Markets for Technology – Is the patent system broken?

Annual Forum #ESMT2050

Prof. Dr. Stefan Wagner TÜSIAD/TCCI Chair in European Economic Integration Berlin, 3. 7. 2014

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www.spiegel.de/netzwelt, May 9th 2014

7/7/2014 1 Intellectual Property Rights and the Market for Technology

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Patents protect technical inventions against imitation

7/7/2014 2 Intellectual Property Rights and the Market for Technology

US Patent US 5,250,534 – “Pyrazolopyrimidinone antianginal agents“ (Sildenafil)

Description Claims

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Patents are key to appropriate the value of inventions

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US-Patent US 5,250,534 – “Pyrazolopyrimidinone antianginal agents“ (Sildenafil)

Blockbuster patent

• Development of drugs costs about 1 billion USD

• 1,8 Mrd. Viagra pills sold by now

• Total revenues so far 25 billion USD (est.)

• Highly profitable business Cost of the active substance for 20.000 pills

roughly 650,- EUR Translates into 3,25 cents per pill which is sold

for 12,- EUR

• Patent expired in 2013, dramatic drop in prices due to entry of generic drugs based on the equivalent substance

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Patents promote innovation but limit competition

7/7/2014 4 Intellectual Property Rights and the Market for Technology

Temporary exclusion right creates incentives to innovate and to disclose inventions

Good for innovation

Bad for competition

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• Discrete product industries

− One patent per product (or few patents per products)

− Examples: Pharma, Chemistry, Foold, Mechanics, Materials, ….

• Complex product industries

− Manufacturing and selling a product requires access to a large number of different patents

− Examples: Semiconductors, Computers, TelCo, Electronics, Audio-visual technologies...

Patents create different incentives in different industries

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A useful taxonomy

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Complex products require access to patents held by various players

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An example from smartphones: Apple vs. Samsung

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Fragmented ownerhsip of patents leads to an armsrace between encumbents

“There is certainly a level of mutually assured destruction among the big companies.

If you build up your patent portfolio, I build up mine—nukes pointing at each other.”

Greg Papadopoulos, CTO at Sun Microsystems

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The prisoners’ dilemma in complex product industries

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„arms race“ for the largest patent portfolio – the „patent explosion“

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The number of global patent grants more than doubled over the last 15 years

Source: WIPO, World Intellectual Property Indicators, 2013

“Even though we have 3,000 patents [awarded annually in America], if we had to, I could make that number 10,000.” (John Kelly, IBM)

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Arms race: changing characteristics of patents

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US 8,046,721: “Unlocking a device

by performing gestures on an unlock image”

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US 5,946,647: “System and method

for performing an action on a structure

in computer-generated data”

Arms race: changing characteristics of patents

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Both patents have been enforced in court in the US

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Both patents have been enforced in court in the US

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“arms race” und resulting conflicts in the smartphone industry

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Source: www.phonearena.com

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Non-practicing entities – a new breed of players in the market for technology

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Ever heard of

Digitude Innovations?

Source: www.phonearena.com

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Non-practicing entities – a self-assessment

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Patents promote innovation but limit competition…

7/7/2014 16 Intellectual Property Rights and the Market for Technology

Temporary exclusion right creates incentives to innovate and to disclose inventions

Good for innovation

Bad for competition

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… or is the patent system broken?

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Temporary exclusion right creates incentives to innovate and to disclose inventions?

Good for innovation

Bad for competition