Friday, April 26, 2013

Patents are not a substitute for R&D

For the last few years, and continuing still, Apple has locked horns with Samsung in court. Why? Apple management believes that Android is a stolen product that mimics the iPhone, a creation of Steve Jobs. Jobs was well known for his desire to destroy Android, and promised nuclear war to that end.

Samsung, despite the lawsuits and Apple's attempt to stir up controversy around Samsung products, seems to be doing very well. Maybe that's because while Apple was suing and spending millions on PR to remind us how original their products are, Samsung has been innovating and creating products that customers want.

Since September of last year, Apple stock has fallen by about 1/3 while Samsung has continue to climb and is reporting strong profits year over year. This disparity represents the cost of rent-seeking on the part of Apple. When Apple is seeking rents, they're not focused on better products and customer satisfaction.

Apple has asserted many patents against Samsung in two different legal actions, patents that are best described as "idea" or "software" patents. The patent for a tablet in a rectangular shape with rounded corners? That's an idea. But because the USPTO issued this patent, Barnes and Noble cut one of the corners on their Nooks to work around the patent. Pretty innovative, huh?

Apple has many patents on user interface behavior that have sent many competitors searching for prior art because the USPTO didn't take the time to do it. Take the "bounce-back" patent asserted by Apple. This is a patent for the behavior of icons to visually bounce back when the scrolling has come to the end of the line. Or how about the "Swipe to Unlock" patent? This is a patent on programming a user interface to unlock when the user swipes his finger across the face of the display. Both of these are idea and software patents. They could be implemented in a million different ways, but because of the broad language of the patent claims, many competitors can be easily ensnared with a threat of litigation from Apple.

A review of Apple's stock price for the last year shows a steady climb leading up to the verdict in the first lawsuit against Samsung. In that verdict, Apple was awarded slightly more than $1 Billion, but due to procedural, and jury errors, the verdict has already been cut by more than a third. A new damages trial is imminent and there is more cutting likely to follow on appeal. Apple's stock price tracks nicely with those events.

During that time, observers have noted that Apple has been recycling their products and that they haven't produced anything revolutionary since Steve Jobs' death. It seems as if the company was relying almost completely on the leadership that Jobs provided as a source of innovative ideas. While that may be true, reliance upon intellectual property protection also played a factor.

Robert Hunt and James Bessen have provided well documented support for the contention that once a company acquires a sizable patent portfolio, patents tend to substitute for R&D. This is what has happened to Apple. During the last three years, Apple has become a significant, if not terrifying patent aggressor. During the same time, Samsung did not prosecute any high profile patent suits and was continually churning out new products.

As a result, Samsung's profits are not only higher, but over the last 3 years, their stock has continued to climb more than 50%. Shareholders have taken notice and the price of Apple stock reflects their concerns, while Samsung continues to attract investors for their technological savvy.

Samsung seems to understand a simple point about ideas:

"If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it." --- Thomas Jefferson

Better to create new ideas than to cling to the old, or to cling to government protection for an idea already disclosed. Of course, someone has noted that in recent years, very few revolutionary inventions have been built. It seems that we're all just really good iterators.

Samsung seems pretty happy with iteration, while Apple isn't quite as enthusiastic as it used to be, but remains, an iterator. Everything they've done is based on the work of someone else. They might be happier if they got over it and started iterating instead of litigating.
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