Taking Intellectual Property Seriously
Sherman, Erik, Chief Executive (U.S.)
There's more at stake in protecting and selling your IP than you may think. BY ERIK SHERMAN
Microsoft has been as tight with its intellectual property as a miser is with his cash. So news that the software giant was going to license IP from its 4,500 patents came as a surprise. A hundred deals were already in the works, the company announced in June and - drop jaw here - Microsoft was willing to deal with friend and foe alike.
At a stroke, the company created new revenue streams at a time when its core product lines faced limited growth, and it found a way to counter monopoly charges by making fundamental technology available. The attention to patents also opened the door to finding infringements on the part of open-source vendors and demanding royalties that would substantially cut the price advantage such software has enjoyed.
Most importantly, IP becomes a strategic tool available to the highest levels of the company, and not just a sandbox for lawyers. "Over the last 10 years, it has become imperative for CEOs to have not just a general understanding of the intellectual property issues facing their business and their industry, but to have quite a refined expertise relating to those issues," Microsoft Chairman Bill Gates wrote in an email to Chief Executive. "It is no longer simply the legal department's problem. CEOs must now be able to formulate strategies that capitalize on and maximize the value of their company's intellectual property assets to drive growth, innovation and cooperative relationships with other companies."
All very high-minded. Yet the reality seems to be that most CEOs, even those known for creating and using new ideas, dismiss their role in managing intellectual property. According to many experts, corporate leaders either totally ignore the important issues or assume that delegating them to technical or legal departments relieves themselves of the responsibility. Because those departments are seen as cost centers, no one focuses on the business value of the IP and how the company should be pursuing a return on the investment.
The results? Companies waste millions of dollars protecting the wrong things, lose significant potential revenue and literally give away valuable IP without realizing it. Experts estimate that 80 to 90 percent of corporations still don't use IP as an offensive as well as defensive tool to block competitors, generate new revenue streams and even increase leverage with suppliers. For all those reasons, CEOs are facing nothing less than an IP crisis.
It is impossible to estimate the amount of money lost each year because of IP issues, but single cases show how painful the results can be. Purdue Pharma is the Stamford, Conn.-based privately held manufacturer of the prescription painkiller OxyContin. In 2000, Endo Pharmaceuticals was looking to create a generic version of the drug. As might be expected, Purdue filed an infringement suit. In January of this year, the presiding judge ruled the patents for the drug were invalid because the patent claims were deliberately misleading and internal company documents showed that management knew the claims to be unproven. According to reports, more than 70 percent of Purduc's $1.8 billion in annual revenue comes from OxyContin. Should the verdict be upheld on appeal, it could spell the worst case of financial withdrawal ever seen by the pharmaceutical industry.
Call it an anomalous event, but companies are more vulnerable than they realize. "Probably 70 percent of the market value of [the S&P 500] is going to be in their intangible assets," says Ashok K. Jain, principal in the valuation services group at the Chicago office of Deloitte Touche Tohmatsu. When talking with the 500 largest companies in North America, he finds that they all assert their IP management prowess. Yet he estimates that only one in 10 can answer the simplest of relevant questions: Do you have an inventory of patents? …