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Factory of the Future? Factory of the Future? Microsoft alum Nathan Myhrvold runs a firm that doesn't make anything, but it's hoarding the key to a new business age: intellectual property By Brad Stone Newsweek Nov. 22, 2004 issue - The offices of the highly secretive Seattle-area start-up, Intellectual Ventures, are filled with evidence of the multiple hobbies of its polymath founder, Nathan Myhrvold. The multimillionaire former chief technologist at Microsoft is a scientist, so there's a collection of antique microscopes in his office. He is a photographer, so striking pictures of nature adorn all the walls. He is an avid writer, so antique typewriters line the hallway. And since he is also a paleontologist, the full-scale head of a T. rex lords it over the lobby. It's actually a replica of the model used in the second "Jurassic Park" Robbie McClaran for Newsweek film. 'Wild and crazy' guy: Myhrvold The dino's ferociously bared teeth hint at elements of Intellectual Ventures' bold business plan. Myhrvold and his partner, former Microsoft chief software architect Edward Jung, have created the quintessential company for the 21st century. It doesn't actually make anything: it outsources, offshores and offloads nearly every task performed by regular corporations. It has no factories, machine shops or marketing teams. Only patent attorneys populate the quiet hallways. The five-year-old firm's plan is to create or buy new ideas, accumulate patents—exclusive rights to use the inventions—and rent those ideas to companies that need them to do the gritty work of producing real products. Because today's businesses are constrained by their need to make money, Myhrvold says, "it is irresponsible for them to think wildly 1 From www.msnbc.msn.com/id/6478691/site/newsweek/ 15 October 2006 outside the box." He wants to fill that innovation gap—"We are thinking wilder, crazier thoughts than anyone else." To generate patentable ideas, Intellectual Ventures hired a dozen top scientists as part-time consultants to participate in several all-day gabfests each month, which the company calls "invention sessions." Lawyers transcribe the discussions, which can range from biotech to nanotech to solid-state physics, and follow up on the most promising ideas with patent applications. One participant, Dr. Leroy Hood of the Institute for Systems Biology in Seattle, says: "We are thinking about how you can solve problems that have never been solved before." Since the company has been holding sessions for only a year, it has likely produced about a hundred ideas whose patent applications won't be processed—or start earning any money—for at least three years. But spinning new ideas is only a small part of the plan. Sources familiar with Myhrvold's strategy say that he has raised $350 million from some of the largest companies in high tech: Microsoft, Intel, Sony, Nokia and Apple. Google and eBay also recently invested. With this large bankroll, the company is out buying existing patents in droves. (Myhrvold won't comment on these activities, but sources say he has already purchased about 1,000 patents.) The strategy is to set up a sort of patent marketplace. Patent owners get money upfront for the dusty ideas sitting on their shelves, the investors get the rights to use the ideas without being sued and Myhrvold gets to rent those same ideas to other companies that need them to continue creating products. Intellectual-property experts say his plan is audacious and unprecedented, customized for a new, rapidly dawning business environment. In this new world, intellectual property is every company's most prized possession—and biggest vulnerability. It has already become America's No. 1 product and export: last year in the United States, for example, movie sales in theaters and as DVDs and videos exceeded the overall sales of steel. Intellectual property is now an asset with independent value that can be bartered, sold or battled over. Large companies have always accused their rivals of capitalizing on their ideas, of course. But now companies with more patents than actual products and a few bloodthirsty lawyers on the payroll have no reason to strike partnerships; they are out to win lawsuits. And the biggest companies with the most products that conceivably trample the most patents are sitting ducks. Last year, for example, Microsoft was ordered to pay $520 million for violating the patent of one employee firm, Eolas, which claimed to own the way users could get videos or songs inside a Web browser (Microsoft is appealing). This is where Intellectual Ventures steps in. It is buying patents from all corners of the high-tech world, including those that could pose legal threats to its powerful investors. An Intellectual Ventures e-mail sent to law and consulting firms last year, and obtained by NEWSWEEK, says the company is 2 From www.msnbc.msn.com/id/6478691/site/newsweek/ 15 October 2006 "interested in purchasing patents and applications in the areas of software, e-commerce, communications, semiconductors, consumer electronics and computer architecture—basically, just about anything that deals with bits." By buying all these patents, Intellectual Ventures ensures they cannot be used against its investors by gadflies like Eolas. But Myhrvold also intends to make money for his backers, not just to protect them. This is where the critics start to get anxious. "We're concerned that these giant pools of patent rights are going to prevent entrepreneurs from entering markets, as opposed to being used to promote innovation," says one worried Silicon Valley venture capitalist. But Intellectual Ventures could do many things, observers say. It could demand licensing fees from its investors' rivals, companies like Yahoo and Amazon. It could also corner the market in a new technology, like a speedier silicon processor, and charge microchip makers a tithe to use it. Or Myhrvold could change directions altogether and start building actual companies around the best ideas. Myhrvold and Jung won't exactly say. But they charge that Silicon Valley companies have stolen other people's inventions for too long while slashing their own R&D budgets. Referring to Intellectual Ventures' portfolio of patents as his own, he says, "If giant corporations are making billions of dollars off my ideas, I want something for it, and I don't think there is anything wrong with that." He expects his business plan will draw controversy, but notes, "Everything new in life is opposed by somebody." He also cites as a model the electronics companies that pool their DVD patents. Manufacturers that want to make DVD players now have to pay these consortiums small fees for the rights. Yet even with this tech tax, the cost of players has dropped sharply during the DVD boom. Where is all this headed? Myhrvold reflects on his early days at Microsoft when he was criticized for selling pure software, a collection of ethereal bits unattached to something tangible like computer hardware. Today, this "ethereal" industry is one of America's largest, and Myhrvold repeats almost as a mantra, "Intellectual property is the next software." In other words, he expects a whole new industry of firms like Intellectual Ventures that deal only in the currency of ideas. He is so sure of it, he has even adopted a new hobby: studying for the patent bar exam. 3 From www.msnbc.msn.com/id/6478691/site/newsweek/ 15 October 2006 .
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