The Trouble with Patents

Matthew Yglesias channels Tim Lee. Both of them are dead-on, and this isn't a small problem:

My friend Tim Lee makes the case against software patents in The New York Times. An old Bill Gates memo makes for a good framing device:

Microsoft sang a very different tune in 1991. In a memo to his senior executives, Bill Gates wrote, “If people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.” Mr. Gates worried that “some large company will patent some obvious thing” and use the patent to “take as much of our profits as they want.”

Mr. Gates wrote his 1991 memo shortly after the courts began allowing patents on software in the 1980s. At the time Microsoft was a growing company challenging entrenched incumbents like I.B.M. and Novell. It had only eight patents to its name. Recognizing the threat to his company, Mr. Gates initiated an aggressive patenting program. Today Microsoft holds more than 6,000 patents.

It’s not surprising that Microsoft — now an entrenched incumbent — has had a change of heart. But Mr. Gates was right in 1991: patents are bad for the software industry. Nothing illustrates that better than the conflict between Verizon and Vonage.

Read the whole thing. I guess I'm not thrilled with the word choice around "bad for the software industry." Patents are bad for the development of new software. If you define "software industry" as "incumbent for profit software firms" it may be good for the "industry." The thing to keep in mind with any sort of IP protection is that strong IP creates, on the one hand, an incentive for innovation but at the same time it also creates a barrier to innovation. In the case of software patents, the balance tips overwhelmingly in the direction of creating barriers — indeed, the main incentive it creates is merely for the innovative production of patents rather than of actual products.

The problem is fairly severe, especially since the U.S. demands very strong IP protections from every trade agreement it enters. In this case, innovation and incentive do seem to be trade-offs: more of one will reduce the other (although the proliferation of open-source technology might be an argument against the idea). Perhaps there's a Laffer curve of the appropriate level of patent protection which will maximize innovation. But, as always, figuring out exactly where we are on that curve is impossible.

Also keep in mind that almost all of the arguments for or against patent protection for software applies to the prescription drug industry. The big difference is that the software industry has MUCH lower fixed costs than the drug trade.