rethink(ip)

Dominant Design and Lost Profits in Creative Labs v Apple Computer

Posted by Bill Meade at May 17, 2006 02:51 PM

By Bill Meade, President – Basic IP Management, Inc.
bill@basicip.com
http://www.basicip.com

James M. Utterback’s (1994) MASTERING THE DYNAMICS OF INNOVATION is one of my favorite books. Utterback has lately been squeezed between Clayton Christensen’s work on disruptive innovation and Geoffrey Moore’s work on market structure and shareholder wealth management. But, I think Utterback deserves reading by patent attorneys.

First, because, Utterback’s book is just plain fun for a technology person to read. It has competition case histories of the typewriter (p. 1), automobiles (p. 34), television (p. 38), transistors (p. 41), calculators, (p. 42), disk drives (p. 46), and many other one-time high-tech industries. Second, I think Utterback deserves reading because his dominant design model has many uses in constructing defenses and offenses in patent litigation.

Utterback is a theorist of how competition grows and declines in an industry. I strongly urge you to buy this book and read for yourself Utterback’s theory (see end notes). I’m going to do a back-of-envelope summary here, to demonstrate how nicely the theory can be applied to patent litigation, specifically, to Creative Labs vs. Apple Computer. And, hopefully, to spark the idea that recent development in economic theory can be handy tools for patent litigators.

Utterback’s Theory: Dominant Designs

As a new technology is developed, entrepreneurs sense its missing features, think of ways to improve the technology, and introduce new products they hope will be differentiated by their improvements. In most new industries the result is that the number of competitors increases over time. What is really going on here is that an adolescent market is searching, groping, and exploring the technology’s capabilities. As people in the market get their heads around the technology, an optimal combination of features becomes clear. This combination is called by Utterback a “dominant design.”

Once a dominant design becomes available, many industries experience a collapse in the number of competitors. The shake-out-precipitating companies are the Microsofts, the Intels, and the Oracles, that benefit from the natural selection of markets. New market natural selection revolves around optimal packages of affordable features.

Two implications of Utterback’s theory that are significant to a patent attorney and patent litigator are:

• Markets are created by systems. Individual features are not enough to generate a new market. To reach critical mass, to precipitate a new market, a system of features is needed to enable new product use-models that can out-compete old use-models. Entrepreneurs like Thomas Edison often understood this. Edison created much more than the light bulb. He designed the light bulb, the generator, the transmission lines, etc. to compete with the gas industry.
• You have to have end-to-end solutions that reliably meet the needs customers find most important.

Example products that conform to Utterback’s theory are the DC3. Peter Senge in THE FIFTH DISCIPLINE (p. 6) listed the 5 components of the DC3 dominant design as:

1. Variable-pitch propeller,
2. Retractable landing gear,
3. Monocque body construction,
4. Radial air cooled engines, and
5. Wing flaps

In 1934, Boeing introduced an airplane similar to the DC3, the Boeing 247 with all of DC3’s components except wing flaps. Unfortunately, the 247 was unstable taking off and landing so as a product, it was not adopted by the market. The next year, however, the DC3 was introduced and it swept the market. “The DC3 was the first plane to support itself economically as well as aerodynamically” (Senge p. 6) and many are still flying in many parts of the world.

Creative Labs vs. Apple

Creative Labs has sued Apple Computer for patent infringement (of US6928433 Automatic hierarchical categorization of music by metadata) in the U.S. District Court for the Northern District of California (case number 3:06-cv-03218-BZ).

David Pogue wrote a great New York Times article on 3/9/2006 (see end notes) which to a reader of Utterback sums up the elements of the iPod’s dominant design at that date. These elements are:

1. Cool-looking hardware.
2. Fun scroll wheel.
3. Simple user interface menu.
4. Great library of add-on accessories.
5. Effortless synchronization.
6. Rock solid integration with an online music store.

The Creative Labs patent can be seen as an attempt to grab the idea behind element #3: Simple user interface menu. The idea is hierarchical menus based on album, genre, artist, etc.

Rating the Products:

Owning both an iPod (20 gig) and a Creative Labs Zen (40 gig) product I would evaluate the products against Pogue’s dominant design elements as follows:

• both the iPod and Zen have cool looking hardware,
• only the iPod has a scroll wheel,
• both iPod and Zen have simple user interfaces,
• the iPod has a vastly superior add-on accessory library,
• the iPod has fantastic synchronization, and the Zen’s synchronization is bad,
• only the iPod has a great integrated music store.

Dominant Design-Based Lost-Profit Argument:

Assume for the sake of argument that the Zen patent is valid, and that it is infringed by the iPod. I have done no analysis of the validity or infringement. For my purposes, I want to explore the concept of dominant design in defending Apple against a lost-profits damages argument by Creative Labs.

A dominant design argument would go like this: “The iPod and Zen products serve 2 completely different markets: the inexpensive stand-alone portable music player market (served by Zen), and the defacto standard portable music player market (served only by the iPod). Because Zen products do not have:

• a scroll wheel (element 2),
• a large library of add-on accessories (element 4), and
• an integrated music store (element 6).

Creative Lab's products serve only the inexpensive stand-alone portable music player market because Zen products do not meet all the market requirements of the defacto standard. If you bought a Zen product for your teenage daughter and saw her disappointment upon opening it, you may have suspected that the iPod and Zen are not substitutes. Dominant design puts theoretical building blocks underneath exactly why products that look the same are not substitutes.

Because the iPod emboides all 6 elements of the dominant design for the defacto music player market, it precipitated the market's formation. Creative Labs is not entitled to lost profits for the defacto standard market. Not entitled because the defacto standard market would not have formed around the Zen products.

End Notes:

Clayton Christensen (2003) THE INNOVATOR’S DILEMMA, Collins Reprint. http://www.amazon.com/gp/product/0060521996/sr=8-1/qid=1147890825/ref=pd_bbs_1/103-5034715-0679031?%5Fencoding=UTF8

Geoffrey Moore (2005) DEALING WITH DARWIN: Portfolio http://www.amazon.com/gp/product/1591841070/qid=1147890923/sr=2-1/ref=pd_bbs_b_2_1/103-5034715-0679031?s=books&v=glance&n=283155

David Pogue (2006) “Almost iPod but in the End a Samsung” NY Times http://www.nytimes.com/2006/03/09/technology/circuits/09pogue.html?ex=1143003600&en=c0b14704defa6610&ei=5070

Peter Senge (1994) THE FIFTH DISCIPLINE, Currency http://www.amazon.com/gp/product/0385260954/qid=1147890981/sr=2-1/ref=pd_bbs_b_2_1/103-5034715-0679031?s=books&v=glance&n=283155

James Utterback (1996) MASTERING THE DYNAMICS OF INNOVATION, Harvard Business School Press http://www.amazon.com/gp/product/0060521996/ref=pd_bxgy_text_b/103-5034715-0679031?%5Fencoding=UTF8