How important are the different approaches to intellectual property protection for iPhone?

"We think competition is healthy, but competitors should create their own original technology, not steal ours. - Steve Jobs, Apple's CEO after a lawsuit against HTC. An invention is the result of creative process, hard work or even luck at times. An innovation is an invention that is successfully put into commercial use. In many ways, an invention is a property, i.e. it belongs to the person or firm who invented it. And just like any other property, an invention needs to be protected. While the worst that could happen to your car is get stolen (your insurance company will cover it), for a firm the worst that could happen is the invention gets copied and the firm that copies it makes huge profits out of it. Therefore intellectual property needs a different sort of protection. Here, Ill examine how important are the different intellectual protection methods for Apple iPhone. In a nutshell, the iPhone is a smartphone that revolutionized the smartphone market with its creative features. It is characterized by a capacitive multi-touch screen, which is the main method of user interaction. It also functions as a camera, e-mail client, full web browser and an iPod. It has been a big success, to date over 70 million iPhones have been sold worldwide. IP protection methods can be roughly divided into three major categories. First is through formal or institutional methods, whereby the use of law to enforce the protection is applied. Second is through informal or strategic methods, where the key is to maintain secrecy over the invention. And third is open source the invention is open ended; users can copy and modify it. The first formal method is the patent. For iPhone, this is no doubt the most important IP protection method. Wikipedia defines a patent as a set of exclusive rights granted by a state to an inventor for a limited period of time in exchange for public disclosure of an invention. When iPhone was launched in 2007, over two hundred patents protected it. While this might seem ridiculously high, it was important to ensure that the innovation was well protected in the competitive smartphone market. The importance of these patents is that they allowed Apple to keep the incentive to upgrade and release much better versions of the iPhone in the later years. The original iPhone was followed by iPhone 3G, then 3GS and the latest is the iPhone 4. If Apple had not been granted the patents, then perhaps the last edition would be the original one, the smartphone market would lack innovation and consumers would settle for substandard phones. This is because competitors like Nokia and HTC would easily copy the invention without any risk and make profits by pricing their products lower and attempt to beat the iPhone. The end result is that Apple would not get the chance to cover the cost of R&D on the iPhone and therefore, discontinue the product. The patents give Apple a legal option to sue any company suspected of copying the inventions of the iPhone. In December 2009, Apple sued Nokia for infringing 13 iPhone patents, in March 2010 HTC for infringing 20 patents, and this October Motorola for 18 patents. This clearly shows how much copying that would take place had the patents not been in place. Economists argue that a patent gives the

firm a monopoly over the invention. This is argument is weighted against the economic loss of incentives for the inventors without the patent protection. The conclusion is it is economically sound allow a temporary monopoly in the short run than a permanent loss of incentive in the long run. It is true that Apple is reaping huge profits on the monopoly power by the patents; but since the patents are out in the public, other firms can improvise on their own products by learning from them. The invention slowly diffuses into the economy. The patents add to the body of knowledge of the public and provide even more incentives to other firms like HTC to innovate better ideas. And the evidence for this is visible; since the release of the iPhone the standard for smartphones in the market has been raised in every respect (touchscreen, user interface, application stores, etc.). This proves that even though the core inventions of the iPhone have been patented; it has led to a much higher increase in the quality of smartphones today. We can go even further on iPhone patents using the economic theory of externalities. In (Mankiw, 2004), a positive externality is an activity that yields benefits to third parties. In essence, innovations cause positive externalities because they benefit the society as whole (which did not take part in the innovation). A result of positive externalities is that there will be underproduction because inventors are unable to capture the full benefits of their innovation. To correct this situation, the government internalizes the external benefit by allowing inventors and exclusive use of their invention for a period of time thus, patents. The next formal IP protection method very much important for iPhone is the trademark. A trademark is a distinguishing mark or logo or symbol that consumers can use to identify products from different companies. Apple wanted to continue their trademark i on most of their products (iMac, iLife etc.), but the iPhone was trademark of Cisco. After a long tussle for rights over the trademark, Apple won and was granted the right to use iPhone. For the iPhone, the trademark has a double use. The first is that it enables consumers to quickly point out the iPhone anywhere and easily tell that this is an Apple product. Second and more important is that Apple uses the iPhone trademark to differentiate their product as not a conventional phone something much more than a phone. This affects how Apple prices the iPhone. They use their iPhone trademark to price it at a premium. They can charge high prices and reap huge profits from the trademark itself, i.e. they use the trademark to reduce the elasticity of demand for the iPhone, making the consumers insensitive to the high prices. The economic interpretation of this is an imperfect market. Consumers will be incapable of choosing other better products just because the trademark makes the iPhone appear much superior to its competitors while in fact the basic iPhone features are now a standard for all smartphones. Of the strategic IP protection methods, the most important for iPhone is confidentiality agreements. IT Knowledge World defines a confidentiality agreement as a legal contract between at least two parties that outlines confidential materials or knowledge the parties wish to share with one another for certain purposes, but wish to restrict access to. Because these agreements are

not normally published, its difficult to even know they exist to begin with, until one party violates them. These agreements typically list out items of nondisclosure to the parties involved. They include unpublished patent applications, the engineering know-how, product schema etc. This is highly relevant to iPhone because Apple is the ultimate network firm. It depends on many different suppliers to produce iPhone thus there is a risk of leakage of IP before it goes out in the market. The agreements are not restricted between Apple and its suppliers; they also apply to its employees. In a February Reuters article, a former Apple employee who worked during the iPhone launch is quoted, "I didn't even talk about it with my wife. - just to emphasize on how much secrecy is involved. The importance of these agreements is that it protects IP thats impossible to protect legally at that specific time like unpublished patents. In context of economics of innovation, these agreements deprive the economy of the benefits of releasing the IP to the public; nothing is added to the body of knowledge where firms can learn from one another and improve on their products. After seeing the importance of the different IP protection methods for iPhone, we can conclude by briefly discussing the implications of these on different parties. Consumers will be worse off after these IP protection methods prices will be much higher than if all firms freely used the innovation and there was more competition. From the supplier point of view, there will be pressure not to violate non-disclosure agreements. Since most of the iPhone is made in Asian countries, there are ethical implications too. The strict rules have led to workers committing suicide after being suspected of IP leakage. From the competitors point, IP protection is limiting because many firms do pre-emptive patenting and the invention never comes out. A competitor who knows how to use the invention cannot do so until the patent expires. Even for Apple itself, the IP protection, especially patents is not the end of things. In (Monosoff, 2010), it is stated there is no patent police. This means that when a patent or any other protection method has been violated, it is up to Apple to commit itself to the legal proceedings and necessary court action to protect it. This is costly and time consuming.

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