Video games are big business. In 2005, the world wide market for video games was estimated at $28 billion, and is expected to grow to $46.5 billion by 2010. And the video game market is still growing fast; the latest estimates show an 11.4% compound annual growth rate.
Nonetheless, while video game developers have become more aggressive about obtaining patent protection for innovations, the video game industry still lags other comparable industries in the number of issued patents.
For example, recent estimates show that various network providers will spend $41 billion on telecommunications equipment for 2007, which is less than a 2% increase from the previous year.
An informal search of issued patents with the word “telecommunications” shows 56,442 entries. By comparison, there are only 6,662 issued patents with the phrase “video game.”
Nonetheless, the pace of patent filings by video game developers is on the rise, and, more importantly, lawsuits involving video game patents are also on the rise. One need look no further than the recently settled “force feedback” suit, in which Immersion managed to extract over $110 million from Sony.
Of course, filing patent applications for every invention, regardless how minor, that a development group conceives is not sound strategy. Like any other business decision, the costs of obtaining a patent must be weighed against the expected value a patent will provide.
The costs of obtaining a patent include filing fees, other patent office fees, attorney or agent fees, and the time the inventor spends working on the patent application when he or she could have been writing code, designing games, or attending to other duties.
For purposes of this article, the costs of obtaining a patent in the United States can be estimated at $10,000 to $20,000, depending on the complexity of the underlying invention, and not accounting for the inventor’s time. Weighed against these costs are the benefits provided by patent protection. Estimating the benefits of patent protection is a more involved process, which is explored below.
The benefits of obtaining a patent include the right to exclude others from practicing the patented invention, the ability to license the patent to others to generate revenue, and the defensive value of having an additional patent.
The value of excluding competitors from practicing an invention depends on a number of factors, including (1) the financial value of the patent, (2) whether the invention will be apparent when incorporated into a product, and (3) whether the invention is necessary to a particular market or can be worked around.
Calculating the financial value of a patent is often difficult, but usually, at least a rough estimate can be made. In the video game space, the price of new games is more or less fixed for console, PC, and cell phone games. However, the demand for a game can vary markedly, and if new technology promises to create more demand for a developer’s games, the increase in demand translates directly into profit for the developer.
Another factor in determining the value of an invention is whether it will allow the developer to create video games in less time or with lower cost, or to create more elaborate games at the same cost.
If the financial value of an invention is not sufficient to warrant filing a patent, but the video game developer intends to practice the invention, the developer may guard itself against a competitor patenting the invention through publication.
When an invention is published, it becomes “prior art” against other’s patents. Notably, under U.S. patent law, the inventor (or his company) may decide to pursue a patent within one year of publication, although the ability to pursue patent protection in most other counties will be lost.
It is also important to determine whether the invention is readily detectable when incorporated into a video game. If a video game cannot be examined or reversed engineered to reveal the presence of the invention, enforcing a patent directed toward the invention may be very difficult or impossible.
The Federal Rules of Civil Procedure require that before a patent suit can be filed, there must be a good faith belief (i.e.; there must be some evidence) that a patent is infringed. For this reason patents directed to certain inventions, such as, for example, an improved clipping algorithm, may have minimal or no value.
In such a situation, maintaining such an invention as a trade secret is the most prudent course of action. A trade secret is any economically valuable information that is not publicly known, and for which steps have been taken to maintain secrecy. Unlike patents, no formalities, such as filing with a government agency, are required to maintain a trade secret.
Also unlike patents, trade secrets endure for as long as secrecy is maintained. If a trade secret is “stolen,” the holder of the trade secret may sue for misappropriation. For inventions that, if implemented by others, would be undiscoverable, the advantage of trade secret protection is readily apparent.
In fact, since an application for patent must include a clear description of the invention, applying for a patent directed to an invention that is not discoverable when incorporated within a product may do little but share the developer’s technology with the developer’s competitors.
Unfortunately, a trade secret will not prevent a competitor from reverse engineering the developer’s technology. Therefore, if an invention is valuable, and is capable of being detected in the product, patent protection is almost always more appropriate.
Before applying for a patent, it is also prudent to consider whether an invention is necessary to pursue a particular market opportunity or can be worked around. Often, an invention is “necessary” to obtain a market opportunity because of government regulations or customer requirements.
Of course, an invention may also be “necessary” to obtain a market opportunity because the invention is ground breaking or pioneering. For instance, when massively multiplayer online games originated, certain network management and game play techniques were invented (although many were not patented), and are now widely copied.
As new markets are developed, for instance, as massively multiplayer games migrate to mobile platforms, similar innovations may be made. If an invention is necessary to pursue a market opportunity, patent protection should usually be pursued.
If a particular invention has sufficient financial value, but the video game developer has no intention of practicing it, the developer should look at the possibility of licensing the invention to others in exchange for licensing fees. To obtain licensing fees the developer does not need to practice the invention or have even built the invention. Practically, the amount of a reasonable royalty is tied to the additional profit enabled by the invention.
Patents also have defensive value, especially in hotly contested new markets. Often, a larger, established company can prevent a smaller video game developer from pursuing a business opportunity by threatening a patent suit.
On the other hand, if the smaller developer has a portfolio of strong patents that the larger company will eventually need to license, the smaller developer will have a much stronger bargaining position. However, this use is often used as an excuse to justify filing a patent. A patent's value as a defensive asset really depends on its financial value – a novel, non-obvious invention that no one will ever use has little value, defensively, or otherwise.
The video game industry is at a point where patents and other intellectual property are becoming vital to determining who the future winners will be. Decision makers at video game companies need to be informed of the different types of protection that can be sought for inventions, as well as the advantages of each. Armed with proper information, video game developers can use intellectual property to establish competitive advantage over their rivals.
Konrad Sherinian is an attorney with Cook & Alex, with his offices in Chicago. His practice focuses on counseling small to mid-size companies, including video game developers, on the strategic use of intellectual property. In addition, Mr. Sherinian maintains a commercial litigation practice, and presently represents a number of patent holders on a contingent-fee basis seeking to obtain compensation for patent infringement. Prior to becoming an attorney, Konrad, who has an electrical engineering degree, worked for various high-tech companies and start-ups, and lead the development of many hardware and software technologies. Notably, from 1998-2000, Konrad worked at Bungie Software, and contributed to the development of Myth II and Halo, as well as Bungie’s game matching platform, bungie.net.