Patenting for Profits

Managing intellectual property rights used to be straightforward. A company produced great innovations in its research and development labs, obtained as many patents as possible and exploited those patents in the marketplace — or prevented others from doing so. The more patents, the better.

How the world has changed. The link between the number of patents a company has and the amount of money it makes has broken down. Today, leading companies are finding they can make more profit with fewer patents by focusing on securing only the essential protections they need to exploit their innovations. They round out their intellectual property portfolios by negotiating licenses for other key technologies.

Most businesses, though, continue to pursue the old “more is better” strategy. In effect, they’re flying blind when it comes to managing their IP portfolio. They can’t even articulate their strategy, let alone measure its effectiveness. It’s a situation reminiscent of where information technology strategy was 10 years ago — nowhere near the chief executive officer’s agenda. The results can be costly. Unfocused R&D programs can erode returns on investments in innovation, and overlooked patents can lead to lost revenues. Companies can end up outspending their competitors yet still find themselves stymied in key markets.

Worst of all, companies that lack a precise understanding of their IP portfolio can end up fighting off claims that a technology for a key product actually belongs to someone else. The risks of such battles have grown with the rise of “patent trolls” — companies that exist solely to generate licensing fees from patents they buy. Look at the recent travails of Ontario-based Research in Motion Ltd., the maker of the popular BlackBerry wireless device, for a painful illustration of the costs of being blindsided by a patent claim.

For technology companies, a highly disciplined patent strategy, tightly connected to the overall business strategy, is becoming essential to long-run success. Companies deriving higher-than-average profitability from their patents share three characteristics.

A Strong Market Focus

First, they tend to focus only on the markets that matter most to them. They have a clear sense of the “freedom of action” — in other words, the ability to commercialize an innovation as they see fit — which they need to compete in each market, and they know precisely where they need to have exclusive rights to a technology and where a shared license will do. Wireless communications giant QUALCOMM Inc., for instance, has used patents and licensing to build its business around a popular segment of the wireless market known as CDMA, or code division multiple access. The company is a leader in the sales of chips needed to make CDMA phones, and it licenses patents to more than 130 mobile phone makers and other chip companies.

The focus need not always be a product market. At Dell Inc., intellectual property has more to do with manufacturing processes than with creating truly unique products. When Dell saw the opportunity to apply its manufacturing expertise to the higher-margin enterprise storage business, it partnered with storage expert EMC Corp., which was rich in storage-related IP. There is no single “right way” when it comes to patents, in other words. What’s important is that your focus fits your business objectives.

A Holistic View

Second, the leaders can articulate how they will derive value from each potential deployment of a patent — licensing revenues, cross-licensing “bargaining chips,” exclusive exploitation in the marketplace — and ruthlessly prune patents that cannot generate an attractive overall return. International Business Machines Corp., the perennial leader for “most U.S. patents received,” takes a particularly rigorous approach to extracting maximum value out of the patents it holds. Altogether, IBM earns more than $1 billion a year in licensing revenues from its vast patent portfolio. The company fiercely defends its intellectual property in key markets, which Amazon.com Inc. has learned as the target of two suits alleging infringement of IBM patents said to cover parts of Amazon’s product recommendation system.

At the same time, though, IBM makes hundreds of its patents available free to others in order to disseminate the company’s software standards in key areas such as electronic commerce and Internet communications. By making its IP accessible to smaller players in these markets, IBM is betting that it can create more of an “ecosystem” around IBM offerings — often an effective strategy in markets where formal standards are still coalescing.

Hitachi Ltd. has boosted profits by pruning its patents. It scaled back its number of patent applications beginning in the early 1990s — and still managed to more than double its licensing income. Before Hitachi files for a patent, the value derived from the innovation must be clearly defined, whether from licensing to earn direct revenue, cross-licensing to obtain critical freedom of action or to secure strategic alliances or exclusive use in its own products.

A Stress On Organization

Third, the top players organize to succeed. They hire top-tier talent to lead their IP efforts. In 2004, General Electric Co. went so far as to hire Q. Todd Dickinson, who earlier in his career had been the director of the United States Patent and Trademark Office, as its chief intellectual property counsel. Top players assign clear roles and accountabilities for decisions about strategy, R&D and IP, ensuring that the groups focused on each activity have regular input into the decisions made by the others. IP specialists can’t be sequestered in a “stand-alone” operation. They need to be involved as critical members of teams working on product development, competitive intelligence, new market entry, offshoring partnerships and other high-profile strategic issues.

Finally, recognizing that the existing talent pool for skilled IP professionals has not grown at the same rate as the skyrocketing demand, these companies also are being thoughtful about on-the-job training.

Changing the Game

An effective patent strategy applies these three principles consistently at every level of the business. At the level of the corporation and the business unit, patent strategy is tightly linked to business strategy, thus guiding investment and managerial attention. At the level of the product line, the aim is to strengthen competitiveness by mapping out the patent landscape in a given market and determining how it can be exploited — and by obtaining freedom of action for key products through licensing or acquisition of intellectual property. At the level of a particular invention, the patent strategy drives the evaluation process. How much is the invention worth? How many patents will it take, and how should the scope of protection be determined?

A thoughtful and comprehensive patent strategy literally can change a company’s fortunes. Consider the classic case of the Japanese electronics manufacturer Canon Inc., which faced enormous odds when it entered the copier business in the late 1960s. Recognizing that Xerox Corp. and others dominated the business with powerful patents, Canon set about articulating a clear patent strategy based on developing new technologies as well as acquiring rights to compete against the incumbents. Even as it spent heavily on R&D, the company made sure that its IP department had enough clout in the organization to collaborate with product development staff from the earliest stages of planning.

Canon analyzed, for example, where Xerox and others were weakest from a patent standpoint and focused its investment to capitalize on those vulnerabilities. If a certain product seemed likely to infringe on a competitor’s patent, R&D quickly shifted direction to come up with a work-around. The company supplemented these activities with strategic licensing agreements.

Canon was one of the earliest companies to realize the importance of taking a rigorous, highly strategic approach to managing patents and intellectual property. Today, all companies should be following its lead.