Interim study report - Executive Summary (January 2008)
(The final study report will be available by the end of September 2008.)
This is an interim report of the Sectoral e-Business Watch (SeBW) study on intellectual property (IP) protection for ICT-producing small and medium-sized enterprises (SMEs), i.e. firms with less than 250 employees. The study provides information about intellectual property rights (IPR) adoption issues in the ICT industry. The objective of the study is to understand whether the actual IPR framework is supporting innovation in ICT SMEs and to describe how companies in the industry are using IPR, in order to assess the impact of IPR on their competitiveness and possible business models and to indicate implications for policy. Findings presented in this interim report are based on literature review, expert interviews and case studies. The final report will, in addition, consider the results of an international survey of enterprises on their IPR use conducted by SeBW in August/September 2007.
The ICT industry as defined for the study includes the following business activities: ICT manufacturing (NACE Rev. 2, 26.11, manufacture of electronic components; 26.2, manufacture of computers and peripheral equipment; 26.3, manufacture of communication equipment; 26.4, manufacture of consumer electronics), software (NACE Rev. 2, 58.21 publishing of computer games; 58.29, other software publishing), and ICT services (NACE Rev. 2, 61, telecommunications; 63, information service activities).
The total number of enterprises under 250 employees in the main ICT Manufacturing, Software and Telecommunication services industries in the EU 25 is approximately 700,000. The largest subsector by far is Computer Services, counting almost half a million enterprises. Micro enterprises with 1 to 9 employees represent about 93% of SMEs in ICT services, but “only” 82% in ICT Manufacturing, which is more concentrated. This prevalence of micro, rather than small (10 to 50 employees) or medium (50 to 250 employees) enterprises is a weakness of the European economic system.
European SMEs are a major source of entrepreneurial skills and innovation. Their role is particularly relevant in the high tech sectors, such as ICT, and affects directly the EU’s potential for competitiveness and growth.
IPR are classified in two main groups, formal (rights granted by the legal system, including patents, copyright, trademarks, industrial design and a few other special cases) and informal (where protection exists in practice but does not depend on a legal procedure, including trade secrets, lead time advantage, complexity of design and Digital Rights Management). Firms may use both, in alternative or in complementary ways, to protect their know how. Patents are the most important and most discussed IPR, but copyright is the most used in the software sector (with its recent and alternative version invented by the open source software movement, that is “copyleft”). The increasing relevance of research and innovation for the competitiveness of ICT SMEs leads to an increasing need to exploit the full range of formal and informal IP tools. ICT SMEs need to develop original knowledge, to protect it and to bring it to the market as fast as possible. EU countries are characterized by a lower propensity to innovate and apply for patents or other IP protection tools than in US or Japan.
IP regulation is at the heart of some of the most heated competitive battles in the industry. There is a conflict between defenders of IP protection and stakeholders who believe that excessive regulation in this field may even result in obstructing innovation, rather than encouraging it. This means that IP protection is an extremely sensitive issue. According to recent studies and analyses, the main shortcomings of the EU legal framework for IP fall into three main areas: Harmonization of national legal frameworks for IP across the European Union; efficiency of the IPR registration and enforcement system; quality of the rights obtained, because of a concern that the recent increase in patents is resulting in a lowering of their quality. The European legal framework for patents is still evolving, with the Commission renewing efforts to establish an effective European patent system as well as an European Patent Litigation Agreement.
ICT SMEs are characterized by an increasing adoption of IPR, both formal and informal. However, exploitation of IPR in ICT SMEs is below what it could be, due to an ineffective Internal IP management. Innovative firms, relying on R&D for their business models, are increasingly adopting IPR because of their importance to protect results of innovation investments. This finding emerges clearly from the case studies, which however represent a “biased” sample composed by enterprises with strong interest in IPR. It will be interesting to check if this finding will be validated by the survey. According to the analysis done, ICT SMEs still lack a proper knowledge of the full spectrum of possibilities to exploit IPR, both formal and informal, and, in most cases, still need to develop an effective internal IP management.
ICT SMEs use IPR mainly to protect investments in R&D and their market position. Trademarks, registered design, copyrights and other measures, as secrecy, are all considered by ICT SMEs as useful means just to protect their investments (either in R&D and/or in other areas, as marketing). If this sounds reasonable for most IPR, it is rather limiting in the case of patents, whose usefulness for innovation strategies is much broader. But most ICT SMEs appear to be far from exploiting the full value of patents,. Considering the case studies sample, the most quoted reasons to apply for patents are of defensive nature, that is to protect the results of R&D investments and/or to protect a specific market position, raising entrance barriers and having a more valuable product. A few innovative SMEs use patents to enter new markets or as assets to ask for funding from venture capital firms. Software SMEs may use patents to negotiate deals with OEM suppliers or with their main customers.
The use of IPR is essential for competitiveness for three groups of ICT SMEs: start-ups and new technology-based firms (NTBF, whose business model is based on IP); for software SMEs (particularly copyright); and for highly innovative manufacturing ICT SMEs, that often rely on open innovation or cooperation in innovation business models (section 4.1). In the software sector, copyright is an essential IPR to guarantee returns from the sale of software licenses.
In the ICT manufacturing sector, the effect of investing in patents can be an increase of sales, thanks to better reputation, higher value of products, and easier commercialisation of products in international markets.
Even so, patents contribution to business results doesn’t always reach desired levels: In general, even considering ICT SMEs that have developed a comprehensive portfolio of patents, none of the analysed firms had generated revenue streams from licences of patented inventions. This is a consequence of the fact that in all cases patents were mainly used internally, associated to the production and sale of products. In one case (that of Net Insight) patents are considered more a constraint than a real added value.
According the analysis carried out, ICT SMEs find that as regards most IPR (trademarks, registered design, copyrights) the actual IPR framework is appropriate to their needs. Instead, ICT SMEs criticize the patent system for the following reasons: the main complaint concerns the costs associated with the patenting process. . As emerges from the literature search, lack of resources actually force SMEs to be more efficient in the use of the patent system, and to weigh, very carefully, when the benefits justify the costs, resulting in a lower number of unused or “sleeping patents”
More relevant objections are those charging the patent framework of preventing rather than promoting innovation, in particular as regards the software industry. Considering how software products are developed (with sequential processes and interoperability needs), the widespread use of patents would not in general favour innovation processes in the industry. In general, the ICT industry pace of innovation and short time-to-market for new products does not fit well with the relatively slow patent system
The enforcement process, especially concerning litigation risks, is not adequate. Litigation risk are very high in the ICT sector, as showed by many litigation cases, mostly between large enterprises, but with some risks of involvement also of SMEs. Right holders often do not have enough legal and funding resources to enforce their patents against alleged infringements. Furthermore, in the global economy, it is crucial that European SMEs can adequately enforce their rights outside the territory of the EU.
Policy implications should be considered as preliminary, and based on key findings of the present study. They will be validated and elaborated in the light of the 2007 survey results, for the final report.
