Why Do Inventors Innovate?

Why do inventors innovate? Should they dream of improving the human condition, or is it all about getting rich? And if it's all about the money, why are so many of them pricing themselves out of the market they created?

From Benjamin Franklin to Steve Jobs, great inventors in human history have never really focused on making money. Make something great, and financial success just follows naturally.

Jobs says he focused on "creating great things instead of making money, putting things back into the stream of history and of human consciousness as much as I could." And, he added, "We are inventing the future." The first of Google's famed "Ten things we know to be true" and that underlies the whole business model is this: "Focus on the user and all else will follow." ("Do no evil" gets more press, but it's only No. 6.) These guys are generally doing it the right way -- and they make billions in the process.

But many would-be inventors and pioneers are attacking the money question from entirely the wrong angle.

The price is right! Or is it?
Micron Technology
(Nasdaq: MU  ) and other memory builders are in court for allegedly trying to kill patent wrangler Rambus (Nasdaq: RMBS  ) with anticompetitive tactics. It's a controversial case where nothing is black or white, but I own Micron shares and still sleep at night. Here's why.

If the memory makers wanted to get rid of Rambus because DRAM was technologically superior, no amount of patenting or licensing would have changed that. Come up with better solutions if you want to win in a fair market.

And what if the memory industry really colluded to kill Rambus because they didn't want to pay exorbitant license fees for a top-notch technology? Well, wouldn't it then have been in Rambus' best interest to lower its prices to a level that everyone could live with?

It's the old law of supply and demand. In this case, Micron and others had a choice of technologies to throw their support behind. If Rambus had the best technology at a reasonable price, it should have won. The company says that it had all of that but was essentially killed by an evil cartel. The whole picture could have been very different if Rambus had offered slightly lower licensing fees a decade ago. The jury has been deliberating on this case for five weeks now and are still asking for more evidence. There's nothing clear-cut about these thorny issues.

Nothing has changed
That's an illustrative story mostly from ancient history. And so it goes with modern patent trolls as well. Slap a big price tag on some juicy wireless-communications patent, expect big money to roll in, and launch lawsuits if the industry doesn't come running to your door to pay exorbitant fees. All the while, you can complain loudly that other companies don't respect your innovations or your rights to profit. But nobody ever talks about pricing the licenses to move.

VirnetX (AMEX: VHC  ) is perhaps the most visible proponent of this model in today's public markets. The company hopes to make big money on security patents for 4G wireless services, but it talks more about legal actions than signing royalty deals. How fair and reasonable can the licensing terms be if nobody wants to sign on the dotted line?

Apple (Nasdaq: AAPL  ) might seem out of place in this list, given how I highlighted Jobs as a role model, but nobody's perfect. The company also runs a huge war machine armed mostly with design patents and not true technology innovations -- and then you have the posthumous revelation that Steve Jobs was willing to spend every penny of Apple's resources to kill Android. In fact, Jobs said he didn't want money for his inventions -- just the exclusive right to implement them. Houston, we have a pricing problem.

Buying semi-random patent portfolios to defend against these campaigns seems equally pointless, not to mention misdirected. Apple's lawsuits against HTC focused on user interface innovations. HTC's countersuit leans heavily on power management patents and signal processing. "You took my lunch money, so I'll pull your sister's hair!" You know? I sure hope Google had grander plans in mind for that Motorola Mobility acquisition, like making some money on Android hardware or perhaps launching a fantastic set-top box of some kind. The patents aren't worth the trouble.

Other approaches
InterDigital (Nasdaq: IDCC  ) seems to have fewer legal troubles, probably because of a lack of inflated egos and expectations of enormous licensing royalties. That hasn't hurt the stock, which gained 60% over the past year amid buyout speculation.

Further down the line, you'll find Universal Display (Nasdaq: PANL  ) , which took 18 months and five temporary contract extensions to hammer out a fair and reasonable OLED license for largest customer Samsung. Isn't that what VirnetX, Intellectual Ventures, and even Apple should be doing instead of pouring so much effort into senseless legal battles? Largely thanks to the Samsung deal, Universal Display shares have gained 50% in three months.

Or look at the open-source model. Anybody can use, sell, or modify open-source software. The lack of royalty expenses, coupled with the freedom to modify, improve, or fix the product before selling it for profit, has made open alternatives very popular. Apache has been the most-used Web server package since 1996. You may not run Linux on your desktop (like I do), but it's inside every Android phone, tons of set-top boxes, probably the cable modem in your closet, and the list goes on. Nobody gets a nickel of license payments from that. Yet Linux expert Red Hat (NYSE: RHT  ) has built a $9 billion market cap and billion-dollar annual revenues on this free stuff.

It's hard to compete with free. Even harder if you think you deserve outrageous payments for your premium innovations. Benjamin Franklin liked the open-source idea long before it was formalized. "As we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours; and this we should do freely and generously," he said. That's from one of the greatest inventors in human history.

Maybe Franklin was just another free-love hippie long before Steve Jobs tried LSD. Or maybe he was onto something big. You don't have to choose between improving the human condition and making money -- do something great and the cash will follow. You don't even need court dates to make it happen.

Today, some of the most important IT trends rely very heavily on open innovation and license-free industry standards. In this free video report, "The Two Words Bill Gates Doesn't Want You to Hear...," you'll learn all about one very investable trend from that camp. Learn how to invest like Benjamin Franklin right now -- the report is (very appropriately) totally free!

Fool contributor Anders Bylund owns shares of Google and Micron but holds no other position in any of the companies discussed here. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services have recommended buying shares of Universal Display, Google, Apple, and InterDigital as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights make us better investors. The Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 31, 2011, at 10:18 PM, pk22901 wrote:

    "The company says that it had all of that but was essentially killed by an evil cartel."

    Got that right. The jury is out and they are deciding damages - hopefully $6B.

    The emails and evidence show that Micron led a price fixing 'kill Rambus' conspiracy with a goons list including Samsung, Infineon, Hynix, JEDEC, the FTC, and others.

    The evidence comes directly out of the DOJs trove of documents. What trove? The trove given to them when Micron got an amnesty agreement from the DOJ by turning in their fellow price fixing conspirators (All foreign companies, a coincidence?). The ones ratted on by Micron had NINETEEN executives spend 3 to 9 months each in US prisons AND paid a total of $900M in fines, all pleading guilty to price fixing.

    Someone will write a book about this attempted Rambus killing and the research will be easy to do; just buy the transcripts of the trial. (BTW, you ought to.)

  • Report this Comment On October 31, 2011, at 11:21 PM, traderjoe9 wrote:

    Is anders really this dumb or is he a paid shill? He said he has shares of MU so I'm going to go with he's really, really dumb. The question is, why is the Motley Fool employing such a dummie? Are the Fools dumb, foolish or both? Even if the MFools were dumb enough to buy the crap anders spits out, wouldn't a really dumb person be smart enough to figure out by now that anders is a dummy? I'm confused by what I read in the Fools crap anymore so I will no longer read it at all.

  • Report this Comment On October 31, 2011, at 11:40 PM, waterworksjeff wrote:

    VHC- "The company hopes to make big money on security patents for 4G wireless services, but it talks more about legal actions than signing royalty deals."

    For once in your life cite a source!! You've been bashing this company as a patent troll every other month for as long as I've known about this company (usually the week of options expiration, coincidence, or ulterior motive?) Are we supposed to take it at face value, i.e. your word, that the overwhelming majority of material released by this company talks of litigation, not licensing?

    It is quite obvious by the minimal number of replies to your articles that you are not widely followed, so my question to you, The Fool, and Yahoo is how your unsubstantiated, biased, and quite often off the mark with regards to reality, opinion pieces show up in Yahoo's Headlines on the stock's starting page of Yahoo Finance? At least on their search engine pages Yahoo designates the search results that are paid advertising as such.

    At a bare minimum, if you desire to continue bashing the stock, do enough research about the company to be able to adequately debate a knowledgable investor.

  • Report this Comment On October 31, 2011, at 11:43 PM, Blakbote wrote:

    Nearly everything Anders says about Rambus is wrong.

    The evidence has long been that the memory makers wanted to get rid of Rambus not because RDRAM was technologically superior but because they didn't control it. Everything the memory makers later came up with including SDRAM, DDR, DDR2 was technically inferior to RDRAM. RDRAM didn't win in the market simply because the memory makers rigged the market against it.

    It wasn't a question of unreasonably high license fees. Micron and Hynix in particular wanted to use the Rambus technology without paying a cent to Rambus. License fees had nothing to do with it. The memory makers wanted to control the memory market in every sense of the word and deliberately set out to kill Rambus.

  • Report this Comment On October 31, 2011, at 11:53 PM, waterworksjeff wrote:

    VHC- "How fair and reasonable can the licensing terms be if nobody wants to sign on the dotted line?"

    From VHC's press release of April 28, 2011, "VHC...today announced that at the request of ETSI, it has agreed to update its licensing declaration to ETSI under ETSI’s Intellectual Property Rights (IPR) policy. This is in response to VirnetX’s March 15, 2011, Statement of Patent Holder identifying a group of its patents and patent applications that VirnetX believes are or may become essential to certain developing specifications in the 3GPP LTE, SAE project.

    VirnetX will make available a non-exclusive patent license under FRAND (fair, reasonable and non-discriminatory terms and conditions, with compensation), to 3GPP members desiring to implement the Technical Specifications identified by VirnetX".

    Even the standards body, ETSI, agrees that VHC's licensing terms are fair and reasonable, is Anders Bylund expert enough to contradict them?

  • Report this Comment On November 01, 2011, at 12:28 AM, TheeMadCatte wrote:

    I wanted to say thanks to Jim Cramer and FOOL for bashing VHC, I've made a ton of money on it. 11 > 40, back to 12, back to 20. Easy money on my way to $100.

    Good luck with your theories about VHC failing.

  • Report this Comment On November 01, 2011, at 8:09 AM, TMFZahrim wrote:

    Well there's this document from ETSI that begins:

    "A patent statement was received by ETSI in December 2009, as a Partner in 3GPP, from a company called “VirnetX, Inc.”. This company is not a Member of ETSI, nor an Individual Member of 3GPP.

    A series of events followed, in which ETSI sought clarification from VirnetX as to whether they were

    prepared to give an irrevocable undertaking to grant irrevocable licences on FRAND terms (Clause 6

    ETSI IPR Policy), and in due course clarification from them that they were not."

    ...which is what VHC responded to with the "agrees to policy request" press release everyone likes to bring up. Try as I might, I can't find any statement from either 3GPP, ETSI, or VHC that the company has actually joined either one of the standards bodies since this. If fact, ETSI has a *lot* of members; VHC is not among them:

    ETSI has not responded to the new licensing policy (http://etsi.org/Application/admininfo/DisplayInfo/Default.as....

    So the way I see it, this is VirnetX unilaterally declaring its own importance. Come back and yell at me if/when VHC's proposals gain traction, the company gets admitted into standards bodies, etc. A non-member clearly can't set any standards. Right now, it's just hot air.

    Anders

  • Report this Comment On November 01, 2011, at 8:14 AM, TMFZahrim wrote:

    Specifically, @waterworksjeff:

    "Even the standards body, ETSI, agrees that VHC's licensing terms are fair and reasonable,"

    No. The standards body *asked* VHC to provide FRAND terms and VHC *says* that it has done so. But ETSI hasn't in any way approved, corroborated, or otherwise confirmed VHC's belief that the new terms are indeed fair and/or reasonable. Again, one-way communication is not confirmation.

    Anders

  • Report this Comment On November 01, 2011, at 10:36 AM, tjsimone wrote:

    Anders-

    You are obviously Biased against VHC-

    If you had been unbiased you would have wrote your bash peice and moved on...

    But EVERY time VHC starts to move up, you find the need to bash VHC yet again...

    ***Newsflash***- VHC has Out performed ALL Motely Fool newsletter picks in the last yet....nothing ELSE Matters but $$$ in my pocket....

    I no longer belong to Motely Fools Newslettters because of Bashers LIke you...

    Dont be a Hater- life is ugly when you are a hater...

  • Report this Comment On November 01, 2011, at 10:48 AM, TMFZahrim wrote:

    @tjsimone, I don't look at VHC charts and don't know or care when the stock is moving. Never held any position in VHC nor any of its options, long or short.

    If I'm biased, it's because I see a sham of a business model. It works from time to time, and the stock reacts like a raw nerve to every little bit of good or bad news. You're making money; good for you. But I don't think you could read the article and still call it a "bash piece" for VHC or RMBS. It's not a memo, it's a mission statement. Even the cover looks like The Catcher In the Rye.

    Anders

  • Report this Comment On November 01, 2011, at 11:32 AM, tjsimone wrote:

    Andes-

    Its a Sham of a business model because you do not understand it...not because they do anything illegal, or immoral..and lets face it, you dont understand it, so it cant be real...

    Holding patents is the American way....actually built this country....its called Capitalism....Qualcom, in a different stage of growth, actually does this quite well...

    A basher is someone who is short on facts, short on knowledge, and short on accountability...you say yourself you dont look at the VHC charts..so you do your readers a disservce by missing a 10 bagger....

    Maybe do your homework, and do your readers right..I am not saying VHC is for everyone, but for those with high risk tolerance, this stock has great potential for a huge gains...

  • Report this Comment On November 01, 2011, at 11:40 AM, justmyopinionNTM wrote:

    Well at least Anders has finally admitted that he owns shares of Micron. Probably the only true statement in his latest pile article.

    Simply put, Anders doesn't know his hind end from a hole in the ground. The royalty on RDRAM was never the real issue. When RDRAM was at it's highest (which the antitrust case has shown was caused by the collusive activities of the DRAM cartel) the royalty amounted to $15 on $1000 worth of RDRAM. That didn't kill RDRAM, the $1000 price did, and Rambus didn't control that price.

    Inventors innovate to make money. Rambus' founders solved the memory bottleneck problem, and under the patent laws get to profit from that invention by licensing it to others, or by excluding others from the technology and building it themselves. Rambus chose to license their inventions. And the memory makers could use those technologies by paying Rambus WHATEVER FEE RAMBUS WANTED. The free market says the memory makers could either pay that rate, or use a different method. If Rambus priced it too high, the memory makers would go a different route.

    The problem is that what they chose to do was infringe Rambus patents, and use the technologies Rambus invented for a competing product, the variations of DDR, and then try to drive Rambus out of the market completely.

    It was never about the royalty, if Rambus had charged ZERO, it would have been too much, because the memory makers, in their own words, were worried about "becoming foundries for Rambus and Intel", without having any design say.

  • Report this Comment On November 01, 2011, at 12:24 PM, nostockpro wrote:

    Anders, you are hilarious. Micron is the dirtiest company named in your whole article, yet you claim "...I own Micron shares and still sleep at night."

    Micron conspired to manipulate the prices of DRAM with their competitors. They didn't just admit it, no, instead they back-stabbed all their partners in crime as whistle blowers so they could get off easy via ACPERA. However, the whistle blower clause says you can't get the free pass if you were the ringleader. There's tons of public evidence showing they were actually the ringleaders. How did they still get the free pass? Hmmm, maybe political connections with certain politicians and specific interested billionaires?

    I'm sure you know this stuff. How could you write so many articles about it and not know? Maybe you have purposefully NOT researched anything in your article specifically so you can "sleep at night". The trade off is that, instead, you just look plain dumb.

  • Report this Comment On November 01, 2011, at 3:45 PM, fforegon wrote:

    Lousy article.

  • Report this Comment On November 01, 2011, at 6:52 PM, tjsimone wrote:

    agreed....

  • Report this Comment On November 01, 2011, at 8:21 PM, waterworksjeff wrote:

    Anders,

    You say, "The standards body *asked* VHC to provide FRAND terms and VHC *says* that it has done so. But ETSI hasn't in any way approved, corroborated, or otherwise confirmed VHC's belief that the new terms are indeed fair and/or reasonable. Again, one-way communication is not confirmation."

    Have you ever seen a document produced by ETSI that approved, corroborated, or otherwise confirmed ANY company's IP? I thought not, they do not work that way.

    I agree that NEITHER of us knows for sure what the inner workings of ETSI think of VHC's IP. The difference is that I've done enough research to invest my hard earned money in this company and you've done no research on the company or its patents and yet you file monthly articles bashing the company on a national platform. How does that effect your sleep at night???

  • Report this Comment On November 03, 2011, at 11:16 AM, efti wrote:

    It's one of the worst TMF articles ever!

    I just hope some justice is done and Anders get's his reward via MU shares (chapter 11?!)!

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