Tuesday, September 19, 2006

Have Patents Killed the Software Industry in the U.S.? Hardly.

In the early 90's, the software industry in the U.S. decried the rise of software patents, claiming that patenting would doom small companies and stifle growth in the industry. Even large companies, such as Oracle and Adobe voiced their opposition to software patents in testimony before the USPTO, stating that "existing copyright law and available trade secret protections . . . are better suited to protecting computer software developments."

Anti-patent activists, particularly in the EU, have used many of these comments as fodder for their quest to eliminate software patents altogether. They have even gone a step further in their rhetoric, suggesting that it will be impossible for software companies to operate once software patents are recognized, since larger sompanies will swamp the smaller sompanies with patent filings and litigation.

However, a current study being conducted by Robert P. Merges, demonstrates that this viewpoint is mostly wrong - patents have not killed the software industry, they have not led to a slowdown in entry, and they appear to have had a negligible impact, if any, on industry structure.

Professor Merges looks at several industry metrics and reaches the following conclusions:

Industry Structure and Concentration - anti-patent commentators previously alleged that, because of software patents, the software industry would become more concentrated over time. The idea was that strong patent protection over "backbone" software would tend to "lock in" a dominant product, and hence the company that owned it. However, this view ignores the dynamic sources of growth in the industry, and underestimates how real and effective this competition is in the fields where it operates. For every "backbone" product – such as an operating system program – there are many applications and ancillary products that connect to the backbone. For these products, ownership rights do not appear to create "lock-in" conditions on anything like the scale envisioned in the early 1990s:

Industry concentration statistics tell the story here. The conventional measure of concentration, the Herfindahl-Hirschman index (HHI) ranges from 0 to 10,000; the HHI for the software industry as a whole is less than 244 for software, compared to an average of 334 for U.S. manufacturing industries. What this means is that the top 20 sellers of pre-packaged software generate 61% of total industry revenues. This compares very favorably to other industries, many of which are considered quite competitive: autos, airlines, and personal computers, for example. There is evidence of significant turnover over time as well – a key indicator of a dynamic industry. Of the top ten software companies in 1990, five did not make the list in 2000, either because they went out of business or were acquired. This is remarkable turnover compared to some industries, such as pharmaceuticals, where similar comparisons from 1990 and 2000 show that eight of ten firms made both lists (and the ones that did not were acquired by others that did)
Comparative Data on Patents and Innovation - to determine how patents relate to these trends, one area of study looked at comparative data concerning differences between the domestic software industries of various countries. Previous research has shown that as a foreign country moves up the learning curve in the software industry, inventors in the software industry from that country receive more patents. Accordingly, software firms in Israel, Ireland and India were studied to see if the patenting trends hold:
Software firms in India and Ireland are less innovative than elsewhere. Routine service-type programming is the norm in India, while in Ireland, the industry is dominated by subsidiaries of foreign firms who add minor value to the parent company software, and who are located in Ireland partly for tax reasons. Israeli
firms, which are perceived as being the source of more innovative software, patent much more heavily than their Indian and Irish counterparts. While a number of reasons might explain this pattern, it is certainly consistent with the view that patents correlate closely with R&D and innovation – which would tend to refute the early 1990s argument that patents are anathema to software innovation. In addition, it can be said that the Israeli software industry is in no sense highly concentrated. So the comparative data once again supports the notion that predictions concerning the concentration-increasing effects of software patents have failed to materialize.
Entry to Market - since the software industry claims large sources of innovation from both large and small companies, a steady flow of new entrants would indicate a robust industry that seeks to establish innovative ideas or products. After reviewing the level of startup activity between 1970 and 1998, and considering the venture capital funding amounts between 1995 and 2005, Professor Merges findings indicate that software startups and financing activity have continued to do quite well.

Other studies on Software Patents:

Ronald J. Mann, Do Patents Facilitate Financing in the Software Industry?, Texas Law Review, Vol. 83, p. 961, 2005

James E. Bessen and Robert M. Hunt, An Empirical Look at Software Patents, FRB of Philadelphia Working Paper No. 03-17

Ronald J. Mann and Thomas Sager, Patents, Venture Capital, and Software Start-Ups, U of Texas Law, Law and Econ Research Paper No. 57

6 Comentários:

Stephan Kinsella said...

Wow, what a strong argument for patents: they have not harmed the software industry that much!

Of course, this does not imply the patent system has no costs; or that the costs are exceeded (somehow) by the benefits of the system (in fact if it has no effect, that means it has no benefits, right?). For more on this, see There's No Such Thing as a Free Patent.

Anonymous said...

Well, software patents did not hurted US industry... only when not used!
Big boys have "cross license", and small firm are safe until they stay on the shadows of big boys (i.e. you produce one of the "many applications and ancillary products that connect to the backbone"). In any case this is a big waste of resources for issuing useless patents, no?
How many new US company have become BIG after sw patents? Uh? No one? Microsoft and IBM are still leading? How can it be if there is such an innovative developement in US? All this after 16 years of sw patents? Where are the small firms that have grown so much thanks to their sw patents? Where is the innovation? In "Amazon one click buy"? Or in Microsoft patents about using XML to store word processor files?
How is that Apple has been sued for iPod "music selection" by Creative? Seems that Apple is not that creative, then...
What about Blackberry?
How many of the US enterprises have never born or have quit soon because of a sw patent infringiment? Any statistic?
Where are the Israely big software products? Where is Israeli OS? Israely Office? Israely CAD? Never used a software from that country... how is that since they are so good?
Software patents are not legal in India and Ireland, so no one wastes money in filing them. And they don't innovate in software because are used as "low cost man/brain power" by western countries (India) or, for Ireland, as a fiscal paradise for Microsoft. Do you really think that is interest of Microsoft to create software house that can attack Microsoft market? What about protecting worldwide that monopoly throught software patents instead? And push for adding that in Europe and India also? (strange coincidence that they tried in both?).
But since software patents seems to exist in Israely, they do just to survive against possible sw patents attack, I guess. What a waste of resources!
Since there is a relation between developed countries and quantity of rubbish, what about passing a legislation that multiplies the rubbish? This will sure lead in a much much better place where live, no?

Anonymous said...

Marco wrote:
Where are the Israely big software products? Where is Israeli OS? Israely Office? Israely CAD? Never used a software from that country... how is that since they are so good?

Marco - please please THINK before you write. Your ignorance is astounding.

Well, here is a partial list of software companies with extensive R&D in Israel: Microsoft, Symantec, Sun Microsystems, IBM, HP.

Here is a partial list of non-'software' companies with R&D in Israel that produce a lot of innovative software - Intel, Freescale Semiconductors, Applied Materials, Cisco

Here is a partial list of 'native' Israeli software companies (or services companies that create a lot of software):
Check Point, Comverse, Amdocs

In terms of CAD software, you may want to check out a company called Proficiency

The above list were constructed from the 'top of my head.' There are many more.

Anyone willing to spend 3 minutes using Google can verify the accuracy of the aformentioned lists !!!

Marco - unless you have been living under a ROCK for the last 20 years, I am SURE that you have used many Israeli software products - you were just unaware of it.

Shalom !!

Anonymous said...

The fact that this conversation is going on, suggests what sad times we live in.

I worked for a small US software firm that was aquired by Amdocs. While we made a great deal of money through licensing and other business agreements with out customer, it was the service our software provided that was of value.

Very few people thought the intellectual property in of itself was valuable, and we freely made us of open source and other freely available libraries whenever it suited us.

Now our new parent company (Amdocs) is concerned because our solution, which processes millions of dollars worth of transactions, contains pieces of IP which we do not wholly own.

Here's my over generalized view of the cultural differences between firms:

1) US software startup:

A small group of bright ambitious people willing to leverage any available resources to produce a successful solution. This may include licensing 3rd party libraries and tools (BEA, Oracle, taxware etc.) and free downloads of opensource tools (linux, mysql, apache).

2) Amdocs

Thousands of developers, many of which are talented, most of whom are paid comparitively lower wages as they work in places like India, China and Cyprus.
Rather than *risk* any legal exposure regarding intellectual property, it is deemed more cost effective to pay a team of Indian developers to code from scratch an XML parser, rather than have an American (who may earn as much as that whole team) simply download a free parser from jakarta.apache.org.

It's becoming exhaustining trying to reconcile these cultural differences.

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Unknown said...

It's a good arguments for software patents in US market

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