Patent Power
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Patenting pays Patent power and software technologies benefiting Companies that sustain high annual from Moore’s Law. growth rates in patent applications • The convergence of technologies and the in comparison to their peers exhibit networking of products driving communication standards and huge greater long-term revenue and economic network effects. market share growth • The increasing output of engineers and scientists from top universities in India, By Vincent Pluvinage China and other countries, combined with accelerating broadband access to Technological innovations have been at the technical and scientific data with root of industrial competition and virtually no time delays and a marginal transformation for many years. During the cost close to zero. last decade, three trends in technology have increased competition between companies A natural consequence of this around the world: the greater movement of transformation is the increasing value of scientific and engineering talent between innovations and the apparent contradiction regions; almost instant and free access to between the need to drive fast adoption the latest technical information via across competitive boundaries while broadband internet; and the increasingly retaining the financial benefits required to global availability of investment capital to sustain and even increase future R&D fuel most stages of development and investments. commercialisation. Intellectual property rights have been an When companies invest in R&D, they integral part of this transformation. Trade typically seek to increase or protect their negotiations between countries have competitive advantage by filing patent strengthened IP rights in many developing applications. Small companies do this countries and provided the PCT process to principally to attract venture capital. Larger streamline the global filing of patent companies may use their patent portfolios applications. This has resulted in key and other types of intellectual property inventions being protected by families of assets in a variety of ways (Figure 1) to patents in a growing number of countries. increase the strategic and financial returns Standards organisations have provided on their R&D investments, as well as for various frameworks to define standard defensive purposes. essential patents, leading to interoperability While in the past the R&D function of products and services on a global basis, remained vertically integrated and was as well as cross-licensing between R&D treated as a proprietary internal resource, contributors. several factors have forced companies to Some companies and institutions have migrate towards a different R&D model. The been able to concentrate on R&D driving factors of this transformation investments rather than end-user product include: development, and have developed profitable • The rise of venture capital to fund investment models leveraging the adoption entrepreneurs. of their inventions. Other companies have • The ubiquity of digital semiconductors concentrated on creating brands, distribution www.iam-magazine.com Intellectual Asset Management July/August 2010 31 Patenting pays Figure 1. Financial and strategic uses of IP assets Cost reductions Expand IP & profits Eliminate/avoid royalties Generate royalties/revenues Financial returns Reduce/offset royalties Cross-licences Assertion deterrence Joint ventures/standards IP Litigation avoidance Product differentiation Strategic returns Litigation settlement Premium pricing Injunction prevention Create/protect new markets Legal protection Commercial competitiveness Defense Offense Figure 2. Global TOP 1000 producers of US patents in 2006, 2007, and 2008 5,120 100 IBM 2,560 90 80 1,280 70 640 60 320 Chrysler 50 (%) 160 40 80 Silicon Graphics 30 Sandisk 40 20 Cisco 20 10 10 0 #1 100 200 300 400 500 600 700 800 900 #1000 Annual number of US patents granted (average for 06,07,08) Cumulative % of total for 06+07+08 Annual average during 96,97,98 and services, while acquiring smaller, alternate technologies based on other technology-focused companies to enhance inventions may wipe out the value of any their organic product development efforts. patent. In addition, enforcing patent rights Intellectual property assets can be may take many years of costly and often accumulated organically or inorganically to unpredictable litigation. Finally, it has been create competitive advantages. But building shown that only a small percentage of the a patent portfolio is not cheap. Aside from patents in almost any large portfolio are the R&D costs, protecting an invention in truly valuable. established or emerging markets requires a multi-year investment in translation, filing, Tracking filings and grants prosecution, patent issuance and Yet despite all this, the number of patent maintenance fees. As globalisation applications filed has increased steadily in increases, the number of countries in which the most developed countries, and has done key inventions must be protected and the so even more dramatically in the fastest- cost of proper geographical patent coverage developing economies. Given the expense multiplies. and risk, as well as the long period between Furthermore, the construction of patent filing and realisation of value, we postulated portfolios is a risky long-term investment: that the annual number of patent it will take many years for the patents to be applications and grants might provide clues granted and another few years to about a company’s global ambitions and its understand the market value of the future competitive position. Specifically, we inventions based on their actual market tracked these numbers over a long period of adoption. The discovery of previously time and across many countries and unknown prior art or the emergence of industries. For publicly traded companies, 32 Intellectual Asset Management July/August 2010 www.iam-magazine.com Patenting pays Figure 3. US and PCT filings by the Global TOP 1000 patent producers (based on their country headquarters) 25,000 US filings PCT applications 20,000 15,000 10,000 5,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Rest of America BRIC Rest of world Rest of Asia Korea EU Japan US PCT apps 97+98+99 US apps 97+98+99 PCT apps 05+06+07 US apps 05+06+07 EU JapanUS Rest of Asia Rest of world we also obtained a series of financial metrics rankings among companies in specific derived from their published financial technology sectors. statements. These relational metrics provide more The number of patent applications or insights than the absolute numbers: patents granted is, of course, not necessarily companies and countries that sustain a an indication of the quality of a patent higher annual growth rate in patent portfolio. A number of prior studies have applications relative to their peers shown that, on average, start-up companies ultimately exhibit greater long-term often have very few patents, but of higher revenue and market share growth. By quality than the average patents found in contrast, companies that once dominated the much larger portfolios of well- their eco-systems and had large historical established corporations. Moreover, even in patent legacies, but which recently have had large portfolios of the most IP-savvy only modest or even no increase in companies, high-value assets may represent patenting activities, have typically only a single-digit percentage of the experienced less successful financial portfolio. In this study, we concentrated on performance. the largest patent producers, assuming that Although demonstrating a correlation their patenting activity is an indication of between the above variables does not prove a their level of investment in IP assets causal link, even a casual inspection of the (regardless of the eventual value of their data provides plenty of motivation for patents, which can be judged only many exploring further hypotheses and conducting years later). Additional data collection and more rigorous statistical analyses. analysis would be required to assess the differences in quality among these Methodology companies’ patent portfolios. The Global TOP 1000 Patent Producers In our analysis, we paid special attention were selected using simple, somewhat to the following: the rates of change over arbitrary criteria: the entities that were time of various patenting activities; the granted the greatest number of US patents ratios of patenting and financial metrics for in 2006, 2007 and 2008. These entities companies headquartered in different include publicly traded and privately held countries; and the shifts in relative patent companies, as well as universities and other www.iam-magazine.com Intellectual Asset Management July/August 2010 33 Patenting pays Figure 4a. Average annual patent applications filed by the Global TOP 1000, ranked from 1 to 200 900 800 700 600 500 400 300 200 100 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 JP US EP PCT DE GB FR Figure 4b. Average annual patent applications filed by the Global TOP 1000, ranked from 801 to 1,000 50 45 40 35 30 25 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 JP US EP PCT DE GB FR research institutions. Some large companies Kingdom (GB); Korea (KR); and China (CN), consist of groups of separate legal entities as well as the European Patent Office (EP) which are consolidated in a parent entity; and Patent Cooperation Treaty (PCT) and we counted all of the patent applications. The PCT process has provided Figure 5. Top 1000 PCT filings: increase applications or issued patents identifying as a way for companies to file a PCT patent over 10 years assignee an entity that includes the name of application first, reserving the right to the parent holding entity. proceed to the national stage in a select 100,000 Japan We did not, however, perform an group of countries until later (within 18 extensive search for patent assets from all months), thus delaying some translation, France 10,000 possible subsidiaries. We also did not filing and prosecution costs while preserving South Korea attempt to track patents sold or purchased, the original priority date.