sorts of waterheaded ideas about what copyright means. If they manage to prosper despite their ignorance, good on 'em. But at the very least they should avoid rewriting history by trying to show Lovecraft as a negative example of the power of fanfic when ultimately, Lovecraft's reputation is what it is today partially because of fanfic.