Taking Intellectual Property Seriously
November 1 2004 by Chief Executive
Microsoft has been as tight with its intellectual property as a miser is with his cash. So news that the software giant was going to license IP from its 4,500 patents came as a surprise. A hundred deals were already in the works, the company announced in June and€¦quot;drop jaw here€¦quot;Microsoft was willing to deal with friend and foe alike.
At a stroke, the company created new revenue streams at a time when its core product lines faced limited growth, and it found a way to counter monopoly charges by making fundamental technology available. The attention to patents also opened the door to finding infringements on the part of open-source vendors and demanding royalties that would substantially cut the price advantage such software has enjoyed.
Most importantly, IP becomes a strategic tool available to the highest levels of the company, and not just a sandbox for lawyers. “Over the last 10 years, it has become imperative for CEOs to have not just a general understanding of the intellectual property issues facing their business and their industry, but to have quite a refined expertise relating to those issues,” Microsoft Chairman Bill Gates wrote in an email to Chief Executive. “It is no longer simply the legal department’s problem. CEOs must now be able to formulate strategies that capitalize on and maximize the value of their company’s intellectual property assets to drive growth, innovation and cooperative relationships with other companies.”
All very high-minded. Yet the reality seems to be that most CEOs, even those known for creating and using new ideas, dismiss their role in managing intellectual property. According to many experts, corporate leaders either totally ignore the important issues or assume that delegating them to technical or legal departments relieves themselves of the responsibility. Because those departments are seen as cost centers, no one focuses on the business value of the IP and how the company should be pursuing a return on the investment.
The results? Companies waste millions of dollars protecting the wrong things, lose significant potential revenue and literally give away valuable IP without realizing it. Experts estimate that 80 to 90 percent of corporations still don’t use IP as an offensive as well as defensive tool to block competitors, generate new revenue streams and even increase leverage with suppliers. For all those reasons, CEOs are facing nothing less than an IP crisis.
It is impossible to estimate the amount of money lost each year because of IP issues, but single cases show how painful the results can be. Purdue Pharma is the Stamford, Conn.-based privately held manufacturer of the prescription painkiller OxyContin. In 2000, Endo Pharmaceuticals was looking to create a generic version of the drug. As might be expected, Purdue filed an infringement suit. In January of this year, the presiding judge ruled the patents for the drug were invalid because the patent claims were deliberately misleading and internal company documents showed that management knew the claims to be unproven. According to reports, more than 70 percent of Purdue’s $1.8 billion in annual revenue comes from OxyContin. Should the verdict be upheld on appeal, it could spell the worst case of financial withdrawal ever seen by the pharmaceutical industry.
Call it an anomalous event, but companies are more vulnerable than they realize. “Probably 70 percent of the market value of [the S&P 500] is going to be in their intangible assets,” says Ashok K. Jain, principal in the valuation services group at the Chicago office of Deloitte Touche Tohmatsu. When talking with the 500 largest companies in North America, he finds that they all assert their IP management prowess. Yet he estimates that only one in 10 can answer the simplest of relevant questions: Do you have an inventory of patents? Which are core to your business? Are you exploiting these to generate the greatest possible value out of these assets?
|An IP Primer|
The definition of what constitutes a company’s intellectual property is broader than many CEOs realize. Here are some essential things to keep in mind about protecting and making the most of your valuable IP.
Questions to Ask
IP as Strategic Risk
Companies don’t look at IP as a strategic business risk,” says Kimberly Klein Cauthorn, senior vice president in the intellectual asset management practice at Marsh in New York. Businesses spend money on R&D and protecting their assets, yet don’t match the investment to the value€¦quot;if any€¦quot;returned. Furthermore, these are assets that can significantly fluctuate in value, and since that is part of a company’s value, tracking IP becomes a Sarbanes-Oxley responsibility that almost no CEO is addressing.
If only the risk and liability were just an issue of patents. IP also includes copyrights, trademarks and a vast amount of accumulated knowledge. Focusing only on patent filings is myopic, missing the full implications of the formulas, the know-how, the employee experience and the business processes, and allowing money to flow out the door. Donald R. Davis, managing director of the consulting firm ipCapital Group in Williston, Vt., remembers the recent case of a large client, a well-known electronics manufacturer that as a key part of its business strategy was making money repairing its equipment. “What they were doing in effect was selling €˜uptime,’” Davis says. But they had massive downtime on protecting their repair know-how€¦quot;another type of IP. The company freely transferred its knowledge to customers and suppliers, without any contractual restrictions, and they, in turn, decided to pursue the same service market themselves. The manufacturer tightened things down, but not before having to spend $1 billion to acquire its new competitors. No one had ever considered how a risk to such everyday IP could undermine the fundamental business model.
Even when CEOs appreciate the importance of intellectual property, many see it as a safe thing to delegate, with researchers, designers and engineers creating it; lawyers filing patents; and marketers selling it. “The problem with IP is that it’s technical in its essence,” says Steve Davis, CEO of Corbis, the image licensing firm founded and owned by Bill Gates. “It’s very simple to wave and say, €˜Somebody else has to deal with that.’”
Even in the technology sector, which specializes in new ideas, few CEOs get it right. Michael Anthony, a director in the Waltham, Mass., office of the consulting firm PRTM, estimates that only 20 to 25 percent of companies he sees are successfully handling their own IP portfolios and monitoring those of their competitors. “Of all the companies in high tech, there are maybe a dozen that have an IP strategy that is well defined,” he says, pointing to such examples as IBM, 3M, Medtronic, DuPont, Pitney Bowes and General Electric. “It’s linked to their technology roadmaps; it’s linked to their development processes. They’ve integrated their intellectual processes with the product-development process.”
Practically speaking, that means most companies are stuck in IP strategies that became obsolete years ago. They do not aggressively file useful patents and often rely on cross-licensing deals in which they make tit-for-tat exchanges of permission to use protected IP, like corporate mutual nonaggression pacts. Some companies, such as Intel, are inventive in creating new IP and good about filing for patents, but they focus primarily on excluding competitors from markets.
It’s a valid strategy, but only one route. Most companies miss more nuanced ways of using intellectual property to their advantage, like using patents to block competitors and filing broad claims to expand legal protection to other industries and then licensing in those noncompeting areas. They also overlook what other companies can do to them. Davis of ipCapital mentions a corporation’s strategic business unit (SBU) that had under a billion dollars in annual revenues but was very profitable in a high-margin niche in its industry, with one customer representing its single largest market. The SBU had become lazy, saving money on key R&D and depending instead on the customer’s labs. Turning the relationship upside down, the client company began patenting technology the vendor would need, then used its IP in pricing negotiations. Margins went down by 20 percent€¦quot;a bottom-line loss of well over $100 million. “They didn’t see it coming until we built the map for them,” Davis says. “They were stunned €¦ and it blew up their business strategy.”
To be sure, some chief executives are waking up and getting it right, usually after getting a swift kick from the market. Mal Mixon, CEO of Invacare, a $1.5 billion medical product manufacturer and distributor in Elyria, Ohio, remembers when he bought the company 25 years ago. “In the first 20 years, I didn’t pay that much attention to patents,” he says. “Part of the reason is that we were beating people pretty easily. We filed for patents, but we weren’t as serious as we are now.” Not only does Invacare have domestic competitors, but also many knock-off imports from China with prices 30 to 40 percent less than Invacare’s. “We have a competitor that actually copies the parts numbers and makes them interchangeable with [ours],” Mixon says.
Even by opening facilities in China itself, the company would not have been able to bridge that gap, so it had to use IP as a strategic weapon. Lawyers were brought into all product design meetings, so protecting intellectual assets became part of the development process. The company is stepping up its pace of innovation to keep its IP ahead of competitors and is getting ready to start filing patent infringement lawsuits. “I’m anxious to send a signal to our industry,” Mixon says.
The effort to pull out of an IP strategic hole is significant, taking years and committed resources. That might explain why many companies have opted for a “no-brainer” approach of patenting everything in sight. But the intelligence behind this type of fix is in short supply. Having many patents is not necessarily a solution, says Ed Kahn, CEO of the Cambridge, Mass.-based IP consulting firm EKMS. Starting in the late 1990s, this strategy became popular as many CEOs read Rembrandts in the Attic: Unlocking the Hidden Value of Your Patents. They were taken with the prospect of found money in their filing drawers and instructed corporate counsels to protect everything. But the results largely backfired. “It’s usually velvet Elvises in the attic,” Kahn says. “In large companies with extensive IP, sometimes 80 to 85 percent [of patents] are nonpracticed. They neither protect company products nor license to anyone else. R&D goes one way, the strategic marketing group goes another, and before long you’ve got a lot of underutilized or unused patents.”
Talk about wasted resources. To properly file and maintain a single patent not only in the U.S. but in the other industrialized countries of the world can easily run $80,000 and up. File a thousand patents that provide no revenue stream or strategic benefit to a company, and a CEO might as well set fire to the $80 million invested. Yet these same CEOs would never allow investment in new facilities or additional headcount without a strong sense of how and when they would see a return.
The other upshot of this approach is that in trying to patent everything, a company can inadequately protect things that are core to its businesses. After insisting on having a cornucopia of patents, the CEO doesn’t learn that the counsel’s budget is squeezed. Working with limited resources, the lawyers protect product-specific aspects of R&D and don’t take the time to develop as broad a coverage as possible. It’s a case of paying attention to nothing when you try to pay attention to everything.
Certainly, CEOs already have much on their plates. Making an IP strategy work means doing research, negotiating deals and filing patents, among other things€¦quot;and senior management can’t be expected to do all of that. The danger lies in letting IP fall off the executive radar so that its transformative benefits remain potential only. It all comes down to priorities, and that brings it back to the CEO.