Lessons from Xiaomi’s Patent Portfolio Expansion

In this post, Balu Nair, our Spicy IP Fellowship applicant discusses Xiaomi’s recent patent portfolio expansion strategy and compares it with the approach adopted by Indian smart phone manufacturers.

This report found here on the massive expansionary policy of Xiaomi vis a vis its patent portfolio is quite insightful from both an academic standpoint and that of patent strategy. The post explores why it is important to create a sizeable patent portfolio despite observations that most individual patents have little stand-alone value.  This is then linked to the strategy adopted by Xiaomi and a comparison is made with the approach adopted by the Indian mobile manufacturers.

Patent paradox and patent portfolios

This paper summarises the literature surrounding patent paradox in a comprehensive way. Many studies have shown that the inherent value of a patent is negligible as the costs required to develop and ensure the protection of patent is much more than the benefits one reaps out of it.  Nevertheless, most corporations and even small enterprises spend a large share of their revenues for creating or acquiring new patents. It is this inherent contradiction that is referred to as patent paradox. Many theories have been proposed to reconcile the seemingly conflicting positions. Some of the more popular ones (as discussed in the paper above) are the lottery theory, information signalling theory (own coinage), the defensive patenting theory and as a measure of employee productivity. It is suffice to say that all the theories above explain the paradox only partially. The authors of the paper have argued that the patent portfolio theory is the one that best explains the patent paradox. According to them, although individual patents by themselves might only have negligible value, when patents are aggregated to form a patent portfolio, their value exceeds the cost of protection and acquisition. Thus, it is not the individual value of the patent but its identity as a cog in the wheel called patent portfolio, which serves a crucial function. Thus, the sum is greater than the value of each patent added up.

In effect, a patent portfolio acts as a ‘super patent’ and has the potential to reduce litigation, increase the bargaining power of the portfolio holder and hedge the uncertainties of the market. Mostly, each patent within a portfolio pertain to the same area of technology in order to ensure maximum protection within that domain. Nevertheless, care will have to be exercised so as to ensure the right balance is struck between casting the net too wide or too narrow (as to the diversity and scale of your portfolio). It is here that an effective patent portfolio strategy comes in handy.

Xiaomi’s patent expansion strategy

As mentioned in the above report, Xiaomi is on a major expansion drive across the world and has done remarkably well in India as well. This is significant as it is embroiled in a number of patent litigations, including in India.  As compared to the other mobile manufacturers, Xiaomi’s patent portfolio is still thin and this is exactly why it has run into patent litigations. The report indicates that although Xiaomi has increased its patent filing considerably since its beginnings, a good share of its present portfolio has been a result of patent acquisitions than its own filing. The report then goes on to list the various deals it has entered into for the purpose of acquisition of patents.  The company is now on an aggressive expansion drive with around 2318 filings on its own along with other acquisitions.

This move by Xiaomi fits in well with the above theory of patent portfolios as a super patent, which has the power to minimise litigations and enable a strong foothold within the market. If one were to read it along with the rise of a company like Qualcomm on the strength of its patent portfolio, one need not look any further for affirmation of the utility of a strong patent portfolio. Nevertheless, questions remain as to the competition law implications of such policies. The possibility of a few major players cornering most of the patents is a real possibility. This could impede the rise of new players. But, viewed differently, smaller enterprises could try and make windfall profits by merely developing patents, which could interest larger players.

Patent portfolios and Indian mobile manufacturers

Indian mobile phone manufacturers are engaged in multiple litigations in India (for an excellent compilation, see here) for infringement of patents. Apart from the stray vision statements of wanting to expand on its patent portfolio, no concrete action has been forthcoming from the domestic manufacturers. I could not find evidence of any follow up on these vision statements. A search of the patent database also reveals the same picture (do write in if there is any other credible data on this front). Apart from the obvious handicap of having to face litigation, future expansion is going to be incredibly difficult for the domestic manufacturers without a sound patent portfolio. There is no doubting that a patent strategy with emphasis on patent portfolio is the way to go for mobile manufacturers within the country. A strategy in line with that of Xiaomi, as discussed above, will hold the domestic manufacturers in good stead for the future.

Image from here