Railroad Patents

by on August 22, 2006

I’ve been reading some of the literature on software patents. Here is a fascinating paper by Berkeley’s Robert Merges drawing an analogy among patenting in the railroad, software, and financial services industries. Here’s his description of the early railroad industry:

To begin, there was a great deal of similarity in the way innovation progressed in nineteenth century railroading and late twentieth century Wall Street. Innovation in both industries was “an inside job”: it was dominated by large, vertically integrated firms (Usselman, 2002). Nineteenth century railroads not only laid track and scheduled shipments. They also performed service on and made routine improvements to locomotives, switching technology, rails, and all other aspects of railroad technology. Moreover, innovations diffused rapidly to rivals, and this was an accepted part of the business. Far from preventing this flow of information, the chief technology players at the major railroads saw themselves as part of a larger, cross-firm enterprise. They shared a common culture that included an implicit norm regarding new techniques: I share with you, you share with me (Usselman, 2002: 65). There was pride in an innovation that others could use, perhaps even some increment to firm or individual reputation.

This sounds strikingly like the software industry of today. So does this:

All this began to change by the 1870s. This era saw a host of “outside inventors” descending on the railroads. They promoted a long series of improvements and enhancements, some centering on safety devices invented in response to highly publicized rail disasters. But many came from mechanics and tinkerers of all varieties, swept up in the fascination with rail and steam that (then and now) seems to hold many in its thrall. The number of patents awarded for various aspects of railway technology grew steadily throughout the nineteenth century.

A modest number of “outside inventions” were adopted by the railroads during this period. But the patent system really burst into prominence when courts began awarding huge damage awards to the holders of patents who had sued the railroads.

Merges goes on to argue that contrary to alarmist early fears, patents didn’t kill the railroad industry. Innovation continued, and may have even accelerated modestly, toward the end of the 19th Century.

He argues that the warnings that software patents would kill the software industry have proven similarly overblown:

A funny thing happened on the way to the demise of the software industry. It never happened. Standard-setting organizations ameliorated some of the problematic effects of having multiple components of complex software products and protocols owned by separate firms. Several early “test cases” found the courts being quite reasonable about scope and validity issues with respect to computer software. And most telling of all, programmers forming startups found that venture capitalists placed a premium on companies with a robust patent portfolio. So leading-edge firms such as Inktomi moved quickly to establish effective patent portfolios. One reading of the history here is that software entrepreneurs found that patents were decidedly not just “for the big guys.” In any event, the industry continues to move ahead, despite–and in some cases even perhaps because of–the advent of patent protection.

On the other hand, software patents have not changed many of the basic features of the industry, including the importance of “network effects” to many of its products. Perhaps there is a deeper path dependency in industrial development than we are aware. An industry, once started on a patent-free basis, establishes an innovation path that later proves relatively impervious to the imposition of patents. Perhaps patents overall simply do not affect the “big variables” of economic life–industry structure, the basic pace of innovation, etc.–in such an industry to any great extent. While these are somewhat humbling thoughts for a scholar who places the patent system at the center of the economic universe, the historical case studies certainly support such a view. Apart from their role in fostering “outside entry,” and perhaps a marginal but significant role in making old industries safe for small, entrepreneurial firms, patents do not seem to have shifted the basic parameters of innovation in either railroading or software. If this pattern holds true, we may predict that patents will not significantly impact the overall structure or innovativeness of the financial services industry.

I think he’s right that software patents won’t kill the software industry. But that’s hardly a ringing endorsement.

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