Small & Medium-Sized Enterprises

Small and medium-sized enterprises would suffer most from the legalization of software patents. They would bear the brunt of all the negative aspects without having a fair chance to derive significant benefits.

Europe's software industry is primarily characterized by small and medium-sized enterprises (SMEs). However, the patent system in general has a reputation for increasingly putting SMEs at a disadvantage, in all areas. The problems are even worse in the field of software. Europe therefore shoots itself in its own foot if it weakens SMEs and strengthens software giants from outside the EU.

Some large corporations want to be able to limit, or even crush, smaller competitors at their choosing. In the field of software, even the smallest company can potentially turn a great idea into a successful product because the capital requirements are relatively moderate. Software patents would force small companies to obtain costly patents themselves and thereby artifically inflate the capital needs of software development. The biggest problem is that small companies can't effectively use patents against large corporations but always have to fear that a much larger competitor will cause serious harm to them with the help of the patent system.

SMEs don't have access to cross-licensing deals. Only large corporations with thousands or tens of thousands of patents are in the position to enter into cross-licensing agreements with their counterparts. The big risk is that the largest segments of the software market would ultimately be owned by a small cartel of patent superpowers. It is the desire of some large corporations to make the ownership of a huge patent arsenal a requirement for being able to safely compete in the marketplace. SMEs have no chance of ever acquiring patent portfolios of that size. The "critical mass" of a patent portfolio is in the thousands. You need to have so many that no one even wants to even look at them anymore.

SMEs lose a lot of shareholder value to the patent industry. Even large corporations have their own problems with productless patent profiteers but they can typically settle any such issues by making a lump-sum payment. SMEs are very often forced into revenue-sharing deals under which they have to give a certain percentage of their sales and/or profits to a patent profiteer. If a company with a 20% pre-tax margin on sales has to give 2% of its sales to an extortioner, then it cedes one tenth of its profits!

A new trend is that large corporations such as IBM and Microsoft impose "patent taxes" on SMEs. IBM prides itself in deriving a billion-dollar amount every year from "outbound licensing" of its patent portfolio. The way those deals work is this: IBM now owns around 40,000 patents worldwide. No one, and particularly no SME, ever has the chance to look at all of those and ensure that there is no conflict between one's products and any of IBM's patents. So IBM approaches companies and offers them a costly license agreement to the entire patent portfolio. Through those deals, IBM not only squeezes money out of the smaller company but also gets access to sensitive information on the business of the other company. In the spring of 2004, the press started reporting that Microsoft is now doing the same. They have already approached around 100 companies, some of which are European, and they said that open-source companies would also be targeted.

Click here to read how software patents are used for a legal form of extortion