Consensus seems to be that Google's (NASDAQ:GOOG) $12.5B acquisition of Motorola Mobility (NYSE:MMI) on Monday was primarily made for access to Motorola's patent portfolio. Motorola has 17,000 patents which will help protect Android "from anti-competitive threats from Microsoft, Apple and other companies" according to Larry Page. The move was in response to the mounting lawsuits in the mobile industry diagrammed below (click to enlarge images):
As tech companies throw around billions to load up on stockpiles of patents in a order to foster an environment of mutually assured destruction, patents are quickly becoming a controversial topic. What's the economic value of hoarding redundant patents in order to defend against lawsuits?
Many argue that rather than spurring innovation, the modern patent system is stifling it because of two systemic flaws: 1) a patent office that awards too many patents and 2) a legal system which is too lenient to patent holders in a litigious society.
To the contrary, the current patent "Cold War" may not be an indictment of the patent system at all. Instead it may be a commentary on the tech industry itself, which is an industry of rapidly maturing companies 20 years out from the real technological boom which birthed it.
Looking at trends in patent issuance demonstrates that the patent office is indeed issuing new patents at an exponential rate over time, but has not accelerated that pace. Since 1883, the number of patents issued has grown from 21,000 to 167,000, a sizable increase, but at a rate which trails GDP growth over the same period: 1.65% annualized. Perhaps not so surprisingly, patent growth tracks much closer to population growth, which was approximately 1.4% over the same period. This suggests that new ideas are a function of new idea-makers, not a trigger happy patent office.
Source: WIPO (all charts)
The growth rate of patent issuance has slowed considerably in the 2000s compared to high growth rates in the 80's and 90's tech boom.
Looking at the patent approval rate also favors arguments that the patent office has acted with discretion in issuing new patents. Either by choice or because of bureaucratic bottleneck, the approval rate of new patent applications has fallen in recent decades as the growth in new applications has far outpaced approvals. If the approval rate has fallen, it's difficult to argue that the patent office has allowed more frivolous patents to be approved.
The falling approval rate may in fact be a sign that there are fewer and fewer truly novel ideas coming to the patent office. In this context, perhaps patent hoarding is a symptom of slowing innovation. The fact that a company like Google is acquiring patents rather than "building" new ones may demonstrate that most of the low hanging fruit of the 1980-90s tech boom has already been picked by the Motorolas of the world. Google is late to the party.
This is more a sign of the maturation of the info-tech industry than an indication of a corrupted patent system. Patents earned in the early days of an infant industry are now being consolidated by mature multi-billion dollar companies. The fact that companies are now wielding these patents as weapons merely indicates that whereas before there were no revenues to protect, now that stakes have been planted, the stakeholders want to protect what's theirs. In general, companies like Google, Apple, Sony, Samsung, LG, Nokia and HTC aren't using patents to establish new territory, they're using them to maintain the share they have. However, this can't last forever because patents do have a shelf life. In this way, maybe today's patent wars don't signal a need for reform, just a need for patience.
While the patent cliff is long (arguably too long) at 20 years, patents issued in the 90s are starting to finally roll off the books (ask Pfizer - PFE). As innovation has slowed and patent approval rates declined, the patent wall will begin to deteriorate. Truly novel ideas will again be able to rise to the top of the patent pool. Although multi-billion dollar companies have the patents now, there's no guarantee (and in fact it's unlikely) that these organizations will continue to be centers of innovation. Patents are designed specifically to protect the infants of industry from the adults. As the adults become less nimble, young companies will innovate and protect themselves via patent. Hopefully this restores balance to the patent system
Meanwhile, outside of the tech world, there's at least one nation that seems intent on hoarding patents of its own. The country everyone loves to hate may not be willing to defend intellectual property, but it's clear that the Chinese value owning the rights to it. The chart below shows international patent grant trends for the top 5 countries by country of origin. China leapfrogged Korea and Germany in 2009 to be the 3rd largest accumulator of new patents.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.