How Not to Argue for Software Patents

Is Patrick Ross trying to make his own side look bad?

The conference heard a compelling perspective on software patents from Guenther Schmalz, director of IP for Europe for SAP, the largest European software maker and the third-largest software maker in the world. SAP burst on the scene in the early1970s, like Microsoft moving into areas of software that IBM had no interest in commoditizing. For years SAP grew and grew and had no patents. Now they’re ramping up a major patent office with a few dozen attorneys around the world. Why? “Times have changed,” Schmalz said. In the early days, SAP’s competitors were way behind, but now competitors are everywhere. Patents are the only way for SAP to ensure returns on its development investment, he said, adding that copyright is no solution, as the actual writing of code only makes up about 20% of the development of software.

“Those who drive innovation need patents,” he said. “Those who don’t imitate.”

To put this a little bit differently, in the past, SAP was an innovative company that was able to stay ahead of the competition by virtue of their superior technology. However, now that they’re a fat, lazy incumbent, they’re discovering the joys of using patent law as a club against their more innovative competitors.

The idea that creators have the right to recoup all of the value they create is a common idea in intellectual property debates. Larry Lessig quotes NYU law professor Rochelle Dreyfuss as dubbing this the “if value, then right” theory of intellectual property. It’s an idea that sounds intuitively plausible, but with a little bit of reflection, it becomes obvious how pernicious it is.

After all, capitalism is founded on the ideal of vigorous competition. When some entrepreneur invents a new product category of business model–say, the fast-food restaurant–he invariably attracts a swarm of competitors. Competition forces down the prices in this newly-created industry, preventing the innovator from capturing the full value of his or her invention. Ray Kroc’s invention of the fast food restaurant, for example, created a whole lot of value, and most of that value went to consumers, not to Kroc. He wasn’t able to use the law to exclude competitors and “ensure returns” on his innovation. To the contrary, under our economic system, he was required to continue innovating if he wanted to turn a profit.

It’s quite possible that Kroc felt resentful toward these upstart “imitators” who copied his business model without (he would claim) adding value themselves. But that’s the way the business world works. Competition is cutthroat, and businesses who stop innovating shrivel up and die. That’s as it should be, and consumers benefit tremendously from such creative destruction.

By the same token, SAP probably resents all these pesky little companies that are barging in on market opportunities that they pioneered. Tough. If they want to stay at the top of their industry, they need to continue innovating. They have no right to expect the government to “ensure returns” on their investments. That’s the way it goes in most other industries, and it’s the way the software industry ought to work as well.

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