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Focus on patent quality, not quantity
National Law Journal—February 7, 2011
By Lewis Lee
For all the blue-sky talk coming out of corporate America about fully embracing an economic future powered not by manufacturing but by knowledge and ideas, why do so many corporations and investors continue to lack a deep appreciation for what a quality patent portfolio can bring to a company's valuation?
These companies are no doubt fortifying the walls around their innovations, but often with little thought to opportunities and threats in the strategic air space above. This space will be dominated by players that view patents as valuable assets and critical components of business strategy, rather than late-to-the-game insurance policies covering specific products.
The world is just now writing the first paragraph of a robust and captivating chapter on wealth creation in the 21st century knowledge economy. Previous chapters cast land barons and corporate titans in the starring roles.
The story line of the new chapter is laid bare in our stock market data. Whereas 80% to 90% of the Standard & Poor's 500's total value as recently as the 1970s was tangible assets — commodities, resources, factories, land — the majority of the value we trade today is intangible assets — as much as 80% of the S&P 500's total worth, according to some estimates. And many a company's stock price performance is tied directly to the successful use of its patent portfolio, a large part of the intangible asset class. That is a remarkable shift in just 40 years.
However, many chief executive officers and the influential around them — boards, investors, product developers, attorneys, even policymakers — have not made an accompanying shift in their corporate strategies. They must better comprehend and respond to the opportunities and threats in that "intangible" air space.
Many companies inadequately view patent strength as a function of quantity of patents obtained. Boards and investors often fall in line with this thinking. As one example, mergers and acquisitions due diligence often becomes a count of the target's patents, and a quick assessment to confirm ownership. Very little analysis is placed on the underlying quality of these assets and how they enhance value of the acquirer. This is likely because existing tools and processes do not offer sophisticated assessments of the true value of a single patent, or a complete portfolio.
Quantity remains a usable metric, but not necessarily the best and only metric. Merely counting patents tends to be a short-sighted and, ultimately, costly substitute for a truly modern approach. Well-formed portfolios that possess both quality and quantity can be exceptionally valuable. Microsoft Corp. and International Business Machines Corp. have successfully built large portfolios with quality patents that have provided tremendous value to their shareholders. It is purported that IBM earns a billion dollars every year outside of its core revenue streams by licensing its portfolio to others.
So how should business leaders lead their companies forward? For one, they should approach patents as strategic resources that are as important as revenue, rather than as an insurance policy against competition or litigation. Because the bulk of their corporate valuation may be attributed to intangibles, they should have a clear understanding of that linkage and an explicit plan for using assets like patents to further increase valuation.
Business leaders should also assess the patent landscape before product development, not after. In doing so, corporate decision-makers are given a map showing where unclaimed territory lies, and where others have already made claims. The unclaimed territory may offer years of productive — and protectable — product development. Disputed lands may bog the company down with costly litigation and unpredictable outcomes.
Google Inc. has this way of thinking coded into its DNA. When Google first emerged, its patent portfolio was constructed around innovations in search. Over time, it began a strategic shift to high-quality mobile patents. It ultimately assembled an impressive array of rights that created passage for the development of Android. But even Google may not be the model company of the future. Our knowledge economy will evolve into one in which there is a decoupling of innovation and implementation.
The traditional model is for companies to innovate and then take those innovations to market. The new model will involve a symbiotic relationship between two players: innovators who specialize in generating ideas and implementers who monetize them by fashioning the ideas into products and marketing them.
In the past 10 years we have witnessed the rise of companies that don't actually make anything but own quality patents and are good at monetizing them through implementers. Business leaders need to address the opportunities and threats associated with the decoupling of innovation and implementation. It is time to rethink the corporate approach to intellectual property. I often say that IP should not be an elective in law school, but rather a requirement in business school. Both types of institutions need to update their curricula to reflect the new reality of the intangible asset the world's graduates will enter. And business leaders need better tools to help them navigate and ultimately value the ever important asset class of IP.
Today our greatest renewable resource is not energy or water. It is ideas — we are simply never going to run out of them. The challenge for business leaders writing the next chapter of the knowledge economy will not be finding good ideas — it will be guiding corporate strategy to ensure they return value for years to come.
