Jim Moore’s blog: Innovation, Strategy, Public Policy

Google Fights Global Internet Censorship - Forbes.com

Bravo for Google Director of Public Policy and Government Affairs Andrew McLaughlin , our former colleague at Berkman, for pressing censorship as a trade issue.  This is exactly the case.  And from my–and Andrew’s–work on bridging the digital divide between rich and poor countries, barriers to internet participation hurt the poor nations most of all.  Their citizens cannot participate in the global knowledge economy.

Now if we could just press for access to undersea fiber as a global trade issue, I’d be even happier.   Undersea fiber connections are the “deep water ports” of the knowledge economy. Countries like South Africa where big telecom companies tightly control these ports are strikingly disadvantaged.  Small and medium-sized knowledge-based businesses are starved.  And yet these businesses are the types that can spring up in web ecosystems quickly in developing contries.  These are businesses that help their local societies become more efficient.  These businesses can provide needed export services, such as outsourced development.  And these businesses promote the growth of the  political middle class.

Economic research on patent licensing by industry demonstrates a maturity curve. Disputes over intellectual property are comparatively rare in industries where intellectual property ownership has long been accepted, such as semiconductors, electronics, telecommunications and biotechnology. Intellectual property licensing is well-understood and actively pursued among companes. While there is inevitable grumbling about prices, generally-acceptable licensing terms have been established in these industries. Most important, there is a vibrant sub-sector of each of these industries where “invention companies” thrive as part of the ecosystem. I have a loft near MIT on Brookline Street, and all around me are biotech idea companies living happy, comfortable lives tackling hard intellectual problems, developing inventions and intellectual property, and licensing the resulting technology solutions to larger industry players who provide downstream development, testing, marketing and distribution.

By contrast in software intellectual property practices are strikingly immature. This can be hard for outsiders to understand, as there is very little real difference between software inventions and analogous inventions in semiconductors, electronics, telecom and biotech.

Why is the intellectual property ethos so immature in the software industry? Mostly because software as a distinct field was so abstract as to be almost invisible until the 1980s. In the academic engineering world, software started out in applied mathematics and computer science as a field came relatively recently. In business, software was seen as a necessary part of hardware, not as a distinct product or service offering. Indeed, up until the 1980s software was typically given away by hardware companies in order to sell their (big) iron. It took an anti-trust settlement with IBM regarding the IBM 360 mainframe to force IBM to unbundle software from hardware. In the minicomputer days, Sun Microsystems was one of the first companies to see software as the basis for a distinct business–an idea that was considered radical at the time. The layered architecture of the personal computer world finally enabled software companies to form a distinct, free-standing industry.

Software patents became recognized as a distinct, official domain of invention in the United States in the mid-1980s. Telecom patents by contrast went back to the beginning of the century.

In the long history of intellectual property, software in now coming of age.

In the software industry companies large and small continue to underemphasize intellectual property licensing. The rationalized ethos of cross-licensing among companies is barely developed. Instead, firms large and small continue to come to blows on the few propery conflicts that rise to high stakes. A myriad of opportunies for licensing and collaboration on intellectual property development are ignored, and–importantly–infringement is a daily business practice.

Slowly, however, the industry is growing up. IBM sets the right pattern in some ways. IBM has long offered to license pretty much any of its 34,000 owned and 45,000 owned-or-controlled patents for 1% of another company’s “relevant revenue” (i.e. revenue directly attributable to employing the patented intellectual property). IBM typically would offer its entire portfolio for 5% of revenues. For many years, other firms found this deal attractive.

Today IBM will license most of its software intellectual property portfolio for 1% of relevant revenues in total. The thinking seems to be that most firms can expect to be licensing software intellectual property from several others. Thus 5% is probably what a firm can reasonably budget for all of its relevant licenses, so IBM figures 1%, or 1 of 5 points, is about what the market will bear for its contributions. This seems a reasonable assumption to me. In other industries, this percentage is about the norm.

We are also seeing the beginnings of a distinction in the software industry between invention and distribution. IBM, interestingly, is becoming more of a distribution firm (a systems integrator), relying on others’ ideas–while continuing its own lab, as well. Google, on the other hand, appears to be investing heavily in ideas–while developing its distribution platform.

What I think will be a most interesting next development is the rise of smaller, entrepreneurial invention firms in software. I look forward to Brookline Street in Cambridge being lined with small software engineering firms solving the hardest problems on the planet–and partnering with larger firms to take the resulting inventions to the world market.

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Regarding Jon Dudas’ testimony today to the Senate Judiciary Commitee, as reported in advance by Steve Lohr in the New York Times yesterday.

Dear Steve,

Unfortunately, I need to take you to task for your article yesterday in the Times about patents.

The creation of inventions and intellectual property is vital to the American economy and the United States’ role in the world economy. For better or worse, America’s economic future depends on creating and licensing intellectual property.Strong worldwide patent rights are the foundation for American economic survival over the next fifty years.

There is a serious lack of balance in your article reporting on the Bush administration’s campaign to change the US patent system.

I hope you will understand that this letter is not a personal attack on you. You are a thoughtful, effective and experienced technology journalist. Over the years I have enjoyed talking with you and reading your pieces in the New York Times. Please consider the following as strong criticism, but intended constructively. I am blogging it because I think the issue is important, and the case requires careful examination.

I. Your article ignores the deep controversy over the Bush administration’s approach to patents. Among experts, especially in the patent bar, there is great frustration with Jon Dudas, the director of patents. Indeed, I am tempted to put “patent reform” in quotation marks when it comes to this administration, just as one is tempted to put “war on terrorism” in quotation marks. No one believes any more that the war on terrorism is uncontroversial, regardless of their point of view.

Unfortunately the Bush “war on patents” is not yet understood by the public. What the administration proposes to do about patents is controversial. That is, whether you agree with the administration or not, there is controversy among experts in innnovation and the law. You article did not report this genuine criticism.

II. To many of us who are students of the situation, the administration is motivated by the economic needs of a few companies, Microsoft and IBM in particular, hope to weaken patent protection and absolve themselves of billions of dollars of potential infringement penalties. In order to help these giant companies accomplish this, the administration and its allies in industry have manufactured a phony “crisis in the patent system.” This crisis simply does not exist.

The proposed fix, which is to make it harder for new players to obtain patents, and to weaken patent protection for existing holders, is clothed in language that makes reform seem to be in the interest of small players and small business. This view, again, is not without controversy. Your readers need your help in questioning this framing, and in making up their own minds about who is served by the proposed changes to the patent system.

The creation of inventions and intellectual property is vital to the American economy and the United States’ role in the world economy. For better or worse, America’s economic future depends on creating and licensing intellectual property. Strong worldwide patent rights are the foundation for American economic survival and leadership over the next fifty years.

III. Without taking up more of your time than is necessary at this point, let me point out an example of one-sided journalism in your latest article. You write, “Both the Senate and the House have introduced patent-reform legislation this year, amid concerns that the current overburdened, litigation-choked system is hampering innovation rather than encouraging it.”

While you are careful to put these words in the mouths of others, “amid concerns,” your colorful language and lack of a articulating the counter points suggests that there is no argument as to the assessment of the state of the system. This is not correct. Whether you agree with them or not, there are strongly differing views about the health of the patent system. Here is a contrasting view to the one you present:

1. The patent system is excellent in America. The US has the best patent system in the world, and is the globe’s leader in innovation. In the view of many and perhaps most scholars in economics, law, and business innovation the patent system is NOT “litigation-choked” but rather is working quite well.

We live in a time when the total number of scientists and engineeers working today is larger than the sum total of all past history. We are approaching what some call a “singularity” in the exponential growth of invention. The progress of progress is itself increasing in rate. Given this, it is not surprising that the patent office is going through growth pains.

On the other hand, the current patent commissioner has embarked on a number of untested initiatives that–as we will see below–may be less motivated by fixing the American patent system than fixing the problems of a few large Republican donors.

Studies show that only a tiny fraction of corporate budgets go toward legal costs associated with patents. In industries where intellectual property has long been respected, such as health and medicine, medical devices, pharmaceuticals and semiconductors, the spread between patent litigation returns and patent licensing returns is very small. To put this more plainly, it is in the interest of patent holders to license their ideas to others, on fair terms, and they do so.

The intellectual property exchange markets work very effectively to provide companies ready access to the inventions they need at a price they can afford. Inventions are licensed efficiently to companies and entrepreneurs by universities, small research-based companies, and among larger firms. The license fees in turn fund university-based and small-company-based creativity on which our country increasingly depends for advances in medicine, information technology, and other sources of international leadership.

2. The patent system works very well in software markets. Indeed, it is helping to tame companies that have been rampant abusers, and it is helping to establish a sub-industry of focused, academically-based small-company computer science research.

Bad behavior on the part of a few big players, in the context of an immature intellectual property market, is what results in the large patent disputes that make the newspapers. The patent system is working to incentivise a higher level of respect for intellectual property rights. This in turn is improving the software industry in America.

Intellectual property exchange markets have difficulty operating in immature intellectual property markets with histories of what might be called “cavalier” abuse of intellectual property rights.

Thus for example Microsoft faces many billions of dollars of unsettled patent infringement claims. Similarly, as IBM has shifted its business model from technology invention to business consulting and technology integration, it has become a vast potential infringer on patents held by others.

Finally, software-oriented venture capitalists have long told their companies to ignore the intellectual property rights of others. Infringement is the direct result of cavalier attitudes toward the rights of others, and of business models that depend upon infringement.

3. The patent system and the courts are helping the software industry mature. The goal is to achieve a healthy, efficient software intellectual property market like we have today in pharmaceuticals, semiconductors. The patent system is doing in software just what it intended to do–to help remedy infringement and drive the industry toward open, efficient licensing. The patent system provides for registered property rights that companies small and large can use to protect the fruits of their labor.

The patent system is the direct analogue of the system of real estate title that makes it possible for investors to buy and sell real estate without fighting over who has title. In the software business there are large players who are accustomed to building on land they don’t own, and they are now having to settle with the true owners of the underlying property. Let us not cry too hard for these previously untamed giants.

IV. Your article does not provide the reader with any background on the players in the story.

The story describes testimony that the director of patent office Jon Dudas plans to make today before the Senate Judiciary Committee.

1. The story simply restates approvingly Mr. Dudas’ point of view. Fully eight of twelve paragraphs are constructed of uncriticises quotes from his proposed testimony. By leaving out the context, your piece becomes mainly a presentation of administration views–not far from an Op-Ed one can imagine Mr. Dudas himself writing.

2. What is happening in the Senate? Why is Dudas testifying? What is the politics of this commitee meeting? You provide only one paragraph of twelve on this topic.

You could have pointed out that legislation to change the patent system is being co-sponsored by Senator Orin Hatch. Hatch is well-known for championing legislation that freed the dietary suppliments industry from FDA oversight, advantaging a number of Hatch contributors and allies. And, arguably, setting up the nation for confusion and potential abuse by makers of suppliments.

3. What about the companies? Who is testifying? Who is lobbying? Who is funding the non-profits and think tanks. Companies are THE central participants in this drama. In the recent, and related, case before the US Supreme Court, a number of firms lined up on several sides of the issue. You could look into the strange bedfellows of patent reform, Microsoft and IBM, who are funding the lobbying campaign.

4. Speaking of IBM and Microsoft, you mention with approval, “The patent office is experimenting with the concept of opening the examination process to outsiders, inviting public peer reviews.” You neglect to reveal that this experiment is being funded by IBM, by way of contibutions to Fordham University and the Electronic Frontier Foundation. You could have gone farther and detailed the connections among campaign contributions, support of non-profit initiatives, and lobbying by corporate interests in the software industry.

5. You quote only one outside expert, Josh Lerner of Harvard Business School. Josh is a thoughtful person with an important point of view on patents, but he is not independent. Here is a quote from his HBS web site:

“Adam Jaffe and Josh Lerner’s Innovation and Its Discontents is a new book that tells the story of how recent changes in patenting—an institutional process that was created to nurture innovation—have wreaked havoc on innovators, businesses, and economic productivity. Jaffe and Lerner, who have spent the past two decades studying the patent system, show how legal changes initiated in the 1980s converted the system from a stimulator of innovation to a creator of litigation and uncertainty that threatens the innovation process itself.”

Josh is NOT an unbiased objective third party, as you imply. He is a participant in the drama. I think it is fair to say that he is aligned with Mr. Duda, and presses him to go farther. I believe Josh himself would agree that he is a crusader for change.

You rely heavily on Josh as a source, not just in this case, but in other stories. Please consider whether you are perhaps relying overly much on one framing of the issues, if you find Josh neutral.

“steve lohr”+”josh lerner” - Google Search

V. Here for your consideration is an alternative framing of the big picture. The following framing, whether you agree with it or not, is certainly a valid way to construct this complex situation. At the very least, there IS controversy.

A few large companies, rampant infringers, are getting their due and they are upset about it. They are blaming the patent system, and have lobbied the Bush administration for relief. Unfortunately the administration seems willing to throw out a hundred years of settled law in order to help these large donors. A few senators appear to be willing to go along.

This, indeed, is a story!

Thanks much, Steve.

Best,

Jim Moore

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