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Patent’ed Profits vs. Freedom of Choice

Posted by hs on December 2, 2005

(updated from a previous post)
CNN Money is carrying a story on a case that is currently before the US Supreme Court (Cheaper refills vs. patent profits).

Although this case (Illinois Tool Works v. Independent Ink.) might seem like the proverbial David vs. Goliath battle, it has lots more facets. The prime contention is: does buying a patented product force the customers to buy services (including consumables, spare parts, etc.) from the original manufacturers (or any other parties mandated by the manufacturer).

Such a coercive (or tied-in sale) is essentially market distorting. The patent-holding company can grow into a monopoly (or an oligopoly at best) and force the customers to pay higher-than-normal prices, thus maximising its own profits at customers’ expense. On the other hand, the patent-holding companies argue that it cuts down the incentive for them to invest in R&D and produce products in the first place.

The current case is a classic example in the technology industry. Printer companies sell their printers significantly below their cost price, and recoup the money by selling the ink/toner/cartridges at a premium. In Inkjet printers, this is exemplified in a very stark manner – customers often find that the cost of buying original replacement cartridges (1 black & 1 color) is often nearly the same as the original cost of the printer. It is just their insecurity which prevents them from junking a working printer and buying new one with full cartridges – otherwise, given the depreciation, and wear & tear plus warranty costs, it might actually be more economical to buy a new printer rather than replace cartidges in the old printer. And, it is also a technology refresh – better print quality, speeds, etc.

Similar is the case with companies that sell hardware for cheap, and then charge a premium for the services.

Arguments put forth by such companies are flawed – true that they put significant investments in R&D efforts and they need to recoup the same, with a decent returns, but earning those returns by distorting customer choice is not the right way. If some other company can come up with a product that interoperates with the orignal products and sell them at a lower price, then the second company is also well-within its rights to recoup the investments that it made in coming up with a compatible technology! And since their investments are not on the same scale as the original R&D, they can afford to charge lower prices – simple economics!

A better way to recover investments is to come up with products that customers can’t simply get away from – either a perfect product which customers simply love, or a highly advanced product that no other company can bear to match. Product Differentiation & Benefits Delivery – that is how customer business is won, not through litigation.

Update (20051201): Two other similar cases have come up recently – both pertaining to patent-holders suing other companies purportedly using their patents. One if MercExchange vs. eBay and the other relates to NTP (successfully) suing Blackberry-maker RIM. In RIM (Research In Motion) vs. NTP case, the most interesting aspect is that the patents NTP is claiming are all just paper-patents. NTP does not have any device based on the patents it is suing RIM for. Given the potential outcome of the case (Judge banning all Blackberry services in US for everyone except Governmental agencies), the dice is heavily loaded in favor of NTP. The only aspect that needs to be finalized is the amount which RIM would have to shell out to NTP. Viva la Patent system!

Update (20051202): The US Patent & Trademark Office (USPTO) has rejected NTP’s claim on one patent, and said that a Norwegian company might have filed for the patent before NTP. RIM can breathe a sigh of relief!
Keywords: Patent, Free markets, Printers, Ink, Court case, Supreme court, RIM, Blackberry, NTP, MercExchange, eBay

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One Response to “Patent’ed Profits vs. Freedom of Choice”

  1. […] Continuing from a previous post: Patent’ed Profits vs. Freedom of Choice […]

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