The costs of the patent Cold War
Imagine what could be achieved with a free 12 billion dollars. What could technology giants such as Google, Microsoft or Apple surprise us with? In which fantastic ways would innovation materialize into revolutionary products?
Now imagine that all that potential got lost in a fruitless patent guerrilla. That’s today.
Google acquired Motorola Mobility on August 12th, for the astonishing sum of 12.5 billion dollars. That means duplicating its workforce with another 19,000 employees, and completing its largest acquisition ever. This was not a strategic move. This was a tactical, defensive operation that cost Google in excess of a net 7 billion dollars, when you discount Motorola’s cash and assets. Its ultimate goal: get hold of a patent arsenal to defend itself from competitors.
Some weeks ago, a consortium including Apple, Microsoft and RIM spent over 4.5 billion dollars in the defunct Nortel’s patent portfolio. This is surely what motivated Google’s quick and bold response. And the madness goes on and on.
These last moves are surprising for several reasons:
- The mean cost per patent has rocketed to over $500,000 each in these acquisitions. Half-a-million-dollars for one-single-patent.
- Neither of these investments provide any innovation value whatsoever to its investors. This is 100% insurance money… just in case.
- Patents have become an asset that’s valued not so much for what it enables you to do, but for what it forbids others from doing.
Patents exist to foster innovation, as The Economist pointed out yesterday, “granting an inventor a limited monopoly over a technology in return for disclosing the details of its workings, so that others can build upon the invention”. One could argue that their use has been corrupted lately, and the costs of the current patent system are damaging, more than helping, innovators. Even worse:
“Patents are emerging as a new currency,” Alexander I. Poltorak, chief executive of the patent licensing and enforcement firm General Patent, told the New York Times. “I’ve recently received several calls from financial analysts and bankers who want to know how to value patents and what does it mean.”
Akin to the Cold War arms race, gigantic amounts of money are being spent in a dissuasive campaign to protect from patent lawsuits. And indeed these amounts are gigantic: to put just these two initial examples into perspective, what Google spent in the Motorola acquisition is somewhat comparable to the cost of developing the Large Hadron Collider, arguably the single greatest and most ambitious experiment the human being has ever pursued. But, unlike the Cold War, this time the industry faces a new enemy: patent trolls.
The purpose of a dissuasive weapon is to prevent opponents from using their own similar weapons, out of fear that they would receive the same damage upon themselves. But patent trolls do not have any product to defend against lawsuits. They have no “population” to protect, and no “cities” that could be attacked. They can just use their patents again and again without fear of retaliation, making millions of dollars every time. These are patent monsters, direct result of how the patent system works:
It is far too easy to be granted a far too vague patent over far too many things these days.
The pharmaceutical and medical industries went over a similar process in the past, and are now stuck in a place where over $50bn a year is spent in “defensive medicine” to protect from medical malpractice lawsuits, or more money is spent in patent litigation than in actual investigation for new prescription drugs. Another study showed that in 1999:
American public companies’ total profits from patents (excluding pharmaceuticals) in 1999 were about $4 billion—but that the associated litigation costs were $14 billion.
There is a great danger that the tech industry could follow next.
Meanwhile, the results of this situation today, are:
There is a continuous value-destruction process going on around the patent warfare. And this is happening while the debt-crisis and stagnant economy challenge our very way of life and the European welfare state. Technology is a strategic asset for value creation, productivity improvements and industry transformation, all three much needed to reverse the current economic downturn.
Fix this mess, or we won’t be able to deal with it later.