Audio Transcription of Interview on Classic FM on 8 May 2006; The Value of Intellectual Property

TONY BLEWITT:

Last week we began with the series "Your company and intellectual property". The purpose of this series is to understand why intellectual property is becoming an important issue in business. We have Chris Bull back with us this week. Chris is a partner of Spoor & Fisher, which is a specialist intellectual property law firm.

Chris, last week you explained how intellectual property assets sit within the broader asset base of a business. Perhaps you could explain how it is that businesses go about making money out of intellectual property. I understand the concept of a business selling a product or services but how else is it that businesses make money out of intellectual property.

CHRIS BULL:

Good morning Tony.

There are many different examples of how companies have managed intellectual property in order to generate shareholder value. The example which is often used in the field of patented technology is that of IBM. In late 1998 Lou Gerstener, who was then head of IBM, was concerned with the low return on investment that was being generated out of the company’s investment in research and development. At that stage the annual budget for research and development was $5 billion. Three executives of IBM presented Lou Gerstener with a plan. The strategy of this group of executives was simple. They would use IBM’s massive portfolio of patents to challenge other hardware manufacturers for infringement of these patents and encourage them to settle with IBM through cross-licensing agreements. Some of these would be in the form of IBM supplying the company with its components or, in other instances insisting that the infringer pay royalties for the use of the IBM intellectual property. This is what is conventionally referred to as a "stick licensing" strategy.

TONY BLEWITT:

"Stick licensing"? What do you mean?

CHRIS BULL:

Under a conventional licensing arrangement two parties meet. One might have world class technology, the other might have a manufacturing facility with capacity. They would then enter into negotiations, perhaps ending with a licensing agreement under which the one party would manufacture components and pay the provider of technology a royalty, typically based on sale of those components. A stick licensing arrangement is slightly different. In stick licensing one party holds registered intellectual property, in the case of IBM patents, and it sets about conducting a survey to find out which competitors are in the market using this technology. It would then approach these competitors and offer a simple choice. The competitor could either exit the market and stop manufacturing the component or, alternatively, pay a licensing fee.

TONY BLEWITT:

How would it be possible for a company to hold patents and not know that its competitors are using this technology?

CHRIS BULL:

Well to set this issue in context. If you take IBM for example, IBM held a portfolio of over 12 000 patents with approximately 2 500 patents being added to its portfolio every year. It is important to note that IBM was at that stage the largest holder of patents in the US. This patent portfolio covered a wide range of technologies from computing, cryptography, software, storage networking, PC and server architectures and semi-conductor design and manufacturing. It is often said that anyone working in the computer industry in the United States has at some time infringed one or other of the IBM patents! Whether this is true or not is largely open to debate. The fact of the matter is that IBM had a substantial patent portfolio which wasn’t being policed properly or in other words wasn’t being leveraged properly in order to ensure that it was deriving the proper return on the investment being made in research and development.

TONY BLEWITT:

That sounds like an extremely large patent portfolio. How successful were IBM?

CHRIS BULL:

Well as I said IBM is often used as an example of the company which has probably been most success in generating revenue from its intellectual property portfolio. In the first 5 years of the programme IBM generated over $1 billion of revenue from its patents using cross-licensing and stick licensing. That is $1 billion extra revenue which was being generated on assets which already existed in this business and which had already been paid for by way of the R&D expenditure in the development of IBM’s own products. The costs associated with the stick licensing programme were negligible in the scheme of things because it was largely the team which was responsible for administering this programme. At the height of its activities this team was 20 people. It is estimated that since 1998 IBM has generated over a billion dollars of extra profit out of this programme. Now of course IBM had a massive patent portfolio and that’s not to say that other companies could achieve the sort of returns that IBM are achieving. Nevertheless the principles still apply in most businesses. We have seen a number of clients applying these strategies in a simple way in order to generate additional revenue out of their intellectual property portfolios.

TONY BLEWITT:

We will continue this discussion next week when Chris has indicated that he will give us examples of other types of businesses which have used intellectual property in this innovative way.

CHRIS BULL:

It’s a pleasure Tony. See you next week.

TONY BLEWITT:

That was Chris Bull, a partner at Spoor & Fisher which is a firm of intellectual property attorneys.

Date published: 2008/05/08
Author: Chris Bull

Tags: audio transcription classic fm intellectual property