Transcript U.S. Software Patents: Good News or Bad News? Stuart Graham College of Management, Georgia Institute of Technology David C.

U.S. Software Patents: Good News
or Bad News?
Stuart Graham
College of Management,
Georgia Institute of Technology
David C. Mowery
Haas School of Business,
U.C. Berkeley
Outline
• The debate over software patents.
• Functions of patents: possible
consequences of increased SW patenting.
• Trends in patenting by US software and
systems firms in the “strong patent regime,”
1987 - present.
• SW patent “quality.”
• Patenting and “open-source” software.
• Conclusions.
The controversy
• Has growth in software patents been
associated with declining patent quality?
• Has growth in software patenting been
associated with declines in innovation?
With declining R&D spending? With
increased market power for established
firms?
• Should a “sui generis” patent regime be
created for software and/or should patenting
be prohibited in software (EU debate)?
Functions of patents
• Create incentives for invention.
• Require disclosure of technical details of
invention.
– Disclosure may enable follow-on inventors to utilize
work of others.
• Create incentives for inventor or others to invest in
commercialization of invention.
• Support markets for IP.
– Often associated with a vertically specialized industry
structure.
• In “defensive” patent strategies, patents may be
used as chips for cross-licensing negotiations.
Causes and effects of increased
patenting in the US SW industry
• Causes:
– Market trends: Rapid adoption of desktop computers in the
1980s => patents, other formal instruments for IP protection
become more important to capturing returns to product
innovation for specialized packaged-SW firms.
– Policy developments: Judicial decisions, US Patent Office
policy support expanded role for patents in SW.
• Effects
– Innovation: Little evidence of change during past 50 years
in rates of invention, innovation in software.
• Although measures are lacking, innovation appears to be high
in both the “nonpatent,” “pro-patent” periods.
– Industry structure: Vertical specialization in SW industry
appears in 1970s & early 1980s, predating “pro-patent” era.
The response to the “pro-patent” US
regime in software, 1987-2003
• Defining software patents is a significant empirical
challenge:
– Look at patent classes that exist throughout 1995-2000 accounting for
majority of patents issuing to leading software-only firms throughout the
1995-2003 period.
– Resulting sample tends to “overweight” packaged SW patents.
• Trends in software patenting as a share of overall U.S.
patenting.
• Patenting by 100 largest packaged-SW firms, 1987-2003,
as a share of overall software patenting.
• Patenting by large electronic systems firms, 1987-2003, as
a share of overall software patenting.
• Trends in the “patent propensity” of the 15 largest
packaged-SW specialist firms, 1987-2002.
• The “patent/Software R&D$$” ratio for IBM and
Microsoft, 1994-2003.
Figure 1: Classification-defined software patents, as a share of
all issued U.S. patents, 1987-2003
(U.S.P.T.O. re-classifications of all patents, December, 2003)
8%
7%
6%
5%
4%
3%
2%
1%
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Software patenting increased from 2.1% to 7.4% of all patents during 1987-1998;
share has remained between 6.9% and 7.4% since 1999.
Figure 2: Large packaged-software firms’ software patents, as a
share of all US issued software patents, 1987-2003
(Comparison: US-class defined “software” patenting by 100 largest “packaged-software”
firms as share of all “software” patents issued, including and excluding Microsoft)
5.0%
4.0%
3.0%
US Class
excl MS
2.0%
1.0%
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100 largest packaged-SW firms’ share of SW patenting grew from <.1% in 1987
to 4.7% in 2002 and 4.1% in 2003.
Removing Microsoft lowers peak share from 4.7% to 1.3%.
Figure 3: Large systems firms’ software patents, as a share of
all software patents, 1987-2003
(Weighted average: US-class defined “software” patenting by IBM, Intel, Hewlett-Packard,
Motorolla, National Semiconductor, NEC, Digital Equipment, Compaq Computer,
Hitachi, Fujitsu, Texas Instruments, and Toshiba)
30%
25%
20%
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15%
Twelve US & Japanese electronic systems firms account for a substantially larger share
of SW patents during 1987-2003 (21% - 28%), but share declines after 2000.
Figure 5: Top 15 packaged-software firms’ software patent
propensity, firms’ patents per R&D expenditure, 1987-2002
( Comparing: Microsoft, Adobe Systems, Novell, Intuit, Autodesk, Symantec, Network Assoc.,
Citrix, Macromedia, Great Plains, RealNetworks, Borland (Inprise), SPSS, Phoenix
Technologies, and Santa Cruz Operation with Top-14 firms [same, excluding Microsoft])
Patents per $million R&D (1987 = $1)
0.16
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Top15
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excl MS
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Patent/software-specific R&D investment has risen since 1987 within 15 largest
packaged-SW specialist firms, with or without Microsoft, but patent/R&D$$ ratio is
essentially flat after 2000.
Figure 7: Comparison of IBM and Microsoft’s software
patent propensity, firms’ “software” patents per “software”
R&D expenditures, 1987-2002
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IBM
IBM
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patents per $million R&D (log scale: 1987=$1)
(3-year moving averages; Patenting limited to each firms’ defined software patents)
IBM displays a much higher patent/(SW-specific) R&D ratio than Microsoft
throughout 1993-2002.
Share of SW patents within IBM’s overall portfolio increases from 27% to 42%
during 1987-2003, and is higher than those of other systems firms (10% to 17%).
Software patent “quality”
• Are software patents “junk patents,” and does it
matter?
– Proliferation of low-quality patents may create a web of conflicting
property rights that impede follow-on innovation.
– Uncertainty over “quality” (validity) of patents may slow or deter
follow-on innovators concerned over litigation exposure.
• Software patents are difficult for US Patent &
Trademark Office to review, because of limited patentbased prior art.
– A common problem in new areas of inventive activity.
• US has weak administrative procedures (reexamination) for challenges to patent validity.
– Proposals now before Congress to introduce a post-issue
“opposition” proceeding.
– But opposition proceeding per se may not resolve uncertainty
concerning patent validity very quickly (Hall et al., 2003).
• Evidence in Figure does not indicate a dramatic drop
in “quality” of software patents assigned to firms, but
this indicator is a limited one.
Figure: Relative “citation intensity” for software patents, 1987-2000.
(Comparing patents issued to (1) packaged SW firms (“SL100”); (2) all US firm
assignees (“All firms”); and (3) electronic systems firms (“Systems”), 3-year window)
2.5
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Systems
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All firms
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Patent “quality” appears to increase slightly during 1987-2000 for all SW patents
assigned to US firms; trends for SW patents assigned to packaged-SW specialist and
Systems firms are essentially flat.
Open-source software: Challenge to
patents?
• Open-source software, shared among users, has a long history.
– “Shareware” appeared in 1958; UNIX was a “user-driven” SW operating
system that evolved into numerous competing standards.
– Internet creates new possibilities for “collective innovatoin” without
fragmentation of the “dominant design.”
• Open-source software has expanded its share among users in segments
dominated by technically sophisticated users (server, operating
systems).
– Share remains modest in “mass-market” applications, but it is growing.
– “User-driven” innovation that requires highly sophisticated users.
• Although open-source appears to pose challenges to patented software,
the situation is complex:
– IBM, a leading patenter in software, has “opened up” a portion of its
software patent portfolio to support open-source innovation.
• But the “crown jewels” in IBM’s SW patent portfolio remain proprietary.
– Red Hat, a leading supporter of open-source applications software, now is
patenting some complementary products.
• The “open-source” model thus is likely to incorporate elements of
patented, nonpatented intellectual property in the future.
Conclusions
• Patenting in packaged SW has increased since 1987 in
response to policy and market changes.
– Great example of “co-evolution.”
• Current data don’t suggest strong links among
increased patenting, R&D spending, vertical
specialization, or innovative performance in the US
SW industry.
– Trends suggest that post-1970s change in feasibility of
SW patenting => higher levels of patenting.
– “Dot bomb” downturn in IT markets appears to have
slowed growth in SW patenting.
• Patenting behavior of packaged-SW specialists
contrasts with that of systems firms.
– Systems firms account for higher share of overall SW
patents.
– IBM patent propensity >> Microsoft.
Conclusions (2)
• Citation-based indicators do not reveal declines in
the “quality” of large packaged-SW firms’ patents
during 1990s.
• Focus on development of stronger “quality
controls” in patent issue, rather than attempting to
define a sui generis regime for software (including
prohibition of patenting).
– Any sui generis regime must (among other things)
develop a politically and economically defensible
definition of a “software patent,” which may be
impossible for such a pervasive technology.
– Weakness in existing US procedures affects many
“frontier” areas of patenting other than software in
which patent-based prior art is lacking.
Evolution of the US legal regime for
software IP
• Copyright protection for software endorsed in 1979 by
Congress. “Look & feel” cases decided by U.S. courts
initially strengthened copyright protection, but later
cases (e.g., Borland) limited its reach.
– Copyright criticized in late 1980s by Menell for lack of
a sufficiently high “quality” threshold; patents viewed
as preferable.
• Software patents (esp. since creation of the Court of
Appeals for Federal Circuit in 1982) have been given
more favorable treatment.
• 1994: Stac Electronics decision underscored the
importance of patents.
• 1998: State Street upheld a financial “business
methods” patent.
Patents & market value
• Software “specialists”:
–
–
–
–
R&D stocks negative, nonsignificant.
Patent stocks positive, nonsignificant.
Microsoft dummy variable positive, significant.
“zero-patent” dummy variable negative,
nonsignificant.
– “Citation/patent” variable positive,
nonsignificant for measures of selfcitations/patent, nonself-citations/patent.
Regression with robust standard errors
Number of obs = 278
F( 21, 256) = 9.17
Prob > F = 0.0000
R-squared = 0.3327
Root MSE = .39
-----------------------------------------------------------------------------|
Robust HC3
log_q | Coef. Std. Err.
t P>|t| [95% Conf. Interval]
-------------+---------------------------------------------------------------k_a | -.0414703 .1267563 -0.33 0.744 -.2910881 .2081475
p_k | .4617576 .3048762 1.51 0.131 -.1386271 1.062142
c_p | .0009819 .0019889 0.49 0.622 -.0029348 .0048985
sc_p | .0237355 .0274568 0.86 0.388 -.0303344 .0778054
msft | .3807435 .0841929 4.52 0.000 .2149446 .5465425
nonpat | -.1506781 .0709059 -2.13 0.035 -.2903113 -.011045
_Iyeara_1988 | -.1394341 .1621663 -0.86 0.391 -.4587841 .1799158
_Iyeara_1989 | -.3247195 .1812059 -1.79 0.074 -.6815636 .0321245
_Iyeara_1990 | -.2768279 .163821 -1.69 0.092 -.5994362 .0457805
_Iyeara_1991 | .0068548 .2017079 0.03 0.973 -.3903632 .4040728
_Iyeara_1992 | -.3604141 .1490577 -2.42 0.016 -.6539494 -.0668788
_Iyeara_1993 | -.339154 .1568459 -2.16 0.032 -.6480265 -.0302816
_Iyeara_1994 | -.3029479 .1474002 -2.06 0.041 -.5932192 -.0126765
_Iyeara_1995 | -.1641403 .1493861 -1.10 0.273 -.4583225 .1300418
_Iyeara_1996 | -.3465946 .1462781 -2.37 0.019 -.6346563 -.0585329
_Iyeara_1997 | -.492964 .155972 -3.16 0.002 -.8001156 -.1858123
_Iyeara_1998 | -.3471741 .1651327 -2.10 0.036 -.6723655 -.0219826
_Iyeara_1999 | -.1357026 .150038 -0.90 0.367 -.4311685 .1597633
_Iyeara_2000 | -.6713705 .1798965 -3.73 0.000 -1.025636 -.317105
_Iyeara_2001 | -.5628939 .1743057 -3.23 0.001 -.9061496 -.2196382
_Iyeara_2002 | -.6627265 .1858164 -3.57 0.000 -1.02865 -.2968031
_cons | .724995 .1378405 5.26 0.000 .4535493 .9964406
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Systems firms
•
•
•
•
R&D stocks positive, significant at 5-6%.
Software patent stocks positive, significant at 2%.
Non-software patent stocks negative, significant at 2%.
Nonself citations/patent negative & nonsignificant for SW
patents, positive & significant for non-SW patents.
• Self-citations/patent positive & significant for SW and
non-SW patents.
• “Zero-patent” dummy positive, significant.
• Larger sample; results are still somewhat strange.
– Overall, consistent with a pattern of “defensive patenting” in nonsoftware fields? Individual non-SW patents do not enhance firms’
market value.
– Patents without citations have no measurable effect on market
value.
Regression with robust standard errors
Number of obs = 9330
F( 23, 9306) = 26.32
Prob > F = 0.0000
R-squared = 0.0915
Root MSE = 1.0075
-----------------------------------------------------------------------------|
Robust HC3
log_q | Coef. Std. Err.
t P>|t| [95% Conf. Interval]
-------------+---------------------------------------------------------------k_a | .0511002 .0262129 1.95 0.051 -.0002828 .1024832
sw_k | .1531996 .06427 2.38 0.017 .0272164 .2791828
nsw_k | -.0224915 .00948 -2.37 0.018 -.0410744 -.0039086
swnsc_p | -.0001004 .0011058 -0.09 0.928 -.002268 .0020671
nswnsc_p | .011221 .0018053 6.22 0.000 .0076822 .0147598
swsc_p | .0251443 .0126252 1.99 0.046 .0003961 .0498924
nswsc_p | .0274082 .0080038 3.42 0.001 .0117191 .0430974
nonpat | .3165821 .0286691 11.04 0.000 .2603843 .3727798
_Iyeara_1988 | .0626769 .0506434 1.24 0.216 -.0365952 .1619489
_Iyeara_1989 | .0237409 .0534289 0.44 0.657 -.0809915 .1284733
_Iyeara_1990 | -.3181831 .0561421 -5.67 0.000 -.4282339 -.2081324
_Iyeara_1991 | -.0388334 .0576816 -0.67 0.501 -.1519021 .0742352
_Iyeara_1992 | .0650597 .0550394 1.18 0.237 -.0428295 .172949
_Iyeara_1993 | .1528974 .0551215 2.77 0.006 .0448473 .2609476
_Iyeara_1994 | .1000545 .053014 1.89 0.059 -.0038646 .2039735
_Iyeara_1995 | .3796126 .0541267 7.01 0.000 .2735124 .4857129
_Iyeara_1996 | .3083593 .0526239 5.86 0.000 .2052048 .4115138
_Iyeara_1997 | .2335444 .0528645 4.42 0.000 .1299183 .3371705
_Iyeara_1998 | .0509885 .0599157 0.85 0.395 -.0664594 .1684364
_Iyeara_1999 | .5805904 .0669306 8.67 0.000 .4493917 .711789
_Iyeara_2000 | .093357 .0651828 1.43 0.152 -.0344155 .2211295
_Iyeara_2001 | .1465358 .0665287 2.20 0.028
.016125 .2769466
_Iyeara_2002 | -.3268941 .0755768 -4.33 0.000 -.4750412 -.178747
_cons | -.1050454 .045623 -2.30 0.021 -.1944765 -.0156143
Patents and firm market value
(caution: work in progress)
• Based on Hall, Jaffe, Trajtenberg (2000).
• Another measure of the economic significance of SW
patents: How do equity markets value them?
• Basic model: Tobin’s Q (market value premium over book
value) = F(R&D “capital,” Patent “capital”).
– Flows of R&D, patents are capitalized, depreciated to create
stocks, deflated by firm assets.
– Should patents be weighted by citation frequency (i.e.,
importance)?
– How should “self-citations” be treated?
• Two samples of firms, covering 1987-2002:
– Publicly traded SW “specialist” firms (19 firms).
– “Systems” firms (larger sample: >620), separating SW and nonSW patents.
Development of the US software industry
• 1945-68: Software largely produced by systems
manufacturers.
• 1969-75: “Unbundling” of software and hardware
pricing and sales begins; independent software
vendors begin to enter.
• 1978-93: Development & adoption of the desktop
personal computer creates a mass market for
“packaged” or “standard” software.
• 1994-present: The Internet becomes an important
market and channel for distribution and application of
software.
– New low-cost distribution, marketing channels for packaged
software.
– Expanded areas for application of software as complements
to a Web-based service or product.
– New possibilities for “open-source” software.