Rembrandts in the Attic redux: Wall Street's undiscovered country
Ten years ago, when I first became interested in intellectual property, I read Kevin G Rivette and David Kline’s classic Rembrandts in the Attic. For those who have not read it, Rembrandts in the Attic is an IP strategy book written by an ex-patent lawyer and a war correspondent, and it had a powerful impact on me.
The authors showed how intellectual property was one of the most valuable strategic assets that a company possessed and revealed how each industrial revolution had been accompanied by a surge in intellectual property, from the invention of the telegraph in the 1800s to the technology boom of the 1990s. In that context, Dell Computer’s annual compound return of 223% between 1996 and 1999, and the $164 billion acquisition by AOL of Time Warner seemed to signal that an IP revolution was imminent.
But revolutions (scientific and otherwise) are often announced decades before they actually happen. Rembrandts in the Attic was published two years after Google was incorporated, before Facebook or Skype existed, when 2G was the mobile network, Amazon had three patents and Nokia was the dominant mobile phone company. Although David Bowie had rocked the music industry a few years earlier by selling his catalogue rights, the visionary ideas in Rembrandts in the Attic only scratched the surface of what was to come.
Fourteen years after the publication of Rembrandts in the Attic, the world’s 10 most valuable public companies are Apple, Exxon Mobil, Microsoft, Google, Berkshire Hathaway, General Electric, Johnson & Johnson, Wal-Mart, Hoffman La Roche and Chevron. This list is notable by the inclusion in the top five of Roche, Apple and Google: propelled by unique intellectual property, it is the success of these three companies that confirms that the latest wave in the history of IP revolutions has happened.
Against an industry-wide collapse in revenues caused by the ill-managed pharmaceutical patent cliff, Roche has remained vibrant. In no small part this derives from its $47 billion acquisition of Genentech and the unique intellectual property that this pioneer in biological medicines provides. In 2000 Apple had gross sales of $8 billion. Twelve years later this had grown almost 20-fold. The remarkable rise of the company is justifiably credited to the verve and vision of Steve Jobs, but it was built on a foundation of intellectual property and an uncompromising attitude towards IP enforcement. In the same year Google had just leased its Mountain View headquarters from the now-defunct Silicon Graphics and its revenues were below $90 million, a far cry from the almost $60 billion reported in 2013.
Wall Street certainly recognised the importance of intellectual property for these three companies, but it was another catalyst – the bankruptcy of Nortel Networks – that set in motion an industrial Game of Thrones, propelling intellectual property to acres of newsprint and a much wider audience.
On July 26 2000, seven months after Rembrandts in the Attic was published, Nortel’s stock price peaked at $124.50. This reflected the company’s position as an innovator of technology, home of world-beating intellectual property and backbone to the growing internet economy. Nine years later, the shares were worth $0.39 and the IP trove that underpinned Nortel’s value came into play.
The eventual sale of Nortel’s patent estate in 2011 triggered an auction that made unlikely bedfellows of Microsoft, Apple, Research In Motion, Sony, EMC and Ericsson. The so-called 'Rockstar Consortium' paid $4.5 billion for the patents. This was an 'anything but Google' price that was a multiple of any value expected by the investment bankers arranging the sale.
The Nortel transaction had the same effect on market awareness of intellectual property as Roger Bannister breaking the four-minute mile did for the profile of middle-distance runners. The psychological barrier to other major transactions was broken, and for the next two years barely a month passed without a major or significant patent transaction, legal action, strategic move or new alliance being formed in the mobile and wireless sectors. Ironically, the prominence of the chess game being played with telecommunications patents positioned intellectual property as a parochial issue, and the notion of intellectual property as a strategic asset for all companies continued to struggle to gain mainstream board acceptance.
However, intellectual property did begin to gain prominence with banks, hedge funds and a mushrooming population of patent trolls, which saw significant transactional opportunities. This focus on the opportunistic monetisation of telecommunications patents, however, further skewed perception of intellectual property for many market participants and obscured the most powerful aspect of Rembrandts in the Attic’s message, namely that IP strategy should matter to every CEO.
As the dust settles down on the legal firefight of the past few years, in part due the cooling effect of new and pending legislation, Wall Street is still trying to quantify the monetary value of intellectual property. In 2013 Bernstein Research, in a series of exhaustive papers, attempted to quantify the impact of the patent wars on the share price of the major players in smartphones. The conclusion was that the costs and settlements had a negligible impact on long-term share prices, although the short-term volatility associated with IP actions was clear. Of much more impact was the ability of management to position their company in a relevant space for the future and to execute on that position – in other words, aligning intellectual property and business strategy.
What has been revealed quite clearly since Rembrandts in the Attic was written is precisely what the authors postulated – the financial consequences of failing to align business and IP strategy can be catastrophic. This message does appear to be penetrating boardrooms, although most still lack strategic IP expertise.
Ironically, as Main Street switches on to the importance of intellectual property, Wall Street seems no closer to a genuine understanding of the issues. I recently interviewed most of the top Wall Street banks in relation to the initial public offering of an IP-centric company. The experience was salutary. Perhaps unsurprisingly, I saw no IP credentials in their pitch books, and when it came to discussions, the understanding of industry-expert bankers of industry-specific intellectual property was very confused. My conclusion? Fourteen years after Rembrandts in the Attic was published, for investment bankers intellectual property still remains an undiscovered country.
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