Standards and Patent Protection

Different factors will have an influence at different phases of the standards process. In the early phases, aimed at demonstrating technical feasibility, factors such as the technological superiority, complementary assets and credibility of the firm are most important, combined with the number and nature of other firms. In the next phase, creating a market and regulation are most important. In the decisive phase, the most significant factors are the installed base, complementary assets, credibility and influence of switching costs and network effects. However, in practice it is not always easy to trace such ex-ante factors to ex-post success in successfully establishing a standard. This is one reason that increasing collaboration is occurring earlier in the standard process, rather than the more historical winner takes all standard battles in the later stages. Research in the telecommunications and other complex technological environments where system wide compatibility is necessary confirms that early advocates of standards are more likely to create standards and achieve dominant positions in the industry network. Contrast the failure of Philips and Sony to establish their respective video standards and subsequent recordable digital media standards compared to the success of VHS, CD and DVD standards which were the results of early alliances. Where strong regimes, exist, compatibility standards may be less important than customer interface standards, which help to lock-in  customers. Apple’s graphic user interface is a good example of this trade off.

It is not necessarily a great advantage to be a technological leader in the early stages of the development of radically new products, when the product performance characteristics and features valued by users, are not always clear, either to the producers or to the users themselves. Especially for consumer products, valued features emerge only gradually through a process of dynamic competition that involves a considerable amount of trial error and learning by both producers and users. New features valued by users in one product can easily be recognized by competitors and incorporated in subsequent products. This is why market leadership in the early stages of the development of personal computers was so vulnerable and why pioneers are often displaced by new entrants. In such circumstances product development must be closely coupled with the ability to monitor competitors’ products and learn from customers. Radical consumer innovations rarely succeed in establishing long term market positions. Success goes to so called early entrants with the vision, patience, and flexibility to establish a mass consumer market. As a result, studies suggest that the success of product pioneers ranges between 20% (for consumer products) and 50% (for higher technology products) depending on the technological and market conditions. For example, studies of the profit Impact of Market Strategy database indicate that (surviving) product pioneers tend to have higher quality and a broader product line than followers, whereas followers tend to compete on price despite having a cost disadvantage. A start up strategy appears more successful in markets where the purchasing frequency is high, or distribution important (e.g. fast moving consumer goods). But confer no advantage where there are frequent product changes or high advertising expenditure (e.g. consumer durables).

Strength of patent protection can, as we have already seen in the examples described above, be strong determinant of the relative commercial benefits to innovators and imitators. The judgments of managers in large European and US firms about the strength of patent protection can be viewed. The firm sectors are showing the strength of protection for product innovations for European firms. On the whole, European firms value patent protection more than their US counterparts. However, with one exception (cosmetics) the variations across the industry in the strength of patent protection are very similar in Europe and the USA. Patents are judged to be more effective in protecting product innovations than process innovations in all sectors except petroleum refining, probably reflecting the importance of improvements in chemical catalysts for increasing process efficiency. It also shows that patent protection is rated more highly in chemical related sectors (especially drugs) than in other sectors. This is because it is more difficult in general to invent round a clearly specified chemical formula than round other forms of invention.

Radically new technologies are now posing new problems for the protection of intellectual property including the patenting system. The number of patents granted to protect software technology is growing in the USA, and so are the numbers of financial institutions getting involved in patenting for the first time. Debate and controversy surround important issues, such as the possible effects of digital technology on copyright protection, the validity of patents to protect living organisms, and the appropriate breadth of patent protection in biotechnology.