07 August 2011

That Dilbert Strip – What It Tells Us About the ‘Smartphone Wars’

It is all over the internet, and it’s funny, so it might as well be here, too – Scott Adams’ take on the current fad amongst tech companies for suing one another for patent infringement.

Dilbert.com

Of course, it spoils the joke to analyse something like this too deeply, but we cannot help but comment on the fact that when something as uninteresting to the general public as patent law makes an appearance in the ‘funny pages’ of newspapers worldwide, something unusual is going on.

However, contrary to much of what you might read on the web these days – including contributions from the likes of Google – the problem with the patent system is not that it is hopelessly broken. It clearly is not, although like most things in the real world, it is far from perfect.

It is, frankly, of no consequence to the vast majority of people in the world that multinational companies like Motorola, Oracle, Samsung, Apple, Microsoft, Nokia and Google are suing each other left, right and centre – and not just for patent infringement, but copyright infringement, unfair competition, misleading and deceptive conduct, trade dress infringement, and anything else they can think of.  However, it appears that we are being asked to care – and indeed to make value judgments – about the behaviour of a few corporates which are big enough to fight their own battles.  There always has been, and always will be, a ‘dirty’ side to competition, and right now it happens that it is being played out over a few patents.  One day it will all blow over, and we will look back and wonder what all of the fuss was about.

If you click on the ‘cases’ link above, and look over all of the patent office and court decisions we have reviewed over the past year or so, you will see that major ICT companies are notable largely by their absence, despite the fact that the top two recipients of Australian patents in 2010 were Microsoft and LG (see Microsoft Tops Australian Patent Grants for 2010).  Of course, this is partly because most of the international battles are being fought primarily on the much bigger stage of the United States.  Recent Australian and New Zealand disputes span a range of more mundane technologies, along with the usual collection of medical and pharmaceutical stoushes.

And therein lies a key point.  In mature industries in which patents play a useful role, a certain level of strategic litigation (and courting of litigation) is considered unexceptional.  There is a tense equilibrium between innovation (which may be expensive) and imitation (which may be cheap), and patents are the weapons used to patrol the border between the two.  In the case of pharmaceuticals, the object is usually to exclude competition from generics for as long as possible in order to maximise return on the significant investments required to bring new therapies to market.  In other fields, equilibrium may be achieved by cross-licensing or ‘patent pool’ arrangements, such as those which cover ‘industry standards’ like DVD or 3G cellular mobile technologies.

Ultimately, cross-licensing and pool arrangements are in the interests of all players in these types of industries. Litigation is expensive – in terms of money, time and energy – and it is simply not practical, or desirable, to pursue injunctions against all of your competitors, just because they market products including a handful of features covered by your patents.  Ideally, in such industries patents will provide a mechanism to establish a ‘market’ for innovation.  A company which successfully invests most in R&D, and obtains the most/best patents, one way or another gains the largest revenue stream.  It may be first to market with new products incorporating those innovations, and/or it may collect a larger share of patent royalties from competitors. 

Companies participate in such a market somewhere along the spectrum between ‘imitator’ and ‘innovator’, with the difference being whether more is spent on license fees, or on original development.

We predict that the 'smartphone' market will fall into this type of equilibrium within the next couple of years.  Indeed, this may already be happening, with recent reports indicating that Microsoft makes more money from sales of Android devices than from those running Windows Phone 7!  Right now, we are seeing the various players manoeuvring for the best seats at the negotiating table. 

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