All too often, companies from emerging and established economies talk past each other when discussing intellectual property — and fail to consider all their options for a productive collaboration. There are five different ways that companies can structure such IP partnerships — and it’s important to choose the one that’s the best fit.
As business becomes increasingly global and technology-driven, companies everywhere are facing pressures to be on the cutting edge. Innovation and intellectual property (IP) — long vital for traditional multinational corporations — are now just as important to the strategy of growing companies in dynamic, fast-changing markets in China, India, the Middle East, Africa and elsewhere.
In this context, most forward-thinking companies recognize the need to forge partnerships to grow and gain access to new technologies, capabilities and markets. Although partnerships between mature multinational companies and growing companies can be challenging, they can also be mutually beneficial. Multinationals can gain market access and technology, while growing companies can leapfrog their competition and gain a foothold on the global stage.
Sadly, the reality is that would-be partners frequently talk past each other when discussing IP collaborations. Often, executives lack a common framework to discuss these collaborations. They do not understand the prevalent choices and models, and often hold narrow views of portfolio management and IP strategy.
In our experience facilitating and studying hundreds of global IP partnerships, we have observed that there are five viable and valuable models for IP management and monetization. By understanding these models and their trade-offs, potential partners are better able to strengthen their own IP strategies and gain greater access to the innovations of other companies.
The Five Models for IP Collaboration
1. IP Licensing
The most common form of IP collaboration is the traditional patent license, which is a stand-alone contract or grant of legal rights. Licenses can also be established for the use of copyright, trademarks, service marks and trade secrets. Licenses can be difficult to enforce in some markets, but many nations that have traditionally had weaker enforcement mechanisms, such as China, have recently been strengthening IP protection. However, even in countries with a long history of robust IP protection, the process of actually enforcing IP can be time-consuming and expensive, and there is no guarantee of a successful outcome to litigation.
Traditionally, licenses established a narrow business relationship that was often difficult to broaden. In return for paying a royalty, licensees would receive the right to use a particular asset (for example, a technology), but the license would often exclude access to any additional process knowledge, technological acumen or expertise. Modern licensing deals should be constructed to encourage reciprocal growth and development by encompassing these auxiliary, but critical, assets.
For growing companies, a favorable deal with a component supplier can provide a significant competitive advantage, especially if similar systems are not available in local markets.
Furthermore, multinational companies have learned to be increasingly respectful of their IP partners in recent years. An overly aggressive and litigious licensor can weaken its brand and put its bottom line at risk, either by losing the battle to protect its IP in court or by winning in court and, in the process, scaring away potential partners.
Accordingly, the intrepid global innovators of the modern world have reinvented the historical patent license. In the new global IP economy, licensing-deal teams must be multidisciplinary — including sales and trade experts, lawyers and business executives — to truly develop commercial relationships, as opposed to narrow legal agreements.
2. Technology Licensing
In addition to the benefits of a patent license, a technology license conveys a transfer of technology — a bundle of designs and instructions necessary to implement or operationalize the innovation. In markets with weak legal protections, a technology license allows for a more explicit, fair trade of knowledge — the growing company’s local expertise for the established company’s technological expertise. The legal grant of intellectual property is part of the contract but often not its driving feature. Because growing companies may perceive technology licenses as delivering greater value than patent licenses, the offer of a technology license could have the power to catalyze licensing negotiations that might otherwise falter.
A number of companies have deployed this approach. For example, San Diego-based Qualcomm Inc. has established a program, Qualcomm Reference Design, that has the specific purpose of providing bundles of technology to clients, including those in emerging markets. MediaTek Inc., based in Hsinchu City, Taiwan, and Nuance Communications Inc., based in Burlington, Massachusetts, have found similar success in licensing certain technologies behind their semiconductors and voice-recognition software, respectively.
Moving from IP licensing to technology licensing is potentially risky. Licensors must develop tool kits, annotated designs, instructions, usage guides and troubleshooting manuals that enable licensees to commercialize the technologies and train their sales and support staffs to sell and service the licensed offerings. San Francisco-based Dolby Laboratories Inc. developed an effective model of bundling its audio optimization technology with the right to use its trademark. To win in the market, Dolby had to sell to both manufacturers and consumers of their audio systems. Though its retail consumer market segment is vastly larger than its professional market of audio engineers, Dolby had to cater to both. Without its professional customers, Dolby would not have a retail market. Companies looking to recreate Dolby’s tactics and success must carefully consider where to enter their industry’s particular value chain.
Technology licensing deals often involve licensors dispatching engineers and trainers to assist licensees with the proper use of the transferred technology. Success with this strategy depends upon developing teams capable of providing this support, often to customers based on the other side of the world. It also requires developing the bundles of technology that are relevant and usable by the target customer groups. And it entails taking risks in supporting a less predictable set of customers, who by their nature may be smaller companies whose own business success is not guaranteed. However, as in the instance of Chinese phone maker Xiaomi Inc., some of these companies may experience dramatic growth — benefiting the companies that have helped them access key technologies.
3. IP-based Component Business
In this model, the licensor offers the licensee products embedded with technology rights, rather than licensing the rights by themselves. For example, when Taiwan-based Asustek Computer Inc. (Asus) purchases a processor from Intel Corp., it obtains the right to install and resell that product, not a blanket license or the right to manufacture processors using Intel’s intellectual property. The IP royalty encompassing patent, trademark, and trade-secret licensing is built into the purchase price and limited to a discrete item.
This format works well in high-value deals in which the transaction costs of negotiating a comprehensive IP or technology license would be expensive. The bundled-component approach is also preferable in markets in which traditional licenses are difficult to enforce or foreign entry is challenging. Mature multinational companies may be wary of entering an IP or technology licensing deal in a market with weak IP protections, but more comfortable selling a closed-box component that cannot easily be reverse-engineered or modified. Companies selling into markets lacking sufficient legal protection may also wish to build additional safeguards, such as having their components run only on proprietary software available via subscription.
Interestingly, some technology-oriented companies choose to move beyond licensing models and forward-integrate into components because they consider licensing models to be more difficult to monetize. For example, AAC Technologies, which has headquarters in Shenzhen, China, has pioneered a range of audio technologies for mobile phones. Rather than choosing to license its technologies to existing manufacturers or customers, AAC has expanded into a broad range of phone components. It captures the value on the entire component, rather than just on the IP within that component. And it avoids the need to negotiate IP licenses with its customer base. For many companies, this is a viable business model. But for the company whose strength is exclusively in IP development, it does require the extension into the development and sale of actual component products — and everything that is entailed in running a successful component business, rather than just a licensing business.
For growing companies, a favorable deal with a component supplier can provide a significant competitive advantage, especially if similar systems are not available in local markets. Furthermore, many growing companies prefer purchasing ready-made modules rather than developing manufacturing facilities to create comparable products. In fact, Chinese companies are often able to strike attractive component deals with mature manufacturers primarily on the basis of their capacity for high-volume orders.
Mature multinational companies can profit handsomely from component sales, especially if reverse-engineering safeguards and high-trust relationships are in place. In time, this model can facilitate deeper, more collaborative partnerships between mature multinational companies and growing companies. For example, many mature multinational companies eventually deploy teams of operations specialists overseas to supervise, lead or advise on the development or execution of manufacturing processes.
4. Contract R&D
In this model, companies provide a specific contracted piece of design work, which generally includes some rights to the associated IP embodied in the design. This model is more similar to a professional services assignment, such as architectural or industrial design contracts, than it is to a traditional IP license agreement. Contract R&D relationships are essentially fee-for-service arrangements in which the client pays for the creation of intellectual property and explicitly purchases rights to its ownership.
The Palo Alto, California-based design and innovation firm IDEO, for example, works closely with companies to create new products and services. Examples include Bayer AG’s user-friendly USB blood glucose meter, Western Digital Corp.’s ultra-portable USB-powered Passport hard drive, and more than 50 projects for Samsung. And Pininfarina S.p.A., a design consultant to Ferrari and Maserati that is based in Cambiano, Italy, has contracted its R&D expertise to Chinese automobile manufacturers since 1996.
Recently, growing companies have begun to flip this model, offering outsourced innovation services to mature multinational companies. For example, WuXi AppTec, based in Shanghai, China, offers its R&D capabilities to global pharmaceutical companies such as Eli Lilly and Company. This evolution is both practical and valuable. Growing companies already understand the intricacies of local culture and can design products to fit them.
5. Joint Venture
The fifth model is the most collaborative arrangement: Companies enter a joint venture in which their combined IP assets are a key contribution. Such joint ventures have generated tremendous value throughout history and are more common than many of their beneficiaries realize. Runners who track their workouts with Nike + iPod products, for example, are taking advantage of a joint venture involving both patent and trademark sharing. Likewise, General Motors Co. and Volkswagen Group have entered China in partnership with China’s largest automaker, SAIC Motor Corp. Ltd.
However, this model poses distinct challenges. Both parties must agree on the value of the contributed IP assets. They also must work together during the life of the partnership to re-evaluate their respective roles and royalties and to make any necessary adjustments to maintain a productive commercial enterprise. For example, one or both of the companies may need to retool a factory to accommodate new innovations.
Joint ventures operate much like startup enterprises with many of the same uncertainties and risks. Both parties should embark on the joint venture understanding these hazards, committed to working together as partners rather than as friendly competitors.
Before Choosing an IP Partnership Model
Before choosing the best model for a particular collaboration, we suggest taking the following five steps:
1. Recognize that the choice of IP business models is a strategic decision, not merely a legal matter. Involve the right executives in the decision-making process.
2. Consider a broad set of IP models before pursuing any one of them. Do not allow mid-level functional decisions to drive your overall strategy. Do not allow your legal or sales teams to lock you into a particular model without a big-picture review of options.
3. Evaluate the models on a range of business, financial, legal and risk criteria. Think about models that might be complementary and those that are mutually exclusive.
4. Carefully evaluate the potential target partners for each model. Consider their motivations and interests. Some models, such as a joint venture, may have very few candidates.
5. Prioritize a few models to be explored in the market. Line up the right people, skills and potential offers to test those models. Obtain feedback from potential partners to determine which models are viable and how they might be positioned.
Before Seeking IP Partners
We suggest the following three steps for any company seeking partnerships to leverage technology from others:
1. Link your technology strategy to your business strategy by identifying the technologies critical to your competitiveness.
2. Assess your technology gaps and consider options for filling those gaps. Consider how the various IP partnership models might help you address these technology gaps.
3. Identify potential target partners and prepare to approach them. An articulation of your desired IP cooperation model and how it differs from other models can facilitate communication with your target partners. It can also help you find the right people within their organizations with whom to work.
Developing these cooperation models requires persistence, patience and new skills. A small number of well-defined partnerships can be a good basis for getting started, creating early successes while building capabilities.