Why are patents important?

In order to understand the importance of patents from a business perspective, I will exemplify with the industry I been working in, during the last around 20 years; the Wireless communication and smartphone business.

Looking at the worldwide handset market 2016, close to 1.5 Billion smartphones were sold with a revenue of more than $420 Billion! The operator revenues 2016  were even larger, around $1300 Billion. Focusing only on the US market, the revenue (2015) for the two largest operators, AT&T Mobility and  Verizon Wireless  was $90+ and $70+ Billion respectively!

As can be seen, the market is huge, and the players in the market need to protect (and possibly try to increase) their market shares. In order to do so, the companies need to invest money in R & D and Patents, and licensing patents to other companies are ways to protect their own business and therefore a way to get money in return on invested R&D.

For a company investing a lot of money in R & D, patents can have different values depending on the company’s business model and position in the market. First of all, patents will protect your own inventions from others. This might be of importance for instance for start-ups with few patents, and then patent protection may then be a way to get venture capital.

Secondly, building a strong patent portfolio helps avoiding paying royalties to other patent holders through cross-license agreements, providing freedom of action. This might be important for a larger company coming into a new business, for instance.

Furthermore, a very strong patent portfolio makes it possible to license the company’s inventions to other companies, which may bring royalty revenues. Furthermore, such revenues may add additional cost of sales to competitors’ products, giving a company with a strong patent portfolio an cost advantage. This is what can be called the offensive value of patents.

So, in short: Why are patents important? It is business!