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Patents Don't Pay
tarball_tinkerbell sends us to the NY Times for word on a book due out next year that claims that beginning in the late 1990s, on average patents cost companies more than they earned them. A big exception was pharmaceuticals, which accounted for 2/3 of the revenues attributable to patents. The authors of the book Do Patents Work? (synopsis and sample chapters), James Bessen and Michael J. Meurer of the Boston University School of Law, have crunched the numbers and say that, especially in the IT industry, patents no longer make economic sense. Their views are less radical than those of a pair of Washington University at St. Louis economists who argue that the patent system should be abolished outright.
Let's say you invent some new physical item, obtain a patent and line up licensing with a manufacturer to produce the product. In the first six months you manage to line up significant interest in large retailers for this product and the money starts flowing in.
Two months later you discover your retailers are deserting you and are buying an identical product made in China. Your revenue ceases because nobody wants your overpriced product when they can buy the cheap knockoff made in China. Unless there are substantial reasons to purchase your original (which there probably aren't), nobody is interested.
You are now looking at your investors that put up the money to get the product manufactured and advertised. They would like the big returns you were promising them and looked like they were going to get. Instead, you are bankrupt and have no friends (they were all investors).
50 years ago US Customs would have blocked the import of a patent-violating product. I don't know when they stopped, but today it is common to find products made in foreign countries that violate US patents and other licensing agreements. Where do you think all those cheap DVD players come from when it is $5 per player for the license? Any player under $100 retail is unlicensed and the Customs folks know it.
Rule 1: If it is a physical product that can be duplicated, it will be.
Rule 2: International trade is a race to the bottom with the lowest cost winning, always.
Rule 3: Patents and copyrights are only as good as the enforcement behind them.
Today, enforcement is a joke. You can sue someone in the US for violating a patent, but if they are violating it from outside the US (say, from China) you can't sue them. China would laugh - they don't enforce US laws. Customs will not block imports. Do you believe you can sue Wal-Mart for selling the product? You can't prevent people from getting cheap stuff - it is almost the 11th item on the Bill of Rights these days.
What this means is that patents are only good as tokens to impress potential buyers of a company with.
So how do you keep something from being duplicated? Have some encrypted software required to operate the device. The R&D effort to duplicate the development would make copying the product too expensive. Sure, they can copy the hardware but without copying the software they have a useless piece of junk. Maybe you can license the software to them, but doing so would be suicide - it turns your company from a hardware vendor into a software supplier.