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Managing patents for profits

Managing patents for profits
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First Published: Tue, Dec 25 2007. 11 22 PM IST

Updated: Tue, Dec 25 2007. 11 22 PM IST
Managing technology patents is becoming a science in itself and, if done well, can add to a company’s profits. IBM, for example, is consistently one of the global leaders in patent filings and has recently filed a patent application to create a unique system for protecting its patents.
Described as a system of “floating privileges”, allowing outside companies to use needed elements of IBM’s 40,000-patent portfolio for a flat yearly fee, IBM said this legal protection would be akin to “purchasing a fire insurance policy”. As companies weigh the advantages of IBM’s offer, it’s more evidence that patent strategy has become anything but straightforward.
Today’s leading companies find they can make more profit with fewer patents by securing only the essential protections they need to exploit their innovations. They fill out the gaps in their intellectual property (IP) portfolios by negotiating licences for other key technologies.
Most businesses, though, are flying blind with unfocused research and development (R&D) programmes that can erode returns on investments, and overlooked patents that can lead to lost revenues. Worse, firms that lack a precise understanding of their IP portfolio can end up fighting off claims that a technology for a key product belongs to someone else. Indeed, such battles have multiplied with “patent trolls”—companies that exist solely to generate licensing fees from patents they buy. For a painful reminder, recall last year’s $612 million settlement won by tiny Virginia-based NTP Inc. in an infringement suit against Research In Motion, the maker of the BlackBerry wireless device.
For technology firms, a highly disciplined patent strategy is, therefore, essential. Leaders such as IBM are developing patent disciplines that share three characteristics.
First, they focus on the markets that matter most. They have a clear sense of the “freedom of action”— the ability to commercialize an innovation as they see fit. And, they know precisely where they need exclusive rights and where a shared licence will do. Qualcomm, for instance, has used patents and licensing to build its business around the CDMA (code-division multiple access) wireless market. It licences patents to more than 130 cellphone makers and other chip companies.
Second, leaders develop a holistic view. They can articulate how they will derive value from each patent— licensing revenues, cross-licensing “bargaining chips”, exclusive exploitation in the marketplace—and they ruthlessly prune patents that cannot generate an attractive overall return. IBM earns more than $1 billion a year in licensing revenues. It fiercely defends its IP in key markets, as Amazon.com learned as the target of two suits alleging infringement of IBM patents said to cover parts of Amazon’s product recommendation system. IBM also makes hundreds of its patents available to others gratis. It’s a strategic move to disseminate the firm’s software standards in key areas such as electronic commerce and Internet communications. IBM aims to create an ecosystem around its offerings—an effective strategy where formal standards are still coalescing.
Third, the best players organize effectively. They hire top-tier talent to lead their IP efforts. GE went so far as to hire Todd Dickinson, head of the US Patent Office. They assign clear roles and accountabilities for decisions about strategy, R&D and IP. They ensure that the groups focused on these activities have regular input into the decisions made by the others. And, they make sure IP managers are part of teams working on product development, competitive intelligence, new market entry, offshoring partnerships and other high-profile strategic issues.
Patent strategy is thus tightly linked to business strategy, guiding investment and managerial attention. At the product level, 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. Weighing 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?
These questions are increasingly relevant for Indian firms in sectors such as IT and pharmaceuticals, as they move up the value chain and invest more in research to find ways of creating sustained differentiation.
A patent strategy is key for focusing pharma investment on innovation that can be protected, and justifies the risks and the returns. Global and Indian pharma firms are looking for greater clarity in patent laws to ensure they undertake research that not only improves patient outcomes but also makes business sense. Although India has signed the Agreement on Trade-Related Aspects of Intellectual Property Rights, which protects drug patents globally, its patent laws exclude protection for drugs which are derivatives of known substances or provide only “incremental innovation” benefits. More lucid laws and better enforcement will help firms trying to craft effective patent strategies.
A thoughtful and comprehensive patent strategy can literally change a company’s fortunes. Consider the classic case of the Japanese electronics manufacturer, Canon, which faced enormous odds when it entered the copier business in the late 1960s. Recognizing that Xerox 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. Canon analyzed, for example, where Xerox and others were weakest from a patent standpoint and focused its investment to capitalize on that. It not only challenged Xerox but found uses for its IP in other areas, such as printers. Canon recognized that strategic necessity is the true mother of invention.
Vinit Bhatia is a partner with Bain and Co. in Hong Kong. Vivek Gambhir is a partner at the India office. Both are members of Bain’s telecommunications, media, and technology practice. Karan Singh, a partner in the India office, leads the health practice. Comments are welcome at theirview@livemint.com
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First Published: Tue, Dec 25 2007. 11 22 PM IST