Software patents & Startup Innovators

A few weeks ago, I wrote about software patent advocates who argue that software patents have done little harm because there is no evidence of patent “thickets” in software. I, too, was skeptical that patent thickets have so far discouraged innovation much in software because most software firms have only recently begun acquiring patents. Instead, I pointed to significant evidence of harm arising elsewhere, especially from litigation, and that the thicket effects appeared to be in other industries.

It turns out I was wrong and so are the people I was criticizing. There is now solid evidence that software patents make innovation harder for startups in software.

Iain Cockburn and Megan MacGarvie have written a paper (“Patents, Thickets and the Financing of Early-Stage Firms: Evidence from the Software Industry”) that does a very thorough and careful job analyzing the effect of patents on new firms in software markets. This is a surprisingly difficult thing to do because so many things might affect a decision to enter a market. For example, one needs to look at specific software markets (e.g., encryption software) rather than at the software industry as a whole because patents are likely to have their strongest effect within a narrow market segment. Although several earlier studies are flawed, Cockburn and MacGarvie do a masterly job, looking at detailed market segments and controlling for lots of possible confounding factors.

The bottom line: They find that the more patents held in a market, the less likely new firms are to enter and the greater the delays those firms face in getting financing. On the other hand, if a prospective entrant holds patents of its own, that increases their odds of entry—that is, defensive patenting improves the odds.

Nevertheless, the result is surprising especially because the level of patenting was quite low during the sample period: only 16% of the firms in the sample ever filed for a patent. Given the recent explosive growth in patenting by software firms, this certainly raises some troubling concerns.

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