Patent wars are, surprisingly, nothing new; a TIME Magazine article from 1929 covered the eruption of a patent war for radio patents against twenty independent radio makers. Nearly a century on, large companies’ penchant for engaging in patent wars is the same as ever, but the sheer scale and antagonism with which they pursue and defend their intellectual property (IP) has grown exponentially. But what’s even more startling – and problematic – is the amount of money these companies have sunk into buying, protecting and defending these IP assets, as opposed to utilising that budget for innovation and new product development.
The New York Times recently published a lengthy article about the now infamous Apple/Google patent debacle, and buried within it, almost as an aside, was the following fact:
Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.
According to a Stanford University analysis, nearly $20 billion was spent on patent litigation and patent purchases in the last two years. Compare this to the relatively low $3.4 billion Apple spent on its research & development (R&D) for the 2012 fiscal year. They spent nearly the same amount, $2.6 billion, towards the acquisition of Nortel’s patent portfolio, but that didn’t even come close to matching the $12.5 billion Google spent buying Motorola Mobility ($5.5 billion of which went towards the patents).
But apart from headline fatigue, why should anyone care what these companies spend their cash on? The concern is two-fold, and it affects innovation on all levels.
The first is that, when established players stop innovating, they run the risk of losing their competitive edge and being overtaken. It’s what Apple did to Research in Motion when the iPhone trumped the once indomitable BlackBerry. It’s what Samsung did to Sony when it toppled Sony’s flat screen TV reign, what Microsoft did when it entered the video-game console market with the Xbox, and what Google did to virtually every popular search engine that predated it. This doesn’t mean that companies should forfeit protecting their IP, of course; on the contrary, we here at Metis Partners believe that protecting IP assets is crucial for maximising a company’s value. However, changing a company’s offensive strategy from innovation to litigation may be harmful in the long term.
Take Apple for (an obvious) example. Since Apple forged ahead with its patent war, the company’s R&D spending has slowly diminished. At the peak of Apple’s period of innovation, circa 2001-2003, it was spending 8% of its annual revenue on R&D, whereas its current R&D budget has faded to a mere2.2% of revenue. This figure is even paltrier given the fact that Apple’s revenue has sharply increased since that innovation heyday. In terms of pure innovation, Apple’s last new product was 2010’s iPad, and even that had its roots in a prototype that existed prior to the iPhone. Instead of focusing on new product development, Apple has primarily fallen into the habit of releasing incremental upgrades to existing products, and taking companies to court over such “innovations” as rounded corners.
Though this may seem like an incentive for new innovators to enter the market, the truth of the matter is that many small inventors find the increasing cost of litigation a deterrent. These litigation-happy companies don’t just attack one another – they are equally happy to go after smaller firms who they feel are infringing on their IP rights. Anecdotal evidence of this comes courtesy of Mr. Phillips who, in 2006, co-founded a voice recognition company named Vlingo. The firm received partnership proposals from Apple and Google, and its technology was even integrated into early versions of Siri. In 2008, however, Vlingo was contacted by a much larger voice recognition firm called Nuance, and were issued an ultimatum: sell Vlingo, or be sued for patent infringement. Suddenly, Apple and Google stopped calling, and the company behind Siri switched its partnership from Vlingo to Nuance. Worst of all, the millions of dollars Mr. Phillips had set aside for research and development purposes now had to be used to pay off lawyers and court fees. Though the court ultimately found that Mr. Phillips had not in fact infringed any patents, the damage was already down; the suit had cost $3 million and Mr. Phillips was forced to sell his company to Nuance after all.
Do companies need to protect their intellectual property? Absolutely. But when the courtroom becomes more important than the lab, and more money is spent on offensive tactics to derail competitors and potential market entrants than on innovation, product development suffers as a whole. Companies need to refocus, rebalance their spending and establish an effective IP budget. Consulting third-party counsel to value IP assets and determine what necessitates greater protection as opposed to what is irrelevant to the company’s business, and can therefore be eliminated, may help avoid wasteful maintenance costs. But more than that, what has become patently clear is that companies need to continue to go on the offensive by way of research, innovation and invention rather than through costly litigious scare tactics.