This is the first in a two-part series.
Innovation has become a critical priority for many companies and, of course, is essential for technology companies. A recent Boston Consulting Group study of more than 1500 executives found that 72 percent of executives ranked innovation as one of their three top priorities, with 26 percent ranking innovation as their top strategic priority.
The pace of innovation and the importance of a coordinated innovation and intellectual property strategy are illustrated in the smartphone operating system market. Nokia dominated this market in 2007 with its Symbian operating system having a 60 percent market share. Yet four years later, the Symbian operating system had been abandoned by Nokia as its market share plunged. The winners were two new operating systems, iOS and Android, which were developed by Apple and Google, companies outside of the telecommunications industry. The iOS was introduced in June 2007 and Android in September 2008, yet by the second quarter of 2011, Android dominated the market, with more than 50 percent of the smartphone market.
This rise of Android has generated a tsunami of litigation with more than 40 lawsuits filed against it. Although such challenges were predictable given the disruptive nature of Android on the market, Google did not fully prepare for them and had a very small patent portfolio (in early 2010, Google had 316 issued patents compared to more than 3,000 for Apple). Google has been trying to fix this problem by purchasing patents from third parties. Google failed in its bid for the Nortel portfolio and most analysts believe that the Google acquisition of Motorola for $12.5 billion is primarily designed to get access to Motorola’s patent portfolio. Yet this acquisition may not solve the problem because many analysts believe that Motorola has a large number of cross licenses and RAND license commitments because of participation in standards organizations which may limit the value of the patents in litigation.
Innovation for large companies can come from a variety of sources: internal research and development, acquisition, corporate venture and joint ventures. Many companies have recognized the fundamental change in the source of innovation and the shift to innovation in small companies, chronicled by Professor Henry Chesbrough in his books on “Open Innovation.” One strand of this trend was discussed in a Harvard Business Review article, “Innovation through Global Collaboration: A New Source of Competitive Advantage,” which emphasized that the complexity of new products requires a collaborative effort of many companies (the bill of materials for iPhone reveals that Apple supplied only the operating system). Intellectual property is a critical asset for participating in such collaborations.
The best practices in an intellectual property strategy focus on protecting the company’s products and developing the assets that make the company an attractive partner in collaborations. The development and implementation of the appropriate intellectual property strategy can significantly increase the value of a company in the market and particularly upon an exit. For example, the market value of Oracle increased by 4 percent within the week after the announcement of the $1.3 billion award in its litigation with SAP. The value of patent portfolios alone (without a business) has been recently demonstrated in prices paid patent portfolios: Novell (800 patents for $450 million) and Nortel (6,000 patents for $4.5 billion).
Many books have been written about innovation and intellectual property strategy, and the next article in this series will summarize the major issues in developing and implementing an intellectual property strategy. One of the best books we have read on this topic, Edison in the Boardroom, is being updated and the new version will be available this month.
Startup and emerging technology companies in particular should have a clear innovation and intellectual property strategy in place. The appropriate mix of intellectual property rights will depend on the product, market and strategy. For example, companies with products that require large investments of capital or have long development cycles, such as semiconductors, industrial solar farms and pharmaceuticals, will have an intellectual property strategy that focuses primarily on patents. However, patents will also play a critical role for many other types of companies. Companies making a product for sale directly to consumers, such as social media or game companies, will have an intellectual property strategy that focuses on trademark selection and protection, although patents may have an important role for defensive purposes.
Any innovation and intellectual property strategy should be reviewed on a regular basis to ensure that it continues to match the company’s business strategy. The development and implementation of an intellectual property strategy is critical to the success of a company’s ability to innovate and succeed in the markets where the pace of innovation has increased dramatically.
Part II of this series will examine the specific components of an innovation and intellectual property strategy.