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Intellectual capital, and related intangible assets and intellectual property are the core assets of our time. What are the implications for management?

In this essay I will examine patent management. According to the United Kingdom Intellectual Property Office (IPO), a patent “protects new inventions and covers how things work, what they do, how they do it, what they are made of and how they are made.” Patents give their owner “the right to prevent others from making, using, importing or selling the invention without permission.”i Patent law varies by country, but the premise is the same. The inventor is given an exclusive right to profit from the invention for a limited period of time, 20 years in the case of the UK, but the invention is made public and after the patent has expired anyone else can use the invention without paying a royalty. Thus it could be argued that the aim of the patent system is to encourage the disclosure of new discoveries. However, for some businesses, particularly those in the field of Information Communication Technology, it could be argued that the patent system in its current form is in fact a barrier to innovation.

To receive a patent in the UK, according to the IPO an invention must: “be new, have an inventive step that is not obvious to someone with knowledge or experience in the subject, and be capable of being made or used in some kind of industry.” Whereas in the past software fell under the works that could not be patented, together with scientific and mathematical discoveries and artistic works, this is no longer the case. This change brings the UK into line with the United States. In fact in 2004, Bessen and Huntii found that software patents comprised 15% of all patents issued in the US.

One of the most high profile patent disputes of recent times is that between consumer electronics companies Apple and Samsung.iii Both companies are close business partners with Samsung acting as a major supplier of components to Apple. In April 2011, Apple filed numerous claims against Samsung over design similarities between specific models of mobile telephone and tablet computer. Samsung counter-claimed that Apple had infringed on many of its related patents. In August a German court issued a preliminary injunction, which prevented the sale of Samsung’s new tablet computer in every European Union member state, except the Netherlands. In October, Australia also banned the computer, but a month later Samsung attempted to ban the sale of Apple’s new mobile telephone in Australia. The case has now been postponed until March 2012. In the mean time, Samsung has redesigned its tablet computer in an attempt to get around the injunction.

But this is just one such case in the lucrative ‘smartphone’ and burgeoning ‘tablet computer’ markets. The Samsung products that Apple took legal action against, run the Android operating system, developed by Google. On August 15, 2011, Google acquired mobile telephone company Motorola Mobility for US$12.5, ostensibly not for its products but for its patent portfolio of 17,000 patents and 7,500 pending patents.iv Google has subsequently extended the protection afforded by these patents to other manufactures of devices running the Android operating system such as HTC.

In April 2010, Microsoft announced that it had reached a patent agreement with HTC.v In practice, this meant that HTC had agreed to pay a royalty to Microsoft on every Android device it sold. Although it has not been established if Android does in fact infringe on any of Microsoft’s patents, HTC clearly felt that it made better business sense to pay the royalty than risk action in the courts.

The above examples illustrate the difficulty companies face, both in protecting their own patents and in avoiding infringement of the patents of other companies. In a market as competitive as the ‘smartphone’ one, patents play a critical role in giving companies the edge they need to succeed.

Different companies in the ‘smartphone’ market use different structures to derive value from their patents.

Microsoft licenses its Windows Phone operating system to handset manufacturers such as Nokia who build devices using the operating system. Microsoft retains control of the technology but the device manufacturer benefits from the resources of the software giant and can concentrate its efforts on building the hardware.

Google shares its Android operating system (it is licensed under an Open Source license) but derives benefit from the OS’s tight integration with its services, which are its main source of revenue. But Google’s purchase of Motorola is an example of buying patents, in this case by buying the whole company; that is the value of the company was primarily held in its patents.

Samsung and HTC both use Android on their devices, but they also pay Microsoft a licensing. This is bullying. Android may not infringe on any of Microsoft’s trademarks but the fear of its legal department is enough to compel large consumer electronics companies to sign a deal to protect them from legal action.

Although it is now in decline, the Symbian mobile operating system, is a good example of an IPR pool. The technology was originally developed by a number of companies including Nokia, and Sony-Ericsson. It was also cross-licensed to other companies who were not in the IPR pool. However, the software became less popular and Nokia decided to license a Microsoft operating system instead of spending further resources on its own effort.

Apple has used the ‘hold on’ approach. It does not license its patents and uses them to attempt to prevent competitors like Samsung from entering the market with competing products.

In a market as mature and rapidly changing as ‘smartphones’ the sheer number of patents involved in the production of a new device acts as a strong disincentive to smaller firms. This can be seen by the dominance of large consumer electronics companies and the reduction of the top end of the market to a few brands. However, Google’s sharing of its operating system and its extension of the patent protection it gained with its acquisition of Motorola Mobile to its licensees means that, at least in theory, a smaller company could enter the market with less fear of patent infringement and its associated legal costs. In most markets the costs of searches, applications and enforcement make patents an option that only larger firms can afford to pursue.

It is also important to note the limits of patents. While Research In Motion achieved a massive success with their original BlackBerry, sales of its touch – input based devices have not been strong. The sheer momentum built up by Apple’s iPhone and iPad, their brand loyalty, and their successful marketing campaigns have all but ensured that even after the ‘patent wars’ are over, Apple will remain the dominant ‘smartphone’ and tablet computer supplier for some time. While the original iPhone was a revolutionary product, it could be argued that subsequent models have been evolutionary, rather than a radical change from the original design. Innovation in the market has come from other manufacturers and this has been generated through competition, rather than protectionism.

Patents must be renewed, and there is no global agreement on patents so that while it is possible to get EU wide protection (although local interpretation may vary as in the case of Samsung in the Netherlands), it is often necessary to file patent applications in many countries. The rules and standards vary widely. For example, prior publication is acceptable in the US, whereas in most other countries it is not. And, as we have seen, enforcement may result in multiple legal cases in multiple jurisdictions.

In summary, patents are only one aspect of intellectual property and to be useful they must be managed appropriately. In the case of ‘smartphones’, many of the available approaches have been tried at different times by different companies with varying degrees of success. It is too early to say which strategies will ultimately prove to be the most successful, but Gartner found that Android currently has a 53% share of the market, up from 44.8% last year while all other operating systems have lost share.vi This could be seen as an indication that collaboration and cross licensing is ultimately the best policy for driving both innovation and revenue.

References

i http://www.ipo.gov.uk/types/patent/p-about/p-whatis.htm
ii Bessen, J, Hunt, R. M., (2004) An empirical look at software patents, Boston University School of Law, Working Paper No. 03-17/R.
iii http://mashable.com/2011/11/23/apple-samsung-patent-wars/
iv http://news.cnet.com/8301-1035_3-20092362-94/google-to-buy-motorola- mobility-for-$12.5b
v http://www.microsoft.com/presspass/press/2010/apr10/04- 27mshtcpr.mspx
vi http://www.gartner.com/it/page.jsp?id=1848514

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Posted by on October 9, 2014 in Business