Last week we talked about the fundamentals on how to profit from your innovation intellectual property (IP). Today we are going to elaborate on you strategic IP management options for your innovation ideas.
“All too often, the managers of a firm holding an IP right assume that the best way of using it is to suppress competition—in other words, to prevent potential rivals from offering customers an identical or similar product or service. The resultant market power, it is commonly thought, will enable the firm to raise the prices it charges for its own products or services and thus increase its profits. Although this is indeed a potential strategy, it is by no means the only option available. In fact, in our experience many managers overestimate the desirability of this option.” William Fisher, Professor of intellectual property law.
Strategic options for your innovation IP management
Last time we have talked about the vehicles for your IP being:
- copyrights and
- trade secrets.
Today we will have a closer look at the framework proposed by professor Fisher. According to this, your strategic IP management options are to:
- exercise market power,
Let’s get into more details on these options.
1. Using your IP to exercise market power
Using your patents to exercise market power can work well. Like many others, Nespresso has done very well riding on their patents. But when the patent protection expires (or gets challenged in other ways), market dominance can crumble.
“The Swiss food giant about three decades ago created the first coffee-pod system that since has become a $13.45 billion global business—and one dominated by Nestlé. But after starting to lose patent protection on its Nespresso system in the mid-1990s, Nestlé has battled a bevy of new players, who are chipping away at its global dominance.” Wall Street Journal, Feb 23, 2016.
Their business model – protected by patents – has helped Nespresso to charge a multiple of comparable coffee prices per kilogram. But this can lead to an over-reliance on such mechanisms. It will be interesting to observe Nespresso’s and the coffee-pod market over the coming years.
Over-reliance on patent protection can be one disadvantage but there are more.
Limitations of exercising market power
Using patents and other forms of IP protection to exercise some sort of market power may well be the most common strategic IP management choice. But this strategic choice is based on one fundamental assumption: that the market size it fixed. This rarely challenged assumption may be wrong more often than managers think.
If the market size is fixed, then you can indeed maximise your profits by increasing your share of the market. One way to do this is to actively work on limiting the competitor’s share (e.g. through patent infringement litigations).
However, if the market was not a nil-sum game, there may be benefits in having a number of competitors because they can help to grow the market. You might make more profits in a larger market even if you have a smaller share of it. An 80% share of a $100m market will make you fewer profits than a 20% share in a $1b market (providing the same profit margin).
Where Steve Jobs went wrong
A well-known example was the Apple of the 80s. Steve Jobs was keen to control the end-to-end customer experience, lock the customer in and lock competitors out of their PC systems. As an (extreme) example only 7 software applications were available for the Apple Lisa for most of its lifetime at prices higher than comparable PCs. Who’d be going for Apple’s Lisa? Trying to lock out others has been frequently cited as one reason why Apple’s personal computer never gained major market share and lost in the long term to Microsoft + Intel-driven PCs.
“The Mac did not gain widespread customer traction and the company faced serious challenges to its long-term viability. The common wisdom at that time was that a major factor in Apple’s decline was precisely its closed system, proprietary outlook, in comparison, for example, to Microsoft, which invited third-party developers to create as many applications as possible for the Microsoft operating system.”
Inviting third-party developers has been seen as an effective measure to increase the size of the market beyond what it would have been with a limited offering of hard- and software extensions. This helped to create software for people from all walks of life. It brought people into the market who wanted to use PCs for business, personal finance, designing, creating, gaming, communication, relaxation, planning, research, media and many others purposes.
As a consequence, the personal computer market was dominated by Microsoft’s operating systems & Intel’s processors (often referred to as Wintel). While opening the market for third-parties, both companies also fiercely protected their core IP with measures that have drawn antitrust attention several times.
Indirect network effects
Indirect network effects enhance the value of an overall system through complementary products (often developed by other parties). It is frequently also called an “ecosystem.” Without these network effects the market for PCs would have been significantly smaller. This observation shows that markets are not nil-sum games and that the right strategic IP management option can make a decisive difference.
What competitors do, plays a significant role for the market trajectory. Professor Fisher also notes that your competitors may compete more fiercely on price if they fear you will become a too dominant player. They may see strategic benefits of doing so even if they are able to provide only an inferior product. The profits you may have anticipated for yourself may move to the consumer because you are forced to compete back on price.
2. Selling your IP
Selling your IP can be a good option if you are not intending to commercialise this IP yourself. There can be good reasons for this. Your company may have other, more promising alternatives, the IP may not align with the future direction of your company and so on.
This can happen particularly in companies with large R&D departments or companies that may wish to withdraw from certain markets. Selling your IP can be a good option to get returns on your R&D investments where otherwise no returns were to be had. The income can be re-invested in into IP areas that align better with the future strategic direction.
Equally, there can be very good reasons to buy patent/IP packages. In a recent article, I have pointed out that Microsoft and Apple have bought jointly an IP package covering 6,000 patents for $4.5b from Nortel (not bad for a bankrupt company.) The package included IP covering telecommunications, internet search, social networking. Microsoft used these patents to immediately “approach” Android phone manufacturers for licensing fees. In a second step, Microsoft has purportedly exerted power over some manufacturers to preinstall MS Office on their Android phones thereby expanding their (Microsoft’s) install base.
In 2009 Disney bought the Marvel brand and associated trademarks for $4b. This covers characters as Iron Man, Captain America, Hulk, Thor, Doctor Strange, Spider-Man, Wolverine and Ant-Man, such teams as the Avengers, the Guardians of the Galaxy, the Fantastic Four, the Defenders, X-Men among others. It gives Disney the right to franchise the toys and many other products using these characters and of course use these characters in their movies. The limits of IP protection were shown to Marvel and DC Comics (the Superman and Batman creators) by brave Graham Jules. Marvel and DC Comics went to court over Mr. Jules using the term “super hero” in a book title. These companies had (questionably) trademarked the term “super hero.”
— InnovationTactics (@InnoTactics) March 17, 2017
3. Licensing your IP
Licensing can be a very fine and elaborate strategy to manage your IP. I have covered the details of the licensing business model recently. You have seen how ARM Ltd relies on the license takers to manufacture some 80 billion microprocessors containing their IP without ARM manufacturing a single one themselves. Quite a remarkable feat.
Licensing and selling can be useful in a weak appropriability regime or in situations where the IP holder does not own the complementary assets to commercialise the IP (read last week’s article to familiarise yourself with these important concepts.) Licensing out can reduce competitors’ incentives to invent-around your IP as it is a capital-light way for the licensee to obtain IP.
Google Android’s “free” licensing
Google’s does surely not offer their mobile operating system Android for free in an act of social welfare. There are important strategic considerations behind this move.
Mobile phone manufacturers have a choice. They can freely install a bare-bones version of Android without any licensing agreement with Google. But this comes without the Android trademark symbol (the green robot) and more importantly without the Google Play app store. Not many mobile phone manufacturers can develop and run their own app store and a phone without it is pretty limited.
This then leaves Android phones only the option of taking Google’s licenses. But this comes with having to pre-install certain Google apps (search, mail, maps, navigation, app store). The European Union’s antitrust regulator has recently launched their charges over Google’s Android practices. “The EU accuses Google of abusing that dominance to force phone makers into favoring the Google search engine and Chrome browser on their devices. Those apps ensure consumers see Google’s search advertisements—its cash cow—when they look things up on their smartphones.” Wall Street Journal, November 10, 2016. Anyone feeling reminded of Microsoft’s IE practices? No decision has been made yet, but you get a taste of it.
More power is evidenced by the fact that not everybody gets a lick of the new Android Nougat (the new OS version 7). There are limitations which phones and which microprocessors are supported. E.g. some Qualcomm graphic processors, as well as other components, are not supported. It hints at the powers Google has gained over manufacturers and consumers.
80% of mobile phones are now using the Android operating system. This gives Google significant influence over the trajectory of the entire smartphone industry. And this was at a time before they had manufactured even one phone themselves (which has changed only since recent). I hope these examples give you a flavour of the opportunities of licensing.
4. Use your IP for collaboration
A common way of collaborating with your IP is cross-licensing, It is a wide practice to obtain valuable IP. It even occurs among competitors such as Intel and AMD (in some cases there is a built-in delay in being able to use the other company’s IP).
Another way to collaborate is through setting standards, application programming interfaces (APIs) and so on. As mentioned in recent articles, ARM Ltd has made great revenues from their IP but they have also served the overall market for specialised embedded micro controllers through their contributions to industry standards.
Another example of collaboration is Apple’s app store. Having learned from previous mistakes, Steve Jobs must have realised that third-party apps can add massive value to the Apple ecosystem. So Apple has an app store open to third parties. The amount of great software is one of the top reasons for consumers to go with Apple’s devices. 130 billion app downloads by mid-2016 is a pretty convincing testament of this. Not surprisingly, Apple exerts a lot of power over the details which apps will be allowed on the app store. Google, Amazon and Nokia are other players who use the collaborative approach of app stores.
5. Donating your IP
Some may ask, why they should donate their IP. There can be a lot of very good reasons to do so. The obvious benefits are humanitarian benefits such as the formula for Penicillin. But there can be good strategic reasons.
You could give away certain parts of your IP while retaining other – possibly complementary – parts of your IP.
Google’s strategy to give away Android for free was likely initially driven by risk mitigation. Their fear must have been to be locked out of search traffic from mobile phones when others (like Apple) own the platform (handheld and browser) through which people go into the search engines. And even if Apple has no search engine they could have chosen to collaborate with another search provider. This strategic risk mitigation alone would have likely justified giving away Android for free without the aforementioned tripwires attached to it.
Other examples for IP donation are Wikipedia and Linux (and many other open source and commons-based innovations). The pace at which Wikipedia has overtaken the established and highly envied Britannica encyclopedia demonstrates clearly the powers of donation-based strategies.
I believe the collaboration & donation options are very intriguing. They open opportunities to grow your company’s IP with people’s great ideas. I highly encourage you to consider these strategies seriously for their power.
I am convinced that at times we don’t manage our corporate IP consciously. We just follow the established processes. But we may be missing out on great opportunities.
Think of the example I mentioned a few weeks ago when Apple developed a new microchip for the Apple Newton. Most companies would have approached this as yet-another outsourced component development. Write the requirements, invite for bids and award the lowest bidder. All they would have got out of that is a marginal saving. But with that, a lot of IP would have moved from Apple to the chip designer.
Apple must have sensed that their contribution deserves more than just that. So they have opted for a joint venture with the chip designer and the manufacturer in which they were the user of the developed product. The whole endeavour came at the cost of a small project ($3m in 1990 USDs). Not only did Apple get the product they wanted. But some 10 years later they sold their share of the JV for $800m(!). How many opportunities has your company missed out on through non-conscious IP management?
It is your responsibility as an innovator to be conscious of your company’s innovation IP and manage it strategically to reap the benefits of your IP.
Take action now & boost your innovation skills
Download and use the worksheet to start managing your IP strategically.
Take action now & boost your innovation skills:
- Using your notes from last week’s exercise, use the one critical IP item assess your strategic IP management options.
- If you haven’t done last week’s exercise you can use the template at the end of this workbook
- Use the template on the next page and in column A identify name / describe the one important IP item.
- In column B describe the commercial/economic value of this IP to your company.
- In column D brainstorm how the solution for each strategy could look like.
- In column E & F assess the risk & opportunities of each strategic options.
On a parting thought
In 1988 Apple launched a lawsuit to prevent Microsoft and Hewlett-Packard from using “their” (Apple’s) graphical user interface (GUI) elements. In 1989 Xerox sued Apple claiming Apple was using their (Xerox’s) GUI. Steve Jobs was always quite open about how his visit to Xerox PARC inspired him of the GUI. Apple’s claims were rejected with the exception of HP using Apple’s “folder” and “trashcan” icons. This humiliating defeat for a very self-convinced Steve Jobs shows the limitations of using your IP to suppress competition.
The best strategic IP management options may be on the sharing side. “Managers assume all too often that the best way of using IP rights is to suppress competition. […] this view of IP is too narrow, and it can have detrimental longer-term consequences. Remarkably often, sharing the value of IP is in the best interest of companies and society” Professor William Fisher.
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