In tech markets that are facing plateauing sales, such as tablets and smartphones, the next wave of growth could come from older patent lawyers in suits, not young entrepreneurs in pajamas and hoodies. And that could have a chilling effect if tech’s most innovative companies start focusing their energies on beating the system rather than disrupting the system.
The latest example that has everyone buzzing is the formation of the Rockstar Consortium by Apple, Microsoft and a handful of other tech companies to take on Google and Android device manufacturers such as Samsung. Rockstar, at its heart, is a patent troll. (In polite company, it’s referred to as an “intellectual property licensing company.”) It’s essentially a legal entity set up for a single purpose – to acquire patents and then launch litigation to keep rivals at bay, or even better, extract money from them for infringing patents.
The company paid $4.5 billion for a patent portfolio from Nortel Networks in 2011, including patents that describe how to do everything from creating a “navigation tool for a graphical user interface” to “notifying a user of an incoming communication event.” In other words, how to browse the Web and receive a text message. All of these patents, of course, have strong implications for the ability of Google and its Android device manufacturers to compete in the smartphone and tablet markets.
Assume for the sake of argument that you have a billion-dollar market opportunity and that your market share is 70 percent. You stand to make $700 million a year. Now assume that, because of higher competition, your market share falls to 50 percent. All of a sudden, you’re facing a $200 million shortfall. (And that’s if you keep your margins steady instead of having to slash prices to beat the competition) You can either make that up by selling $200 million of cool new products, or by finding a way to wrest back that 20 percent in market share that you just lost.
Actually, that’s not so hypothetical after all. Check out Apple’s latest earnings report. The company just reported its third straight quarter of declining profits. Sales of the iPad and iPhone are showing signs of stabilizing, and there’s just too much competition out there not to impact margins eventually. That puts Apple in a difficult situation – even if it sells more product, it may not make as much money. Wall Street only cares about the bottom line. How much money did you make during the quarter?
And that’s where the Apple-backed Rockstar Consortium comes in. By launching patent lawsuits in Texas against nearly every major tech rival, it can attempt to block companies such as Google and Samsung from competing with the likes of Apple – or force them to pay up to use these patents. That’s where the patent licensing comes into play – Apple can tell these companies that they can continue to make their products, but only if they kick in some money every quarter for using these patents. Rockstar hired the best and brightest, bought a whole trove of patents, and now has this talent reverse-engineering tech products in search of possible patent infringements.
When the market for tablets and smartphones was growing like gangbusters, it didn’t seem like a stretch for companies like Apple to continue to post double-digit sales growth figures. That was when everyone wanted a new tablet and a new smartphone. That’s no longer the case, though. Now it may be easier to launch strategies to win market share versus growing market size. In short, in markets that are facing plateauing growth, patent lawyers are the new rock stars.
That has strong implications for innovation. Companies should be spending all their energies on research and development and surprising and delighting their customers, not on reverse-engineering their rivals’ products and taking them to court. And, yet, it’s easy to see how more companies will indulge in these types of activities if Apple gets away with it.
We used to roll our eyes at the antics of patent trolls, but that could change as mainstream tech companies such as Apple, Google and Microsoft launch sophisticated new patent strategies (both offensive and defensive) designed to keep competitors busy in the courtroom rather than in the research and development lab. On Wall Street, the slogan used to be, you can’t put lipstick on a pig. In Silicon Valley, let’s just hope they don’t decide to put lipstick on a troll.