Startup general interest

Software patents – a brake on innovation

By August 17, 2011 6 Comments

Since Google’s acquisition of Motorola’s Mobility division on Monday intellectual property law has been a hot topic of discussion.  The acquisition value was $12.5bn, and according to Google’s CEO Larry Page Moto’s seventeen thousand patents were the principle attraction.  Since then I have talked with two journalists on the subject and had numerous conversations and email chats with friends and colleagues.  Nick Clarke of the Independent has written up his thoughts here.

Patents have also been in the news this week because Apple successfully claimed that Samsung had copied the shape, user interface and packaging of the iPad secured an injunction prohibiting sales of the Samsun Galaxy Tab across most of Europe, and then the injunction was over-turned.

Additionally six weeks ago Apple and RIM clubbed together to buy a patent portfolio from Nortel for $4.5bn, and Interdigital’s patent portfolio is rumoured to be up for sale for $2-10bn and of interest to Google, Apple and others.

All of this strikes me as an awful lot of money for what is essentially a sideshow to the real action – the showdown in mobile between Google and Apple and arguably Samsung and Microsoft.  Worse, there will be clear winners and losers in this battle and it doesn’t seem like there is any correlation between victory and the effort put into innovation.  Rather, it seems that Google has made huge efforts and investment to introduce Android to the world and now finds itself having to pay $12.5bn to keep its fledgling ecosystem alive.  If Motorola had done a ton of innovative work and Google had stolen their best ideas and put them into Android then I would see this differently, but I don’t think that is the case.  I’d love to hear any arguments to the contrary.

At the startup end of the world patents are not helping either, at least not for software and internet companies.  The problem is that there are a very large number of broad patents now in issue and almost any software development is likely to be in breach of something, somewhere.  Most of these patents are either un-enforced or un-enforceable so companies go about their business of building product regardless, but an unlucky minority later find themselves on the end of a lawsuit.  The problem is acute in the US where patent law is strongest and numerous VCs are blogging on the subject and petitioning congress for a change in the law.  It is also a problem here for companies that sell into the US or want to be acquired by US companies (which is just about all VC backed businesses).

To give you a sense of how ridiculous the situation has become, one of our portfolio companies recently thought that they might be infringing a very broad patent held by one of their US competitors and was advised by their patent lawyers not to conduct any further investigation into the topic.  The argument being that if the company then found that they were in breach they would be in a worse situation than if they hadn’t bothered to check.  Amazingly, the lawyers stood by that advice despite the fact that our company had evidence that their technology pre-dated the competitor’s patent.  The portfolio company was sold recently, and this potential patent infringement was an issue which slowed the deal down and resulted in a marginal reduction in value.

I think this example is not unusual for software companies.  Patents and IP law consume a smallish amount of cash, a smallish amount of executive and board attention and then often result in a small reduction in value at exit.  This is not catastrophe, but it is a brake on innovation.

It is a subject that doesn’t get talked about too much though because naming companies telling actual stories invites lawsuits, and without the names of companies the stories don’t make very interesting reading (well done if you made it through my no-name example above without skipping..).

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