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a broken patent system? the case of samsung vs. apple

Vanity Fair has a new article on the Samsung-Apple litigation. Kurt Eichenwald makes the following case about Samsung’s business strategy:

  • Pick a cool area of electronics.
  • Quickly reverse engineer lower quality, low cost versions of the innovators.
  • When sued for copyright or patent infringement, fight non-stop legal battles that only end with last-minute settlements.
  • You win by either (a) grabbing insurmountable market share during the legal battle or (b) punishing small firms with exhausting litigation and high legal fees (Samsung counter-sues almost all plaintiffs).

If this is an accurate account of Samsung’s strategy, it has interesting implications. First, it contradicts resource based value theory in that the firm doesn’t need a monopoly on anything – just the ability to quickly mimic and exploit the system. Second, it suggests that markets are indeed stable in the absence of patents or enforceable intellectual property rights. Samsung has beat up some other firms, but most competitors have survived. Third, it suggests an interesting use of slack resources – throw them at emerging markets. Fourth, it suggests that the patent system is simply an ineffective means of enforcing intellectual property rights when the defendant is sufficiently large.

Strategy scholars and intellectual property gurus – go nuts in the comments.

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Written by fabiorojas

May 8, 2014 at 12:06 am

7 Responses

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  1. I currently write my dissertation about patent lawyers. I think their strategies offer a nice illustration of Eric Leifer’s theory of action (http://www.soziale-systeme.ch/pdf/leifer.pdf).

    It’s sort of interesting to note that patent battles are a rare event even within fields like information technology. Despite all the talk of “patent wars”, only a share of around 1 to 3 percent of patents is actually litigated in court (maybe around 5-6 percent in the U.S. today, there are no current numbers).

    Most of the time, patent lawyers are milling about, watching what others are getting patents for and trying to best position their clients/firms for possible engagements.

    When you have skilled lawyers on both sides, with similar resources, they will use ambiguity strategies to conceal their patent claims until there is some evidence that a claimed market position can actually be secured. By doing this, they will often sustain delicately balanced patent portfolios allowing them to negotiate cross-licensing agreements on “fair” terms. For instance, Microsoft built a large patent portfolio in the 1990s to negotiate on more equal terms with IBM.

    Sometimes, however, patent owners with increasingly symmetric positions challenge each other in court, mainly because technical fields have matured, and there is now significant “ambage” about market positions (I take the basic idea from Roger Gould: http://www.amazon.com/Collision-Wills-Ambiguity-Social-Conflict/dp/0226305503/)

    We know from economic research that particularly financial analysts closely watch patent litigation to get some sense about underlying values, and adjust their investments accordingly.

    Like

    Markus

    May 8, 2014 at 9:15 am

  2. Sure the system is broken, but it’s the other way around.

    Apple patented a rectangle. The original Ipad patent has a guy standing holding a rectangle. Also, they patented a rectangle with round corners. That’s fashion and design, not an innovation to patent. Samsung just used rectangles with rounded corners. There’s prior art on that one so they should be fine. For one, see the PADD from Star Trek TNG.

    The fact that apple has a huge war chest for litigation just makes it worse.

    http://gizmodo.com/5958762/apple-finally-patents-the-round-cornered-rectangle

    Like

    LKT

    May 8, 2014 at 6:47 pm

  3. LKT: comments like yours make me think that we probably over protect intellectual property in this country.

    Like

    fabiorojas

    May 8, 2014 at 7:06 pm

  4. The really interesting case is Intellectual Ventures run by former microsoftie Nathan Myhrvold (of Modernist Cuisine fame). The company is easily in the top five of patent holders in the United States, as their business model consists of suing other companies who infringe on their vast portfolio. No new technology gets invented or diffused, just rents collected.

    It’s problems like this that drive many technologies to protect their IP through non-legal means, namely not telling anyone about your new innovations.

    Like

    dr

    May 8, 2014 at 8:32 pm

  5. My understanding is that the only companies actually making money off smartphones are Apple & Samsung.

    Like

    Wonks Anonymous

    May 8, 2014 at 9:04 pm

  6. I don’t remember the details, but for a long time a firm held a patent on the idea of using computers to handle medical data (at that level of specificity) and was shaking down medical software firms for royalties.

    Like

    olderwoman

    May 8, 2014 at 11:22 pm

  7. I am teaching a Korean business school that sees lots of Samsung students, execs etc. I think “just the ability to quickly mimic and exploit the system” is a bit more than that and it can fit nicely into a resource-based view of the firm. There is a reason that Samsung has been so successful at the fast following strategy – one basically being tried by about every other company but Apple in the industry. The speed and rigor with which they reverse engineer is rather incredible and grounded in the extraordinary social control Samsung can exercise over its employs. There are few other companies in the world that can get top level engineers to hole up working multiple months of 20 hour a day/7 days a week to reverse engineer a product. That is a cultural/human resource that almost no other firm has been able to copy or imitate – especially at Samsung’s scale. Also, it does ignore Samsung’s actual technological lead in development and production of memory. One of Apple’s problems is that a good chunk of their machines are reliant on Samsung innards – Flash memory, DRAM, the processor. One of the very real threats they have used in the patent lawsuits has been that if the patent suit ends up fining them 1 billion dollars that they will just raise the price of the components Apple are dependent on by a pretty similar amount. There is some limit to that of course but Samsung’s performance and quality edge in the components are real. http://www.economist.com/blogs/dailychart/2011/08/apple-and-samsungs-symbiotic-relationship

    So while I agree with many comments that the patent system has many problems including allowing patents to be help almost indefinitely without use, an archaic system and case law for determining and enforcing patents, I still think resource (and knowledge) based views of the firm are more than applicable to the Samsung- Apple tussle. Though I think the writer is right that patent litigation is definitely in favor of the heavy weights following litigation strategies for reducing competition.

    Like

    Ryan Hammond

    May 9, 2014 at 2:05 pm


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