Description‫المملكة العربية السعودية‬ ‫وزارة التعليم‬ ‫الجامعة السعودية اإللكترونية‬ Kingdom of Saudi Arabia Ministry of Education Saudi

‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬
Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University
College of Administrative and Financial Sciences
Assignment 3
Management of Technology (MGT 325)
Deadline: 04/05/2024 @ 23:59
Course Name: Management of
Technology
Course Code: MGT325
Student’s Name:
Semester: 2nd
CRN:
Student’s ID Number:
Academic Year:2023-24
For Instructor’s Use only
Instructor’s Name:
Students’ Grade:
Marks Obtained/Out of 10
Level of Marks: High/Middle/Low
Instructions – PLEASE READ THEM CAREFULLY
•
The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
•
Assignments submitted through email will not be accepted.
•
Students are advised to make their work clear and well presented, marks may be reduced
for poor presentation. This includes filling your information on the cover page.
•
Students must mention question number clearly in their answer.
•
Late submission will NOT be accepted.
•
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
•
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
•
Submissions without this cover page will NOT be accepted.
Course Learning Outcomes-Covered
✓ Recognize the dynamics and the importance of managing technological innovation
strategically. (LO-1)
✓ Explain of the concepts, models for formulating strategies, defining the organizational
strategic directions and crafting a deployment strategy.(LO-3)
Assignment
Marks: 10
Students are requested to read chapter 9 “Protecting Innovation” from their book Strategic
Management of Technological Innovation.
Based on the conceptual knowledge and understanding obtained from the readings Section 1: Theoretical Foundations (3 Marks)
Q1. Explain the concept of intellectual property (IP) and its importance in protecting
innovations. (1.5 Mark)
Q2. Differentiate between patents, copyrights, trademarks, and trade secrets, providing an
example of what each might protect in the realm of technological innovation. (2.5 Marks)
Section 2: Scenario Analysis (7 Marks)
Consider a scenario where a small tech startup has developed a revolutionary new type of battery
technology that could significantly extend the battery life of electronic devices. The startup is
concerned about protecting their innovation from competitors.
Q3. Based on the scenario, recommend the most appropriate IP protection mechanisms
the startup should use. Justify your recommendations. (3 Marks)
Q4. Discuss potential challenges the startup might face in protecting its innovation and
how it might overcome them. (3 Marks)
NOTE: It is mandatory for the students to mention their references, sources and support each
answer with at least 2 peer reviewed journal.
Chapter Nine
Protecting Innovation
The Digital Music Distribution Revolutiona
Fraunhofer and MP3
In 1991, Fraunhofer IIS of Germany developed an algorithm that would set in
motion a revolution in how music was distributed, stored, and consumed. The
algorithm (commonly referred to as a codec) allowed compression of digital
audio to approximately one-tenth of its original size with minimal compromise
in audible quality. The format also enabled song information such as the song
title and artist to be embedded within the file. This format for compressed audio
files was later dubbed MPEG-1 layer 3—a.k.a. MP3. By 1995, software programs
were available that enabled consumers to convert tracks from compact discs
to MP3 files. This technology transformed how music could be manipulated—a
song was now a file that could be kept on a hard drive, and the file was small
enough to be shared over the Internet. The MP3 format became wildly popular by users sharing their music online, and software companies began releasing many variants of MP3 encoders (utilities that compress files into MP3s) and
decoders (utilities that play back MP3s). Hardware manufacturers decided to
capitalize on this new trend and several hardware MP3 players began appearing
on the market.
With the growing popularity of the file format, Fraunhofer was faced with
a dilemma—should it enforce its patent on the use of the MP3 algorithm and
attempt to collect royalties for its use, or should it allow users and software/hardware manufacturers to make free use of the algorithm, allowing the momentum
of the format to build? If it was to limit the use of the algorithm, it faced the risk of
established rivals such as Microsoft and Sony developing competing formats, yet
if it allowed free use of the algorithm, it would be difficult to profit on its invention.
Fraunhofer decided to pursue a partially open licensing approach, partnering with Thomson Multimedia as the exclusive licensing representative of MP3
patents in 1995.b Thomson, in turn, negotiated agreements with several companies including Apple, Adobe, Creative Labs, Microsoft, and many others. Such a
broad base of MP3 licensees (100 by April 2001) provided consumers with easy
access to encoders, decoders, and the format in general. Licensees generally
197
198 Part Two Formulating Technological Innovation Strategy
opted to provide decoders free of charge, while charging a nominal fee to those
who wished to encode MP3s.
Fraunhofer continued to innovate, introducing the mp3PRO format and working on the Advanced Audio Coding (AAC) format with Dolby that Apple would
later use. Many other companies also developed or adapted their own audio
compression codecs including Sony (ATRAC codec, originally developed in 1991
for use with Mini Discsc) and Microsoft (WMA, launched in April 1999d). However,
by 1996, MP3s could be found on computers worldwide, and it appeared that
MP3 had won the battle for dominant design in compressed audio formats.
Napster Takes the Lead
In 1999, while a student at Northeastern University in Boston, Shawn Fanning
released Napster—a software program that allowed users with Internet access to
easily share MP3 files. Napster provided a user-friendly solution to music fans wishing to share and find music online. Napster provided a user interface with a search
box that pointed individuals to other users with the files they wished to download.
The Napster servers did not host any MP3 files; rather they hosted a database with
information on which users had which files to share and whether they were online,
and connected one computer to another for downloading. Napster was one of the
first widely adopted “peer-to-peer” applications, and helped popularize the term.
Napster was free, and as the growing number of people with Internet access
realized, so was the music that it allowed them to access. Users were increasingly trading copyrighted material—commercial records and songs. In fact, the
great majority of music downloaded through Napster was copyrighted material.
By March 2000, 5 million copies of Napster had already been downloaded.e At
its peak, there were 70 million Napster users.f
While “music pirates” around the world embraced Napster, the Recording
Industry Association of America (RIAA), the trade group that represents the leading music business entities in the United States, grew increasingly alarmed. The
RIAA worried that the growing illegal trade of music would result in a loss of profits for its constituents—record labels that owned the rights to much of the popular
commercial music that was being traded online. The RIAA initiated legal action
against Napster and Napster users in an effort to take the service offline and
curtail illegal file sharing. This move was controversial for several reasons. Some
analysts believed that it would be difficult to fight a technological advance such
as this by legal action alone, and that the RIAA would not be successful unless it
offered a legitimate alternative for users who wished to purchase music online.
Other analysts took an even stronger stance, arguing that the record labels were
not only fighting to protect the rights of artists, but to protect a business model
that had become outdated.g They argued that the popularity of Napster was partially due to the rigid and overpriced traditional music distribution model, where
fans were forced to buy albums for prices that some felt were inflated, and did
not have the choice to buy individual songs. This was not the first time the entertainment industry had resisted a change in business models and was reluctant
to embrace a new technology. A 2001 article in The Economist pointed out that
“Phonographs were going to kill sheet music, the rise of radio threatened to
Chapter 9 Protecting Innovation 199
undermine sales of phonograph discs, video recorders were going to wipe out
the film industry, and cassette recorders spelt doom for the music business. . . . In
each case, their fears proved unfounded. The new technologies expanded the
markets in unprecedented ways.”h Some commentators believed that the new
technology could be beneficial for the recording industry. If harnessed appropriately, it could enable an inexpensive distribution method, as well as direct
intimate interaction with consumers that allowed for targeted marketing.
In 2001, Napster offered the RIAA a partnership that included a legitimate digital distribution model that would make online music available via a subscription
service. The RIAA declined, and instead continued to pursue a legal judgment
against Napster. In July 2001, the court ruled in the RIAA’s favor, and the Napster
service was taken offline. It was a blow to peer-to-peer fans worldwide.
Though the record labels had won the battle against Napster, they began to
realize the war was far from over. Services similar to Napster began to sprout up
online, offering “users in the know” the opportunity to continue pirating music.
The record labels continued to pursue legal action against peer-to-peer services and users who engaged in illegal file trading, while coming to terms with
the need to offer a legitimate alternative service. Subsequently, Warner Music
teamed up with BMG, EMI, and RealNetworks to introduce MusicNet, and Sony
Entertainment and Universal created Pressplay, both of which were subscription services that enabled individuals to download music legally from the Web.
However, in an attempt to control their music catalogs, the labels used proprietary file formats and severely limiting digital rights management (DRM) schemes
that confused users. Furthermore, neither service offered the breadth of selection offered by unauthorized peer-to-peer services such Kazaa or Gnutella. The
popularity of peer-to-peer music swapping continued to grow. The RIAA needed
a savior. Steve Jobs offered to be that guy.
iTunes Just in Time
On April 28, 2003, Apple opened its iTunes Music Store. After striking agreements
with the five major record labels (Sony, Universal, BMG, Warner Music Group, and
EMI), iTunes launched with an initial catalogs of 200,000 songs for purchase at
99 cents per song.i iTunes showed immediate signs of success, boasting 50 million
downloads within the first year, and quickly became the leading distributor of music
online.j Apple got the blessing of the recording industry after guaranteeing them
that the files offered via the Music Store would allow for protection against illegal
sharing thanks to the “FairPlay” DRM scheme. In essence, the iTunes Music Store
offered audio in two file formats—Advanced Audio Coding (AAC) and modified
MP3s. With Apple’s Fairplay DRM, song files could be loaded on up to five computers only, and could not be played on non-iPod MP3 players. In addition, the files
could not be e-mailed or distributed over the Web, and files were “hidden” on the
iPod through a subdirectory structure that made it difficult to copy songs from a
friend’s iPod. All of these features helped to prevent users from mass-distributing
songs to others, helping to ease the minds of record company executives.
The success of iTunes was fueled by a number of factors. The company
had a “cool” image that was attractive to the recording industry and users alike.
200 Part Two Formulating Technological Innovation Strategy
The company also used the familiar MP3 format, offered an attractive price tag
for online music, and its licensing agreements with all five major labels enabled
it to offer a one-stop source for customers. In addition, the FairPlay DRM was not
as restrictive as other competing formats,k and this was important to many users.
The success of iTunes was also accelerated by the success of Apple’s iPods.
iPods are hard-disk–based portable MP3 players that are well designed, well
marketed, and user-friendly. Though there had been some criticisms concerning their dependability (chiefly related to battery life)l and sound quality issues,m
casual music consumers took to these players in large numbers. To the appreciation of the RIAA, the iPods required synchronization with one’s music collection
via the iTunes application, thereby making it difficult to share music stored on the
iPod, or purchased from iTunes.
The recording industry had found a new channel of distribution that earned
significant revenues (about $0.70 of every $0.99 sale on iTunes is delivered
directly to the record labelsn), and Apple had licensing agreements with all the
major labels, which afforded Apple access to huge catalogs. Apple leveraged
these catalogs to entice users to buy music through its iTunes Music Store, and
this in turn helped drive sales of the Apple iPod, since files bought on iTunes
could not be played on rival MP3 players. Apple was well positioned, but threats
loomed on the horizon.
In March 2006, the French National Assembly approved a bill requiring Apple
to open its FairPlay DRM technology to industry rivals in France.o This meant that
Apple would have to allow songs downloaded from the French iTunes Music
Store to be played on non-iPod MP3 players, and that iPods would need to play
competing file formats, such as Sony’s ATRAC3 files purchased through the Sony
Connect online music store. Many users could appreciate this interoperability, yet
it would challenge the “single operator license model” that had eased the minds
of the recording industry and created a large and loyal customer base for Apple.
Initially analysts speculated that Apple would withdraw from the French market,
but instead Apple began working on negotiating fewer DRM restrictions from
the record labels. By March of 2009, Apple had convinced all the major labels
to permit their songs to be sold through iTunes without DRM. In return, Apple
adopted the tiered pricing model that the major labels had long requested.
The rise of smartphones that could hold users’ music digital libraries in addition
to offering a host of other useful functions helped to fuel the growth of digital music
sales. By 2011, digital music sales exceeded physical sales in both the United
States and South Korea, and by 2016 digital music sales exceeded physical music
sales in roughly half of the major music markets of the world.p However, an even
bigger transition was also changing the landscape of music. Rapidly growing services such as Spotify, Pandora, and Apple Music were now streaming music over
the Internet, enabling listeners to hear whatever music they wanted, whenever they
wanted, on a wide range of devices, without the user ever taking ownership of the
music. Though many had feared that a transition to streaming would be disastrous
to the recorded music industry, instead paid music streaming subscriptions fueled
record-setting market growth. In 2016, the global recorded music market grew by
almost 6 percent—the highest rate since 1997—to a total of US$15.7 billion.
Chapter 9 Protecting Innovation 201
Discussion Questions
1. What industry conditions led to the revolution in audio distribution described
above? Which stakeholders stand to benefit most (or least) from this revolution?
2. Why did the music stores created by the record labels fail to attract many subscribers? What, if anything, should the record labels have done differently?
3. What factors led iTunes to be successful?
4. How do you think a move away from owning music led to record-setting
music revenues?
a
Adapted from a New York University teaching case by Shachar Gilad, Christopher Preston, and Melissa
A. Schilling.
b
“Thomson Multimedia Signs 100th mp3 Licensee,” press release (PR Newswire), April 18, 2001.
c
Junko Yoshida, “Sony Sounds Off about Mini Disc,” Electronic World News, no. 41 (June 3, 1991), p.15.
d
Jack Schofield, “Music Definitions,” The Guardian, October 5, 2000, p. 3.
e
Karl Taro Greenfeld, “The Free Juke Box: College Kids Are Using New, Simple Software Like Napster to
Help Themselves to Pirated Music,” Time, March 27, 2000, p. 82.
f
Michael Gowan, “Easy as MP3,” PC World 19, no. 11 (November 2001), p. 110.
g
“The Same Old Song,” The Economist 358, no. 8210 (January 24, 2002), pp. 19, 20.
h
Ibid.
i
Michael Amicone, “Apple Took a Big Bite Out of the Market,” Billboard 116, no. 16 (April 17, 2004), p. 2.
j
“iTunes Music Store Downloads Top 50 Million Songs,” press release, March 15, 2004.
k
Ibid.
l
“Apple Faces Class Action Suits on iPod Battery,” Reuters, February 10, 2004.
m
Randall Stross, “From a High-Tech System, Low-Fi Music,” New York Times, July 4, 2004, p. 3.
n
Alex Veiga, “Recording Labels, Apple Split over Pricing,” Associated Press, April 2, 2006.
o
Rob Pegoraro, “France Takes a Shot at iTunes,” WashingtonPost.com, March 26, 2006, p. F06.
p
International Federation of the Phonographic Industry Global Music Report 2017.
OVERVIEW
A crucial element of formulating a firm’s technological innovation strategy is determining whether and how to protect its technological innovation. Traditionally, economics and strategy have emphasized the importance of vigorously protecting an
innovation in order to be the primary beneficiary of the innovation’s rewards, but the
decision about whether and to what degree to protect an innovation is actually complex. Sometimes not vigorously protecting a technology is to the firm’s advantage—
encouraging other producers (and complementary goods providers) to support the
technology may increase its rate of diffusion and its likelihood of rising to the position of
dominant design. In this chapter, we first will review the factors that shape the degree
to which a firm is likely to appropriate the returns from its innovation, and the mechanisms available to the firm to protect its innovation. We then will consider the continuum between a wholly proprietary strategy and a wholly open strategy, examining
the trade-offs inherent in decisions about whether (and to what degree) to protect or
diffuse a technological innovation. The chapter concludes by listing factors the firm
should consider in formulating its protection strategy.
202 Part Two Formulating Technological Innovation Strategy
APPROPRIABILITY
appropriability
The degree to
which a firm is
able to capture
the rents from its
innovation.
tacit
knowledge
Knowledge that
cannot be readily
codified or transferred in written
form.
socially
complex
knowledge
Knowledge
that arises from
the interaction
of multiple
individuals.
The degree to which a firm can capture the rents from its innovation is termed
appropriability. In general, the appropriability of an innovation is determined by how
easily or quickly competitors can imitate the innovation. The ease with which competitors can imitate the innovation is, in turn, a function of both the nature of the technology itself and the strength of the mechanisms used to protect the innovation.
Some technological innovations are inherently difficult for competitors to copy; the
knowledge underlying the technology may be rare and difficult to replicate. A firm’s
unique prior experience or talent pool may give it a foundation of technical know-how
that its competitors do not possess. If this knowledge base is tacit (i.e., it cannot be readily codified into documents or procedures) or socially complex (i.e., it arises through
complex interactions between people), competitors will typically find it very difficult to
duplicate.1 For example, a firm that has a team of uniquely talented research scientists
may have a rare and difficult-to-imitate knowledge base. While some of the skill of the
research scientists may be due to imitable training procedures, talent typically implies
that an individual (or group) has a natural endowment or ability that is very difficult,
if not impossible, to replicate through training. Furthermore, if the unique capabilities
of the research team arise in part from the nature of the interactions between the scientists, their performance will be socially complex. Interactions between individuals can
significantly shape what each individual perceives, and thus what each individual—and
the collective group—discovers or learns. The outcomes of these interactions are path
dependent, and thus are idiosyncratic to the combination of individuals, the moment of
the interaction, and the nature of the interaction. This means that knowledge can emerge
from the interaction of a group that could not be replicated by any individual or any
different group.
Many innovations, however, are relatively easy for competitors to imitate. Individuals and firms often employ legal mechanisms to attempt to protect their innovations.
Most countries offer legal protection for intellectual property in the form of patent,
trademark, copyright, and trade secret laws.
PATENTS, TRADEMARKS, AND COPYRIGHTS
patent
A property right
protecting a process, machine,
manufactured
item (or design
for manufactured
item), or variety
of plant.
trademark
An indicator
used to distinguish the source
of a good.
While patents, copyrights, and trademarks are all ways of protecting intellectual property, they are each designed to protect different things. A patent protects an invention, and a trademark protects words or symbols intended to distinguish the source
of a good. A copyright protects an original artistic or literary work. Thus, a typical
computer might have components whose designs are protected by patents, logos such
as the Starbuck’s mermaid that are protected by trademark law, and software that is
protected by copyright (though as discussed later in the section on patents, many types
of software are now also eligible for patent protection).
The purpose of intellectual property protection is to provide recognition and incentive for creative work. Patents and copyrights, for example, provide a legal means for
individuals to protect their creative work and earn rewards from it, in exchange for
making the knowledge underlying their work public. Making this knowledge public is
important because it helps others to build upon that knowledge, driving technological
Chapter 9 Protecting Innovation 203
copyright
A property right
protecting works
of authorship.
and social advance. In absence of those protections, people might prefer to keep their
discoveries and inventions secret.
Patents
In many countries, inventors can apply for patent protection for their inventions. An
invention can be a product, such as a new type of battery, or a process, such as a new
way to manufacture bagels. In the United States, patents are categorized into different
types such as a utility patent for a new and useful process, machine, manufactured item,
or combination of materials; a design patent for an original and ornamental design for
a manufactured item; or a plant patent for the discovery and asexual reproduction of a
distinct and new variety of plant.
Each country has its own patent system with different requirements, and unless a
patent is filed under a regional patent office or an international treaty, the rights it is
granted are applicable only in the country in which the patent is filed.
To qualify for a patent, an invention must usually meet the following criteria:
1. It must be useful (i.e., it must produce a desirable result, solve a problem, improve
on or propose a new use for an existing development or show potential of doing so).
2. It must be novel (i.e., it must not already be patented or described in public literature, or be in public use for more than a year).
3. It must not be obvious (i.e., a person with experience or skill in the particular art
of the patent would not be expected to achieve the same invention with a normal
amount of effort).
In most countries, the discovery of scientific principles that pertain to natural laws
(e.g., gravity) cannot be patented because they are considered to have always existed.
Additionally, the following are not typically patentable:
∙
∙
∙
∙
∙
Substituting one material for another (e.g., plastic for metal).
Merely changing the size of an already existing device.
Making something more portable.
Substituting an element for an equivalent element.
Altering an item’s shape.
Printed materials are not typically patentable, but it may be possible to protect them
by copyright, as discussed in the next section. Historically software algorithms were
not considered patentable, but in 1998, a U.S. Supreme Court case upheld a patent
on a computerized method of managing mutual funds that relied on software algorithms, unleashing a flood of patent applications for software. From 1997 to 2000,
patent filings in the United States for software-enabled methods of doing business
increased more than 700 percent.2 For example, Amazon patented its “1-click” system
that streamlines the process by which customers place orders.3
Patenting an invention is a serious undertaking. To apply for a patent, the inventor must explain how to make and use the invention, and make claims about what
it does that makes it a new invention. Drawings of the new invention are also often
required. In the United States, this application is reviewed by a patent examiner who
may modify the scope of the claims made by the patent. The patent is then published
204 Part Two Formulating Technological Innovation Strategy
FIGURE 9.1
Patent
Applications
in 2015 and
2016 in the 10
Largest Patent
Offices around
the World
Source: WIPO Patent
Statistics Database,
September 2017.
Australia
Canada
Russian Federation
India
Germany
European Patent Office
Rep. of Korea
Japan
United States
China
–
Patent applications 2016
500,000
1,000,000
1,500,000
Patent applications 2015
for a time in which other inventors can challenge the patent grant (if, e.g., they believe
that the patent infringes on previously granted patents). If the standards for patentability are met, the patent is then granted. The entire process from application to granting
is lengthy. For example, the time from filing to grant is between two and five years
in the United States, three and five years in Europe, five and six years in Japan, and
five and seven years in India. In industries in which product lifecycles are short, such
delays significantly diminish the usefulness of patenting. This has led to a number of
proposals for how the patenting system might be reformed to make it more efficient.
The number of patent applications being filed is growing around the world, but
nowhere faster than China, which had both the largest number of patent applications
in 2015 and 2016, and the largest rate of growth in patent applications (21.5 percent)
between 2015 and 2016 (see Figure 9.1).
A number of costs are also involved in filing and maintaining a patent. Fees vary
by patenting office. In the United States, the entire patenting process for a “small
entity” (e.g., an independent inventor, a small business, or a nonprofit organization)
costs around $1500 in filing fees (and roughly double that for large entities), and
$5000–$10,000 in attorney fees. In most countries, patent protection lasts for 20 years.
In a major study of historical success rates for U.S. patent applications, Michael
Carley, Deepak Hegde, and Alan Marco followed the history of the 2.15 million new
patent applications filed at the USPTO after 1996 and found that only 55.8 percent
of the applications became granted. Patent applications in the “Drugs and Medical
Instruments” sector had the lowest success on average (42.8 percent), and applications
in the “Electrical and Electronics” had the highest (66.6 percent). They also found that
success was generally lower for small firms and that overall, success rates for all types
of applications had gone down over time.4
Major International Patent Treaties
There is currently no “world patent,” and a patent granted in one country does not
automatically provide protection in other countries. In some regions, however, there
Chapter 9 Protecting Innovation 205
are regional patent offices (such as the European Patent Office and the Africa Regional
Intellectual Property Organization) that grant patents valid in all the member nations
of that program.
Significant differences exist in national patent laws. For example, in most countries, publication of information about the invention before applying for a patent will
bar the right to a patent, but the United States allows a one-year grace period (i.e., an
inventor can publish an invention up to a year before applying for the patent). Thus,
if international patent protection will eventually be sought, inventors must uphold the
stricter standard of applying for patent before publishing information about the patent, even if they plan to first patent the invention in the United States. Many countries
also require that the invention be manufactured in the country in which a patent was
granted within a certain time frame (often three years) from the time the patent is
granted. This is called the “working requirement,” and it effectively prevents inventors from patenting inventions in countries in which they have no intention of setting
up production.
Many inventors wish to patent their inventions in many countries simultaneously.
To make that easier, several international treaties have been negotiated between countries that seek to harmonize the patent laws around the world. Two of the most significant are the Paris Convention for the Protection of Industrial Property and the Patent
Cooperation Treaty.
The Paris Convention for the Protection of Industrial Property (also known as the
Paris Convention Priority) is an international intellectual property treaty adhered to by
177 countries as of March 2018. Under the Paris Convention, a citizen of any member
country may patent an invention in any of the member countries and enjoy the same
benefits of patent protection as if the inventor were a citizen of those countries. That
is, the Paris Convention eliminates (for its member countries) any differential patent
rights afforded to citizens of the country versus foreign nationals. Furthermore, the
treaty also provides the right of “priority” for patents and trademarks. Once an inventor has applied for patent protection in one of the member countries, the inventor may
(within a certain time period) apply for protection in all the other member countries.
The time period is 12 months for utility patents and six months for design patents and
trademarks. Most important, the applications to these later countries will be treated as
if they were made on the same date as the first application. This enables the inventor to
establish priority over any other patents applied for in those countries after the inventor made the first application. For example, if an inventor applied for a utility patent
for an invention in Madagascar in January 2003, and another inventor applied for a
patent for a very similar invention in France in June 2003, the Madagascar inventor
could have applied for patent protection in France in December 2003 and claim priority over the French invention. The French inventor would have to prove that his or her
invention was substantively different from the Madagascar invention, or the French
inventor’s patent would be denied.
As mentioned previously, in many countries, public disclosure of an invention
makes it impossible to subsequently patent that invention. However, with the priority
rights established under the Paris Convention, an inventor who patents an invention in
one of the member countries can then publicly disclose information about that invention without losing the right to patent the invention in the other countries—each patent
206 Part Two Formulating Technological Innovation Strategy
application will be treated as if it were applied for at the same time as the first application, and thus as if it were applied for before public disclosure. Without this treaty, it
would be nearly impossible for an inventor to patent an invention first in the United
States and then in other countries because U.S. patent applications are made available
to the public.
Another very significant international patent treaty is the Patent Cooperation
Treaty, or PCT. This treaty facilitates the application for a patent in multiple countries. An inventor can apply for a patent to a single PCT governmental receiving
office, and that application reserves the inventor’s right to file for patent protection in
152 countries for up to two-and-half years. Once the inventor has filed the application,
a PCT governmental searching office will perform the patent search for the application
(this search verifies that the invention is not already subject to a prior claim). Once the
search is completed, the inventor can choose to enter Chapter II of the process wherein
the PCT governmental office assesses the patentability of the invention subject to the
standards of the Patent Cooperation Treaty. Eventually, the inventor must have the
PCT application filed in each of the national patent offices in which the inventor is
seeking protection.
Filing a single PCT application offers numerous advantages. First, applying for the
PCT patent buys the inventor the option to apply to multiple nations later without committing the inventor to the expense of those multiple applications. With a PCT application, the inventor can establish a date of application in multiple countries (protecting
the inventor’s priority over later claims), while paying only the single PCT application fee rather than the numerous national application fees. Though the inventor will
eventually have to pay for national applications in the countries in which protection
is sought, the inventor can delay those costs. Thus, the inventor has time to assess the
likelihood of the patent being granted and the potential profitability of the invention. If
the PCT process suggests that the patent will not be granted or if it appears the invention has limited potential for earning returns, the inventor can forgo the expense of
applying to the national offices.
Another advantage of the PCT process is that it helps make the results of patent
applications more uniform. Though individual countries are not required to grant a
patent to those inventions that are granted a patent by the PCT governing office, the
granting of the patent by the PCT provides persuasive evidence in favor of granting the
patent in the individual national offices. As of August 2015, there were 148 member
states of the Patent Cooperation Treaty.
Patent Strategies
It is typical to assume that an inventor seeks a patent because they desire to make and
sell the invention themselves. However, inventors and firms may monetize patents in a
range of different ways, including licensing the technology to others or selling the patent rights to another firm that can better utilize the technology.5 Furthermore, whereas
the conventional wisdom is that most inventors prefer to keep the details of their invention secret before the patent is granted (to prevent rivals from having access to their
proprietary knowledge), this turns out not to be the case. A study by Stuart Graham
and Deepak Hegde found that the vast majority of patentees prefer to disclose their
patent applications before they are granted. Both large and small inventors, across
Chapter 9 Protecting Innovation 207
patent trolling
A pejorative term
for when an individual or firm
misuses patents
against other
individuals or
firms in attempt
to extract money
from them.
patent
thickets
A dense web
of overlapping
patents that can
make it difficult
for firms to compete or innovate.
all major technology fields exhibited this preference for early disclosure, presumably
because it allows them to publicize their invention’s quality and scope to competitors, external investors, and potential licensees. Disclosure via patent application also
establishes the date from which patentees can enjoy provisional patent rights.6
Firms may also seek patents just to limit the options of competitors or to earn revenues through aggressive patent lawsuits. These actions are sometimes referred to as
“patent trolling.” A patent troll’s primary purpose in owning patents is to extort
money from other firms. For example, a patent troll might buy a patent from a bankrupt firm to sue another company that it claims is infringing on the purchased patent. Apple claims to be the number one target for patent trolls, having faced nearly
100 lawsuits between 2011 and 2014.7 According to RPX Corporation, a firm that
helps companies resolve patent lawsuits through licensing, patent trolls filed more
than 2900 infringement suits in the United States in 2012.8 This type of predatory patenting has sparked an effort by the U.S. Federal Government to make patent granting
stricter and to impose penalties against spurious patent lawsuits.9
In industries with complex technologies such as computers, software, and telecommunications, a dense web of overlapping patents known as “patent thickets” can
make it very difficult for firms to compete without falling prey to patent suits by
other firms in that technology domain. This can seriously stifle innovation and has
resulted in the rather peculiar strategy of firms buying bundles of patents to create
war chests that they hope will deter the patent attacks of others. For example, in 2011,
the bankrupt Nortel auctioned off its massive patent portfolio. The auction was won
by a consortium called Rockstar Bidco that included Microsoft, Apple, RIM, Sony,
and Ericsson, who paid $4.5 billion for the war chest, beating out Google which bid
$4.4 billion. Google subsequently bought 1030 IBM patents that covered a range
of technologies, from the fabrication of microprocessing chips, object-oriented
programming, and other business processes. These patents were not necessary for
Google’s business directly; rather they provided a retaliation threat to others that
might attack them through patent suits.10 Google also bought Motorola Mobility for
$12.5 billion the same year, and it was widely believed that the purchase was almost
solely for Motorola’s patents, which would bolster Google’s position in the lawsuit
they expected would arise from the Nortel patents.11 In October of 2013, confirming
Google’s fears, Rockstar Bidco filed suit against Google and seven companies that
make phones for Google’s Android operating system.12 Google countersued based on
its own patents, and in November 2014, it was reported that Google and Rockstar had
reached a settlement.13
Trademarks and Service Marks
A trademark is a word, phrase, symbol, design, or other indicator that is used to distinguish the source of goods from one party from the goods of others. The “Intel
Inside” logo on many computers is one example of a trademark, as is the familiar
Nike “swoosh” symbol. A service mark is basically the same as a trademark, but distinguishes the provider of a service rather than a product. Often the term trademark is
used to refer to both trademarks and service marks.
Trademarks and service marks can be embodied in any indicator that can be perceived through one of the five senses. Most marks are embodied in visual indicators,
208 Part Two Formulating Technological Innovation Strategy
such as words, pictures, and slogans. However, marks are also registered that use other
senses such as sound (e.g., tones that are associated with a particular company or
brand) or smells (as in fragrance). Trademark rights may be used to prevent others
from using a mark that is similar enough to be confusing, but they may not be used to
prevent others from producing or selling the same goods or services under a clearly
different mark.
In most countries, the rights to a trademark or service mark are established in the
legitimate use of the mark and do not require registration; however, registration provides several advantages. First, registering the mark provides public notice of the registrant’s claim of ownership over the mark. Second, marks must be registered before
a suit can be brought in federal court against an infringement of the mark. Third,
registration can be used to establish international rights over the trademark, as when
the U.S. registration is used to establish registration in other countries, and to protect
the mark against infringement from imported products. As of April 2018, the U.S.
Patent and Trademark Office charged between $275 and $375 application fee to register a trademark. It normally took 10 to 16 months to receive certification from the
U.S. Patent and Trademark Office, but the protection offered by the registration of the
trademark begins from the date of filing. Unlike patents and copyrights, trademark
protection can last as long as the trademark is in use, but the registration requires
periodic renewal.
Major International Trademark Treaties
Nearly all countries offer some form of trademark registration and protection.
National or regional offices maintain a Register of Trademarks that contains information on all trademark registrations and renewals. To eliminate the need to register
separately in each country (or region), the World Intellectual Property Organization
administers a System of International Registration of Marks governed by two treaties:
the Madrid Agreement Concerning the International Registration of Marks and the
Madrid Protocol. Countries that adhere to either (or both) the Madrid Agreement or
Madrid Protocol are part of the Madrid Union. Any individual that lives in, is a citizen
of, or maintains an establishment in a Madrid Union country can register with the
trademark office of that country and obtain an international registration that provides
protection in as many other Madrid Union countries as the applicant chooses. As of
April 2014, there were 91 member countries of the Madrid Union.
Copyright
Copyright is a form of protection granted to works of authorship. In the United States,
the authors of original literary, dramatic, musical, artistic, and certain other intellectual works can obtain copyright protection.14 Like trademarks, the rights of copyright
protection are established by legitimate use of the work. This protection is available
whether or not the work is published and prevents others from producing or distributing that work. Under section 106 of the 1976 Copyright Act, the owner of the copyright has the exclusive right to do (or authorize others to do) the following:
∙ Reproduce the work in copies or phonorecords.
∙ Prepare derivative works based upon the work.
Chapter 9 Protecting Innovation 209
∙ Distribute copies or phonorecords of the work to the public by sale or other transfer
of ownership, or by rental, lease, or lending.
∙ Perform the work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works.
∙ Display the copyrighted work publicly, in the case of literary, musical, dramatic,
and choreographic works, pantomimes, and pictorial, graphic, or sculptural works,
including the individual images of a motion picture or other audiovisual work.
∙ Perform the work publicly by means of a digital audio transmission (in the case of
sound recordings).
There are, however, limitations to these rights. In particular, in the United States,
the doctrine of fair use stipulates that in most circumstances it is not a violation of
copyright for others to use copyrighted material for purposes such as criticism, comment, news reporting, teaching, scholarship, or research. Furthermore, some types of
work cannot be protected by copyright. For example, work that has not been fixed
in a tangible form of expression (e.g., a choreographed dance or improvisational
speech that was not notated or recorded) is not eligible for copyright protection. Titles,
names, short phrases, slogans, familiar symbols, and lists of ingredients also cannot
be copyrighted.
Unlike patent protection, copyright protection is secured automatically when an
eligible work is created and fixed in a copy or phonorecord for the first time. No
publication or registration with the Copyright Office is necessary to establish this
copyright, though registering the copyright is advantageous in that it establishes a
public record of the copyright claim and is required before filing an infringement
suit in court. As of April 2018, basic online registration of copyright with the U.S.
Copyright Office costs $35, and it took about 3 to 10 months to receive a certificate
of registration.
Before 1978, copyright protection lasted only 28 years from the time it was secured
(though during the last year the author could opt to renew the protection for an additional term). Revisions to U.S. copyright law, however, give copyright protection to
works created after 1978 that lasts for the author’s life plus an additional 70 years.
Copyright Protection around the World
As with patents and trademarks, no international copyright law automatically protects
an author’s work throughout the world. Copyright protection varies from country to
country. However, most countries do offer copyright protection to both domestic and
foreign works, and there are international copyright treaties for simplifying the process of securing such protection. One of the most significant is the Berne Union for
the Protection of Literary and Artistic Property (known as the Berne Convention).
The Berne Convention specifies a minimum level of copyright protection for all member countries, and it requires member countries to offer the same protection to both
its own citizens and foreign nationals. Other treaties include the Universal Copyright
Convention (UCC); the Rome Convention for the Protection of Performers, Producers
of Phonograms and Broadcasting Organizations; the Brussels Convention Relating to
the Distribution of Program-Carrying Signals Transmitted by Satellite; and the World
Intellectual Property Organization Copyright Treaty.
210 Part Two Formulating Technological Innovation Strategy
TRADE SECRETS
trade secret
Information that
belongs to a
business that is
held private.
Rather than disclose detailed information about a proprietary product or process in
exchange for the grant of a patent, inventors or firms often will choose to protect their
intellectual property by holding it as a trade secret. A trade secret is information that
belongs to a business that is generally unknown to others. Trade secrets need not meet
many of the stringent requirements of patent law, enabling a broader class of assets
and activities to be protectable. For example, while the formula for a beverage is not
patentable, it can be considered a trade secret. Trade secret law traces its history back
to Roman law punishing individuals who induced someone to reveal the details of
their employer’s commercial affairs.15
Information is typically considered to be a trade secret only if it (a) offers a distinctive advantage to the company in the form of economic rents, and (b) remains valuable only as long as the information remains private. Examples of trade secrets might
include information about a firm’s customers, its marketing strategies, or its manufacturing processes. Trade secret law protects such information from being wrongfully
taken by another party. In the United States, trade secret law is implemented at the
state level, but the Uniform Trade Secret Act attempts to make these laws consistent
from state to state.
For information to qualify as a trade secret under the Uniform Trade Secret Act, the
information must meet the following three criteria:
∙ The information must not be generally known or readily ascertainable through
legitimate means.
∙ The information must have economic importance that is contingent upon its secrecy.
∙ The trade secret holder must exercise reasonable measures to protect the secrecy of
the information.
If information meets these criteria, the Uniform Trade Secret Act stipulates that its
owner can prevent others from benefiting from this information without the owner’s
permission. In particular, the act states that no individual or group can copy, use, or
otherwise benefit from a trade secret without the owner’s authorization if they meet
any of the following conditions:
1.
2.
3.
4.
5.
They are bound by a duty of confidentiality (e.g., employees, lawyers).
They have signed a nondisclosure agreement.
They acquire the secret through improper means such as theft or bribery.
They acquire the information from someone who did not have the right to disclose it.
They learn about the secret by mistake but have reason to know that the information was a protected trade secret.
In most regions, if owners of a trade secret believe that another party has stolen
or improperly disclosed their trade secret, they can ask a court to issue an injunction
against further use of the secrets, and they may also be able to collect damages for
any economic harm suffered by the improper use of the trade secret. For example, in
November 2002, Procter & Gamble sued Potlatch Corporation, claiming that Potlatch
had stolen trade secret methods used to produce Bounty paper towels and Charmin
Chapter 9 Protecting Innovation 211
bath tissue by hiring away two of Procter & Gamble’s paper manufacturing experts.
Potlatch is a large, private-label tissue manufacturer that produces toilet paper, facial
tissues, napkins, and paper towels for grocery store chains such as Albertsons and
Safeway. By March 2003, the two companies had reached an agreement to settle out of
court, keeping the terms of the settlement confidential.16
THE EFFECTIVENESS AND USE OF PROTECTION MECHANISMS
open source
software
Software whose
code is made
freely available
to others for use,
augmentation,
and resale.
The methods used to protect innovation—and their effectiveness—vary significantly
both within and across industries.17 In some industries, such as pharmaceuticals, legal
protection mechanisms such as patents are very effective. In other industries, such
as electronics, patents and copyright provide relatively little protection because other
firms can often invent around the patent without infringing on it (as IBM discovered
when Compaq was able to produce a computer nearly identical to its personal computer design). It is also notoriously difficult to enforce patents protecting industrial
processes such as manufacturing techniques. If patents provide little protection, the
firm may rely more heavily on trade secrets; however, the ability to protect trade secrets
also varies with the nature of the technology and the industry context. To protect a
trade secret, a firm must be able to expose its product to the public without revealing
the underlying technology, but in many cases, revealing the product reveals all.
For some competitive situations, protecting a technology may not be as desirable
as liberally diffusing it. In industries characterized by increasing returns, firms sometimes choose to liberally diffuse their technologies to increase their likelihood of rising to the position of dominant design. As discussed in Chapter Four, learning-curve
effects and network externalities can cause some industries to demonstrate increasing
returns to adoption: The more a technology is adopted, the more valuable it becomes.18
This dynamic can lead to winner-take-all markets that create natural monopolies.
A firm that controls the standard can reap monopoly rents and can exert significant
architectural control over both its own industry and related industries.19
This enviable position can be so lucrative that firms may be willing to lose money
in the short term to improve their technology’s chance of rising to the position of
dominant design. Thus, firms may liberally diffuse their technologies (through, e.g.,
open source software or liberal licensing arrangements) to accelerate the technology’s proliferation and thereby jump-start the self-reinforcing feedback effect that can
lead to the technology’s dominance. However, the firm often faces a dilemma: If it
liberally diffuses the technology to would-be competitors, it relinquishes the opportunity to capture monopoly rents when and if the technology emerges as a dominant
design. Furthermore, once control of a technology is relinquished, it can be very hard
to regain; thus, such diffusion may result in the firm losing all hope of controlling the
technology. Finally, liberal diffusion of the technology can result in the fragmentation
of the technology platform: As different producers add improvements to the technology that make it better fit their needs, the “standard” may be split into many nonstandardized versions (as with UNIX, as described in more detail later in the chapter).
To resolve these trade-offs, firms often adopt a strategy of partial protection for their
innovations, falling somewhere on the continuum between wholly proprietary systems
and wholly open systems.
212 Part Two Formulating Technological Innovation Strategy
Wholly Proprietary Systems versus Wholly Open Systems
wholly proprietary systems
Goods based
on technology
that is owned
and vigorously
protected through
patents, copyrights, secrecy,
or other mechanisms. Wholly
proprietary technologies may be
legally produced
and augmented
only by their
developers.
wholly open
systems
Goods based on
technology that
is not protected
and that is freely
available for
production or
augmentation by
other producers.
Wholly proprietary systems are those based on technology that is company-owned
and protected through patents, copyrights, secrecy, or other mechanisms. Such technologies may be legally produced or augmented only by their developers. Wholly
proprietary systems are often not compatible with the products offered by other manufacturers. Because their operation is based on protected technology, other manufacturers are often unable to develop components that may interact with the proprietary
system. Proprietary systems typically provide their developers with the opportunity to
appropriate rents from the technology. However, they might also be less likely to be
adopted readily by customers as a result of their higher costs and the inability to mix
and match components.
In wholly open systems, the technology used in a product or process is not
protected by secrecy or patents; it may be based on available standards or it may be
new technology that is openly diffused to other producers. Wholly open technologies may be freely accessed, augmented, and distributed by anyone. Such technologies
are usually quickly commoditized and provide little appropriability of rents to their
developers.
Many technologies are neither wholly proprietary nor wholly open—they are partially open, utilizing varying degrees of control mechanisms to protect their technologies. It is useful to think of a control continuum that stretches from wholly proprietary
to wholly open (see Figure 9.2). For instance, most of the major video game console
producers (Nintendo, Sony, and Microsoft) utilize a wholly proprietary strategy for
their consoles, but a limited licensing policy for their games. The licensing policies are
designed to encourage developers to produce games for the systems, while enabling
the console producers to retain a great deal of control over the games produced. All
games developed for the consoles must be approved by the console producer before
they can be made commercially available. For example, in the case of Microsoft,
would-be Xbox games developers must first apply to the Xbox Registered Developer
FIGURE 9.2
Examples on
the Continuum
from Wholly
Proprietary to
Wholly Open
Wholly
Proprietary
Limited Licensing
Moderate
Licensing
Liberal
Licensing
Wholly Open
Microsoft’s
Xbox video game
console;
Monsanto’s
Roundup before
1999
Videogames for
the Microsoft
Xbox console;
Monsanto’s
Roundup from
January 1999 to
September 2000
Microsoft
Windows
Sun’s Java
Glyphosate
(the base
ingredient of
Monsanto’s
Roundup) after
September 2000
Chapter 9 Protecting Innovation 213
original
equipment
manufacturers
(OEMs)
Firms that
assemble goods
using components made by
other manufacturers, also called
value-added
resellers (VARs).
Program (for established games developers) or the Xbox Incubator Program (for
smaller or newer games developers). If accepted into one of these two programs, the
developer will receive access to development tools, but this does not guarantee the
approval of any resulting game titles. The games are subjected to a separate, rigorous
approval process.
By contrast, the licensing policies for Microsoft’s Windows are more open. Windows is protected by copyright, and Microsoft defends its exclusive right to augment
the software; however, it also permits complementary goods providers to access portions of the source code to facilitate development of complementary goods, licenses
the rights to such providers to produce complementary applications, and licenses
original equipment manufacturers (OEMs) to distribute the software by bundling
it with hardware. Those who purchase a license for the software can execute and bundle the software with other goods but may not augment the software. For example,
software applications developers may produce and distribute value-added applications
for use with Windows as long as those applications do not affect the functionality of
the Windows program itself.
As described in the Theory in Action section later in the chapter, Sun’s “community
source” (as opposed to “open source”) policy for Java is even more open. This policy
grants anyone immediate access to the complete source code for Java and allows users
to develop commercial applications based on the code, or to augment the code for
their own implementations. These developers pay no license fee to Sun. However, any
augmentation to the core structure of Java must be approved by the Java Community
Process, which is managed by Sun. Sun’s “community source” principle is meant to
encourage the broader software community to improve Java and develop complementary applications, but it allows Sun to retain some control over the core platform to
ensure that the platform does not become fragmented through unmanaged development by the software community.
Many technologies that were once wholly proprietary or partially open become
wholly open once their patents or copyrights expire. For instance, Monsanto’s highly
profitable Roundup herbicide is based on a patented chemical ingredient called glyphosate. This extremely potent herbicide was adopted by farmers in more than 100 countries and accounted for a substantial portion of Monsanto’s sales.20 However, facing
impending expiration of its patents, Monsanto began to license the rights to glyphosate production to a few other companies (including Dow Agrosciences, DuPont, and
Novartis) in 1999. In September 2000, the U.S. patent on glyphosate expired, and any
chemical company was free to produce and sell glyphosate-based herbicides in the
United States, making glyphosate a wholly open technology.
Advantages of Protection
Because proprietary systems offer greater rent appropriability, their developers often
have more money and incentive to invest in technological development, promotion,
and distribution. If a single firm is the primary beneficiary of its technology’s success, it has much greater incentive to invest in further developing the technology. The
profits from the technology may be directly reinvested in further improvements in the
technology. The sponsor of a proprietary technology might also adopt a penetration
pricing strategy (i.e., it may offer the technology at a low price or free) to rapidly build
Theory in Action
IBM and the Attack of the Clones
In 1980, IBM was in a hurry to introduce a personal computer. When personal computers first began to emerge
at the end of the 1970s, most of the major computer
manufacturers considered it no more than a peculiar
product for a hobbyist market. The idea that individuals
would want personal computers on their desks seemed
ludicrous. However, as total U.S. personal computer
sales reached $1 billion, IBM began to worry that the
personal computer market could actually turn out to
be a significant computer market in which IBM had no
share. To bring a personal computer to market quickly,
IBM decided to use many off-the-shelf components from
other vendors, including Intel’s 8088 microprocessor
and Microsoft’s software. However, IBM was not worried
about imitators because IBM’s proprietary basic input/
output system (BIOS), the computer code that linked the
computer’s hardware to its software, was protected by
copyright. While other firms could copy the BIOS code,
doing so would violate IBM’s copyright and incur the
legendary wrath of IBM’s legal team.
architectural
control
The ability of a
firm (or group of
firms) to determine the structure, operation,
compatibility,
and development
of a technology.
214
However, getting around IBM’s copyright turned out
not to be difficult. Copyright protected the written lines
of code, but not the functions those codes produced.
Compaq was able to reverse-engineer the BIOS in a matter of months without violating IBM’s copyright. First, a
team of Compaq programmers documented every function the IBM computer would perform in response to a
given command, without recording the code that performed the function. This list of functions was then given to
another team of “virgin” programmers (programmers who
were able to prove that they had never been exposed to
IBM’s BIOS code).a These programmers went through the
list of functions and wrote code to create identical functions. The result was a new BIOS that acted just like an
IBM BIOS but did not violate its copyright. Compaq sold a
record-breaking 47,000 IBM-compatible computers in its
first year, and other clones were quick to follow.
a
R. Cringely, Accidental Empires (New York: HarperCollins,
1992).
its installed base, it may spend aggressively on advertising to increase awareness of
the technology, and it may even subsidize the production of complementary goods to
increase the desirability of its technology to customers. A firm may be willing to lose
money in the short term to secure the technology’s position as the standard, because
once the technology has emerged as a standard, the payoff can be substantial and
enduring. By contrast, when multiple firms can produce a technology, losing money
on the technology in the short term to promote it as a standard is highly risky because
the long-term distribution of the payoffs is uncertain. While the technology’s developer may have borne the bulk of the cost in developing the technology, multiple firms
may vie for the profits to be made on the technology.
Protecting the technology also gives the developing firm architectural control over
the technology. Architectural control refers to the firm’s ability to determine the
structure and operation of the technology, and its compatibility with other goods and
services. It also refers to the firm’s ability to direct the future development path of
the technology. Architectural control can be very valuable, especially for technologies in which compatibility with other goods and services is important. By controlling
the technology’s architecture, the firm can ensure that the technology is compatible
with its own complements, while also restricting its compatibility with the complements produced by others.21 The firm can also control the rate at which the technology is upgraded or refined, the path it follows in its evolution, and its compatibility
with previous generations. If the technology is chosen as a dominant design, the firm
Chapter 9 Protecting Innovation 215
with architectural control over the technology can have great influence over the entire
industry. Through selective compatibility, it can influence which other firms do well
and which do not, and it can ensure that it has a number of different avenues from
which to profit from the platform.
Microsoft’s Windows is the quintessential embodiment of this strategy. Because
Windows is the dominant operating system in the personal computing market and
because it serves as the interface between a computer’s hardware and software, Microsoft has considerable market power and architectural control over the evolution of the
personal computer system. Among other things, Microsoft has been able to incorporate ever more utility programs into the core program, thereby expanding and taking
over the roles of many other software components. Once a user purchased an operating
system, uninstaller programs, disk-compression programs, and memory management
programs separately, but Windows 95 and 98 integrated all these products and more
into the operating system. This “feature creep” had a major impact on competition in
the industry; many utility producers such as Qualitas, Stac Electronics, Microhelp,
Quarterdeck, and others were forced to abandon their once-profitable products.
Advantages of Diffusion
The primary argument for diffusing a technology instead of protecting it is that open
technologies may accrue more rapid adoptions. If multiple firms are producing, distributing, and promoting the technology, the technology’s installed base may accumulate much more rapidly than if one firm alone is responsible for such activities.
Competition among producers may drive the price of the technology down, making
it more attractive to customers. Both customers and complementary goods providers
may also perceive the technology as better (or its future more certain) if there are
multiple companies backing the technology. This perception can lead to much more
rapid adoption of the technology by customers and complementary goods providers, which further stimulates more companies to back the technology. Thus, a liberal
diffusion strategy can stimulate the growth of the installed base and availability of
complementary goods.22
Google used a liberal diffusion strategy to help its Android operating system for
smartphones become widely adopted. Google’s liberal licensing policy for Android
attracted many handset manufacturers and applications developers to the system,
enabling its ecosystem to grow rapidly. A larger ecosystem with more phone models,
price points, and applications, in turn, attracted a wider range of customers.
Open technologies can also benefit from the collective development efforts of parties external to the sponsoring firm. For instance, Netscape Navigator, UNIX, and
Linux are all technologies that have benefited significantly from external development. By making the source code freely available to the vast world of developers who
could benefit from the technology, the technologies reaped the advantages of having
a much larger pool of talent and resources directed at improving the technologies than
could have been rallied by the original developers.
External development, however, poses some costs and risks. First, external development efforts typically lack the coordination of internal development. External developers may have very diverse objectives for the technology; rather than work together
toward some unified vision of what the technology could achieve in the future, they
216 Part Two Formulating Technological Innovation Strategy
might work in different, possibly even conflicting, directions.23 Much of their effort
may be redundant, as different external developers work on solving the same problems
without communicating with each other. Finally, whether and how these improvements
get incorporated into the technology and disseminated to other users of the technology
can prove very problematic. UNIX provides a stark example of this.
UNIX was an operating system first developed by AT&T’s Bell Laboratories in
1969. Though a Department of Justice injunction forbade AT&T from selling software commercially, it made the source code for the product available through licensing arrangements. Early licensees (notably, University of California—Berkeley) began
using and adapting the software for their purposes, causing many incompatible versions
of the software to emerge. Though the software community made several attempts to
standardize the UNIX operating language, their efforts failed. AT&T also challenged
the commercialization of several UNIX variants, but to no avail. Ultimately, AT&T
sold the division responsible for UNIX to Novell, and Novell handed over the rights to
the UNIX trademark to the X/Open standards-setting body.24
Given the range of advantages (and risks) of protecting versus diffusing a technology, a firm must carefully consider the following factors in deciding whether, and to
what degree, it should protect its innovation.
Production Capabilities, Marketing Capabilities, and Capital
If the firm is unable to produce the technology at sufficient volume or quality levels
(or market the technology with sufficient intensity), then protecting the technology so
that the firm is its sole provider may significantly hinder its adoption. For example,
when JVC was promoting its VHS standard for video recorders, its management knew
JVC was at a disadvantage in both manufacturing and marketing capabilities compared
to Sony (which was promoting the Beta technology). JVC chose to vigorously pursue
both licensing and OEM agreements, lining up Hitachi, Matsushita, Mitsubishi, and
Sharp to boost the technology’s production rate.
Similarly, if complementary goods influence the value of the technology to users,
then the firm must (a) be able to produce the complements in sufficient range and quantity, (b) sponsor their production by other firms, or (c) encourage collective production
of the complements through a more open technology strategy. The only firms that have
been successful in the U.S. video game industry were those that were able to produce
games in-house (ensuring that a wide range of games would be available at the console’s launch) and that encouraged third-party development of games (to ensure that
the number of game titles grew quickly). Both Nintendo and Sega had previous arcade
experience, and thus possessed considerable game development expertise. Microsoft
had long been a producer of PC-based video games, so it had some game developing
experience, and it also acquired a few small game developers (e.g., Bungie) to expand
its expertise in developing console-type games.25 Sony had no prior game experience,
but aggressively acquired in-house developers, licensed external developers, and set up
a program with Metrowerks to provide developer tools that would make it easier for
external developers to produce PlayStation games. If a firm lacks the production capability or expertise to produce a sufficient range of complementary goods, or the capital
to acquire such capabilities quickly, it should encourage collective production of complements through a more open technology strategy and utilize forms of sponsorship.
Chapter 9 Protecting Innovation 217
Industry Opposition against Sole-Source Technology
Sometimes other industry members are able to exert strong pressure against the adoption of a technology that would give one (or a few) producer(s) undue control and
power, causing a technology that is restricted to such production to be rejected or more
hotly contested than a more open technology. This was the case with Sony and Philips’
Super Audio CD (SACD) audio format. Sony and Philips had jointly created the original compact disc (CD) format and split the royalties on every CD player sold, totaling
hundreds of millions of dollars. The rest of the world’s leading consumer electronics
producers (including Hitachi, JVC, Matsushita, Mitsubishi, and Toshiba) and record
producers (including Time Warner and Seagram’s Universal Music group) banded
together to form the Digital Video Disk (DVD) Audio consortium. This consortium’s
purpose is to promote the DVD Audio standard that is intended to displace the CD and
enable royalties to be split among the 10 companies that control the patents.26 Industry
observers note that a driving force underlying the formation of the consortium was to
prevent Sony and Philips from controlling yet another generation of audio formats.
The degree of industry opposition to a sole-source technology needs to be considered
when the firm formulates its technology strategy. If the industry is able to pose significant opposition, the firm may need to consider a more open technology strategy to
improve the technology’s likelihood of being chosen as a dominant design.
Resources for Internal Development
If a firm does not have significant resources (capital, technological expertise) to invest
in the technology’s functionality, it may have difficulty producing a technology that has
an initial performance level, and rate of improvement, that the market finds attractive.
In such instances, it can be valuable to tap the external development efforts of other
firms (or individuals) through utilizing a more open technology strategy. For example,
when Netscape found itself in a race to match browser capabilities with Microsoft, it
was at a tremendous disadvantage in both human resources and capital. Microsoft had
legions of internal developers and a lot of money to invest in Explorer; there was no
way that Netscape could match those resources internally. Instead, Netscape tapped
the external development community by giving them access to its source code and
incorporating their improvements into the Navigator product.
Control over Fragmentation
For technologies in which standardization and compatibility are important, maintaining the integrity of the core product is absolutely essential, and external development
can put it at risk. As the UNIX example illustrates, if the developing firm relinquishes
all control over the development of the technology, the technology will have no shepherd with the ability and authority to direct its trajectory and ensure that a single standard remains intact. This suggests that the developer of any technology that requires
standardization and compatibility should retain some degree of control over the technology, or find/establish another governing body with the authority to do so.
Incentives for Architectural Control
Architectural control over the evolution of a technology is always valuable; however,
it becomes particularly valuable if a firm is a significant producer of complements to
218 Part Two Formulating Technological Innovation Strategy
the technology in question. A firm with architectural control can typically design the
technology to be compatible with its own complements and incompatible with those of
competitors. If the technology is chosen as the dominant design, this architectural control allows the firm to ensure that it reaps the lion’s share of the rewards in complements
production. Furthermore, by making the technology selectively compatible with some
competitors and not others, the firm can exert great influence over the competitive field.
Architectural control can also enable the firm to direct the development efforts put
into the technology so that it exploits the firm’s core competencies. Technology trajectories are path dependent; minor events in their evolution can set them careening off
into unexpected directions. A firm that has a significant stake in a particular evolution
path (because, e.g., it has technological competencies that are much more amenable to
one path of evolution than other potential paths) may place a high value on architectural control, which can enable it to co-opt or destroy less favorable development paths
by denying their progenitors access to the market.
Summary
of
Chapter
1. The degree to which a firm can capture the rents from its innovation efforts is
largely determined by the degree to which competitors can quickly and easily imitate the innovation. Some innovations are inherently difficult to copy; others are
difficult to copy because of the mechanisms the firm uses to protect its innovation.
2. The three primary legal mechanisms used to protect innovation in most countries
are patents, trademarks, and copyrights. Each mechanism is designed to protect a
different type of work or good.
3. International treaties have helped to harmonize patent, trademark, and copyright
laws around the world. Most countries now have patent, trademark, and copyright
laws of some form, and in some instances protection can be applied for in multiple
countries simultaneously.
4. Trade secrets provide another mechanism of protecting innovation. Firms that
protect their intellectual property as a trade secret often have legal recourse if
another party wrongfully takes and uses such property.
5. Legal mechanisms for protecting innovation are more effective in some industries
than others; in some industries, inventing around a patent or copyright is relatively
easy. Similarly, in some industries, it is nearly impossible to protect an innovation
by using trade secrets because commercializing the innovation reveals its underlying technologies.
6. Sometimes the choice between protecting versus diffusing a technology is not
obvious. Both strategies offer potential advantages. Many firms use neither a
wholly open nor a wholly proprietary strategy, but rather a partially open strategy.
7. Protecting an innovation helps ensure that the firm earns the lion’s share of the
returns from the innovation. These returns can then be reinvested in further
developing the technology, promoting the technology, and producing complementary goods.
8. Protecting an innovation also preserves the firm’s architectural control, enabling
it to direct the technology’s development, determine its compatibility with other
Chapter 9 Protecting Innovation 219
goods, and prevent multiple incompatible versions of the technology from being
produced by other firms.
9. Diffusing a technological innovation can encourage multiple firms to produce,
distribute, and promote the technology, possibly accelerating its development and
diffusion. Diffusion can be particularly useful in industries that accrue increasing
returns to adoption. It is also useful when the firm has inadequate resources to be
the sole developer, producer, distributor, and marketer of a good.
Discussion
Questions
1. What are the differences between patents, copyrights, and trademarks?
2. What factors should a firm considering marketing its innovation in multiple countries use in formulating its protection strategy?
3. When are trade secrets more useful than patents, copyrights, or trademarks?
4. Identify a situation in which none of the legal protection mechanisms discussed
(patents, copyrights, trademarks, trade secrets) will prove useful.
5. Describe a technological innovation not discussed in the chapter, and identify
where you think it lies on the control continuum between wholly proprietary and
wholly open.
6. What factors do you believe influenced the choice of protection strategy used for
the innovation identified above? Do you think the strategy was a good choice?
Suggested
Further
Reading
Classics
Levin, R., A. Klevorick, R. Nelson, and S. Winter, “Appropriating the Returns from
Industrial Research and Development,” Brookings Papers on Economic Activity,
Microeconomics 3 (1987), pp. 783–820.
Bound, J., C. Cummins, Z. Griliches, B. H. Hall, and A. Jaffe, “Who Does R&D
and Who Patents?” in R&D, Patents, and Productivity, ed. Z. Griliches (Chicago:
University of Chicago Press for the National Bureau of Economic Research, 1984).
Jaffe, A. B., and J. Lerner, Innovation and Its Discontents: How Our Broken Patent
System Is Endangering Innovation and Progress, and What to Do about It (Princeton,
NJ: Princeton University Press, 2004).
Schilling, M.A., “Protecting or Diffusing a Technology Platform: Tradeoffs in Appropriability, Network Externalities, and Architectural Control,” in Platforms, Markets
and Innovation, ed. A. Gawer (Cheltenham, UK: Edward Elgar Publishing, 2009).
Teece, D. J., “Profiting from Technological Innovation—Implications for Integration, Collaboration, Licensing and Public-Policy,” Research Policy 15, no. 6 (1986),
pp. 285–305.
Recent Work
Farre-Mensa, J., D. Hegde, and A. Ljungqvist, “What Is a Patent Worth? Evidence
from the U.S. Patent ‘Lottery’ (March 14, 2017),” USPTO Economic Working Paper
2015-5. Available at SSRN: or
10.2139/ssrn.2704028
220 Part Two Formulating Technological Innovation Strategy
Fisher, W.W., and F. Oberholzer-Gee, “Strategic Management of Intellectual Property,” California Management Review 55, no. 4 (Summer 2013), pp. 157–83.
Graham, S., and D. Hegde, “Disclosing Patents’ Secrets,” Science 347 (2015), no. 6219,
pp. 236–37.
Holgersson, M., O. Granstrand, and M. Bogers, “The Evolution of Intellectual Property Strategy in Innovation Ecosystems: Uncovering Complementary and Substitute
Appropriability Regimes,” Long Range Planning 51 (2018):303–19.
Somaya, D. “Patent Strategy and Management: An Integrative Review and Research
Agenda,” Journal of Management 38 (2012), pp. 1084–114.
Endnotes
1. J. B. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management
17 (1991), p. 990.
2. “Software Patent,” Bank Technology News 14, no. 3 (2001), p. 25.
3. A. B. Silverman, “Software Patents for Methods of Doing Business—A Second Class Citizen
No More,” Journal of Management 52, no. 19 (2000), p. 64.
4. M. Carley, D. Hegde, and A. Marco, “What is the probability of receiving a US Patent?” Yale
Journal of Law & Technology, 17 (2015), pp. 204–223.
5. D. Alderucci and W. Baumol, “Patents and the dissemination of inventions,” Journal of Economic Perspectives, 27 (2013), no. 4, pp. 223–26; D. Alderucci, “Monetization Strategies for
Business Method Patents,” The Licensing Journal (2000), November.
6. S. Graham and D. Hegde, “Disclosing Patents’ Secrets,” Science 347 (2015), no. 6219,
pp. 236–37.
7. “Apple Complains of “Patent Trolls,” LA Times (2014), February 8.
8. A. Jones, “Tech Firms Back Obama Patent Move,” Wall Street Journal, June 4.
9. W. New, “White House Takes Major Action Against “Patent Trolls,” Intellectual Property
Watch, (2013), June 4; “Hatch Introduces Measure to Stop Patent Trolls,” The Ripon Advance
(2013), November 4; E. Wyatt, “FTC Settles First Case Targeting ‘Patent Troll’,” New York
Times (2014), November 6.
10. S. Decker and B. Womack, “Google Buys 1,023 IBM Patents to Bolster Defense of Android,”
BloombergBusiness (2014): September 14.
11. Q. Hardy, “Google Buys Motorola for Patent Parts,” Forbes (2011), August 15.
12. J. Mullin, “Patent War Goes Nuclear: Microsoft, Apple-owned “Rockstar” Sues Google,”
Arstechnica (2013), October 31.
13. J. Roberts, “Apple-backed Rockstar Ends Patent War on Android, Deal Suggests,” GigaOM
(2014):November.
14. U.S. Copyright Office.
15. The Trade Secrets home page.
16. S. Decker, “Procter & Gamble, Potlatch Resolve Trade Secrets Suit,” Seattle Post Intelligencer,
March 14, 2003.
17. R. Levin, A. Klevorick, R. Nelson, and S. Winter, “Appropriating the Returns from Industrial Research and Development,” Brookings Papers on Economic Activity, Microeconomics 3
(1987), pp. 783–820; and J. Bound, C. Cummins, Z. Griliches, B. H. Hall, and A. Jaffe, “Who
Does R&D and Who Patents?” in R&D, Patents, and Productivity, ed. Z. Griliches (Chicago:
University of Chicago Press for the National Bureau of Economic Research, 1984).
Chapter 9 Protecting Innovation 221
18. W. B. Arthur, Increasing Returns and Path Dependency in the Economy (Ann Arbor: The
University of Michigan Press, 1994).
19. C. H. Ferguson and C. R. Morris, Computer Wars (New York: Random House, 1993); and
R. Henderson and K. Clark, “Architectural Innovation: The Reconfiguration of Existing Product Technologies and the Failure of Established Firms,” Administrative Science Quarterly
35 (1990), pp. 9–30.
20. S. Brooks, M. A. Schilling, and J. Scrofani, “Monsanto: Better Living through Genetic Engineering?” in Strategic Management, Competitiveness and Globalization, 5th ed., eds. M. Hitt,
R. Hoskisson, and R. D. Ireland (Minneapolis/St. Paul: West Publishing, 2001).
21. M. A. Schilling, “Toward a General Modular Systems Theory and Its Application to Interfirm
Product Modularity,” Academy of Management Review 25 (2000), pp. 312–34.
22. C. W. L. Hill, “Establishing a Standard: Competitive Strategy and Technological Standards in
Winner-Take-All Industries,” Academy of Management Executive 11, no. 2 (1997), pp. 7–25;
and M. A. Schilling, “Winning the Standards Race: Building Installed Base and the Availability
of Complementary Goods,” European Management Journal 17 (1999), pp. 265–74.
23. R. Garud, S. Jain, and A. Kumaraswamy, “Institutional Entrepreneurship in the Sponsorship
of Common Technological Standards: The Case of Sun Microsystems and Java,” Academy of
Management Journal 45 (2002), pp. 196–214.
24. D. Essner, P. Liao, and M. A. Schilling, “Sun Microsystems: Establishing the Java Standard,”
Boston University teaching case no. 2001–02, 2001.
25. J. Kittner, M. A. Schilling, and S. Karl, “Microsoft’s Xbox,” New York University teaching
case, 2002. 45.
26. J. Brinkley, “Disk versus Disk: The Fight for the Ears of America,” New York Times,
August 8, 1999.
Part Three
Implementing
Technological
Innovation Strategy
In this section, we will cover the key aspects of implementing a technological
innovation strategy, including:
∙ Structuring the firm to improve its likelihood of innovating, its effectiveness at
new product development, and its speed of new product development.
∙ Managing new product development processes to maximize fit with customer
needs, while simultaneously minimizing development cycle time and controlling development costs.
∙ Composing, structuring, and managing new product development teams to
maximize new product development effectiveness.
∙ Crafting a strategy for effectively deploying the innovation into the marketplace, including timing, licensing strategies, pricing strategies, distribution,
and marketing.
Implementing Technological Innovation Strategy

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