The IP double standard: Why is it OK to pay for innovation in a product, but not when innovation is the product?

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The IP double standard

By Steve Tobak
My-ESM

08/01/2004 10:00 AM EST
URL: http://www.my-esm.com/showArticle?articleID=26100959

In our society, intellectual property is revered. IP is the flywheel that drives the technological advances that propel our high-tech world forward. We hold companies and organizations such as Bell Labs, the Xerox Palo Alto Research Center, Intel, IBM, the Defense Advanced Research Projects Agency, Stanford and MIT in the highest esteem for the intellectual capital they develop. Indeed, IP is the backbone of our knowledge-based economy.

We love these organizations and their innovation--as long as they don't try to turn IP into a business. As soon as IP licensing becomes the primary business, an innovator becomes a renegade, a notorious IP company, forever branded an evildoer whose primary mission is filing litigation.

Interestingly, the business model of licensing IP isn't new. We routinely pay license fees for software and entertainment. Technology as old as the Phillips-head screw was licensed to help manufacture the first production-line autos. And of course we recognize a company's right to be compensated for its research in the form of a product or service. All told, we seem to be comfortable licensing technology--as long as there's the perception or reality of something tangible attached to that IP.

But when innovation is the product, the rules change. Why the double standard? The answer is tied to the market forces that created today's IP companies.

The 1990s' emphasis on horizontal specialization opened the door for companies to specialize in breakthrough technology. They partner with the rest of the supply chain to incorporate their technology into manufactured products. It has really become almost impossible for one company--an OEM or chip maker--to market a breakthrough technology and drive it as a standard. To ensure CDMA technology's broad, industrywide adoption, Qualcomm had to give up making cell phones.

Due to the Herculean marketing and infrastructure development efforts required to gain broad adoption for a breakthrough technology, IP can become quite visible well in advance of its adoption. As a result, the technology is often adopted for use in applications that are somewhat peripheral to the one intended by the inventing company. The most famous example of this was the obvious incorporation of Rambus' patented technology in so-called alternative standards, SDRAM and DDR DRAM. Companies seem to find creative ways to incorporate others' inventions into their products without compensating the inventors.

Many of these companies negotiate for submarket terms or try to outlast their much smaller adversary's funding. But if an IP company lets one company get away without paying, it has effectively diminished the IP's value. So IP companies have no choice but to litigate, and the stakes can be high. Ironically, most negative perception of IP companies results simply from their quest for fair compensation for their "product."

In my view, the number of successful technologies developed by standards organizations can be counted on one hand. For the most part, standards organizations have very little to do with innovation. With rare exception, all electronic products, technology building blocks and even standards began life as IP owned by someone or some institution. So the next time you hear about IP litigation, take a minute to think about whose side you're on.

Steve Tobak, formerly senior vice president of worldwide marketing at Rambus, can be reached at stobak@invisor.net.

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