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Google pays $22 million per patent to defend itself

As I noted in Nortel Patents Sold for $4.5 Billion to Consortium Which Includes Apple, the consortium that won Nortel’s 6000 patents paid $750,000 per patent. Remember, these patents cost probably $20-30k at most each to procure.

Google then responded by buying Motorola Mobility, to obtain its 17,000 patents and 7500 pending patent applications, for $12.5 billion. (See Motorola: Enemy or Friend of Google?; Google buying more patents to defend itself.) Now, as discussed in Masnick’s Techdirt post below, the patents accounted for at least half the price paid. I think it’s more like 90%, but let’s say half: $6.25 billion. Let’s assume 2/3 of the 7,500 pending patent applications will mature into patents: or 5,000. So that means Google paid $6.25 billion for 22,000 patents. That’s about $284,000 per patent.

But you know, most of these patents are junk, or will never be used, or at not applicable. My guess is that at most 1% of these patents are really worth anything to Google–and probably less. But they had to buy them all–probably had to buy the whole company–just to get those 220. And if you divide $6.25 billion by 220 patents, you get $22.4 million per patent. And who says the US doesn’t create anything any more? Look at all this value we are creating! If China would just adopt a US style patent system, think how much more capitalist they would be!

Motorola Deal Showing Massive Loss To Innovation Caused By Patents

from the dead-weight-loss dept

In response to Google’s deal to buy Motorola mostly for its patents (most people are now saying that the patents represented at least half the value of the deal), we’re seeing two responses. The first is that companies with lots of patents are suddenly being re-evaluated for their patent value. Because of the demand, otherwise practicing firms are suddenly being told their patents may be worth more than they are. Such is life in a market where the value of patents is massively inflated due to dangerous thickets, where patents are necessary to play.

But at the same time, more people are finally realizing what a massive economic and innovation loss this represents, entirely contrary to the intentions and purpose of the patent system. That last link is to the NY Times, which quotes Harvard economist Josh Lerner (who warned of this problem years ago) highlighting what a ridiculous economic loss it is when patent values are so ridiculously inflated:

“You’d much rather see Apple spend some of that $4 billion on new inventions, and Google invest that $12 billion to generate new knowledge,” said Josh Lerner, an economist at the Harvard Business School. “It’s a transfer of wealth from innovators to bondholders and stockholders who have no motivation to innovate. It’s disturbing.”

It’s beyond disturbing. It’s harmful. It hurts these companies’ ability to innovate. It hurts our economy’s ability to grow. It costs consumers a massive amount in economic rents, and it acts as a massive shift in wealth from consumers and companies that actually innovate… to those who aren’t innovating. It’s really dangerous, and will open up more opportunities for foreign competitors to focus on real innovation, while we move money away from innovation to lawyers.

So, we can now add the NY Times to the list of mainstream publications highlighting the problem. Why is Congress still focused on a patent reform bill that does nothing to address this problem?

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{ 4 comments… add one }
  • Dale B. Halling August 19, 2011, 11:13 am

    Stephan,

    I worked in house for Motorola in the 1990s in the cellular telephone division. Almost every patent we filed was used in a product, so your 1% figure is nonsense. Economist Jacob Schmookler looked at the issue of how many patents are commercialized in a systematic way and found that 50% of all patents are commercialized. (Schmookler, Jacob, Invention and Economic Growth, Harvard University Press, Cambridge, Massachusetts, 1966, p. 49.) If you use this more realistic number, Google paid more like $440,000 per patent. Given the importance of this property rights to Google that hardly seems like a large cost.

  • Stephan Kinsella August 19, 2011, 11:21 am

    “I worked in house for Motorola in the 1990s in the cellular telephone division. Almost every patent we filed was used in a product, so your 1% figure is nonsense.”

    I don’t believe this for a second.

    “Economist Jacob Schmookler looked at the issue of how many patents are commercialized in a systematic way and found that 50% of all patents are commercialized. (Schmookler, Jacob, Invention and Economic Growth, Harvard University Press, Cambridge, Massachusetts, 1966, p. 49.)”

    There is no context here to know what this means–does commercialized mean used to shake down people for royalties? What does it mean? In any case, it has nothing to do with the reason Google wants those patents: to assert in countersuits against competitors using patents aggressively against them. So what’s relevant is not how many of Motorola’s products the patents cover, but how many of the patents cover competitors’ products. I think that is much closer to 1% than 50%. There is no way 50% of the Motorola portfolio covers competitors’ products. If you have any clear empirical evidence in this regard, send it over.

    “If you use this more realistic number, Google paid more like $440,000 per patent. Given the importance of this property rights to Google that hardly seems like a large cost.”

    Yes, given the threats the patent system imposes on them–the risk of losing hundreds of billions of dollars due to patent extortion–it’s reasonable to pay $6 billion. Sure. but the threat itself is a shame, as is the fact that they have to waste $6B in protection money.

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