Monetizing IP: The Executive’s Challenge

Many companies fail to develop a strategy around protecting and monetizing their intellectual property. In this Q&A, Harvard Business School professor Josh Lerner discusses current trends in IP including the rise of patent pools.
by Sean Silverthorne

According to the U.S. Patent and Trademark Office, intellectual property in this country is worth more than $5 trillion—about twice the amount of the current federal budget. The question: Are companies taking advantage of this value?

Not as much as they could be, is the answer from Harvard Business School professor Josh Lerner, an expert in intellectual property protection and commercialization. He believes many companies have failed to recognize the growing importance of IP in the global economy. "It has become more essential than ever that firms have a clear policy for maximizing the value of their intellectual property," he says.

We asked Lerner to discuss current issues in IP and also describe an Executive Education course he will teach this summer on the subject.

Sean Silverthorne: Do you think companies in general do an effective job at monetizing intellectual property or using it to gain competitive advantage?

Josh Lerner: There is a tremendous diversity of responses to the growing importance of intellectual property on the part of firms.

In many cases, firms have ignored the increased role of intellectual property in today's economy for too long, and have failed to adopt strategies to monetize their holdings. In other cases, however, companies have adopted "scorched earth" policies that aim to confront and litigate with rivals about intellectual property, which have often proved to be counterproductive as well.

Q: Why is it important today for firms to focus on their IP?

A: In many nations, intellectual property has become increasingly important. In part, this change has reflected the changing mixture of the economy, with the development of knowledge-intensive industries such as software and biotechnology.

This change has also been driven by policy shifts, which have sometimes naively associated stronger intellectual property protection with more innovation. Global treaties and conventions have played a role as well. As a result of these shifts, it has become more essential than ever that firms have a clear policy for maximizing the value of their intellectual property.

Q: How effective are copyright law and patent law, both here and globally, in protecting IP? What are the weaknesses that companies need to think about?

A: The range of patent and copyright legislation is vast, and the complexity of policies in even a single country is substantial, so it is hard to generalize. But it is clear that intellectual property laws are not a cure-all.

In many cases, rivals can "patent around" even the broadest award, and copyright law is typically even narrower. Even when a firm can prevent a rival from undertaking a directly competitive product, if the rival introduces an inferior substitute, it may damage consumers' perceptions and depress sales in the entire product category. As a result, intellectual property protection must be seen as not a cure-all, but rather as a tool with both strengths and weaknesses.

Q: What companies would you consider the exemplars in developing effective strategies for their IP? What makes these strategies so effective?

A: We can consider a few examples of striking strategies:

  • In several large companies, patent enforcement activities have become a line of business in their own right. These firms have established patent licensing units, which have frequently been successful in extracting license agreements and/or past royalties from smaller rivals. For instance, Texas Instruments has in recent years netted close to $1 billion annually from patent licenses and settlements resulting from its general counsel's aggressive enforcement policy. In some years, revenue from these sources has exceeded net income from product sales.
  • A variety of dynamic firms have catalyzed the establishment of patent pools, where firms with different agendas make their patents available on common terms. One example is MPEG-2, a digital video compression standard used in products including DVD and high-definition television. The standard was developed by the International Organization for Standardization, but during the completion of the standard-setting process, intellectual property issues became a paramount concern. The MPEG-2 patent pool was thus formed in 1993 to develop a unified approach to licensing. Led by CableLabs, an R&D consortium for the cable industry, the group established a patent pool that almost all the key players in the industry joined, despite the different incentives among pool members. This seems to have greatly facilitated the adoption of the MPEG-2 standard.
  • A number of firms have taken the radical step of adopting a code release strategy, where companies release some existing proprietary code and then create a governance structure for the resulting open source development process. For example, IBM released half a million lines of its Cloudscape program, a simple database that resides inside a software application instead of as a full-fledged database program, to the Apache Software Foundation. And Hewlett-Packard released its Spectrum Object Model-Linker to the open source community to help the Linux community write software to connect Linux with Hewlett-Packard's RISC computer architecture. This strategy is similar to giving away the razor (the released code) to sell more razor blades (the related consulting services that IBM and HP hope to provide).

Q: What is happening in the area of patent pools? Are these becoming more popular and, if so, in which industries?

A: In a patent pool, firms blend their patents with those of other firms. These pools allow users to access a number of firms' patents simultaneously, thereby avoiding the "patent thicket." In many cases, the pooling agreements also specify the pricing schedule in the agreement that establishes the pool, assuring that no party attempts to extract very high fees or to increase its fees after users are locked in.

Patent pools date back as far as the 1850s but have proliferated in recent years. Goods covered by patent pools totaled at least $100 billion in the United States in 2000, while multiple standard-setting bodies today cover virtually every high-technology product. Moreover, the scope of these activities is likely to grow in future years. In many industries, leaders have expressed frustration about the proliferation of patent thickets—the large number of overlapping awards—and the ensuing rise of costly and time-consuming litigation. In many cases, technology sharing has been proposed as a remedy.

It is clear that intellectual property laws are not a cure-all.

And the scope of industries considering adopted patent pools has also grown. While the patent pools have been well established in basic manufacturing and electronic industries for decades, they have been seen as a potential solution for increasingly prevalent patent licensing issues elsewhere, such in new biotechnology-related fields. For instance, a great deal of interest has surrounded proposals to use patent pools to address the multiplicity of rights that are slowing research in critical diseases such as AIDS and breast cancer.

Patent pools are only one way in which firms share their technology with each other. The rapid growth of open source software over the course of this decade has been highlighted in numerous press accounts. The multibillion dollar initial public offerings of Red Hat and VA Linux, IBM's embrace of open source and its investment of billions of dollars into these projects, and the recent (though qualified) embrace of Linux by Microsoft, formerly a bitter opponent: all these events have been extensively documented. What is much less well appreciated, however, is that open source is only the tip of the iceberg of the technology sharing that is reshaping high-technology industries. Patent pools, standard-setting organizations, and technology licensing efforts are having a profound effect on how firms seek to exploit new discoveries.

Q: You are teaching an Executive Education course this summer on Strategies for Protecting and Monetizing Intellectual Property. What are some of the key takeaways you hope to leave with your participants?

A: The course will be an attempt to explore this exciting and dynamic arena. Its key goals are:

  • Build a greater appreciation of intellectual property as a strategic asset that can be used to enhance a firm's value and competitive positioning.
  • Study the range of strategies employed by firms to monetize their intellectual property.
  • Understand the limitations to intellectual property rights and how their use can have surprising and even deleterious consequences.
  • Review the key changes in intellectual property law around the world and their consequences for businesses.
  • Appreciate the growing interest in the sharing of intellectual property, and how it represents a major challenge to firms as well as an approach that companies can use to enhance their competitive positions.
  • Explore how intellectual property is becoming increasingly important even in industries that have not traditionally relied on such protection, such as the financial services industry.