What Apple should do with its patents

Apple's legal victory has the potential to be highly corrosive to its future. But it has a chance now to create a long-term win-win provided it can stop thinking like a traditional high-tech company.

Its been a huge month for the company in Cupertino. They broke the record on the NYSE for the largest market value. They also won a landmark patent infringement case with a billion dollar damage award.  The big question is can the company ignore all of this and keep moving forward.

I wrote about this in a prior post – an open letter to Apple – that warned about self-congratulations on its performance might lead to complacency and the company might ‘jump the shark’. Apple’s financial performance and marketplace success triggered those posts.

Last week’s patent ruling has the potential to be more corrosive and coercive to Apple’s future than any financial success.

Winning a patent lawsuit recognises that your IP is unique, but it can also have a stifling effect on the need to be innovative and creative.  When the patent becomes the ‘cash cow’ financially and the dominant design in terms of it’s engineering then its prudent to ask about a firm’s future prospects. Consider companies like:  Polaroid and its patent on instant pictures, or Kodak and its patents, or Xerox in copiers or Edison in DC current.  It seems that being right can also lead you down the wrong path.

It’s not the patent, but what it does to the company that is in discussion here.

The patent wars and patent trolls are an unfortunate outcome of a system where the motivation to litigate is as strong as the motivation to invent.  One perspective on this is a radio story “When patents attack”. Patent litigation is not new, in fact more than 110 years ago it was at the centre of commerce as patent battles raged over who invented the telephone and other high tech products of that day. The issue here is not that patents and IP protection are good or bad for the economy, but what this one company – Apple – does in this one particular situation.

What this might do to engineering and product development

The legal vindication of your product engineering feeds the ego and validates improving rather than pushing the original design.  Such improvements can stifle new ideas in the market and within the company.  The Wall Street Journal warned as much in their analysis on Saturday of the award: “That means that Apple could find it easier to defend its market position and lofty profit margins, while consumers may see a bit less choice and higher prices — as fewer competitors court buyers with me-too models and pass along costs of damage awarded in the price of their products.”

The company’s designs could become patent-centric, as they have to exploit and protect the patent and strategies form around a unique idea from the past rather than innovations in the future. If the company announces that it will build on these innovations, strengthen them and they are the foundation of their future, then its time to ask – should we start filling the shark tank?

Wasn’t this more about pride, punishment and vindication than protection or profit?

If I understand what Steve Jobs said and what Walter Issacson wrote in the biography, “I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear on this.”  This was personal for Mr. Jobs.  It was as much or more about pride than profit.  It seems that proof that others were ‘stealing’ from your ideas and prosecuting the plagiarists was a major motivation for this approach.  Apple’s next move should be based on its motivation rather than a recipe provided by accountants and lawyers.

The company has that proof.  They have vindication.  Now the question is what will they do with that vindication?  Those actions will say much about Apple and how it sees its future, where it sees its inspiration and how it feels about its role in the industry.  If Apple chooses to close the market, not license its innovation, chase others out of the market, then what does that say about the company’s confidence in its future or its belief in the future of consumer electronics.

Can Apple win and everyone win too?

Winning, particularly when you want to prove a point, is made not in the decision but in what you do after your proven right.  Apple wins, now what about everyone else?

Traditional IP strategy says you make the competition pay either via licensing, removing competing products, or other market based tactics.  That really means that customers pay in pricing, product innovation, etc.  There are already signs that Apple is doing this with court orders to remove products in some geographies and bans on selling them in others.  This is a legitimate strategy, but one that is likely to be win-lose in the short term and lose-lose in the long term. Win financially today and lose the innovative edge has been the downfall for other companies.  That leads to a long-term loss of innovation, competitiveness all while customers lose by not benefiting from new ideas as competitors play elsewhere.

Apple could create a long-term win-win by recognizing that innovation and competition creates more value than copying destroys.  This recognition would require Apple to think of itself more like a consumer oriented, fast moving, positional products rather than a traditional high-tech company which is more corporate, multi-year cycle driven and infrastructurally oriented.   Apple already operates this way – as a fast moving/positional product company – with its annual product releases, high focus on brand image and consumer focus.  Apple is like the hip and cool design house compared to its competitors.

If Apple believes that it is the best because it out-innovates, out-performs and out-operates its competitors, then it should continue to do so by licensing its technology to others at a very reasonable rate.  It could take the billion dollars in the award create some social good as they already admit they have enough cash.  Those are actions that would prove that the suits were not about the money and more about being proven right in the marketplace.

Apple can encourage and continue to build the entire consumer technology industry, expand its frontiers and shape it by the power of its ideas/products in the marketplace.  Or it can stack up its patents and court judgments at the border of its new headquarters and man the battlements.  Investors might not like a more open approach to its IP, but then again staying focused on leading the market has been pretty good for them, so why stop when we are on the verge of a new digital world?

Markets, engineering talent, investors, customers everyone recognizes a winner and sometimes winning requires an official judgment.  Apple’s market cap hitting a record proves that.   Winning is not limited to a judge and jury saying you are winner.

Patents are important, valuable and lead to innovation.  They are part of the reason why we have technology and its benefits.   But their role is not just to grant a license to exploit an invention in the market; they also encourage others to invest time, sweat, capital and knowledge in new ideas.

The patent wars will not go away, but they also do not have to define the future of technology. That is left to those who win the war, as we know that history is more often written by them, but not always.

This is not the last patent fight.  Apple will have to arm and fight the patent wars just like Google, Microsoft and others.  This appears to be an alternative way of winning in this industry via IP rather than winning in the market, winning in customer value, etc.   So I am not saying that what Apple or any other company is doing is wrong, its just part of the competitive landscape.  But this issue is when you win, what do you do?  How to you treat victory?

This week can be two steps in a story of a great company who defies conventional wisdom and continues to redefine the world we live it, or it can be two steps in a traditional dance others have done before.  To push that metaphor to its extreme, time will tell if Apple invents a new dance step or creates another version of the Charleston.

Mark McDonald, Ph.D., is a group vice president and head of research in Gartner Executive Programs. 

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