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Tuesday, 14 June 2011

Software patents: protecting innovation or a monopolistic tool and barrier to entry for small tech firms?

My single biggest concern under the digital policy umbrella is the emergence of monopolistic practices from dominant players; and software patents sit, alongside copyright, centre stage.

Once the cost of litigation, speculative patent portfolios and patent-office folly is taken into account; what should be a finely-balanced weapon to protect innovators has become, in the world of software at least, the nuclear missile of corporate warfare.

Market competition vs regulation

Government micro-regulation of most aspects of online business can be avoided if the free and open market works.

It's not that I'm a raving libertarian see-no-evil capitalist - capitalism sucks! But it sucks less than state control, since the link between customer and corporate revenue is far more direct than the link between elector and government in most democracies.

The public can kill almost any corporation if sufficient numbers choose not to put their ££s, €€s, $$s into its products.

The internet helps open up all markets, even offline businesses, as it closes the feedback loop between customer and supplier on a scale never previously possible:- where suppliers choose to "bunker down" and ignore customer concerns, customers will simply communicate their experiences directly with other customers.

The link between customer perception and revenue was already perfectly clear, but until recently, companies invested in public relations as a method of maintaining an illusion of good service.  Now they are faced with only one realistic option:- actually providing a good service.

Regulatory emphasis should be on keeping the markets free and open rather than attempting to regulate for a specific "desirable" outcome - simply because the variables are so numerous and interactions so complex that micro-regulation is more likely to result in undesirable unintended consequences than fixing any specific given problem.

Part of keeping the market free and open involves preventing anti-competitive practices, ensuring accuracy in product descriptions, and preventing barriers to entry for new innovative players.

Patents and intellectual property rights

The intent of the patent system on a whole in noble, and fits neatly with the notion that governments should encourage and protect innovation as an important part of a free and open market.

Designed for the industrial era, where it could cost tens or hundreds of millions in today's terms to "tool-up" a factory to bring a new product to market; patents prevented so-called fast second advantage.  The first company to bring a new product to market shoulders all the risk that buyers will not buy in sufficient numbers or at a sufficiently high price to warrant the investment in tooling up a factory.

A fast second enters the market after price and demand has been tested.  Furthermore, second-movers frequently indulged in industrial espionage to copy as much of the factory design as possible, thereby reducing cost and risk!

Patents offer a limited state-backed monopoly (20 years) as a reward for investment in new ideas, but this comes at a price to the consumer.

With no lawful rival, the innovator is pretty much in control.  If the public wants their product, they have to pay a price set by the company, not determined by the market.  Standards of customer service and an ethical regard for customer rights may go out of the window when there is only one legitimate supplier of a product.

So patents (and copyright, when it comes to consumer media like music and films) are a double-edged sword.  They encourage innovation, thereby giving consumers something they might not otherwise have had, but consumers get that product on terms set by the patent holder.

The patent thicket and litigation costs

I made the analogy between patents and nuclear missiles because litigation can be incredibly destructive to companies, and effective deployment is beyond the reach of most corporations.  Mid-sized corporations which attempt to enforce a technical patent risk being obliterated in extremely expensive counter-suits.

The problem has three sides:
  1. Large corporations invest in massive, often speculative, patent portfolios. See Google's recent intention to bid on Nortel's patent portfolio.
  2. Patents are granted far too often for ideas that aren't patentable.  Particularly the notion of inventive step that is important in distinguishing between an patentable innovative advance and a non-patentable logical solution to a problem is highly subjective.  What is often blindingly obvious to a software engineer seems inventive to a patent clerk.  Additionally, it's increasingly difficult to establish where prior art exists (you can't patent someone else's work, even if they chose not to patent it themselves).
  3. The cost of litigation could bankrupt a small country!
The 2006 Gowers report stated it costs around £750,000 to mount a reasonably straightforward challenge to a patent when there's clear evidence it should not have been granted.

It can cost £1m to defend a business against an unjustified infringement claim (The Enforcement of Patent Rights, IPAC 2003), and evidence cited in Gowers (pp8.61) suggests smaller businesses can find it easier to pay licensing fees on a patent they believe to be invalid than mount a court challenge.

Whilst it costs relatively little to file a patent (around £10,000), the cost of litigation alone puts legal remedies beyond the reach of most innovative smaller technology companies.

Furthermore, the biggest companies continue to develop their patent arsenal to use in "self defence".  It's not quite mutually assured destruction, but the combined cost of litigation and settlement fees could reach a billion dollars (Kodak v Apple and RIM)

The legal options for small companies are severely limited by the ability to fund litigation, allowing large companies to act with relative impunity.  El reg only today alleges Apple have questions to answer in the case of a UK-based developer Greg Hughes, whose app for wirelessly syncing an iPhone with iTunes was last year rejected from the official App Store. Apple yesterday announced a similar feature would be included in iOS 5!

As well as buying patent portfolios, large corporations have other tools I've witnessed (and been party to) to maximise their patent arsenal:
  1. Aggressive patent scrubs to protect everything in a product (overkill, but understandable)
  2. Cash rewards for patent filings, with further bonuses for granted patents, on any vaguely related idea - even if not used in a current product and with no plans to use in current product
  3. "Defensive publications" in own journal of any vaguely patentable idea, as a "prior art" catalogue in case need to challenge other patents
Coupled with Audience Monopolies and the anti-competitive weapon of free, a "revolving door" to governments and regulators and corporate defamation, patents are another tool to keep big corporation big; true innovators and consumers once again loose.

See also: copyright and the digital economy act - copyright gives 100+ years protection for some works, whereas the saving grace of patents is they expire after 20 years.



  1. It's worse than you say. All the big ICT firms are trying to lock in customers with "platforms" and "fabrics" that are opaque and which rise the cost of moving, despite claims of interoperability.
    One area that is not well addressed is the news business. Hargreaves gives some comfort to the music and film industry, but I can find none there for news.
    A Washington Post managing editor, writing in Forbes magazine queries the situation where more people than ever read the (expensive) content produced by the Post's reporters, but they refuse to pay for it online. Why is that?
    A further issue is that the music and film sectors have supplementary sources of income - gigs, videos, merchandise etc. News has none. It's advertising or pay per view.
    Are there too many sources? Possibly. Do people care less about the world than about their friends and family? Probably. Must news be subsidised? Right now, it looks that way. In which case, what's the role of copyright in the expression of news?

  2. Seems to me that companies are pushing harder than before to compete with competitors without doing the actual work of inventing new things rather just building on the work of others I think as this trend continues so will the cases of patent infringement and patent enforcement increase.


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