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• Explore the competitive effects of software patents and the amplifying role of company capabilities. • Software patents held by a company negatively correlate with the market value of its competitors. • Competitors' enhanced R&D capabilities can mitigate the adverse effects of these patents on their value. • Marketing and operational strengths of a company can enhance the economic gains from its software patents. • Utilize a stochastic frontier analysis to assess IT firms' distinct capabilities along the value chain. Software patents have been shown to have a positive effect on the patenting firm's market value. Although there is anecdotal evidence that software patents of a focal firm can adversely affect its rival firms, there is a paucity of empirical research on such competitive impacts of software patents. In order to advance our understanding of the competitive impact of software patents, we investigate the impact of a firm's software patents on rivals' market value using data from the US IT industries. Importantly, we consider heterogeneity across firms, in terms of their ability to successfully commercialize their patented invention, which has not been studied. Drawing upon resource-based view (RBV) and dynamic capability perspective, we examine how rival firm's R&D capabilities might moderate such a competitive relationship. Furthermore, we theorize that firms must have supportive marketing and operations capabilities if they are to commercialize software patents and generate significant value. Specifically, our analysis of a large unique panel dataset of 563 IT firms in the United States during the period 2003–2012 indicates evidence of negative impacts of a focal firm's software patent stock on its rivals' market value. However, if rivals have sufficient R&D capabilities, they can mitigate the negative impacts of the focal firm's software patents. Moreover, we find that marketing and operations capabilities indeed ensure that software patent stock has strong positive impacts on the forcal firm's market value. Implications for research and practice are discussed. [ABSTRACT FROM AUTHOR]