BT’s decision to go to court over its claim that it owns hypertext, the technology that enables web surfers to move between sites by clicking their mouse, has exposed it to widespread criticism. Many people are opposed to companies asserting proprietorial rights over the web, while others have suggested the telecoms group could be humiliated if it attempts to argue it invented one of the net’s foundations.
However, BT’s apparent readiness to take such risks is perhaps indicative of the new seriousness being accorded intellectual property rights. After years of being told that the successful business of the future will have to be serious about knowledge management if it is to fully realise the value of its intellectual capital, companies are starting to do something about putting the mantra into practice.
This is partly a response to tough economic conditions. With growth hard to come by, executives are being forced to make more of what they have.
Roger Mavity is chief executive of Boxclever, a company that rents televisions and electrical goods, and is owned by Granada and Japanese bank Nomura.
He said recently that – like other media companies – Granada is worried by the recent fall in advertising revenue. “But,” he added, “Granada is a great programme maker and it could make more money from exploiting that.”
The Big Idea, a recent publication from the UK Patent Office, says “globalisation, shorter product life cycles, skill shortages and advancing technology are some of the factors making IP more important to business”. In addition, the unbundling of corporate activities so single organisations rarely take complete control of the design, production and distribution of goods and services creates opportunities for obtaining more revenues, as well as some risks.
With business becoming more complex, it is incumbent upon managers to give their intellectual property the same attention they devote to tangible assets, such as plant and machinery. The problem for them is that there is a general lack of understanding of this area.
Intellectual property – intangible assets that can be protected, such as patents, trade marks, copyrights and some designs – is just one part of what is known as intellectual capital. The key populariser of this concept is Thomas A Stewart, a US journalist who recently published The Wealth of Knowledge (Nicholas Brealey, 2002). He writes: “It has become standard to say that a company’s intellectual capital is the sum of its human capital (talent), structural capital (intellectual property, methodologies, software, documents and other knowledge artefacts), and customer capital (client relationships). Every company has all three, but some emphasise one more than the others.”
Then there is the tricky question of putting a financial value on all this. Various studies indicate that – in contrast to the situation even 25 years ago – the bulk of a typical company’s value is accounted for by intangible, rather than tangible assets. As a senior member of the asset management practice at accountancy firm Andersen said a year ago: “Fully 76% of the Fortune 100’s total market capitalisation is represented by intangible assets, such as patents, copyrights and trademarks.”
The bursting of the internet bubble may have convinced some that the pressure for new accounting rules has diminished. But there is widespread agreement that the current approach does not give enough importance to IP, a field that, according to one commentator, has been transformed into “one of the driving engines of a high-technology economy”.
While this debate continues, consultancies have sprung up that claim to be able to help companies value and exploit substantial overlooked IP resources. InteCap, which has been operating in the UK for a year, after being founded in the US in 1998, is one such. It says it can advise companies on the worth of trademarks, patents and even un-produced film scripts – and can help make many companies ten times more competitive simply by assisting in the exploitation of hidden IP assets. Its “bible” is Rembrandts in the Attic, a book published by Harvard Business School Press in 2000, in which authors Kevin Rivette and David Kline suggest that patents are the “smart bombs” of tomorrow’s business wars.
InteCap’s starting point is that companies need to evaluate what they have in the way of patents – and then decide what to do with them. “They can use some, or license, or even drop some and save the fees,” explains John Hudson, InteCap’s in-house economist. Indeed, with annual registration fees for patents in several countries running into tens of thousands of pounds, just rationalising an IP portfolio can make a substantial difference to costs.
It was during such a review, in 2000, that among the 14,000 patents it has registered around the world BT stumbled across the one that is the basis of its current court action. This was lodged in 1980 as part of the Prestel technology, a system of linked computers that the company developed when still part of the Post Office. BT’s suit against Prodigy, an internet service provider, which is part of US telecommunications company SBC, began in a New York court in February 2002. It is a test case that could lead to similar actions against other ISPs in the US. Those in the UK are thought to be safe because the British patent has expired.
Companies should not focus only on their own IP. Through legitimate inquiries, known as patent mapping or landscaping, they can discover what patents their competitors are filing – and thereby the areas they are researching.
Once a company is aware of what it has and what is going on elsewhere, it should devise an IP strategy. This should influence whether it opts for licensing, consolidation or whatever. One option InteCap is keen on is establishing an IP holding company.
Lucent (see panel, above) and Ford Motor Company are two prominent examples of companies adopting this approach. Among the key advantages of taking it is that it provides analysts and shareholders with more information about the company’s IP assets, so – theoretically, at least – creating greater value and giving managers greater focus on maximising their value.
The signs are that the likes of InteCap are pushing at an open door.
At a time when even banks are spending small fortunes promoting their brands, companies of all sorts are becoming increasingly aware of the potential value of their intangible assets – and the growth of licensing and the rise of specialist companies is the most obvious incarnation of the increasing willingness to exploit them.
Another illustration of the growing use of IP is the proliferation of images such as Thomas the Tank Engine. But it does not stop at children’s merchandising. Computer company IBM is often cited as an example of how to mine a huge patent portfolio to get out of a crisis. IBM was earning $1bn a year in royalties (see panel, below) by the end of the 1990s.
Jan Mugerwa, a solicitor in the IP group at City solicitor Stephenson Harwood, stresses IP rights are “something to protect intellectual capital, like the skull protects the brain.” But business success is increasingly dependent on gaining incremental advantages over the competition. Christopher Pike, author of Virtual Monopoly (Nicholas Brealey, 2001), says companies are realising that, since patents last up to 20 years, intellectual property can create space for them to gain market share.
This can happen in new areas. For example, it is hardly surprising that registrations of service marks – which have only been allowed since 1987 – accounted for 41.6% of all UK trademark registrations in 2000. Similarly, there is growing interest in patenting business methods. This is currently allowed in the US, but a draft directive recently issued by the European Commission suggests Europe will continue its more restrictive approach.
Nevertheless, although there may be doubts over how vital online retailer Amazon.com’s One-Click payment system is to its business, computer company Dell is certain its business model is responsible for its success. To judge from the series of patents it has taken out, it intends to protect that advantage. Not that Dell is limiting its IP strategy to using patents to curb would-be business model copiers. In 1999, as Rivette and Kline note, it entered a $16bn deal with IBM under which it gained access to IBM’s patented PC components, while Big Blue obtained access to systems for running build-to-order direct sales.
Companies once used patents to protect their intellectual property, now they are using them to share information – and to earn revenue. After all, such a strategy may not only see a company through hard times but give it an advantage when the economy picks up.
CASE STUDIES IBM & LUCENT
IBM is one of the most frequently cited examples of companies exploiting long-dormant patent assets. Like many others, it did not take drastic action until forced by a downturn in its fortunes. In the 1990s as part of a restructuring aimed at reversing losses, it began to look for ways to mine its huge patent portfolio. Now, it earns $1bn a year in royalties.
Because the costs of producing such revenue are minimal, these earnings go straight to the bottom line – which, as Rivette and Kline point out – goes a long way to explaining why others have been inspired to follow suit.
For example, Lucent, the US telecommunications company born out of the old Bell Laboratories, has centralised its extensive IP assets in a substantial business unit run pretty much as a profit centre.
With the help of an automated IP management system, the company launched a patent licensing programme that quickly earned several hundred million dollars a year. Moreover, managers have a clear remit to maximise returns on the company’s hefty annual investment in R&D.
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