Are software patents the "scaffolding of the tech industry"?

[nsane.forums]

Last week, Wired's Tim Carmody commented that when it comes to the debate over software patents, "the intellectual ammo is all on one side"—the side of the critics. It's nice to think that software patent critics are dominating the debate. But people learn more if there's a healthy back-and-forth. So I was happy to see several posts this week making the case in favor of software patents.

Former Engadget editor Nilay Patel argued that there's no distinction between software and hardware, and that patents benefit the public by causing inventors to disclose their inventions. Michael Mace of Cera Technology argued that patents protect small companies from being ripped off by their larger competitors. And Carmody himself has a post calling software patents "a key part of the scaffolding of the tech industry."

I've addressed Patel's points elsewhere. Here I'd like to talk about Carmody's and Mace's arguments. Here's Carmody:

Holding patents signals to potential investors that the startup's founders are organized and serious; it prevents big companies or a slew of me-too competitors from imitating an idea, which could kill the company when still in the cradle; and it becomes one of the primary assets the company can trade on if it's purchased outright or sold off piecemeal when it fails. One of those two scenarios is how the overwhelming majority of startups end.

In a very short time, patents have become a key part of the scaffolding of the tech industry. Eliminate them, as an asset class and value signal, and those structures needs to be rebuilt again, for better or worse.

It's worth being explicit about what's being described here. There's no doubt that patents are valuable to those who own them. But you can't eat in a patent or live in it. Patents are valuable for one reason and one reason only: they can be used to generate licensing revenues, often by threatening other companies with lawsuits. And this value is entirely zero-sum. Every dollar a patent holder receives in revenue reflects a dollar that some other company had to pay. And most patent licensing fees are paid by other tech companies, which represents a disincentive to innovate.

So it's obvious that patents are good for the people who get them. The key question is whether patents have a net effect of encouraging innovation. And there's no reason to believe this is the case. To start with, a big chunk of patent revenues simply flows to patent lawyers. The rest goes disproportionately to huge incumbents like Microsoft (18,000 patents) and IBM (more than 50,000). These companies have as many patents as they do not because they are hundreds of times more innovative than smaller companies like Google (754 patents) and Facebook (11 patents), but because it takes time to build the massive legal bureaucracy required to file thousands of applications every year.

This point is most obvious in a case where a failed company's patents are put up for auction. It can be sad when a company goes out of business, and a company's investors understandably want their money back. But the reason the auctioned patents are valuable is usually because the winning bidder will turn around and demand licensing fees from the failed company's more-successful competitors, effectively punishing success.

Being first isn't everything

Of course, it's possible that the bankrupt company failed because its more successful competitors simply ripped off its technology and undersold it. But at least in software, this is not the common case. More often, many companies independently come up with similar ideas. The company that prevails is the one that executes best, not the one who came up with the idea first. Which means that the patent system simply transfers wealth from those who are good at building useful products to those who are good at navigating the patent system.

Mace's post is based on a similar fallacy. He argues that patents are good because they allow a small company like his to prevent a large company like Google or Apple from copying him. Obviously that's valuable to him, but it's not clear that it's good for the economy as a whole.

Companies have other ways to protect their innovations. They can use copyrights, trade secrets, and the head start that any inventor has over copycats. Mace objects that these protections aren't adequate to guarantee that the original inventor will win in the marketplace. But that's the point: consumers benefit from the robust competition that results when inventors have only a limited advantage over competitors. The first company to enter some market shouldn't be able to simply rest on its laurels. Remember, Facebook was a "me-too competitor" in the social networking space; it's a good thing that Friendster and MySpace weren't able to stop Mark Zuckerberg from entering its market.

The function of the patent system isn't to maximize the profits of inventors. Rather, it's to provide inventors with sufficient incentives to ensure they continue innovating. In software, the protections offered by copyrights and trade secrets are already more than adequate to produce a huge amount of innovation. As a bonus, these regimes are less cumbersome and less prone to frivolous litigation than patents.

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[myidisbb]

yes all software patents are illegal. you can only copyright it. this is one of the main problems in the usa