Accountants: Heed the warning – the Patent Wars will eventually reach us, too.

Apple’s billion-dollar award from Samsung completely changes the environment for mobile computing. It may cause the elimination of many useful products, or make others prohibitively expensive. And it’s another brick in the wall as Apple slowly takes over the world. As Apple becomes more aggressive in protecting its patent rights, so, too, may other manufacturers, like Google and HP.  Together, they will squash innovation. Or so conventional thinking goes, at least.

That said, Jesus Diaz at Gizmodo got me thinking. He argues that Apple’s Patent Wars are going to be good for innovation:

So hope that Apple wins all the appeals. Hope that Apple wins every single lawsuit in which their patents are valid. Because the fact is that Apple’s court triumph will drive innovation, not stifle it. Steve Jobs’ ultimate afterlife victory will drive prices down, not up. It will give us, the consumer, more options not less.

What’s Diaz thinking? He believes that Apple’s lawsuits will stifle the copycats (like Samsung) and encourage competitors to create more revolutionary products and ideas, one of which is Windows 8:

Microsoft showed the world that there was a different way to do things. Like I said one year ago, Windows 8 “introduces diversity, new methods, evolution. That, as someone who loves brilliant technology, excites me. You should be excited too.

This makes sense. Apple will sue the easy targets – makers of lame and cheap copycat products. But we will benefit from the more revolutionary products to come.

I think that the existing Patent Wars are just a stage for a much larger conflict, much the way the Vietnam War was a stage for a much larger war of ideas, the Cold War. Apple somehow made itself the stand-in for the old, closed, proprietary way of doing things. Its software only runs on its hardware, and its hardware only runs its software. It represents and collects a huge share of the royalties of every major media company. Furthermore, its software remains closed, so that the only way that it can innovate is by either creating ideas in-house or buying them from other companies. As innovative as its products may be, Apple is completely tethered to a proprietary ideal.

In the other corner we find a much more innovative bunch. Open-source products and the crowd sourcing ideology have begun to bear fruit, in such products as FireFox, Wikipedia and Android. Even Google Search, one of the biggest internet businesses around, is really just a crowd-sourcing device (by searching and finding, you help other people to search and find). With Windows 8, even stalwart Microsoft is embracing the open-source bug.

Therefore, I think that there are really two ways to think about the Patent Wars. On the stage right now, we have Apple and its lawyers, fighting a myriad of competitors and their lawyers, arguing in court which features we can have on which products. But on the larger stage, the great conflict is between the old proprietary closed model and the new open-source model. Here, I don’t see how Apple can stand a chance.

So what does this all have to do with us accountants? On the one hand, we might not be able to save money by buying cheap rip-off mobile phones. Furthermore, where there’s litigation, there are litigation support opportunities. Big deal. But in the larger war of ideas, we, too, are stuck in the old closed proprietary model. GAAP and GAAS are closed models, set by a small group of people. Audits, by their very nature, are closed and proprietary functions, protected by government regulation. If you think about the Patent Wars as part of a larger conflict of ideas, where a communal new open model battles against an older closed proprietary model, I fear that we have put ourselves on the losing side.

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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

4 comments

  1. I agree that a win for Apple will result in more innovation and sends the message that shameless copying isn’t OK. When I was told that plagiarism wasn’t allowed in college, I bit the bullet and went out and did my own original research. It was good for me. Can’t say that I’m much of a Microsoft fan in general, but I applaude their efforts to think outside the box and innovate in this space.

    Regarding the “I don’t see how Apple can stand a chance” comment. In one corner is Apple, now the most valuable company in the world, and in the other is “open-source” Google, who literally loses money on every Android device sold. Am I missing something?

    First, a couple of clarifications:
    * “I don’t see how Apple can stand a chance.” In one corner is Apple, now the most valuable company in the world who regularly tops the customer satisfaction charts, and in the other is “open-source” Google, who literally loses money on every Android device sold. Am I missing something?
    * “[Apple’s] software only runs on its hardware.” Except when it doesn’t, such as Safari for Windows.
    * “[Apple’s] hardware only runs its software.” Tens of thousands of independent developers making a living writing software for OSX and iOS would probably take exception to this assertion.
    * “Audits, by their very nature, are closed and proprietary functions, protected by government regulation.” Are you saying you want the auditing of public companies to move to an “open-source” system? Perhaps a GAAP/GAAS Wikipedia of sorts where everyone has the ability to alter and ammend the rules as they see fit? All snarkiness aside, I would be genuinely interested to know how such a system could offer more assurance to the capital markets and not cause a financial meltdown.

    But I digress, I wanted to stick to the accounting analogy.

    I like your analogy between GAAP/GAAS and the so-called ideological war between “Open vs. Closed,” but using this same analogy I actually come to the exact opposite conclusion. Absent from most discussions of the presumed superiority of “Open” systems such as Android is the serious and often crippling downsides that such a system brings. For starters, regardless of how adroit and innovative Google is at developing its latest version of Android, the ability of consumers like you or me to enjoy those innovations depends on (1) whether the carriers decide to push those updates to existing users (they usually don’t – this is why something like 5% or less of Android users have access to the latest version), and (2) how much the carriers decide to change the build to add their own proprietary skin on top of the core Android kernal. Openness can get ugly.

    The IFRS comparison here actually fits quite well. The IASB works hard to develop the best standards it can, but, like Google, it lacks teeth to enforce the adoption of these standards across its constituents. So, in theory its nice that so many countries are operating under IFRS – look under the hood though, and what you find is a patchwork of countries all using their own proprietary interpretations of “IFRS.” The arguments of increased international comparability under IFRS start to sound much more thin in this light.

    Take the example of the Kindle Fire. Amazon forked a version of Android to build a competing product that looks and acts nothing like any other Android device out there (a move that I’m sure provoked Google to no end). In many ways, Android has become an amorphous blob that Google has little control over. Is this really what we want accounting standards and the accounting standard setting process to look like in the US?

    The other frequent criticism of Apple’s “walled garden” approach is their curated approach to allowing apps into their App Store. “Android’s openness is far superior because it lets me download whatever I want from whomever I want!” Serious buyer beware though when navigating the jungles of the Android market places. There are some gems in there, but you’re going to navigate through the piles of ripoff imposter apps (mostly harmless, but annoying) and the more sinister apps loaded with various malware designed for all kinds of nefarious purposes. “Walled gardens” are actually quite pleasant, so why the bad rap? Ever been to Buchart Gardens? The place is phenomenal and breathtaking, and it’s that way precisely because it is carefully curated and protected. Should we tear down the walls and let the public have free reign on planting and arranging things however they want? I should think not. I personally prefer my experiences – both in electronics and in accounting regulation – to take place in the protected confines of a “walled garden”.

    As with IFRS so it is with Android – the pie-in-the-sky rhetoric of openness, collaboration, comparability, and superiority sounds nice on paper, but the devil is in the details.

  2. I agree that a win for Apple will result in more innovation and sends the message that shameless copying isn’t OK. When I was told that plagiarism wasn’t allowed in college, I bit the bullet and went out and did my own original research. It was good for me. Can’t say that I’m much of a Microsoft fan in general, but I applaude their efforts to think outside the box and innovate in this space.

    First, a couple of clarifications:
    * “I don’t see how Apple can stand a chance.” In one corner is Apple, now the most valuable company in the world who regularly tops the customer satisfaction charts, and in the other is “open-source” Google, who literally loses money on every Android device sold. Am I missing something?
    * “[Apple’s] software only runs on its hardware.” Except when it doesn’t, such as Safari for Windows.
    * “[Apple’s] hardware only runs its software.” Tens of thousands of independent developers making a living writing software for OSX and iOS would probably take exception to this assertion.
    * “Audits, by their very nature, are closed and proprietary functions, protected by government regulation.” Are you saying you want the auditing of public companies to move to an “open-source” system? Perhaps a GAAP/GAAS Wikipedia of sorts where everyone has the ability to alter and ammend the rules as they see fit? All snarkiness aside, I would be genuinely interested to know how such a system could offer more assurance to the capital markets and not cause a financial meltdown.

    But I digress, I wanted to stick to the accounting analogy.

    I like your analogy between GAAP/GAAS and the so-called ideological war between “Open vs. Closed,” but using this same analogy I actually come to the exact opposite conclusion. Absent from most discussions of the presumed superiority of “Open” systems such as Android is the serious and often crippling downsides that such a system brings. For starters, regardless of how adroit and innovative Google is at developing its latest version of Android, the ability of consumers like you or me to enjoy those innovations depends on (1) whether the carriers decide to push those updates to existing users (they usually don’t – this is why something like 5% or less of Android users have access to the latest version), and (2) how much the carriers decide to change the build to add their own proprietary skin on top of the core Android kernal. Openness can get ugly.

    The IFRS comparison here actually fits quite well. The IASB works hard to develop the best standards it can, but, like Google, it lacks teeth to enforce the adoption of these standards across its constituents. So, in theory its nice that so many countries are operating under IFRS – look under the hood though, and what you find is a patchwork of countries all using their own proprietary interpretations of “IFRS.” The arguments of increased international comparability under IFRS start to sound much more thin in this light.

    Take the example of the Kindle Fire. Amazon forked a version of Android to build a competing product that looks and acts nothing like any other Android device out there (a move that I’m sure provoked Google to no end). In many ways, Android has become an amorphous blob that Google has little control over. Is this really what we want accounting standards and the accounting standard setting process to look like in the US?

    The other frequent criticism of Apple’s “walled garden” approach is their curated approach to allowing apps into their App Store. “Android’s openness is far superior because it lets me download whatever I want from whomever I want!” Serious buyer beware though when navigating the jungles of the Android market places. There are some gems in there, but you’re going to navigate through the piles of ripoff imposter apps (mostly harmless, but annoying) and the more sinister apps loaded with various malware designed for all kinds of nefarious purposes. “Walled gardens” are actually quite pleasant, so why the bad rap? Ever been to Buchart Gardens? The place is phenomenal and breathtaking, and it’s that way precisely because it is carefully curated and protected. Should we tear down the walls and let the public have free reign on planting and arranging things however they want? I should think not. I personally prefer my experiences – both in electronics and in accounting regulation – to take place in the protected confines of a “walled garden”.

    As with IFRS so it is with Android – the pie-in-the-sky rhetoric of openness, collaboration, comparability, and superiority sounds nice on paper, but the devil is in the details.

    • Nate,

      Thanks, Nate, for the thoughtful comments, you very nicely explain some of the perspectives that my posts neglects.

      How can I say that Apple can’t stand a chance when it is one of the most valuable companies in the world? Size, in itself, doesn’t necessarily breeds innovation. Remember that both IBM and Microsoft have ruled the digital world, at different times, each so much so that they were hounded by the government over anti-trust concerns. Apple may very well be in the same place that IBM was 40 years ago, or that Microsoft was in 15 years ago. Here, for example, is an article that weighs in on the controversy (I think, more on your side than mine): http://www.economist.com/node/21541826 . Furthermore, it remains to be seen whether the loss of Steve Jobs has blunted Apple’s innovative edge.

      You are correct – there is Apple software that runs on other systems, and outside programmers write software for Macs and iOS. My age is showing – I was confusing software with operating systems. The operating systems of all Apple products are defiantly closed.

      You point out many of the benefits of closed systems – I agree with you here. So far, Apple and Microsoft have advanced the closed system model to the point where their systems are more powerful, reliable and secure than open-source models. (I’m no authority on Android, so I may be wrong – but I think I’m safe to say this.) Similarly, GAAP/GAAS and IFRS, as closed systems, do the job. They have problems, but they do the job. The idea of “open source” accounting methodology is science fiction; there is no serious “open” alternative to GAAP/GAAS or IFRS, and hence, no immediate threat.

      That said, consider a different stage in the war: Web 2.0. Every industry that treated the internet revolution and web 2.0 as science fiction has gotten completely clobbered. What havoc has RSS wreaked on the magazine and newspaper world? Who would think that a technology as simple as RSS could spell the end to newspapers as we know them?

      I don’t think that the “open source” ideal, or the technology to realize it, has yet developed to the point where it could supplant an iOS or Mac, but we are getting close. FireFox, for example, is pretty good. If Microsoft can get Windows 8 right, it will be really good. However, we are a lot further away from seeing the open source ideal threaten GAAP/GAAS/IFRS.

      But we can’t pretend that we’re not a part of this conflict of ideas. We, too, are in the information-delivery business, and it’s hard to imagine how accountants are going to keep working the same way we always have, even after every other part of the information-delivery business has been transformed.

  3. Hi Mark,

    A brilliant article, one that really gets the mind thinking, more specifically Jesus Diaz’s quote. I am impressed with your accounting analogy, the whole idea of the so-called ideological war between “Open vs. Closed” is quite captivating and controversial at the same time just as Nate exclaims. Additionally I agree that Apple’s win is overall good for innovation, and the debate you have with Nate is also exceptionally well thought out.

    Regards,

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