Smart phone patents and platform wars

Firms in the smartphone market have been suing one another over patent violations. I cannot recall any other platform war that involved as many intellectual property disputes.

Look, society grants patents as part of trade-off. A patent enhances the incentives to generate new invention by giving the inventor a temporary monopoly. That trade-off should never be far from the top of the discussion. Let me say that another way: Artificial monopolies are clearly bad for the economy. There is no reason to grant them unless society gets something in return, such as more invention.

It is easy to speculate that something is amiss. Was society still on the good side of this trade-off when a non-practicing entity sued RIM-Blackberry for hundreds of millions of dollars, even though the dispute involved patents invented by someone who never got close to putting them into a viable business? Was society on the right side of this trade-off when a consortium spent four billion dollars for patents in bankruptcy court from Nortel, a firm that made some very bad bets during the dot-com boom and had run itself into the ground? Was society on the same side of the trade-off when Google felt so cornered that it bought Motorola for its patents, and, after it was announced, very few analysts saw any reason to point that Google also received tens of thousands of talented engineers as part of the deal?

This is a way of introducing a recent article, “Owning the stack: The legal war to control the smartphone platform.” I recommend it. It appeared in Ars Technica. It brought considerable clarity to events by explaining the actions and motives of various players in the recent patent wars involving smartphones. It was written by James Gimmelman at NYU law school, and recommended to me by David Laskowski, a student from a prior class at Kellogg (Thanks David!).

This post passes on that recommendation and offers a few comments.

Nub of the situation

Here is the nub of the economics of the situation: The best inventors (call them “inventing firms”) are not necessarily the firms who are best at bringing products and services to market (call them “commercializing firms”). The separation of inventing firms from commercializing firms happens when there is divided technical leadership. As explained in a previous post, divided leadership enables invention in many places by many participants. In turn, that makes it very likely that the inventing firms are not the same as the commercializing firms. The latter own manufacturing facilities and developed brand names, or probably have established distribution channels, all the activities affiliated with doing some (or all!) of the commercial activity that translates invention into new goods and services.

So a deal is necessary. Society gets on the good side of its patent trade-off when the inventing firms and commercializing firms consistently make smart deals that combine inventions with commercial assets that make those inventions valuable. When that happens regularly, users get new products, inventors get paid off, and future inventors can reasonably expect to find markets for their inventions from a wide set of buyers.

That does happen sometimes, thankfully. Indeed, I would venture to guess that it happens most of the time. (Things would be pretty broken otherwise).

Why does that deal not happen all the time? Well, as Yogi Bera liked to say, in theory there is no difference between theory and practice, but in practice there is.

Here are a couple simple ways things become twisted. Sometimes the best commercializing firms are not necessarily the firms with the most value at stake or the most money to bid. The latter might be existing firms — in particular, those with existing assets that new invention devalues (call them “defensive firms”). In addition, sometimes the patents under consideration are just plain lousy, because they were written vaguely, the result of the poor performance of a patent examiner who had a few bad days many years earlier when that patent application happened to get attention (call them “lousy patents”).

Here is one scenario. Defensive firms buy up these patents, whether lousy or good, assemble them together, and send threatening letters. A typical strategy involves the assembly of many patents, enough to overwhelm defendants and courts, who do not have the time and energy to assess whether all the claims make sense to begin with. With that weapon in hand, a defensive firm pursues activities largely fueled by defensive motives — namely, keeping others out of its markets. In that case, users do not get the new products as quickly, though inventors might still be paid off (at least somewhat, though the bulk of the gains could go to intermediaries).

How to recognize the difference between a commercializing firm and defensive firm? At best, the evidence is indirect. Symptoms of the difference will show up, but it is hard to tell without careful examinatoin.  Lke most economists, I am loath to call a spade a spade based solely on symptoms, and because it is too easy to make mistakes. And, moreover, overconfident assessments too easily leads to errant public policy. I am hesitant to see a judge or administrative agency make an assessment except under the most egregious of circumstances (Ah, but what are those? Do we have all day to discuss it?).

In short, even when it appears actions are on the wrong side of society’s trade-offs, caution should carry the day when discussing public policy.

So let’s rephrase the core question. Why, in spite of such caution, do the smart phone patent suits and acquisitions of the last few months seem to be showing disconcerting symptoms of wandering into territory on the wrong side of the societal trade-off?

Well, for one, I am far from the first observer to notice that defensive motives appear to be playing a big role, and the transactions have little to do with generating useful invention.  It is, after all, almost impossible to make sense of Google’s 12 billion dollar purchase of Motorola without calling it a defensive move, a reaction to the 4 billion dollar purchase of the Nortel patents. And it is hard not to see that purchase as a byproduct of the absurdities of the suit faced by RIM and Blackberry several years ago.

For two, the suits have continued almost unabated to the present even since RIM paid its six hundred million dollar award, like a brush fire that never fully extinguished, burning just below the surface, ready to explode into an inferno when the wind picked up or a stray animal kicked up the dirt. There were many symptoms of it over the last two years, in a variety of lawsuits involving HTC, Motorola, Samsung, Apple, Google, and others.

And that inferno has erupted, most overtly with the sale of the Nortel patents and with the sale of Motorola to Google. It involves plenty of large firms, such as Apple, Microsoft, and Google. And I am not the first observer to worry that the smart phone market has gotten swept up in a vortex of events centered on an arms race of patent accumulation, becoming an enormous legal distraction for everyone, a lot of legal gamesmanship which takes energy and resources away from inventive activity.

To be sure, I am not blaming the managers or executives at any firm, since they are just trapped in the situation and doing what is best for their companies. It just looks wrong for society. Users are supposed to benefit from this system eventually, remember? That seems hard to see at this moment.

That is a long way of whetting your appetite for Gimmelman’s article. Read this opening:

In the last few weeks, the smartphone industry appeared to produce more lawsuits than phones. Apple briefly managed to stop the sale of the Samsung Galaxy Tab 10.1 in all of Europe, and is now going after the whole Galaxy line. Back Stateside, Google first complained that Microsoft and Apple were using “bogus patents” to target Android, then spent $12 billion for Motorola and its patent arsenal. These are big, high-stakes fights—and the last company left standing may walk away with control over nothing less than the smartphone market itself.

In the flood of stories about tactical filings and counter-filings, it’s easy to get lost in the details. But step back and it’s clear that the Smartphone Wars aren’t just a war of all against all; there’s an underlying logic to these disputes. Most companies are fighting to control one part of the hardware-software stack, then use that control to pry money free from the layers above them.

Gimmelman goes on to describe the three types of motivates fueling behavior. He labels them horizontal plays (i.e., sue someone in the same component market), vertical plays (i.e., sue someone next door in the protocol stack), or strategic plays (i.e., use a combination of suits to disable a key rival and force an exit). He provides plenty of examples. Then he goes on to provide ample examples of all three.

And he ends on this closing paragraph:

It’s hard to work through this list without getting first exhausted, then jaded, then angry. (Your own emotional order may vary.) The law helps protect real innovators, from the smallest one-person app developer to the huge teams that create new devices and new operating systems. But the sheer, baroque profusion of lawsuits and threats signals a system out of balance. The future of the smartphone market is cloudier than it ought to be—and the increasing dominance of intellectual property lawyers is in large part to blame.

Do you want to know more? Then read on.  And thanks to James Gimmelman for writing such an insightful and provocative piece.

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