Patents as Part of the Innovation Eco-system

Apple vs Nokia, Round One

With the recent news that Apple has won the initial ruling by ITC on the Nokia's patent infringement complaint, I am reminded of how innovation strategists often do not spend enough time on how legal maneuvers can hinder or enhance the innovation process.

A Hindrance

Looking form an incumbent's perspective, it is understandable that every tool at its disposal should be used to create an orderly market. (Without violating any anti-trust regulation, of course.)

Usually it involves a set of patents that are core to a particular application. On one hand, these patents can be used to prevent new entrants into the space and limit the number of players. Moreover, it allows incumbent firms to work with each other to maintain an orderly market in terms of technology evolution. In other words, because patent litigation can be very costly in time and billable hours, not to mentioned management attention, there is incentive to play nice and cross license each other's patents.

Basically, evil big companies trying to monopolize its industry through an army of lawyers.

An Enhancer

Although not emotionally satisfying as a question, but is cross-licensing such a terrible thing? It is hard to say. Around 2004, Applied Materials (AMAT) and Novellus (NVLS) announced a settlement to that effect. With this "cease fire", the respective technology teams at AMAT and NVLS could focus on creating better solutions for the semiconductor capital equipment industry instead of scrubbing their design for potential infringement.

Format Wars

For everyday consumers, this is often not a bad thing. The periodic format wars, such as the recent Blu-Ray vs HD DVD fight, are partly driven by the patent management consideration. However, once the winner has been declared, the relevant patents are cross licensed so that Toshiba, who championed HD DVD format, would also be able to produce Blu-Ray players under the RAND (reasonable and non-discriminatory) principles.

For technical participants in the format war, there are additional interesting dynamics. Initially, the contributors are focused on advocacy and performance to get its format accepted. Then, there is the incentive to contribute as many applicable patents as possible in order to receive the highest royalty payment under the RAND structure.

Looking Beyond Patents

I cannot tell you how the Apple vs Nokia case will resolve itself. What is clear, however, is that Apple's iPhone business model is much more than selling smartphones. As I have argued in Making a good platform, the success of Apple iPhone does not even rest on its Apple/Jobs touch in design.

Let's say that Nokia does indeed win its case and can demand royalty payment from Apple, a very big if. As long Apple continues to effectively engage its eco-system through its multi-sided platform business model, Apple a options in terms of minimizing the impact.

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* Special thanks to Mr. Martin Grönberg who shared his insight for this piece.