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Did Apple and Google really spend more on patents than R&D? Yes – but it’s not all it seems

There’s been a meme doing the rounds based on the New York Times’ story on “the iEconomy” which claims that in 2011, both Google and Apple spent more on patent protection than R&D. This, on the face of it, looks like a savage indictment of the whole parent system – legal nonsense taking priority over real research.

There was something, though, that didn’t quite add up for me. Call it an old journalist’s nose for something fishy, but… it just didn’t smell right.

The paragraph this claim was made in is this:

In the smartphone industry alone, according to a Stanford University analysis, as much as $20 billion was spent on patent litigation and patent purchases in the last two years — an amount equal to eight Mars rover missions. Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products, according to public filings.

Aha. There’s the bit which set off my journo-sense.

As that paragraph notes, there were several unusually large patent portfolio deals in 2011. Apple, for example, contributed $2.6 billion towards the purchase of Nortel’s patent portfolio, in a consortium deal which also included Microsoft, RIM, Sony and EMC. That deal – worth a total of $4.5 billion – was a one-off. Portfolios like that rarely come on the market.

Likewise, Google spent $12.5 billion buying Motorola Mobility, a deal which Larry Page described as being about “strengthening Google’s patent portfolio” (Google actually accounted the patents as $5.5 billion of the purchase). Again, that’s a one-off: there aren’t many Motorola’s around and available for purchase. Likewise, the deal which saw Google buy over 1,000 patents from IBM.

So yes, Google and Apple did spend more on patents in 2011 than R&D. But that’s very likely to be a one-off, simply because 2011 was an unusual year which saw several highly-desirable patent portfolios come on the market. What the NYT didn’t say is that Apple also increased its R&D spending in 2011 by 33%, and that Google’s R&D spending continues to trend upwards massively, with the company spending a whopping 12% of all its revenue in R&D last year.

Read the NYT piece, and you would think that the technology market has shifted from being about research and development of new products to being about acquisition of patents. Given that this is based on a single year, when some very big patent portfolios came on the market in one-off deals that aren’t likely to be repeated in the future, that’s a long way from the truth.

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  • Walt French

    And no recognition given to how much it cost Moto, Nortel et al. to research all those patents that the buyers paid for, either. Say what you want about non-practicing entities, but they all provided support to companies such as Nortel that committed their engineers while only hoping that there was a payback for all the work. No market for patents? R&D dollars just became noticeably riskier.

    I’m astonished that even in professional discussions about intellectual property, elementary notions of business go by the wayside. Fr’instance, a recent Federal Reserve paper found no evidence that patentability figured in businesses, without asking the simple question, “when company X considers some new product/service, how do they ensure that THEIR investment dollars, not competitors’, are rewarded if/when the widget is a success?” A service such as Google’s search might never have gotten the venture capital to build its critical mass, if the VCs had to worry that Microsoft would jump into the business — which Microsoft didn’t, at least in part because of the (Larry) Page Rank patent.

  • http://www.technovia.co.uk Ian Betteridge

    All good points, Walt, especially the last one.

  • TeeJay2000

    Read the NYT about anything related to Apple, and the complete truth seems a long way off. I do not remember seeing anything like a retraction or correction, related to parts of their iEconomy series based on Mike Daisey’s ‘fabrications’. As far as patents and IP, I think a lot of people wonder about the value of R&D spending if the only IP protection in the US is from ‘molasses speed’ courts or an ITC that is reluctant to enforce anything.

  • http://www.facebook.com/InklingBooks Michael W. Perry

    What you’ve said doesn’t negate the fact that these giant high-tech companies are spending a heck of a lot of money buying patents. Toss in how dubious, for a societal benefit POV, many of these patents are, and there’s a heck of a lot of money being wasted.

  • http://www.facebook.com/profile.php?id=1048146459 Russell Greim

    “societal benefit”?? Since when do corporations spend millions (billions?) of dollars on R&D for societal benefit? They spend that money to make money. Patents are their assurances that their competitors won’t come and outright steal their hard earned ideas and copy cat their invested product. Intellectual Property is REAL and those who wish to live in a world where ideas flow freely without financial compensation and anyone can just build off the ideas of another have no skin in the game. They have obviously never achieved anything or had an idea of their own in their life that was worth protecting.

  • http://www.technovia.co.uk Ian Betteridge

    Why do you think it’s wasted? 

    Think about it: Who profited from Apple paying $2.6 billion to Nortel? The former shareholders of Nortel who would otherwise have got nothing. Who benefits from Google paying for Motorola? The shareholders of Moto – who happen to be mostly pension funds, which means folks like you and me.

    Money never disappears, and it’s always doing something. 

  • http://abhi.id.au/ Abhi Beckert

    There are a lot of people in copyright/patent discussions who do not know what they’re talking about.

    But there are also people on both sides who do understand it. Those of us on the anti-patent (perhaps better described as anti-intelectual property) are not saying that patents and copyright are useless.

    We agree, patents and copyright do allow investors to receive wonderful returns for otherwise highly risky investments.

    The problem is, those returns come at the expense of other investments.

    If google did not have patents making it virtually impossible to create a good search engine, I would be able to create my own search engine that is as good as Google’s in all the ways that count, but different in some way to target a slightly different segment of the market.

    If Apple did not have copyright on their operating system, I would be able to create Mac and iOS hardware to run their software. My hardware would be better than Apple’s in some way (price comes to mind, as does screen size, or perhaps a shockproof device could be created? Or one with a massive/heavy battery?).

    If Sony/BMI did not have copyright on their music collection, I would be able to offer a competing music store to iTunes, Amaazon, and Sanity that is in some way better than theirs.

    Right now, I am not able to get any venture capital for any of those businesses because my investors and I would probably be sent to prison or at least be bankrupted by statutory damages if we tried it. It is encouraging investment while at the same time blocking other investments.

    The amount of money advertisers are willing to spend on marketing (google/bing), the amount of money consumers are willing to spend on hardware (mac/ios), the amount of money consumers are willing to spend on music (Sony/BMI)… none of that would change. The only thing that would change is who the money goes to – it would be spread out among many small innovators instead of a single massive one.

    A lot of people seem to think that innovation and creativity would be brought to a stand-still if we took away the chance for creating a massive multi-bilion dollar monopoly. I am an engineer. I have been innovating and creating stuff professionally my entire adult life, and as a hobby before that.

    In my opinion, innovation and creativity are cheap. They will always happen. If you level the playing field to the point where everyone’s expenses are the same for creating a product, the only place left to differentiate your product from someone else’s is by making it a better product. Yes, they will rip it off – but by the time they do that you will have already implemented some other innovation, and consumers will still pick your product.

    Also, patents and intellectual property are prohibitively expensive. You will rarely see unsigned/independent artists or tiny software development companies protecting their intellectual property. They don’t have enough money to hire the lawyers, and they are too busy innovating to bother doing it without a lawyer.

    And yet, despite doing nothing to protect their IP and having stuff pirated and features copied, all of these small innovators are still producing excellent work and getting paid for it.

    I expect to spend my entire life creating intellectual property, and in my opinion I do not need the law to protect it.

  • http://www.technovia.co.uk Ian Betteridge

    “If google did not have patents making it virtually impossible to create a good search engine, I would be able to create my own search engine that is as good as Google’s in all the ways that count, but different in some way to target a slightly different segment of the market.”

    In the real world, here’s what would have happened. Larry Page would have developed PageRank at Stanford. He’d have launched Google. 

    A couple of weeks later, Microsoft would have launched a search engine, using the same methods as PageRank, because there was no IP protection on it. Because Microsoft already had IE, it would have been the default search engine. No one would have switched to Google – why bother, when Microsoft search can do the same job? And Google would have sank without trace. 

    In the real world, with no protection for IP, the big guy always wins – because the have the deepest pockets and incumbent advantage. 

  • Michael Long

    SInce you choose Moto, let’s go with that. Any shareholders or pension funds or IRAs or whatever who are still heavily into Moto deserve their fate, as the shares have been in decline for years. Most of the money, “which is always doing something”, is doing it somewhere else, at a more profitable company.

    Paying billions for a pile of patents solely as insurance against lawsuits is a terrible waste of dollars that could have spent elsewhere. Like raising salaries for folks like you and me.

  • Walt French

    I wouldn’t say the big guy always wins, but rather the one with the most muscle. Competition shifts from the best ideas to the most overwhelming copying/implementation.

    Not the world we want, no matter how you put it.

  • Mike Daisey

    That’s because none of the NYT work was based on my work. You may wish to read the articles in question—it’s very clear.

  • Walt French

    @openid-9370:disqus  wrote, “In my opinion, innovation and creativity are cheap.”

    If this is the foundation for your position—and I think it is—then you ought to have some better documentation for it.

    My personal experience is the opposite. I come from a couple of generations of research scientists; they (and my older brother) spent their entire lifetimes working on building up the incremental knowledge that pushed the ball forward. They were/are smart, dedicated, hard-working, and as such, were tasked with valuable challenges, where they pushed against the Unknown in order to get more productivity or appeal out of food and fibers, inventing analytical tools that’d never been done before as a part of it.

    My more modest talents had me start up a business based on applying some specialized economic analyses to stocks. (Page Rank, the intellectual machinery that cut Googol-sized problems down to practical size, utilizes a variation of the technique that I applied to investing a decade before them.) I spent about 5–7 man-years researching, testing and finally building a business around my invention. Rather than patent it (the first financial patents had just appeared, IIRC), I kept it as a trade secret that has served me for over two decades.

    Not all business approaches can use a trade secret, and patents were actually conceived to let the world see the bright idea while letting the person who invented it reap the rewards for a “reasonable” time — less than I’ve profited from my tack, as it works out. And had some conniving ex-employee gone to a big investment shop with my work, the lack of patent protection would’ve simply put me out of business.

    So now I have another project I’m working on, one that cannot be a trade secret. So far, I have about two man-years into it. You are blithely volunteering the notion that all my inspiration and work should be taken from me because innovations are cheap.

    Your claim is an insult to everybody who puts their energies to others’ benefits.

    If they’re so easy to come by, why haven’t you been down in the basement knocking ‘em out by the bushel, coming up just long enough to give them away to the billions of people on the planet who could stand their lives to be better?

  • Walt French

    Think a bit bigger, Mr. Perry.

    Cellphones alone are something like a $1 trillion business. If the R&D for it cost even $50 billion, that’d be 5% of revenues, a small fraction of annual profits. What a WONDERFUL use of engineers’ talents and businesses’ finances!

    Then, there’s computers with wifi, intricate CPUs. Movies that are increasingly created, distributed and viewed through intricate, highly-efficient software. Automobiles that get twice the gas mileage of their 20-year-ago forbears, while being much safer, more comfortable and luxurious — and adjusted for inflation, costing no more. Drugs that can target even somewhat rare diseases, thanks to incredible innovations in biotech.

    Yes, a lot of money is being wasted. But companies that waste money end up not competing very well, and sink below the waves. (Think Motorola, which for all its historical glory, was worth more dead than alive.) Much, much more of that money goes to providing us gadgets that let us stay in touch with our families & friends, zoom us around the world, live healthier lives for decades more than our parents did.

  • equanimous

    No one is saying the system is perfect, the price you highlight is the price of putting a protection mechanism in place. Benefits STILL outweigh the costs. What’s your alternative that so brilliantly manages the concerns of innovators and business worldwide while simultaneously never being used maliciously?

  • Walt French

    First, Google was deeply dishonest — or clueless, which I doubt — about its rationale for buying Moto. Independent analysts estimated the patent portfolio a third or much less of the purchase price; I think the other 2/3 was basically “goodwill” to not make it look like the Android OHA was falling apart when Moto threatened to sue firms — conceivably, other OHA members — who were using its patents.

    Did Google get a good deal? I totally agree with you, if it’s on the basis that they said, it was stinko. But on the REAL terms, I think, yes, it was a HUGE success that is only now being recognized by analysts. 

    There are many unknowns, but Android is clearly the most-used mobile OS on the planet; soon to top all flavors of Windows, even. Anything that gives anybody access to do business with 2/3 of the planet has an incredible, unprecedented reach, and the Moto deal appears to have forestalled Samsung from going its own way or US customers from avoiding the platform, and Apple from focusing its complaints.

    As to the real benefit of the patents: most of ‘em are old, either not used or easily worked around or pledged to be licensed at low cost. The backers got the rewards from them years ago, because they kept Moto going. Had the patents been unsalable, the backers wouldn’t have been so hung-ho on the R&D, and Moto would’ve folded years ago.

  • TeeJay2000

    While ‘this’ discussion is about IP,  there is a link to truth and integrity in journalism. Unsupported reports that aim to portray Apply in the worst
    possible light (regardless of your intentions), harm Apple, whether they deserve it or not. And yes Wall Street notices and personal portfolios shrink. But in a perverse way harms the Chinese workers as well, because we can continue to buy cheap tech with perhaps even less guilt –  because you and others re-enforce to the public that the bad news is (probably) just made up
    anyway…..

  • gdavid2

    You think that your employer would pay you more if there was no patent system? You better tell us who you work for.

  • TeeJay2000

    As a research scientist and clinician, I would have been elated to have discovery science smoothly translated to real products for patients. From more than 2 decades of experience and frustration, I can tell you that academia is even less prepared to move innovations forward, with hurdles of intellectual property protection from big and small guys, huge numbers of enabling licenses, sub-optimal investments, lack of business models that work in this setting… Yikes.  A complete re-think is needed.

  • Walt French

    And yet, this is the cesspool from which Sun Micro and so much more was spawned.

    I never said it was easy; in fact, that was my point. But I never heard my Dad say that patents were a problem altho he contributed to some w/o any direct comp.

  • tinycritterfromthesea

    It was painful listening to you obfuscate like a four year old caught in a lie on ‘This American Life’ as you tried to justify your passing off fiction as fact.

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  • http://www.halobrien.com/ Hal O’Brien

    “A couple of weeks later, Microsoft would have launched a search engine…”

    No, a couple of weeks later, Microsoft would’ve set up a committee to look at whether a search engine was worthwhile.  The Windows guys would’ve said, “Who cares?” The Office guys would’ve said, “Who cares?” The languages guys would’ve said, “Who cares?”

    And that would’ve pretty much been that.

    “In the real world, with no protection for IP, the big guy always wins – because the have the deepest pockets and incumbent advantage. “

    If only we had a real world example to test that theory…

    Oh, wait!  We do!  http://www.ted.com/talks/johanna_blakley_lessons_from_fashion_s_free_culture.html

  • http://www.technovia.co.uk Ian Betteridge

    Yes, fashion’s free culture.

    http://articles.latimes.com/2012/sep/07/business/la-fi-red-shoes-20120907

    Oh no wait…

    You have a short memory Hal. Remember how Microsoft killed Netscape? When you’re a behemoth, you don’t need to move fast: you simply need to have enough leverage to crush smaller competitors when they reach the kind of size that can irritate you.

    The list of smaller companies that Microsoft did that to in the 90’s/00’s is long enough to suggest your caricature of them is wishful thinking.

  • http://www.halobrien.com/ Hal O’Brien

    Unsurprisingly, I disagree.  Microsoft’s real genius, for the longest time, was that it didn’t act like a behemoth.  It acted liked a fanatically hungry start-up, regardless of scale.  In many ways, this is what led to the complaints about “anti-competitive” behavior — MSFT didn’t emulate IBM and become stodgy and complacent, like everyone at the time expected.  (MSFT has since managed to address this lack. {cough}) Boneheadedness on the small guys’ part wasn’t anti-competitive behavior on Microsoft’s part.

    Joel Spolsky’s piece on Netscape’s re-write is a good example of how Netscape’s woes were almost entirely self-inflicted.  http://www.joelonsoftware.com/articles/fog0000000069.html

    Now, if you want to say that size allows you the luxury of being able to wait long enough for your opponent to screw up and stumble upon scaling, I’d agree with that. Think of it as the business analog to why invading Russia is a bad idea.  Winter is the Russians’ best general.

    But none of that has anything to do with IP per se.  It has to do with the execution of ideas, not the originating of them.

  • http://www.halobrien.com/ Hal O’Brien

    And a trademark case from 4 weeks ago somehow invalidates decades of practice and billions in sales?  Hm.

    From the article cited:“Jyotin Hamid, a Yves Saint Laurent lawyer, said in an interview that the ruling is a win for his client because the court affirmed that its monochromatic red shoes did not infringe on copyright.” (emphasis added)

  • http://www.technovia.co.uk Ian Betteridge

    Joel can think what he likes, but a government investigation lasting several years and hearing plenty of testimony from the main players disagreed. I’ll go with them.

  • http://www.technovia.co.uk Ian Betteridge

    You claimed that fashion had a free culture. It doesn’t. They’re happy to sue each other over IP when they want to. Worth reading this: http://www.wipo.int/sme/en/documents/wipo_magazine/5_2005.pdf as a starting point. 

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  • Sophlady

    Doesn’t matter whether your lies were relied on in that particular ineptly researched article.  Your reputation as a serial prevaricator is here to stay.  You more than earned it.  

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  • http://www.facebook.com/profile.php?id=668806314 Paul Voluntarist Michel

    Intellectual Property is a misnomer. Calling an idea IP is akin to
    calling Native Americans Indians. I’d sell you people a clue if I
    believed in IP…Think of it like this, if I have 2 apples, and you take
    one, I have 1 left. If I have 2 ideas, and you copy one, I still have 2
    ideas. Making a profit from your R&D is the responsibility of the
    company, not mines. Why am I forced to pay for government via taxes to
    uphold the whole USPTO, not to mention resources such as courts, judges,
    etc that could be going towards prosecuting real criminals and
    exonerating innocent victims of the so called justice system instead of
    these make believe theives? A patent is just a government granted
    monopoly on an idea. Besides, there’s a huge advantage to being first to
    market, which would go a long way to recouping R&D investment. Ever
    heard of the fashion or fragrance industry? No patents there. Huge
    profits made every year. Besides, running a business is supposed to be a
    risk. The corporate welfare in this country is partly what is
    bankrupting it.

  • http://www.technovia.co.uk Ian Betteridge

    How about you lose the attitude you teenage idiot (“sell you people a clue”), spend some time learning to spell (“theives”) and stop believing everything you read which accords with your prejudices (thinking that fashion is somehow IP-free when in fact you’ll get the shit sued out of you if you make a heel with a red sole)?

    If you can’t do that, then fuck off, because *my* blog is not a platform for idiots to have a rant.

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