Intellectual Ventures' Nathan Mhyrvold

Intellectual Ventures' CEO and founder Nathan Myhrvold, who previously spent some 14 years at Microsoft Research, took the stage here at D10, and as predicted, his interview with Walt Mossberg was quite the invigorating one. You may know the man and his company for its vicious patent trolling -- or, what appears to be patent trolling. In essence, a lot of its business comes from acquiring patent portfolios, and then licensing and / or suing companies to "enforce" them. Naturally, Nathan has a radically different perspective than most sane individuals on the matter, insisting that the system isn't necessarily broken, and that "making money from enforcing patents is no more wrong than investing in preferred stock."

The talk centered predominantly around how Intellectual Ventures operates, what it does, and if its CEO feels that the "rat's nest of lawsuits" -- as Walt put it -- was getting out of control. Despite saying that his company has hundreds of people working on new inventions to help deliver medicines in Africa (in response to a question from the crowd on whether his outfit was truly helping people), he confessed that suing to enforce patents was simply another method of capitalism working. Care to take a ride on the crazy train? Head on past the break for a few choice quotes from the interview.

In response to Walt's probing about what Nathan's company does, Nathan stated: "We like to say invention capital. Our goal is to invest in invention. We file patents ourselves on our own inventions or those that partner with us. We also have a business like private equity, where we take a controlling interest in existing patent portfolios -- from universities, from all over the place.

We have labs -- one in Bellevue, where over 100 people come to work

We believe it's important for there to be a liquid capital market. We think there's a lot of value in people investing in stuff, and then being able to realize a return. Just as private capital revolutionized their part of the economy, I think we need this [patent buying / licensing]."

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When Walt asked if "spending all this time suing each other was a good thing," he quipped: "The way our system works, it's very duplicative. People compete. You could say 'Why shouldn't there be one smartphone company -- why doesn't everyone else go home?' The set of incentives that go around patents -- including the one that gives ownership and the right to enforce -- that's how the system work. You could ask 'Why do these tech execs get rich? Shouldn't they plow that into R&D?' I think inventors should get rich. It's good for everybody."

Walt then replied: "C'mon -- it has exploded into insanity. Even Tim Cook said it's a pain in the ass and it's overhead, he even said it's broken."

Picking up from there, Nathan stated: "He specifically mentioned standards bodies and how they deal with patents. I think meritocracy is the best way to run an industry. In the past, nobody had any patents. In the mid-1990s, Microsoft was sued by Apple, trying to stop Windows -- they didn't use patents, because they didn't have any. These days, we now have head-to-head competition with companies that have patents. People use lots of tricks and techniques. Anytime there's a strategic tool that someone can use to get ahead -- back in the day it was Netscape and Microsoft, Apple and Microsoft, etc. -- those big battles involve companies with patents today. I didn't create that situation, but it was clear as day to me that it was going to happen, because that's what happens in mature markets."

Walt followed up: "You just buy up patents and then you sue people, and I don't understand how that helps innovation and creativity in the world."

Said Nathan, "If people create something and don't get paid, that's a problem. It's very hard for individual inventors to get paid. For the same reason that private equity is valuable -- broadly, that's a good thing -- in the case of patents, many that own them aren't in a good position to take the next step. Mostly, we license patents; we don't mostly sue people. If you don't enforce your rights, no one is going to enforce them for you.

Most CFOs see the R&D department as a black hole -- the roach motel for cash. Money goes in and it doesn't come out. Patent revenue helps make R&D a better investment."

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Walt cut straight to the point: "Do you see any problems with the rat's nest of lawsuits."

To which Nathan replied: "The problem is that the industry is growing up. In mature industries, people actually respect patents. Look at biotech -- how much innovation would exist without patents? Experts will tell you, 'None.' The incentive that patents provide is essential in mature industries. In this narrow industry, people used to think 'Hey, we're different.' In the early days of the software industry, people cared about copyright and didn't give a damn about patents -- they copied each other willy-nilly.

From there, Walt proposed this: "How would you change the patent system, or is it just fine right now?"

Nathan offered up: "Not long ago, there was the America Invents Act, it was maybe seven years in the lobbying process. As with every bill of its size, there were some pros and cons. Most observers of the patent system would say, however, that it was as good as we could've done. It'll probably be ten years before it changes majorly again, save for court decisions along the way. With the Act, the goals they had seven years ago -- most of those were dealt with by court decisions in between. When people say it's broken, they almost always have an axe to grind. If you look at quantitative reasons, you don't see the patent system as broken at all."

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Walt, in closing: "If you were Tim Cook, and you had his job -- or if you had the job of running Samsung, would you continue slugging it out in court, or would you let the market deal with it, sign a licensing deal, what?"

Nathan: "They commoditize the handset guys and control them down to a ridiculous level. The miracle that Jobs did was the creation of a new business model. He forced the carrier to not mess with them, allow Apple to own the App Store -- he had a different business model. It's one of the great business achievements of the 21st century. As a result, when he sees Android coming in -- well, you don't buy Android, you give it away for free -- it winds up undercutting that specialness. They don't want to be the R&D lab for people to give it away for free, and they don't want to devalue that specialness. Tim Cook is now trying to protect his very valuable castle. If I were Samsung -- who makes great products also -- I'd say 'How can I get [Apple-level] clout?' It's really hard to compete with Apple on pure coolness, and if you do, you're probably going to use some of the things they pioneered."

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Intellectual Ventures' Nathan Myhrvold defends patent trolling, calls tech industry immature