A value-based approach

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.

Table 1. Uber goes shopping

Source: ktMINE/USPTO assignment database

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.

Opportunities knock

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.