A value-based approach
Intellectual property is hard to value at the best of times, but when you are in-house and it is much more about dollars on the balance sheet, justifying the value that it brings to a business is a key part of the job
It is the kind of question that Jeremiah Chan relishes. Just a few weeks into his new role as head of the patents group at Facebook and Chan was having his first sit-down meeting with one of the company’s vice presidents of engineering.
Keen to hear more about how the patents group could be improved, Chan’s colleague assured him that the team was great – the strong technical backgrounds of its members meant that they could get quickly up to speed when discussing new inventions with the company’s engineers.
But there was something troubling the Facebook vice president. He told Chan that he knew just what kind of return on investment (ROI) his team of engineers delivered for every hour they worked on a new product or tweaked an existing application. But that insight did not translate to intellectual property.
“What is the ROI for the time that we spend on patenting and portfolio development?” he asked Facebook’s new patents chief. “We do all these educational sessions, we do all these invention harvests but what is the return? I don’t really see it.”
As he pointed out, Facebook’s portfolio was not created with an offensive monetisation strategy in mind. Its intellectual property is there – as it is for many companies – to help ensure freedom to operate and ward off potential infringement threats, not to deliver dollars to the company’s bottom line.
Just what is worth a company’s while (or time and money) is a question that many chief IP officers face as they grapple with their roles as heads of what for most businesses is a cost centre. The number of companies that generate a meaningful, monetary return from their intellectual property – a group that is dominated by businesses in the mobile telecoms and semiconductors sectors – is dwarfed by the vast majority that – for a variety of reasons – do not monetise their rights in a way that shows up directly on their bottom lines.
This means that they must show the value that intellectual property brings to a business in different ways – from freedom to operate and defending against infringement lawsuits to using intellectual property to help facilitate broader business transactions. The question of IP value has become even more acute in the United States as changes to the patent system mean that rights holders may increasingly be questioning the value of their portfolios.
“As the patent landscape has become more challenging in the United States, really thinking about the business case for your patent investments – whether they’re in portfolio development or IP enforcement – has become even more important”, explains 3M chief IP officer Kevin Rhodes.
With this changing market in mind, IAM spoke to four senior IP leaders at major patent-owning businesses to discuss how they demonstrate the value that they deliver.
A more focused approach
Chan insists that he likes questions around how much value his team and patents in general provide to the wider business because he says that they should be challenged. “We pay our engineers top dollar and if we’re going to take time away from their research and their ability to innovate, we’d better make sure it’s worth it”, he comments.
When he took on his current role in 2018, that value discussion started with portfolio development and he has overseen the introduction of a more focused approach to the patenting process.
As the Facebook patent supremo explains: “We don’t just patent because something is patentable, we patent if it is connected to the use case that we’re trying to achieve for the company and will advance the company’s mission to connect the world.”
This leads to conversations with the company’s engineers which are not only framed around what they are working on and might merit patent protection, but also around the specific needs of the business.
“We now say to [the company’s engineers] ‘here are the threats that we’ve identified, here is the surrounding landscape and here is where we really don’t have enough in our portfolio if we were to be attacked in a lawsuit’”, he explains.
Facebook’s portfolio of around 4,000 US assets may be firmly eclipsed by the likes of Samsung and IBM but it is growing rapidly through organic growth and acquisitions on the secondary patent market, picking up assets from the likes of AT&T and Hewlett Packard Enterprise. These deals have helped to fill gaps in the portfolio and some of the assets have been used in a countersuit against Blackberry after the Canadian tech giant sued Facebook in 2018 over the alleged infringement of several messaging-related patents.
The social media giant might have no interest in asserting its assets with monetisation in mind but the Blackberry suits have helped Chan in his talks around the ROI for intellectual property, highlighting the importance of having strong defences against possible competitor lawsuits.
But beyond ensuring that you have the right kind of defensive playbook, one of the challenges that any patent head faces involves trying to predict how technology trends are likely to evolve and which patents are likely to deliver the most value years down the line. That is not simply to protect your own innovation but also to pinpoint possible areas where grants are likely to read on a rival’s technology.
Chan rejects the idea that you cannot make some well-educated guesses around portfolio development to ensure that you have the right assets in five to 10 years. “I would rather do the speculation or the ‘guesstimation’ up front and make some bets on where the technology is headed”, he remarks.
One area in which Facebook has invested heavily is augmented reality (AR) and virtual reality (VR), where it has been one of the market leaders since its 2014 acquisition of Oculus. Chan points out that there are some parts of the AR/VR fields, such as occlusion, that every company in the space is going to have to address and ultimately try to protect. “There are certain features that every competitor in that space is going to need to tackle and we are developing those fundamental features now”, he explains.
It may be years before the results of Chan and his team’s guesstimations become apparent but he says that his engineering colleague is already noticing the results of the new approach. “He loves it because the strategy is a lot tighter and more precise, and he has a much better feeling that there is more direction in terms of how we ask his team to spend their time with us.”
The $100 billion question
Going public can make you a target. For any management team and its coterie of advisers who are preparing for an initial public offering (IPO), last-minute surprises in the shape of an infringement lawsuit are best avoided. Plus investors need to know that the innovation which can be responsible for a huge chunk of a valuation is adequately protected.
When you are already a household name and you are eyeing a possible $100 billion listing, then the stakes are just that little bit higher.
For Uber’s IP head John Mulgrew the focus on a listing has at least given him a clear sense of his priorities and a clear means of demonstrating the value that he and his team bring to the wider business. As he expounds, they have three main priorities: “One is clear IP risk to Uber’s business, two is protect Uber’s technology and brands and three is to build external relationships.”
In terms of the company’s priorities in developing a robust patent portfolio, Mulgrew also stresses three points. “The first is to build investor confidence, the second is to deter competitors from asserting IP against us and the last, which is a distant third, is to build some kind of deterrence to operating company licensors”, he reveals.
To explain the importance of owning a strong patent portfolio, Mulgrew gets his message across to senior management by using a familiar method. “I tell stories”, Mulgrew says. “I talk about Twitter, I talk about Facebook, I talk about Snap – I talk about companies that they tend to know and what happens on the IP side during their phase of going public.”
The Facebook example is presumably instructive given that it faced an infringement lawsuit in March 2012 from Yahoo! and then loaded up on patents from AOL (via a deal with Microsoft) and IBM to fight its corner. The court case from the erstwhile search business eventually settled.
Azure IP Advantage – what is included
As Microsoft’s cloud platform has grown, the company’s IP function has developed a programme which minimises IP risk for Azure customers. In doing so, it is one way that the group demonstrates the value of the software giant’s huge patent portfolio in supporting the company’s wider objectives. Here is a breakdown of what the Azure IP Advantage programme offers:
- Uncapped indemnification – Microsoft’s IP indemnification has been extended to cover any open-source technology that powers Azure services.
- A patent pick to help in defending possible lawsuits – Microsoft has made 10,000 patents available to Azure customers to help defend themselves against patent lawsuits involving any of their services that run on the cloud platform. This patent pick option has been extended to customers who are building Internet of Things applications that connect to Azure.
- A springing licence – Microsoft is not generally in the business of selling patents to NPEs, but as part of the programme the company has promised that should it do so in the future, then members will receive an automatic licence to the grants.
- Patents for start-ups – any start-up that joins the License on Transfer Network and spends a certain amount on Azure services can receive three free patents in certain technical areas.
Table 1. Uber goes shopping
Number of assets
13 January 2017
26 October 2016
16 June 2017
12 January 2017
9 June 2017
19 January 2018
14 December 2017
16 May 2017
Source: ktMINE/USPTO assignment database
Uber clearly learnt from the experience of Facebook and other companies that have built their portfolios in the run-up to an IPO so that any rival operating company thinks twice about launching an opportunistic infringement suit. In 2016 it hired former Motorola and Google dealmaker Kurt Brasch in part to help it aggressively grow its portfolio in the secondary market. This led to deals with the likes of AT&T, HP Enterprise and Microsoft (see Table 1).
In the run-up to its much-touted IPO, the ride-sharing giant looked to bolster its portfolio through a careful acquisition process which saw it buy more than 200 assets on the secondary market. This helped to guard against any potential infringement suits from rival operating companies which might have spooked potential investors. Here is a breakdown of what it bought.
While Mulgrew and his team work to ensure that external investors are convinced that the company has the right kind of IP firepower, he also points out that the same message can work internally. “Everyone understands that. Everyone says ‘ok, I want our IP position to be strong so that we don’t face concerns about whatever valuation people might ascribe to the company’”, he comments.
While Uber aggressively grew its IP position in the run-up to its May 2019 market debut, which ultimately valued the company at a little over $80 billion, Mulgrew insists that he is still keen to take a measured approach. “I want to avoid bulking up our portfolio and having assets that don’t serve the mission”, he asserts.
For a business as dynamic as Uber, the company’s IP chief admits that his group’s strategy will need to be flexible according to whatever direction it takes: “I don’t get to tell the business how to grow or what to avoid, that’s not my place – our place is to serve the business, not veto it.”
Azure sky thinking
Arguably no other company has undergone quite as big a transformation around how it assesses the value that intellectual property delivers to the wider business than Microsoft. In the past five years it has gone from – in IP value-creation terms – being best known for its billion-dollar licensing business, particularly in the Android smartphone universe, and as arguably the strongest backer of the giant NPE Intellectual Ventures, to a company where intellectual property is a core component of its push into new areas and where value is about much more than dollars and cents on the balance sheet.
With this shift the company’s intellectual property, including its tens of thousands of patents, has become part of much broader business deals. For example, its 2016 deal with Xiaomi saw the Chinese mobile business pick up a portfolio of 1,500 grants, while in return a selection of Microsoft applications came pre-loaded on Xiaomi’s devices.
More recently, the company’s IP group, which has been led by Erich Andersen since 2014, has pivoted to support two broad (often interrelated) efforts by the wider business – its push into the cloud and its embrace of open source software.
As Andersen points out: “Our business has changed a lot, our executive leadership has changed a lot and as we’ve moved forward over time and particularly in the last five years, certain things have become clear in terms of where we’re going and where the focus of the company is.”
Microsoft’s cloud platform, Azure, has quickly become the number two in the market (behind Amazon Web Services) and a rapid growth engine for the business, in which CEO Satya Nadella has made a big commitment.
In early 2017 the software giant announced the launch of Azure IP Advantage, a programme designed to leverage the strength of the company’s patent portfolio in the growing but highly competitive cloud market. While Amazon’s cloud business is currently number one in the market, the online retail giant has nothing like the IP depth of its Washington State neighbour so, as it looked for a competitive edge, Microsoft’s patent portfolio was a logical place to turn.
Under the original terms of the programme, the company’s cloud customers are indemnified from infringement claims relating to their use of Azure products and are given access to a portfolio of 10,000 grants from which they can pick one to use in defence of any infringement suit. In the unlikely event that the company should transfer any intellectual property to an NPE, then eligible customers would automatically receive a licence.
At the start of this year the programme was expanded so that start-ups which are members of the License on Transfer Network and Azure customers with a monthly spend of at least $1,000 can pick three patents from a stockpile of 500 that Microsoft donated to the network (see Figure 1).
The programme developed, Andersen says, from the IP group asking itself a fairly straightforward question: “We asked ‘how could we bring our patent portfolio to our customers in such a way that they would value and that would give them a meaningful reason to choose Azure?’” he reveals.
The company’s IP head claims that the feedback they have had from customers and the level of activity in the programme has helped demonstrate its value to the broader business. It also proves one point, which Andersen is keen to stress: “Very often we find success by having intellectual property be part of a larger whole.”
It helps that Andersen clearly thinks deeply about the role that intellectual property plays in the wider business and when talk turns to managing and developing one of the world’s largest patent portfolios, he recognises the responsibility that that carries. “I think everybody who has a job like mine needs to have a mindset that portfolios are expensive to build and to maintain”, he reflects.
“All of us must take a thoughtful approach towards demonstrating value to our management teams of what we’re building and maintaining – there needs to be an ROI.” He also points out that patents are, by their nature, about the long game and therefore ideas around value can shift according to the conditions in the patent system and the wider business environment. This means that the focus must be on developing high-quality assets that not only have defensive value but also may – years down the line – have value in other areas, such as licensing.
“Ultimately you’re trying to build assets that kind of future-proof the company’s future strategies”, Andersen explains.
What do the numbers say?
Changes in the US patent system might have some senior executives wondering just how valuable all of their grants actually are, but one clear advantage that a chief IP officer of today has over their predecessors is access to more sophisticated data analytics, which can help to demonstrate the value of a portfolio and an IP strategy more generally.
This can inform decisions in a whole host of areas – from when and where to file and which patents to maintain to litigation strategy around likely outcomes in particular district courts.
Facebook’s Chan is emblematic of an emerging breed of IP leaders who marry a traditional legal background with a keen understanding of the benefits of data analysis. He was originally hired at Google to bring in a more data-driven approach to portfolio development and the IP group in general. That gave Chan and others at the search giant a far greater understanding of the company’s patent portfolio of tens of thousands of assets.
As he told IAM back in 2014, shortly after he joined: “I hear chief IP officers say that when you get to 20,000 or 30,000 patents then you don’t know what you have – we know exactly what we have.”
Since his move to Facebook in 2018, he has brought the same kind of rigour to the social media platform’s patent group and can tap into a centralised analytics function which services the company’s entire legal function.
While Chan is clearly a leader in the field, a data-driven approach is taking root at more and more companies. As Uber’s Mulgrew explains, it can play a key role in portfolio management.
He questions: “Do I need to have 50 patents in order to make sure there are five good ones in there? I think the answer is no, with analytics you should be able to invest in a lower number of assets and have a higher predictability of quality than in the past.”
Better data analytics would be expected from the denizens of Silicon Valley where what the numbers say has always counted for more than gut feelings. But the new approach is extending well beyond Big Tech.
“We use a lot of data-driven IP management”, says 3M’s Rhodes. “We are much more rigorous at looking at the performance of our patent assets over time in different countries and if they’re not aligned with our business interests or with revenue generation, then we’re pretty ruthless about trimming them.”
Despite the rise of data analytics, there are still limits on how much some IP professionals are prepared to trust the numbers. “I can’t even tell you how many conversations I’ve been part of where the lawyer looks at the data, there is an inarguable position presented by the data team, and the lawyer just says ‘my experience is different so, no thank you’”, Chan espouses.
This might be in part because of some deep-seated resistance among members of an IP department. “You still have this dynamic where you’ve got senior patent attorneys or senior attorneys in some legal departments who don’t like being told what to do by non-attorneys”, the Facebook patent chief adds.
One thing has not changed with Microsoft’s IP evolution – its guiding principle is to determine how best it can support the company’s wider strategy. That is a goal that chimes with many chief IP officers, including 3M’s IP head Rhodes. “The primary goal of the IP function at 3M is to tie into our business strategy to support the monetisation of technology through the manufacture and sale of differentiated tech-based products”, he outlines.
Intellectual property plays a key role in protecting those products, but Rhodes admits that the return the company gets on that IP investment can be hard to value. He says that they look at the performance of products where they have robust patent protection compared with areas where they do not, but he concedes that it is a more nuanced discussion than a profit and loss model in which his group’s contribution would show up on the balance sheet. The Minnesota-based conglomerate does generate some licensing revenue but it is not at the forefront of the company’s IP strategy.
Like his peers at Facebook and Uber, a focus on IP value has also led Rhodes and his team to introduce a more directed approach to patenting. “We really need to have our assets tied to business opportunities in emerging product areas or existing product areas that we want to protect”, he explains.
Where better use of data analytics shows that the business case for a patent is no longer there, the company is quick to get rid of a grant to save on maintenance fees. Rhodes says that making that assessment “as data driven as possible eliminates a lot of the negotiation and pushback on abandoning assets that don’t make sense continuing to invest in from a dollars and cents perspective”.
Similar to Microsoft, 3M views its intellectual property as a way of facilitating deals with other businesses or research institutions that are broader than a simple licensing agreement. According to Rhodes, that trend is in large part due to more elaborate production processes and more sophisticated end results: “I think it’s a result of more complex products, more digital content and more interconnected and complex supply chains that really make collaboration integral to global competitiveness.”
The company may have started life as a mining business and be best known for the Post-it Note, but it now spans a range of sectors manufacturing products, such as smart road signs that can communicate with autonomous vehicles, to breathing equipment for firefighters and a digital stethoscope that has been used on the International Space Station.
The 3M engineers are responsible for a vast amount of innovation each year but the company’s IP function now ensures that what is ultimately patented is supported by a clear business case. “We used to think of it more in terms of the pure basic technology which needed to be protected and that’s still important but what we’ve added is a deeper sense of the business opportunities that the intellectual property might enable”, Rhodes reflects.
For most businesses, generating value from intellectual property means a lot more than dollars on the balance sheet. But as executives grapple with how they justify their worth to their wider company, there are some principles that they must increasingly adhere to.
- IP strategy must be closely tied to the business’s overall objectives and it helps if the IP team talks regularly with other business functions, such as business development.
- Portfolio development must be focused on the company’s short and long-term needs, not simply on patenting any innovation that is developed in house.
- Patent rights can be a key part of broader business deals helping to facilitate agreements that deliver more than just cash to a balance sheet.
- Greater use of sophisticated data analytics is helping in-house teams demonstrate the value of intellectual property.