Tour the changing IP landscape

Intellectual property (IP), which constitutes the heart of the knowledge economy, has not been well managed. Even companies whose survival depends on effective management of IP often fail to take steps that would maximize returns on those assets. Fortunately, new approaches to IP management are emerging, along with new tools to support analysis and decision making. Companies are realizing that they can no longer afford to let their hard-earned intellectual assets languish idly. Moreover, some high-profile successes, such as IBM's reported $1 billion per year in patent licensing income, have spurred other companies to re-evaluate their approach to managing intellectual property.

Patents represent a well defined and important form of IP--about 90% of invention activity shows up only in patents. The most fundamental change in patent management today is the shift toward integrating patents into planning. Once the domain of corporate lawyers and engineers, patents are now being seen as strategic assets. Many in the patent field also see a shift away from a defensive approach based on protection and litigation toward a more pragmatic (and profitable) approach focused on licensing and partnerships. Patent management is becoming a required core competency for the knowledge economy.

Patent analysis can be used to support several kinds of strategic decisions:

• investment in R&D,;

• mergers and acquisitions, and;

• licensing;

Analyzing the patent panorama

A thorough analysis is key to providing a basis for investment and marketing decisions.

"Licensing can get your company value back from investment, but the best way of leveraging resources is to make the right investment decisions in the first place," says Daniel Davison, CEO of BentonsEdge, a competitive intelligence research and marketing firm. Traditionally, patent filing has been an administrative function, but it is now becoming more strategic.

"Companies should understand the intellectual property landscape, particularly the patent landscape, to see where the proposed development would fit in before committing to larger R&D investments," advises Davison. "By doing so, the company can see if competitors have staked out protective patent boundaries around it, or who might come by demanding royalties just as you go to market."

Aureka 7.2, a software product from Aurigin, provides a way to research, manage, analyze and report on patent information. It can also draw on other documents such as scientific articles, charts and other innovation-related information. A key feature is its ability to help companies visualize the patent environment in their current and potential markets. Aureka presents a 3-D landscape in which mountains represent concentrations of patents around a particular topic, and the distance between mountains reflects the closeness of related concepts.

Paul Germeraad, CKO of Aurigin, says that integrating patent activity with other information provides the context for decisions about investments and resource allocations. "The trick to good patent analysis is being able to see both the details of individual patents and the overall landscape at the same time." Germeraad says. He notes that although such maps can be put together manually, the time savings using Aureka software can be stunning--an hour vs. many months. In the hands of technical experts, who are usually in short supply, the software can open up information and analysis.

Since patents are expensive to obtain in the first place and to maintain over time, companies are making more astute decisions about what to patent.

Kevin Rivette, president and CEO of Aurigin, advises companies to draw on expertise throughout the company in making such decisions. "Go to the marketing department and find out the top five branding issues that differentiate your product and then protect those," he says. "Find out from engineering how those features can be made economically."

The aspect of the technology to protect might not be a physical property at all, but a service-related feature such as ease of installation. "Look for the 'choke points' and protect those," says Rivette. "It's much more efficient than covering every aspect of the technology that the product embodies."

Rivette cites the case of Dell as a prime example of a company that is protecting the right things. In his book, "Rembrandts in the Attic," which he co-authored with David Klein, Rivette points out that Dell's phenomenal growth did not result from remarkable products, nor price. Dell is winning through the method it invented for taking orders for custom computers either over the Internet or by phone, and putting those orders into its manufacturing operations for delivery within a matter of days. And that's what Dell patented--its sales model and the integration of that model into its business operations. Dell has about 40 patents either awarded or in the works for such business methods.

Licensing takes off

One of the hottest areas in patent management today, licensing is a $100 billion market with the potential to grow by an order of magnitude in just a few years. A number of companies, including IBM, Texas Instruments, and Lucent, have released information on how much money they are making from licensing. That has caught the attention of other companies.

Licensing provides a particularly good model for using patents that do not relate to a company's core competencies. Perhaps the company's direction has shifted, the market has shifted or the patents were obtained through an acquisition. In any case, those assets might otherwise go to waste. Licensing also can prove to be a win-win strategy for companies with related technologies when infringement may be a factor. IBM offered to license technologies to Dell and to provide the components based on IBM's technology, rather than fighting possible infringement by Dell. As a result, IBM increased its revenues from both licensing and sales, in the amount of $1.6 billion per year for the component sales alone.

Because patent licensing revenues go right to the bottom line, they can have a significant impact on profitability. Profit margins for best-in-class patent licensing organizations can be 90% on licensing fees, according to Dooyong Lee, executive VP and general manager of PATEX, a patent and licensing exchange. Margins on manufacturing operations are far smaller.

For the licensees, rewards are great too. Those firms have saved considerable development costs and minimized risk. Licensing is also a way of putting a dollar value on an intellectual asset that might otherwise go unrecognized on the corporate balance sheet. That in turns contributes to a higher market capitalization and, therefore, to a higher share price for the stock.

IP portals and marketplaces

Given the surge of interest in patents and licensing, it is not surprising that IP portals and licensing marketplaces have sprung up on the Internet. The Patent and License Exchange was designed as a secure environment for patent licensing and IP exchange, and has a value-added component that converts IP into liquid financial assets. pl-x uses the Technology Risk Reward Unit (TRRU) system to provide a market-driven valuation for intellectual assets. It integrates information related to the technology's market value with the Black-Scholes Options Pricing Model to create a suggested price for the asset. With that price as a starting point, the two parties can enter into online negotiations. Due diligence is conducted offline, and Chicago Title handles the financial aspects of the transaction. Finally, the transaction is insured for up to $10 million if the patent is found invalid or is not enforceable.

An important first step in that process is for the licensing company to get its patent portfolio in order. Such a prioritization helps firms decide which patents should be developed, licensed or even donated to others for a tax break.

"Ironically," says Nir Kossovsky, chairman and CEO of pl-x, "the industry that needs the ability to license its IP quickly is the least likely to do so." That industry is information technology, where the life span of a new technology maxes out in five or six years. In some cases, that is because companies do not make any use of developments outside their core competencies; in other cases, however, companies do not even recognize the value of their IP. Many of the dot.coms have created revolutionary e-commerce infrastructures that could be licensed to other companies and industries. Sometimes the value becomes apparent after they file for bankruptcy and sell off all their assets, including IP. Even a delay can be costly.

"If two years is spent working out licensing, which is not uncommon," says Kossovsky, "50% of the present value of the asset could be lost."

CorporateIntelligence.com is an IP portal that provides a variety of products and services, including PATEX, MicroPatent, and trademark.com. PATEX has more than 8,000 listings of patents and technologies available for licensing. Users can browse the database and then click to contact the licenser.

The company has teamed with BTG PLC, a large technology commercialization firm, to jointly develop and market PATEX. Prospective licensers can use BTG's deal facilitation services to receive professional advice on licensing strategy, terms and conditions, and related matters. A contingency fee is charged if a deal is concluded.

"Understanding the licensing marketplace is a critical success factor," says Lee. "Law school teaches the laws, but not how to make deals." The business aspect of patents and licensing has been neglected, he believes, but is now commanding more attention.

PatentCafe is an IP portal that links to seven sites, each of which has a different purpose. The patent search site offers a tool that facilitates access to multiple databases without requiring the user to learn different query systems. The system currently includes the United States, Europe and Japan, and soon will add Russia. It provides a robust front end to many technology, prior art and patent databases. PatentCafe also provides an environment in which clients can seek attorneys specializing in patent law as well as find services such as patent portfolio management, litigation or patent searching.

A broad search is important because the U.S. Patent and Trademark Office does not cover prior art, which can invalidate patents.

"Finding a doctoral dissertation that describes a one-click method of purchase could be worth millions to companies now paying royalties to Amazon.com," says Andy Gibbs, president of PatentCafe. That possibility highlights the dynamic nature of the patent arena--things can change overnight. Prior art can also be used defensively. If a company has patented a basic concept, it can then introduce variations of the concept into the public domain, thereby making them unpatentable.

PatentWizard is a software tool that helps an inventor or business file a Provisional Patent Application (PPA), a new filing option available since 1995. PatentWizard was developed by Michael Neustel, a patent attorney. With a filing fee of only $75 and no requirement for drafting claims, the PPA is a way for an inventor to keep initial costs low while conducting market research or production feasibility.

"There has been a big rush to file business method patent applications, particularly with PPAs," says Neustel, "ever since State Street Bank established a precedent in July 1998 for patenting business methods. E-commerce companies that may be up and running within a month or two and are short of cash can make use of this economical option to protect their intellectual property."

"An estimated 300,000 patents will be filed in 2000, twice as many as last year," says Gibbs, "and 95% of them will fail commercially." Inventors need more than good ideas--they need guidance on market research, commercialization, marketing, licensing and the tools that make knowledge management a reality in order to succeed.