Patents, Entry and Growth in the Software Industry

In the late 1980s and early 1990s, people in the software industry often said that the coming of patents would spell doom, particularly for small companies. The entry of new firms - the seedbed of growth in the industry - would dry up, and only large, bureaucratic and decidedly non-innovative firms would remain. This paper concludes that these predictions were wrong. New firm entry remains robust, despite the presence of patents (and, in some cases, perhaps because of them). Successful incumbent firms have adjusted to the advent of patents by learning to put a reasonable amount of effort into the acquisition of patents and the building of patent portfolios. Patent data on incumbent firms shows that several well-accepted measures of "patent effort" correlate closely with indicators of market success such as revenue and employee growth. Whatever the effects of patents on the software industry, this paper concludes, they have not killed it