Do Patents Promote Innovation? The Market is the Final Arbiter

The emergence of mobile computing as a technology platform has been a game changing development in many ways.  The ability to be connected anywhere and to have real time information at our finger tips has transformed the way we do business and live our lives. As this computing paradigm has gained mass market acceptance we’ve witnessed a series of patent battles among firms vying for their share of this lucrative market.  These so-called  smart phone patent wars have in turn motivated patent system critics to vociferously decry the system as an impediment to innovation, which must be eliminated or radically overhauled. Defenders of the system respond that patent battles are a characteristic of market competition occurring with other breakthrough innovations throughout our history, and that patents address the need to protect innovations to encourage investment in innovation.

Despite all the chatter however, there is something that we have not heard in the discussions about these smart phone patent wars. The debate seems to have focused on patents and the patent system and it has ignored the fact that this current patent battle is really a battle between three competing business models advanced by the three highly competitive mobile OS providers and members of their ecosystems. Apple is pursuing a fully proprietary business model where mobile OS and mobile hardware are proprietary to Apple. This is consistent with Apple’s prior business model in traditional computing which has worked quite well for them. Similarly Microsoft is advancing a business model much like its successful traditional computing business model with a proprietary OS and an “open” hardware platform that allows third party handset makers to provide phones running the Windows mobile OS. Finally, Google is advancing an “all open” model in which it uses Android, an open source mobile OS and an open hardware approach.

Aside from presenting a fascinating topic for market study by techies and economists, this concurrent trinity of business models says something very positive about the competitive dynamic in the US technology marketplace. It also makes a powerful argument in favor of our current patent system which enables a market characterized by competition among firms pursuing such a wide diversity of market approaches. It is my view that this aspect of the patent system is an important part of how patents promote innovation. But whether you agree or disagree with this position is secondary to the discussion it engenders. The focus for meaningful debate on the patent system ought to be on what patents enable and what they impede in the market. With that in mind I will provide support for my premise – that a properly operating patent system enables a diversity of competing business models and thus encourages  innovation.

Those who argue for the abolition or substantial reduction of patent protection are in fact making an argument that goes beyond the notion of whether it is morally, socially or otherwise wrong to attach property rights to inventions. They are arguing for a particular market approach, which narrows or eliminates some of the business model options for firms seeking to protect their innovative products. Some critics may take issue with this characterization pointing out that when it is possible to patent inventions that are not truly deserving of protection the disruption to the marketplace is more profound than anything the protection properly administered might offer. This however is not an argument for completely or substantially eliminating patents but rather for improving the quality and certainty of the patent process – an objective even the staunchest pro-patent voices will readily agree with. It seems instead that the position that the patent system should be eliminated in whole or substantial part is simply a view that as a practical matter there is only one acceptable market approach for innovative companies and that is the “everything is open” approach. When viewed in this light it is easy to see the problems with such an extreme position.

The recent history of the development of the smart phone is instructive on this issue. Consider what has happened in this market. Apple released the first iPhone in 2007 following 4 years of secretive development of the proprietary hardware and OS. Of course Apple built this development platform on the experience and technology it developed over decades of competing in the computer hardware and OS market. Microsoft meanwhile had been evolving their proprietary mobile OS since the mid 1990’s with the first Windows Mobile device offering in 2003; and the  first Windows Phone using the new OS released in 2010. Microsoft developed their mobile OS after decades of competition in the computer OS market. In 2004 Google was neither an OS company nor was it a hardware company and it did not have significant industry experience in those areas upon which to build a mobile business. Google was the proprietor of the most successful internet search engine. But Google undoubtedly saw the emerging mobile computing platform as an opportunity to expand their advantage in the web search market and thereby increase the ad revenues they obtain from that enterprise. Apple’s and Microsoft’s proprietary OS approaches no doubt presented a threat to that expansion. So in 2005 Google purchased Andriod Inc. for its open source mobile OS, which was released in 2007 under the Apache open source license concurrently with the founding of the Open Handset Alliance comprising 86 mobile hardware, software and telecom companies advancing open standards for mobile devices. In 2008 the first Android phones hit the market and by the end of 2010 Android had become the world’s leading smart phone OS. Google is the classic success story of the fast follower, moving from search company to smart phone market leader in just five years based on an open market approach.

Google’s successful use of an open business model in the mobile computing field should not come as a total surprise to tech industry followers.  Successful proprietary business models have been the exception exemplified by Apple.  The rule has generally been that fully proprietary companies and products do not survive: the DEC PDP-11 computer, the Sony Memory Stick, and legions of other leading edge products and companies make up the tech industry proprietary graveyard.  Interoperability seems to be the constant criterion that separates success from failure and as such an open approach in IT carries an inherent advantage. But while these products and companies may not have fared well, consumers have been a constant beneficiary as these products have introduced important features that have been adopted and enhanced by successor products from other companies.  And this is the by-product of robust competition by companies who have different visions of products as well as market approaches.  For example, it is indisputable that Apple’s proprietary products have raised the bar for all competitors in the mobile computing space regardless of their business model.

Some readers are likely to now say – sure competition is good for innovation but why should the  company pursuing the all open business model (Google for example) need to acquire patents to defend itself against its proprietary rivals?  It’s a fair question, but consider the fact that Google entered the market after Microsoft and Apple who had invested heavily in mobile computing R&D for years before Google set its sights on that market.  Consider also that Google was nonetheless able to enter the market and secure a leadership position in just five years.  Google did not have to make the investments in R&D that Microsoft or Apple made building their proprietary OS.  Instead, they purchased an open source OS and got third party hardware companies to make compatible handsets, and shortly thereafter they were competitive.  The flip side of this rapid market entry is that Google did not have patents in the mobile computing area because they did not do R&D in the area.  It is only rational that the incumbents would seek to defend their market position against a highly competitive newcomer that lacks patents by leveraging their patents .  Their patents are the by-products of their R&D investment that was their cost of entry to the market.  If firms like Apple and Microsoft did not react this way anyone could enter a market by simply copying the innovations of the incumbents, and since they would have no need to cover the cost of that R&D, it would be trivial to sell at lower prices and drive the incumbents from the market.  Except there wouldn’t be any incumbents.  Aware of this inevitable outcome, rational companies would not make the investment in R&D needed to create an innovative platform, only to be undercut and eliminated by copyists.  So the system as it now stands enables competition between the original first moving innovator and the agile  fast follower and patents help balance the equation. The need for a fast follower pursuing an open business model to purchase patents to offset the patents held by these original innovators is part of the cost of market entry for the follower.  Rapid market entry by fast followers who choose open approaches balanced by use of patents by incumbents to protect their investment in innovation, permits open and proprietary business  models to coexist and provides feature and price competition for consumers.  These are the hallmarks of highly competitive markets.  And this is why it makes sense that Google had to acquire patents to compete in the mobile market.  They needed them to offset the threat from the patents owned by incumbents and they needed them to protect their own open ecosystem.   The patent system provides the important balance that enables diverse business models to co-exist in the technology marketplace.

Notice that I said that Google needs patents not only to offset the patents of the incumbents but also to protect their open ecosystem.  Just because you practice an open business model doesn’t mean patents don’t help you support your model. Some of the largest contributors to open source and open standards are also the largest patentees.  Patents protect open ecosystems from encroachment by proprietary enterprises just as they protect proprietary enterprises from encroachment from other proprietary or open enterprises.  The  GPL open source license or the various patent pledges made by companies like  IBM, MicrosoftNokia and Sun or the protection for Linux community members offered by  Open Innovation Network all demonstrate that patents can be used to create a commons where open market uses are protected while proprietary uses are not protected.   Moreover, while Google may have originally purchased patents for defensive use against the incumbents as they rapidly entered the market, Google now has products and an ecosystem of partners to protect and Google has been spending time and money innovating and acquiring innovative companies in the mobile space.  So for example, if Google saw the need to keep one of its proprietary competitors from using an innovative feature of it’s mobile OS that is covered by a Google patent (whether invented or purchased by Google) they would be equally justified using the patent offensively against these competitors.  So too does the status of incumbent and fast follower change with time. Google will inevitably be the incumbent in subsequent evolutionary phases of the mobile market. Lest we forget, there was a time when Microsoft and Apple were the upstarts in markets where others were the incumbents.

In my opinion the best way to judge the success or failure of the patent system is by looking broadly at the type of competition it enables or disables in the marketplace.  And that doesn’t mean focusing solely on patent litigation statistics – of course there are going to be fights when such a high stakes prize as mobile computing is up for grabs and of course firms competing with such different business models are going to come into conflict.  But look at what that competition has done for innovation and product advances and for consumer choice and pricing.  You need the option of patent protection to provide the necessary freedom of choice in market approach, (whether it is open, proprietary or a blend of both), to enable competition between firms employing different market approaches  and the innovation engendered by that competition..  The correct focus for this issue is not the intrinsic merit of the concept of patent protection, but rather what the existence of patents does to promote business model diversity and what that in turn does to promote innovation.  This is the important point and at least in my view it seems clear that having patents enables more business model diversity and consequently more innovation than not having them.


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