Thursday, October 29, 2015

Understanding the Role of Patents for Small Smartphone Companies

When I think of smartphones and smartphone patents, I think of the big battles and players: Apple v. Samsung, Motorola v. Microsoft, NTP v. RIM, Nokia, Ericsson, Google, Sony, and other mega-companies. But what about small smartphone companies? Do they have patents? And, if so, how do those patents affect important issues like fundraising and litigation?

Joel R. Reidenberg, N. Cameron Russell, Maxim Price & Anand Mohan (Fordham Law School and Fordham CLIP) answer some of these questions in their article, Patents and Small Participants in the Smartphone Industry (18 Stan. Tech. L. Rev. 375 (2015)). Here is the abstract:
For intellectual property law and policy, the impact that patent rights may have on the ability of small companies to compete in the smartphone market is a critically important issue for continued robust innovation. Open and competitive markets provide vitality for the development of smartphone technologies. Nevertheless, the impact of patent rights on the smartphone industry is an unexplored area of empirical research. Thus, this Article seeks to show how patent rights affect the ability of small participants to enter, compete, and exit smartphone markets. The study collected and used comprehensive empirical data on patent grants, venture funding, mergers and acquisitions, initial public offerings, patent litigation, and marketing research data. This Article shows empirically that small participants succeed in the market when they have a low and specific critical mass of patents and that this success exceeds the general norms in the startup world. Surprisingly, the analysis demonstrates that the level of financing and market success do not increase with larger patent portfolios. Lastly, despite the controversies over patent trolls, this Article demonstrates that patent litigation, whether from operating companies or NPEs, does not appear to be a significant concern for small players and does not appear to pose barriers to entry. The Article concludes by arguing that patent rights are providing incentives for innovation among small industry players and that contrary to some expectations, patent rights support competitiveness in the smartphone industry for small market players.
This is an interesting article - my comments after the jump.

The methodology involved identifying smartphone related patents and then drawing a random sample of companies to find small smartphone patent holders. The portfolios are pretty small, and yet they are big enough for the companies to have a 90% survival rate, far outstripping your average startup. These companies also obtained funding at a better rate than other startups, which probably helps explain their better survival rate.

In many ways, this study mirrors one of my favorite studies, Entry and Patenting in the Software Industry by Iain M. Cockburn and Megan J. MacGarvie. There, the authors find that increased patenting in the industry can reduce new entry...unless the entrant has patent applications. This leads to my primary wish for this paper: that they had grabbed some random companies that did not have patents in order to determine whether the patenting companies wound up with different outcomes than non-patenting companies in the same industry during the same time period. While the comparison to startups generally is a step in this direction, it leaves open questions about whether there are systematic differences in the smartphone industry regardless of patenting.

In any event, a surprising finding was the role of litigation. While patent trolls and smartphone wars are often portrayed as dampening the industry, this study finds that these companies are largely unhindered by litigation. Whether this is limited to the small companies or is generalizable to the industry as a whole is another question. As I blogged years ago, if this is the smartphone industry being dampened, I can only imagine what it would be like to the contrary.

This paper is an interesting one, and worth a read to get a better feel for the smartphone industry, given that few reports focus on these small companies.

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