Why Do Inventors Innovate?

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Why do inventors innovate? Should they dream of improving the human condition, or is it all about getting rich? And if it's all about the money, why are so many of them pricing themselves out of the market they created?

From Benjamin Franklin to Steve Jobs, great inventors in human history have never really focused on making money. Make something great, and financial success just follows naturally.

Jobs says he focused on "creating great things instead of making money, putting things back into the stream of history and of human consciousness as much as I could." And, he added, "We are inventing the future." The first of Google's famed "Ten things we know to be true" and that underlies the whole business model is this: "Focus on the user and all else will follow." ("Do no evil" gets more press, but it's only No. 6.) These guys are generally doing it the right way -- and they make billions in the process.

But many would-be inventors and pioneers are attacking the money question from entirely the wrong angle.

The price is right! Or is it?
Micron Technology
(NAS: MU) and other memory builders are in court for allegedly trying to kill patent wrangler Rambus (NAS: RMBS) with anticompetitive tactics. It's a controversial case where nothing is black or white, but I own Micron shares and still sleep at night. Here's why.

If the memory makers wanted to get rid of Rambus because DRAM was technologically superior, no amount of patenting or licensing would have changed that. Come up with better solutions if you want to win in a fair market.

And what if the memory industry really colluded to kill Rambus because they didn't want to pay exorbitant license fees for a top-notch technology? Well, wouldn't it then have been in Rambus' best interest to lower its prices to a level that everyone could live with?

It's the old law of supply and demand. In this case, Micron and others had a choice of technologies to throw their support behind. If Rambus had the best technology at a reasonable price, it should have won. The company says that it had all of that but was essentially killed by an evil cartel. The whole picture could have been very different if Rambus had offered slightly lower licensing fees a decade ago. The jury has been deliberating on this case for five weeks now and are still asking for more evidence. There's nothing clear-cut about these thorny issues.

Nothing has changed
That's an illustrative story mostly from ancient history. And so it goes with modern patent trolls as well. Slap a big price tag on some juicy wireless-communications patent, expect big money to roll in, and launch lawsuits if the industry doesn't come running to your door to pay exorbitant fees. All the while, you can complain loudly that other companies don't respect your innovations or your rights to profit. But nobody ever talks about pricing the licenses to move.

VirnetX (ASE: VHC) is perhaps the most visible proponent of this model in today's public markets. The company hopes to make big money on security patents for 4G wireless services, but it talks more about legal actions than signing royalty deals. How fair and reasonable can the licensing terms be if nobody wants to sign on the dotted line?

Apple (NAS: AAPL) might seem out of place in this list, given how I highlighted Jobs as a role model, but nobody's perfect. The company also runs a huge war machine armed mostly with design patents and not true technology innovations -- and then you have the posthumous revelation that Steve Jobs was willing to spend every penny of Apple's resources to kill Android. In fact, Jobs said he didn't want money for his inventions -- just the exclusive right to implement them. Houston, we have a pricing problem.

Buying semi-random patent portfolios to defend against these campaigns seems equally pointless, not to mention misdirected. Apple's lawsuits against HTC focused on user interface innovations. HTC's countersuit leans heavily on power management patents and signal processing. "You took my lunch money, so I'll pull your sister's hair!" You know? I sure hope Google had grander plans in mind for that Motorolacquisition, like making some money on Android hardware or perhaps launching a fantastic set-top box of some kind. The patents aren't worth the trouble.

Other approaches
InterDigital (NAS: IDCC) seems to have fewer legal troubles, probably because of a lack of inflated egos and expectations of enormous licensing royalties. That hasn't hurt the stock, which gained 60% over the past year amid buyout speculation.

Further down the line, you'll find Universal Display (NAS: PANL) , which took 18 months and five temporary contract extensions to hammer out a fair and reasonable OLED license for largest customer Samsung. Isn't that what VirnetX, Intellectual Ventures, and even Apple should be doing instead of pouring so much effort into senseless legal battles? Largely thanks to the Samsung deal, Universal Display shares have gained 50% in three months.

Or look at the open-sourcemodel. Anybody can use, sell, or modify open-source software. The lack of royalty expenses, coupled with the freedom to modify, improve, or fix the product before selling it for profit, has made open alternatives very popular. Apache has been the most-used Web server package since 1996. You may not run Linux on your desktop (like I do), but it's inside every Android phone, tons of set-top boxes, probably the cable modem in your closet, and the list goes on. Nobody gets a nickel of license payments from that. Yet Linux expert Red Hat (NYS: RHT) has built a $9 billion market cap and billion-dollar annual revenues on this free stuff.

It's hard to compete with free. Even harder if you think you deserve outrageous payments for your premium innovations. Benjamin Franklin liked the open-source idea long before it was formalized. "As we enjoy great advantages from the inventions of others, we should be glad of an opportunity to serve others by any invention of ours; and this we should do freely and generously," he said. That's from one of the greatest inventors in human history.

Maybe Franklin was just another free-love hippie long before Steve Jobs tried LSD. Or maybe he was onto something big. You don't have to choose between improving the human condition and making money -- do something great and the cash will follow. You don't even need court dates to make it happen.

Today, some of the most important IT trends rely very heavily on open innovation and license-free industry standards. In this free video report, "The Two Words Bill Gates Doesn't Want You to Hear...," you'll learn all about one very investable trend from that camp. Learn how to invest like Benjamin Franklin right now -- the report is (very appropriately) totally free!

At the time this article was published Fool contributorAnders Bylundowns shares of Google and Micron but holds no other position in any of the companies discussed here. The Motley Fool owns shares of Apple and Google.Motley Fool newsletter serviceshave recommended buying shares of Universal Display, Google, Apple, and InterDigital as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights make us better investors. The Fool has a disclosure policy.

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