Thursday, October 06, 2005

The True New Economy.

The Idea Economy: Battle over right to sell knowledge

By James Kanter International Herald Tribune

SUNDAY, OCTOBER 2, 2005

PARIS: In another era, a nation's most valuable assets were its natural resources — coal, say, or amber waves of grain. But in the information economy of the 21st century, the most priceless resource is often an idea, along with the right to profit from it.

This reality is transforming business and creating new diplomatic fault lines between continents. Some companies — Thomson of France, in consumer electronics, and BTG of Britain, in technology, for example — can make more money selling access to their ideas than from building anything themselves. The right to profit from a breakthrough idea can be so valuable that the contest over the concept can be more decisive than the competition for consumers, as Sony and Toshiba demonstrate in their tug of war over whose next-generation DVD patents will win out, long before the discs come to market.

From the United States to Europe and Japan, more patents were sought in the past 20 years than in the previous 100, evidence that protecting the rights to an idea is itself growing in importance. Patents ''are becoming the highest-value assets in any economy,'' said Jerry Sheehan, an economist with the Organization for Economic Cooperation and Development in Paris.

But a crisis is at hand, say government officials, corporate executives and academic experts, and the future of idea creation as the grease of the global economy, the force in deciding winners and losers, is in the balance.

Today, the process for capitalizing — either financially or socially — on innovation and creativity is staggering under the strain of a digital revolution of a speed and scale never seen before. At a time when many of their most valuable assets can be shared and exchanged easily, businesses and governments scrambling to redefine who owns what.

Failure to resolve where to draw the line on ownership of ideas will mean even more litigation and even more multimillion-dollar lobbying battles in the halls of the U.S. Congress and the European Parliament. Ultimately, experts say, some innovations and creations will never be exploited because it costs too much money and time to pursue the rights.

Ideas that are free, widely available and instantly duplicated were impossible to contemplate in the days when copyright and patent law took root, a time when the expenses needed to print, distribute and sell a book or movie were considerable.

Now, the information, entertainment and technology industries say they lose billions of sales to the free exchange of ideas. Incremental advances are stalled by endless lawsuits over inventions. Drug companies are on the defensive when they refuse to share their original research. And regulatory changes — like the European software patent directive this summer — are dying under the weight of lobbying forces from both sides.

The battles pit companies against companies, creators against distributors, almost everyone against the United States — and, some say, China against the rest of the world. ''This is warfare,'' said Jerry Klein, a Silicon Valley entrepreneur. ''It's a high-stakes intellectual battle, and it's very complicated.''

Companies, even those the size of Intel, could one day be blocked from marketing a particular product whose design is made up of hundreds of thousands of patents just because an opportunist has claimed ownership of a single patent, said Adam Jaffe, dean of arts and sciences at Brandeis University in Massachusetts and a patent expert.

Some intellectuals say that the more such rights are expanded, the less good the public reaps, a benefit that government's protection of innovation once intended. And now some companies are starting to agree, arguing that the race for rights and royalties can actually harm competition.

''In certain cases,'' said Elsa Lion, an analyst at the London research firm Ovum, ''technology companies are beginning to realize they have more to gain by releasing patents to the general public than by hoarding licensing income.''

By giving away some of their knowledge, companies like IBM and Nokia are not just polishing their image among the Internet generation.

They are also questioning a business strategy that has become a bedrock of contemporary capitalism: Whoever has the most patents wins.

The real problem is how to fashion a system that promotes innovation, not mere accumulation. If savvy entrepreneurs can manipulate the system by locking down valuable ideas, true pioneers will find it too tough to win rewards for their inventions.

''Our standards-setting process risks being corrupted by having people filing for, and getting, any patents they want. That poses a real danger to the effectiveness of innovation,'' said Josh Lerner of Harvard Business School.

Dietmar Harhoff, a professor at Ludwig-Maximilian University in Munich and an expert in innovation research, said, ''I think it has made some independent inventors less aggressive for fear of lawsuits.''

Here to stay?

The number of patents issued in the past 10 years has never been seen before, soaring to more than 958,000 in 2004 from about 642,000 in 1995, in part because of breakthroughs in digitization and the life sciences.

At the same time, governments have made holding patents increasingly appealing by giving companies more ammunition against copycats and other challengers in the form of favorable judgments and long ownership terms.

And patent offices worldwide, overwhelmed by new applications, are under growing pressure to cut backlogs by using hasty assessments, creating the conditions for what Harhoff called ''a vicious cycle of deteriorating quality.''

Of course, despite the legal quagmire and grass-roots efforts to publicly share innovation, patents are not going away. Industry experts say companies need to freely register their ideas, given the swiftly moving nature of technology and competition.

Patents are supposed to stop others from making, using or selling an invention for 20 years in Europe, Japan and the United States, the three parts of the world where about 85 percent of all patents are granted.

Like any other form of property or asset, patents can be bought, sold, leased or mortgaged. Businesses even give patents back to the government in exchange for tax breaks. Start-up companies use patents — often their only collateral — to lure investment from venture capitalists. Midsize businesses swap and barter patents, even with rivals, to build products they could not make on their own. And many companies license patents to bolster their balance sheets.

In the 1980s, Kenneth Dam, then an executive at International Business Machines, helped push the company to increase its patent output as a one of a number of strategies to nurse it back to health. Its U.S. patents numbered 3,248 in 2004, up from 607 in 1990, when the company began tracking the figures, according to John Bukovinsky, an IBM spokesman. Last year — the 12th in a row that IBM took home the most U.S. patents — it earned $1.2 billion from its intellectual property holdings including patents, or about 15 percent of the company's $8.1 billion total income.

IBM's patent strategy helped make research into ''a profit center rather than a cost center,'' said Dam, now an emeritus professor at University of Chicago Law School. He said patents also were ''a way of demonstrating IBM's technological leadership.''

Like IBM executives two decades ago, Bill Gates, chairman of Microsoft, is pushing his company to switch into high gear, setting ever higher goals for patent applications — 3,000 in the financial year just ended — for his staff. (In 1990, Microsoft, then a 15-year-old company, was awarded only five patents.)

'Trolls' cashing in

Critics say the skyrocketing volume of patent applications makes it increasingly difficult to assess whether the underlying ideas are valuable, nonessential or even valueless. Critics also say the current system encourages using the courts to sue other firms for using ideas you registered first.

Apple Computer's best-selling iPod is a prime example. In early August, Microsoft boasted of snaring a patent on parts of the
design of Apple's portable music player two months before Apple started marketing the iPod in 2002. Two weeks later, Creative Technology, of Singapore, claimed patent rights on the interface on an iPod screen, saying it would sue Apple for damages.

A lone ''patent troll'' looking to extract huge payments from big companies on patents that were never commercialized has yet to wipe out a Fortune 500 company. But Horacio Gutierrez, associate general counsel of Microsoft Europe, does not think it is impossible.

A patent infringement case against Microsoft in 2003, for instance, cost it $521 million, he said. Likewise, he cited an outstanding case against the maker of the BlackBerry e-mail device, Research in Motion, that at one point was close to a $450 million settlement, nearly equal to RIM's quarterly sales.

Similarly, in March, the German chip maker Infineon Technologies agreed to pay Rambus, a California chip designer, quarterly amounts totaling nearly $50 million until 2007 with the possibility of further payments of up to $100 million to settle a U.S. patent. The suit could have entitled Rambus to as much as a 3.5 percent share of all memory chip sales in the $26 billion industry, or revenue of about $910 million annually, said Michael Cohen, a California-based analyst with Pacific American Securities.

Rambus, which is expected to earn about $21 million this year from licensing patents, spent $23.1 million on litigation in 2004 and has pending fights with other chip makers, including Samsung of South Korea, which continue to accuse Rambus of making overly broad claims to ownership of vital chip technologies.

''Today's collaborative technologies are presenting a real challenge for patent law,'' Jaffe, the patent expert, said, ''and for the kinds of thinking that emerged at the time of Thomas Edison and Alexander Graham Bell, when individual inventions seemed much more distinct, much less complex.''

In June, a trade group including Bertelsmann and EMI accused Toshiba, Philips and others of breaking antitrust laws by overcharging for the DVD standard, a technology protected by hundreds of patents. In a complaint to European authorities, the music companies said similar fees on patents for a new generation of DVDs to be introduced this year would also be anticompetitive and mean higher retail prices.

The Geneva-based group, the International Optical Disc Replicators Association, said companies like Toshiba and Philips, whose research led to DVD technology, had failed to honor promises to European and U.S. authorities that only ''essential'' patents would be licensed and that an ''independent expert'' would be appointed to evaluate their legitimacy.

Guy Marriott, the trade association chairman, also accused the patent holders of refusing to cut licensing fees sufficiently to match declines in the value of DVDs on world markets, declines that Toshiba, Philips and the others get a direct benefit from since they also make DVDs. ''Our members are paying for patents that they do not want or need,'' Marriott said. ''There already are hundreds of patents on this generation of DVDs. What will happen when the companies launch the next generation of discs and start claiming thousands of patents?''

The technology companies are preparing their defense, stressing that antitrust officials previously approved their licensing program, said one lawyer involved in the matter. The lawyer spoke on condition of anonymity, saying that antitrust officials had made no decision about whether to pursue the complaint.

The disc association met with Department of Justice officials this year but made no formal complaint. Frank Fine, a lawyer for the association, said the U.S. officials showed no interest in investigating their concerns. European regulators are ''studying the complaint,'' said a spokeswoman for Neelie Kroes, the EU competition commissioner.

If there is trans-Atlantic divergence over the DVD case, it would not be an isolated instance. Experts point to Europe's failure this year to pass a software patent law as the most recent difference in views over how to protect ideas. After years of lobbying frenzy in Brussels and Strasbourg, the law failed in the European Parliament in July after some software developers warned that their ability to write code would be compromised by U.S.-style patent standards.

''The Bush administration seems to think patent holders can do no wrong,'' said Fine, the Brussels lawyer for the DVD trade group. ''But the U.S. is badly out of whack, and we think the Europeans will want to reset the balance.''

Shift in corporate attitudes

Even if the technology companies successfully defend themselves against the group's challenge, other battles concerning ''overpatenting'' lie ahead. The U.S. Congress already is looking at ways overhaul the patent system.

So is the world's patent leader, IBM. While the sun is far from setting on the 21st century gold rush, IBM already is anticipating a time when the environment will not be so friendly.

In January, John Kelly, senior vice president for technology and intellectual property at IBM, announced the release of 500 IBM patents for use by open-source programmers. ''This is not a one-time event,'' Kelly said at the time.
Lerner at Harvard sees ''a big shift in corporate attitudes'' in the move by IBM.

''Reform is being driven by the sense that the system is out of control,'' he said. ''As a result, we are moving into a world where patent holders won't be islands anymore, but knowledge-sharing organizations.''

Victoria Shannon, Kevin J. O'Brien and John Markoff contributed to this report.

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