Product Firms More Likely To Patent Than Service Firms

Business Professor John R. Allison, Economist Abe Dunn, and Law Professor Ronald J. Mann posted their article “Software Patents, Incumbents, and Entry” on SSRN. The article provides data showing that product based firms (e.g. Microsoft) are more likely to seek and obtain software patents than service based firms (e.g. EDS).

The article examined the relation between patents and different business models used by firms in the software industry. Part of the article analyzed firms’ pattern of patenting (how many patents the firms sought and received). The authors stated, “if the desire to build portfolios for defensive purposes were the main justification for patents in the industry . . . one would expect portfolios roughly proportionate to litigation exposure.” Id. 1594. They assert that a firm’s size is a reasonable proxy for its litigation exposure. Therefore, “if the defensive portfolio hypothesis is correct, patent portfolios would correlate closely with size, and there would not be a great deal of variation tied to other factors such as market sector or R&D intensity.”

However, the authors predicted the pattern of patenting would “depend not only on size, but also on [1] whether the firm focuses on selling products or services, [2] how devoted the firm is to R&D . . ., [3] whether the firm is primarily a software firm or a hardware/electronics firm, and [4] competitive issues in the specific sector of the software industry in which the firm is located.

The authors found that whether a firm sought and obtained patents depended, in part, on the extent to which the firm sold products as opposed to services. The data showed that “[a] firm that derives all its revenues from products . . . is expected to produce 230% more patents than a firm entirely devoted to providing services.” Id. at 1601. They found that the data did not show that some industry sectors merely relied more on products and some more on services, but rather the differences between patenting practices of products firms and services firms existed even within particular industry sectors.

The authors were not sure what caused this difference between products and services firms. The causes might be that (1) patents have a greater ability to protect innovation in products, (2) there is a “greater need to protect innovation that is disclosed through the distribution of products,” or (3) “a patenting culture in a firmís early days . . . contribute[s] to its survival as a products firm.” Id. at 1063.

[Allison, John R., Dunn, Abe and Mann, Ronald J., “Software Patents, Incumbents, and Entry” . 85 Texas Law Review 1579 (June 2007) Available at SSRN: http://ssrn.com/abstract=989592]

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