Creating Value from Intellectual Property

We live and work in an increasingly knowledge-based economy. Much of what people produce and consume has no tangible manifestation. Even when it does, the thing that makes that good most valuable and unique – the innovation that sets it apart – does not.

As companies increasingly compete on innovation, and as we continue to digitize everything (IDC predicts we will generate close to 1,000 exabytes of data by 2010) – as that happens, our ability to understand, leverage and protect our intellectual assets is core to the health of our organizations and our economy.

Last month I moderated a panel on The New IP Economy at a meeting of the Executive Council of New York. The discussion took the assumption that at least some portion of that 1,000 exabytes of data is not only materially valuable; it also can and should be accorded property status so it can be valued, leveraged and protected appropriately. (Note: there’s a patent or copyright lawyer in your future if not your present.) We talked about the current state of IP; opportunities and risks; organizational implications, and where things are headed.

The panelists were extremely knowledgeable and brought an eclectic mix of views to the topic. They included Robert Cote, a nationally recognized patent litigator and trial lawyer who is a partner in law firm Orrick’s IP litigation group and chair of their software group, and Marshall Phelps, who heads Microsoft’s intellectual property groups and oversees the company’s management of its intellectual property portfolio (which comprises some 20,000 patents worldwide) and who previously did similar work at IBM.

David Kuttler, vice president of information management architecture in the office of the CIO at Johnson & Johnson, brought an executive management view of leveraging and protecting IP – a view that was shared by Jack Nelson, senior vice president and CIO at Mount Sinai Hospital.

Finally, J. Moses, co-founder and CEO of UGO Networks, an online entertainment network for men age 18 to 34, is more concerned about copyright protection than patents. As other sites have built business models around “user-generated content,” he made the strategic decision not to allow users to upload content to his site. Given last month’s announcement of Viacom’s $1 billion suit of YouTube for copyright infringement, that’s looking like a pretty savvy move.

What Is the New IP Economy?

I launched the

discussion by asking each of the panelists for his definition of The New IP Economy.

Microsoft’s Phelps pointed out that according to some estimates, over 80 percent of the value of the S&P 500 is tied up in intellectual property.

Bob Cote added that with so much of the market value of corporations tied to intangible assets, companies need to come up with a way to manage that IP, protect it and exchange it with others around the world.

J&J’s Kuttler agreed but stressed how important it is in the health care realm to be able to do that simply, to make it easy, and to know what to protect and what not to. “The concern for us is that we protect the wrong things and make it harder for people to have successful healthcare alternatives.”

Mt. Sinai’s Nelson raised the issue of IP and partnerships. “ We have to make sure that IP doesn’t get in the way of the business relationship; how do we keep innovation going even though we’re protecting IP on both sides?”

J Moses, who in a previous life was head of interactive at BMG, and who founded MTV in Russia (that hotbed of intellectual property rights) talked about the challenges of running a mid-size online media business that respects IP at a time when a lot of competitors are abusing copyrights – but because they’re not generating revenue (just stealing eyeballs), the copyright holders don’t go after them. “We can’t play that game, because we’re large enough to get sued.”

In response to a question about who needs to worry about IP protection, Phelps replied, “Everyone has to worry about this, I don’t care what business you’re in. You can patent your back office now. The reason we’re still having conversations like this is IP still doesn’t show up on the balance sheet. The accountants have taken a pass on this.”

The State of Patents & Copyright

The conversation quickly turned to patents and patent protections. Bob Cote told the audience their companies would become “a free research and development lab for your competition if you don’t protect your ideas, your innovation. And then all you really have is a head start.”

In response to a complaint by an audience member about the U.S. patent system and some of the ways it is abused (e.g., Jerome Lemelson and his “submarine”

patents; see “Lemelson’s Legacy: Great Inventor Or Patent Hoarder?”), Cote said, “The problems that are out there are overplayed; by and large the system works. We want the system we have in the U.S.” as opposed to the systems that exist in other economies.

Media exec Moses returned to the issue of the copyright wars that are taking place over the Internet. “At the moment in the media business we have a lot of big players with very big bats in a ring beating the heck out of each other. Google is as much in the business of fighting this fight as they are in the business of search. But to carry a big bat is enormously expensive.”

At the end of the day, Cote added, this is a fight that’s going to be fought “on Capitol Hill and in Brussels and all around the world.”

The IP of You

J&J’s Kuttler made a fascinating point about IP in healthcare. “We’re starting to talk about the information you receive about your health. We’re talking about what happens with the genome, and what’s available to you [as the individual]. Digital rights management goes beyond the YouTube discussion to who has ownership of the information about you. Can an insurance company apply that information if you have a specific genomic disorder and determine what your health profile is and make some determination based on that? Digital rights management has to be expanded to cover that territory. The situation with Viacom and YouTube is about starting that conversation, but it needs to take a broader context.”

He also worries about applying IP protection to business processes: “this notion that because I choose to do something a certain way I can patent it. That actually scares me. the notion that a doctor could do a particular surgery in a particular way and patent that, so he licenses other doctors to use that procedure: that’s monetizing intellectual property, and that scares me.”

Making Money

The topic of monetization brought up other interesting ideas. For example, said Cote, IBM uses IP as part of its services portfolio, making $1.5-2 billion a year in an 80 percent to 90 percent gross margin business. He cited IBM as one of the real pioneers in recognizing that the innovation and ideas are the product.

Microsoft takes a different approach to monetizing its IP, taking promising

ideas and spinning them off as independent companies. They’re able to take an equity position in the company with their IP only, no cash.

Lockheed Martin takes their defense-related innovations and uses them to seed companies in the commercial space.

And some companies use IP as a way to enter a new market. If you don’t have patents, panelists agreed, it will cost you 20 percent to 30 percent more to get in.

Evolving Business Model

Moses has faith in the integrity of the U.S. consumer. “My base philosophy is that, in the United States, if you offer people a good product and a value equation that works, they’ll take it, because Americans, by and large, do not like to steal.  Steve Jobs and Apple have proven this to be true. This can be and should be and will be applied to other types of media going forward. It’s about putting the right technology in place, it’s about pricing it correctly, and it’s about making it accessible. Now, I also launched MTV in Russia and spent a year in Russia; I’m not sure this would work in Russia.”

Organizational Hurdles and Changing Behaviors

To fully leverage your IP, you have to be able to “put the discoveries of your professionals in the hands of your other professionals,” said Mt. Sinai’s Nelson. To do that, you have to “reward knowledge creation, sharing and reuse.”

It’s not easy to change the way large organizations operate. Nelson was with Ernst & Young in the early ‘90s when the firm realized that knowledge and IP were a huge differentiator and a way to win business. To change people’s behaviors, they dedicated a fifth of their reward system to knowledge. Adding to the corporate knowledge base tied directly to earning more money.

“To change culture, you have to create a reward system,” Nelson said. “Most people are coin operated.”

Microsoft’s Phelps offered another suggestion for kick-starting an IP program: “Go find a place in the company that’s not doing very well. They’re going to be your easiest customer. If you make someone a few million bucks… then other divisions will see what’s going on and say why can’t we get in on that? That’s how IBM did,” said Phelps, who should know, since he helped start it all. “It took a few years to get everyone in the rowboat, but that’s how

we did it.”

Panelists agreed that none of this will happen without senior management and the CEO driving it across the company, but it can be difficult to even get senior management engaged, in part because “it’s a complete change in the business model,” said Kuttler. “Getting people engaged in that discussion – to believe in it – is a huge challenge.”

What the Future Holds

We wrapped up the discussion with panelists’ predictions for the State of IP 10 years from now.

Marshall Phelps: “This horizontal model we have now is going to move completely across industries – for example, data mining/supercomputing and the pharmaceutical industry.  The 767 was designed totally inside a computer. This kind of horizontal thing is going to blossom even more.”

Bob Cote: “Patent portfolio and IP management will become a critical component of companies’ market value.” Various studies show that companies with patent-driven business culture and sophisticated IP culture have significantly higher market value than those that don’t. (Here’s a great paperfrom Cote.)

David Kuttler didn’t have a prediction; he had a wish: To have the horizontal nature of patents actually work well: to understand what’s out there; to make that simple for a small company that’s out there doing something new, and the ability to include that in a contract in understandable, readable format. “For me it’s about horizontal enablement – for me those are the business mashups that are going to occur. Mashups aren’t about the technology but about how the businesses work together and make those things happen, and we’re seeing fabulous results out of that.”

J Moses: “There will be an almost limitless way in which we can all access intellectual property, and there will be an economic model to support it.”

Jack Nelson: “Knowledge sharing and collaboration is going to happen. What I’d like to see is a truly dialogue-based knowledge tool that you can ask questions of, in English, and get back a real answer – not 94 million hits, most of which are meaningless.”

What I Think

A few things struck me about all this. First, there are some amazingly sophisticated examples of large companies cultivating, leveraging and protecting their IP — and there are some amazingly crude examples of companies being without a clue. This has created a huge delta between the leaders and the followers, and the leaders have a tremendous

competitive advantage.

Second, the issue of copyright protection will get resolved, but it will take years. In the meantime, people’s content will be used and abused in all sorts of interesting ways. Thanks to a provision in the Digital Millennium Copyright Act, the burden is on the copyright holder to track down and notify the infringer to cease and desist — and with sites like YouTube, where users pop up content at warp speeds, this can be like playing a cosmic game of Whack-a-Mole in a truly surreal Fun House setting.

Finally, companies are already being awarded patents on business processes. When you apply this to processes that affect public safety or health or any other socially critical area, the implications are stunning.

Does your organization value IP in the same way it values tangible assets? What’s changed as a consequence? Let us know!