Why patents, trademarks, and other intellectual property protections are bad--that's right, bad--for business.
By most measures, the Sten was a forgettable product. This British submachine gun, thrown together for World War II, was wildly inaccurate and so unreliable that the only thing troops counted on from it was a jam at the worst possible moment.
Yet the Sten was one of the true hit products of the mid-20th century, and with a run of some 4.5 million, it became one of the all-time bestsellers in the world of weaponry. By contrast, the U.S.-made Thompson M1 machine gun and its variants, used by American troops in World War II and a more accurate and reliable weapon, saw a run of only 1.7 million in its half-century lifetime. How could a gun as lousy as the Sten sell so well--and even outsell the M1? One big reason: It was easy to copy. The Sten's blueprint was widely circulated, and the gun was purposely designed to be easily manufacturable by anyone with modest metalworking skills and tools, making it the darling of resource-strapped Allied units. Though none of these Sten-alikes produced royalties for the weapon's originator and maker of record, London's Royal Small Arms Factory, the Sten's sheer familiarity became such that after the war Britain and other countries around the world ordered it from the factory by the truckload well into the 1960s, making the Sten a gold mine.
And therein lies a lesson for entrepreneurs today. Though companies continue to treat intellectual property as an asset to be kept out of the hands of others at all costs, there have long been compelling reasons that such aggressive IP protectiveness is not only unnecessary but also counterproductive. Today we're in the midst of a shift in which the potential benefits of relaxing IP paranoia are becoming less of an interesting exception, a la the Sten, and much more the rule.
That may sound like a strange claim, given the near-frenzied attention paid to the value of intellectual property today, as well as to efforts to bolster our patent and copyright systems. Some $5.5 trillion worth of IP is said to be rattling around the computers and file drawers of U.S. companies, accounting for just under half of the nation's GDP. About twice as many patent-related lawsuits were filed last year as in 1992, suggesting companies are more determined than ever to keep others' mitts off their good ideas.
And yet the simple truth is that companies rarely succeed because they succeed in protecting intellectual property, or fail because they do not. Ninety-five percent of patents end up being of absolutely no commercial value. Even in high tech, where IP is king, the best rule of thumb for patent protection is: Don't bother. "A long period of patent protection for a new technology isn't all that useful because a newer technology will quickly displace it," says Glen Whitman, an associate professor of economics at California State University, Northridge. "The faster the pace of innovation, the less important will be the patent." To put it another way: Superb execution trumps IP protection every time.
That's because it usually isn't individual big-bang product ideas in and of themselves that make or break a company; rather, it's a constant stream of smaller good ideas in any and all areas of the business. According to a study by researchers at Boston University and Princeton, patent protection is of little or no benefit when it comes to such an ongoing string of ideas--which makes sense, given the time it takes to get a patent into place and the relative perishability of any single idea.
Why do so many companies become obsessed with patents? In part, it's because they don't really understand their own business, says Danny Shader, CEO of Good Technology, a wireless software maker based in Santa Clara, California, and the main rival to Research in Motion's BlackBerry in the hand-held e-mail market. "A lot of people think they're in the invention business, but they're really in the application business," says Shader. "They confuse innovation with patents, and that's a classic mistake." Profitable innovation comes not from inventing a new product, he maintains, but from having a team of smart employees who figure out how to do a better job every time they interact with customers. "That sort of innovation will do a lot more for your company than a piece of parchment," he says.
It's not just that IP protectiveness is useless; it can be harmful, too. Companies that work to put walls around their IP tend to make a lot of enemies. Look no further than Bill Gates, who started sowing ill will as a student hacker when he refused to let other programmers use his code, in gross violation of all that hackers hold sacred. A continued trail of IP bullying has left Microsoft one of the world's most resented corporations. It's hard to argue that the company has failed because of this enmity. But it helps explain why Microsoft software now suffers so many hacker attacks that the company has designated one Tuesday a month as "Patch Tuesday."
It's not just the big guys that can offend with a mania for protecting whatever they might consider to be intellectual property. Make an online reservation with the easyGroup Companies' easyHotels in London or Basel, Switzerland, and you'll get a confirmation e-mail that includes this charming statement: "The easyGroup of companies has built up a significant reputation in the name 'easy' and has a number of trademark applications and registrations in many countries. easyGroup cannot permit others to use the 'easy' name without the group's rights being prejudiced. It follows that no use should be made of the name 'easy' (or anything similar to it) without our consent." What shouts "friendly host" and "thanks for your business" more than a gratuitous threat intended to curtail the use of the English language?
Alienating customers and potential partners are some of the soft costs of IP protection. The hard costs can be impressive too: a minimum of about $20,000 to see an application through the patent process, not counting the cost of the time of the employees who are pulled into it, and most definitely not including the potentially explosive costs of waving the patent at a defendant in an actual or threatened legal action. And remember, this is for a patent that has a 95 percent chance of being worthless. "Patents are expensive to get and more expensive to enforce," says Tom Bell, a professor at the Chapman University School of Law in Orange, California. "If I had a patentable invention, I might rationally say that I'd rather spend the money on having my engineers create something else."
Ninety-five percent of patents end up being of absolutely no commercial value. Even in high tech, where IP is king, the rule of thumb for patent protection is: Don't bother.
IP protection, goes the conventional wisdom, preserves an incentive for companies and people to invent and create. But when you talk to the people who actually do the inventing and creating, a different picture emerges. In a 2005 survey conducted by the American Association for the Advancement of Science, 58 percent of researchers whose work had been affected by patents reported that their research was delayed as a result of the patent process, and 28 percent said they ultimately had to abandon their work because of it. The Boston University and Princeton study concluded that inventors tend to have a greater chance of profiting when IP protection is relaxed and the door is opened to increased competition and imitation.
Indeed, some of the very industries that are most dependent on new ideas and innovation are the least dependent on IP protection. Take the sailboat industry, where manufacturers are constantly refining materials, shapes, and gadgets in a drive to add an extra knot, a bit more stability, a cleaner line, or a longer life. One of the better-known sailboat design firms is Jim Taylor Yacht Designs in Marblehead, Massachusetts, which has produced blueprints for some 3,500 boats, many of them on behalf of leading manufacturers such as Sabre Yachts and Precision Boat Works. "I never bother with patents," says founder Jim Taylor, "and there are very few innovations anywhere in the sailboat business that have been patented." When one boat based on a new Taylor design debuted, another company bought it, took the boat apart, and soon brought out its own boat incorporating a construction technique that was a key part of the Taylor design. Taylor says he just shrugged it off. "We don't go around sharing all our designs and ideas freely, but we don't make much of an effort to protect them, either," he says. "If someone manages to do something similar to what you've already done, then they are by definition behind you, so why should you care? I'm more interested in always moving forward."
Many large companies see the issue differently. In fact, corporate America is lobbying hard to make our patent and copyright system ever more restrictive. Big companies, after all, often have the resources to prevail in IP disputes. The notable exception, of course, is when a major company gets hit by a so-called patent troll--that is, a company that exists primarily to extort money via patents and which serves no useful role in the economy. In the most prominent recent example of trolling, RIM nearly had its BlackBerry service shut down and only survived after agreeing to pay a $612 million settlement. But it hardly ends there. About one out of five genes in your cells, for example, have been patented by U.S. organizations, typically in the hopes of squeezing licensing fees out of companies that develop drugs targeting those genes.
As a result, smaller companies trying to bring out new products, especially in high tech, often find themselves buried under the administrative and financial requirements of shelling out license fees for an ocean of processes, techniques, and gizmos covered by patents. According to a 2003 Federal Trade Commission report, the development of a single new product can entail wrestling with thousands of such patents. "It shouldn't be surprising that an intellectual property model that arose in Charles Dickens's time doesn't quite fit the needs of the information age," says David Stork, chief scientist at electronics manufacturer Ricoh's California Research Center.
Most companies would do better to channel their energies away from building legalistic fences around their creations and toward mastering the art of sharing. If you're looking for a role model, forget about Thomas Edison's patenting of the electric light bulb--a patent later ruled invalid after much ugly legal wrangling. Instead, consider the way a consortium of companies came together and agreed upon a standard socket shape for the electric plug. "Looking at IP as something to give away is not as entirely strange as it might seem," says Lawrence Rosen, a lawyer with high-tech law firm Rosenlaw & Einschlag and a lecturer at Stanford Law School. "If you can get cooperation from others on developing your product, there's the potential for your technology to become widely embraced and even ubiquitous, and you ultimately get a bigger ecosystem in which your technology can thrive." In its fullest incarnation, this sort of free swapping of work becomes the open-source approach most famously embodied in the Linux computer operating system, which companies such as Red Hat and Novell profit from--even though, in a sense, Linux is owned by everyone and no one. To be sure, the open-source approach is extreme. But it's nonetheless a useful mindset that could apply to any business.
Of course, there are some situations in which IP aggressiveness may be reasonable and even essential. The minority of industries that are driven not by marketing and customer relations and a bevy of features but by a small number of large, painstakingly developed and easily copied technical breakthroughs probably need strong protection. The pharmaceutical industry is a clear example. It takes about 10 years and the better part of a billion dollars to identify the one molecule out of trillions that works against a disease and then drag it through the multistaged testing process. Once the pill is out, it might take only a week to bring out a perfect imitation that could be sold at cut-rate prices to take over the market, since few people are loyal to any particular drug company.
But it's hard to come up with many other industries that fit this description. Perhaps the blockbuster movie business, where piracy makes it more difficult to recoup the $150 million or so needed to go into the black on big-budget films. But that's just a sliver of the entertainment business. In fact, there really are relatively few cases where easing IP protection would endanger an entire industry or class of product, even if it caused a bit of scrambling to adjust. "Most would do okay without it," says Chapman University's Bell. "Businesses wouldn't be dying, and we'd enjoy most of the products we enjoy now." Hollywood may be screaming bloody murder about the havoc that piracy will wreak, but this is hardly the first time movie moguls have warned that the sky is falling. Jack Valenti, the former head of the Motion Picture Association of America, testified thusly to Congress in 1982: "The VCR is to the American film producer and the American public as the Boston Strangler is to the woman home alone."
Even in the case of small biotech companies, IP protection need only be short term, says Robert Freedman, CEO of Hurel Corp., a biotech start-up in Beverly Hills, California. "As products mature, the balance point of competition shifts away from the uniqueness of the technology and toward the embodiment of the product into fully developed services," he says. In other words, even in big-bang technology businesses, the companies that win in the long term aren't necessarily the ones that do the inventing; it's those who figure out how to bring product improvement and better marketing and customer service to the fore.
Anyway, it may not matter what you or I think about it. It's what the kids think about it that counts. And upcoming generations are not merely less concerned with IP protection, they're appalled at the notion of locking up ideas or works. Sure, it's useful to take that point of view when you're strictly on the receiving end of pilfered IP, but anyone who tries to switch it when it's his or her IP on the line will doubtlessly be roundly booed by his or her peers. It's hard to see how this genie can be put back in the bottle. The breadth and depth of what's available online is simply staggering--including movies that haven't even been released yet, and every episode of what seems like every TV show ever made, from thousands of different sources, downloadable a dozen different ways. "The technology of sharing has changed the world," says Stork. "Business models have to change to adapt to it."
Contributing editor David H. Freedman writes Inc.'s What's Next column.