The fast pace of change is one of the main characteristics of the intellectual property field. The single most important thing you can do as a CEO or senior manager is to ensure that your strategy is dynamic and forward-looking. Now that you have your asset class established with intellectual property, you are prepared to take advantage of changes in the field of intellectual property that will affect your industry.
Look to the Edges
A key to finding the right balance that you need to strike in your intellectual property strategy—and determining how your organization can benefit from intellectual property—is to look to the edges of the marketplace.
Edge 1: Places Where the Marketplace for Intellectual Property Is Changing Fast
Intellectual property is a field in flux. Though that’s always been true to some extent, it has never been more critical than it is in today’s increasingly global, knowledge-based economy. The manner in which your organization invests in the development of intellectual property, how you account for the intellectual property rights you hold, what you can do to exploit these rights, and the value placed on intellectual property by investors, acquirers, and partners are all changing rapidly.
First, while the market in intellectual property rights is growing, it is not mature—at least not on the patent side. Despite all the activity associated with the valuation of intellectual property assets and the hundreds of billions of dollars involved in licensing around the world, there’s no established market for intellectual property licenses and asset sales. There is somewhat more stability in the marketplace for trademarks and copyrights for the purpose of merchandising, but even there, royalty rates can range from the low single digits up to more than 20 per-cent for the hottest properties.
At the moment, the market for intellectual property is a little bit like the one for local real estate: intellectual property is worth what someone else will pay for it. There’s certainly no big, public market for intellectual property rights with many buyers. There is an asymmetry to this market that could work to your advantage if you are a sophisticated player.
Second, the legal and regulatory environment with respect to intellectual property, too, is unstable—no doubt a driver of the changing practices by organizations. Proposals to reform patent and copyright law, in particular, are on the front burners in the United States as well as key markets in Europe and Asia. The value to organizations of other areas of intellectual property—such as the diametrically opposed trade secrets (by definition, closely held) and trademarks (when valuable, widely disseminated)—continues to increase in significant ways. At stake is nothing short of the future of what it means to be an innovative organization and how to value your assets.
Two major patent reform efforts in the United States could dramatically change the landscape of intellectual property law along with what it means to business. The first is broad reform proposals for the patent system at large. The second relates to so-called follow-on biologics— especially important to the pharmaceutical industry. (As I’ve done throughout this book, I’m setting aside the question of what kind of change would be “good for society” as a matter of public policy.)
For the past several sessions in the US Congress, debate has swirled around the topic of systemic patent reform. From a lobbying perspective, large IT companies primarily drive the main proposals. Some lobbyists argue that the patent system is badly broken. Too many low-quality patents are issued, they say, by too few qualified patent examiners. The process takes too long, others say, and achieves a low-quality result. Some biotech and pharmaceutical companies complain that patent terms are not sufficiently long in order for organizations to recoup the costs associated with research and development of new drugs as well as Food and Drug Administration (FDA) trials. Others disagree just as adamantly: the system is working well enough, and changes will only benefit incumbents, who have all the patents they need today.
Most of these proposals hark back to a major study in 2004 by the National Academy of Sciences on the need to reform the patent system.1 For the purposes of anticipating where things might go, one might look to the principles set forth in this report as likely to occur over time. The report calls for greater transparency in the patent system, increased public participation, and greater funding for the system at large.
The second major series of proposals focus on the issue of follow-on biologics—medicines that are similar to, but not the same as, innovator biologics. The powerful congress-man Henry Waxman of California argues that we should make it much easier for innovation to occur on the basis of work previously done by other organizations. His proposals would allow the FDA to consider data generated by an innovator to establish the safety and efficacy of a follow-on biologic sharing structural and functional similarity to the innovator product, thus decreasing the cost and time needed to bring follow-on biologics to market. On the other hand, the big pharmaceutical organizations contend that this type of legislation would harm innovation by giving insufficient data exclusivity to the original developers of biologics.2 On the flip side, this change would benefit the makers of generic drugs as well as significantly decrease the cost of biologics to consumers through increased com-petition. This series of possible changes would also affect the way that the FDA carries out its regulatory charge.
The courts are also involved in the process of changing intellectual property law. One important court-driven change, for instance, relates to the patentability of business methods. Under recent case law, it may be getting somewhat harder to patent a method in the United States.3
Third, intellectual property strategies are getting much more sophisticated. This is where the real opportunity lies for CEOs and senior managers. Organizations that figure out how to be creative in getting and using intellectual property are at a huge strategic advantage. Rather than seeing things as cut-and-dried, business leaders who are looking for new edges in intellectual property licensing and exploitation stand to benefit.
Edge 2: Changes in Social Norms
As every parent of a teenager knows, young people often relate to intellectual property very differently than did their parents and grandparents. There is no secret as to why Tower Records liquidated its stores or why Napster was so instantly popular when it hit the Internet scene. Young people love digital media. Many of them are creative in their reuse of copyrighted works, especially online. But many young people do not pay for the music and movies that they enjoy. This phenomenon is not limited to the United States or even only to young people.
Another aspect to social norms and intellectual property can be viewed through the lens of debates about patent reform, or the analogous debates about the relative merits of open-source and proprietary software. There is cultural force behind the idea of sharing software code, and then selling services and other applications of the code to customers—a concept at the core of the open-source soft-ware movement’s success. Particularly in the online world of chat rooms, blogs, and other social media, these strong views of a vocal community are quickly visible. Think also of what it means that Wikipedia has become by far the largest encyclopedia in the world, created entirely by volunteers with no obvious profit motive. In fields like computing, it’s crucial to pay attention to this community as well as consider the merits of its argument, even if it is not your core strategy to operate in an “open-source” mode.
These changing views of intellectual property amount to a trend that you need to watch, and it has a range of different implications. In one sense, it appears to be a challenge to the notion of thinking of your intellectual property as an asset class. If a generation of young people refuses to respect the intellectual property of others, the job of enforcing your intellectual property over time might seem to be a Sisyphean task. In some fields, this turns out to be true; ask the software executives leading companies in many parts of East Asia about piracy and you will see that they indeed have their hands full.
The more fundamental lesson from these changes in social norms is the need to be flexible and open to mul-tiple strategies. Over time, these same young people who today are sharing the copyrighted music of others illegally are becoming creators themselves. They are going to work for companies in knowledge-based businesses. They will become the leaders helping to strike a balance between intellectual property protection and the legitimate inter-ests of the public at large in ideas and expressions. As a business leader, you stand to benefit by listening to what these young people are really saying about their views on intellectual property as a guide to where the cultural and economic marketplace for intellectual property is heading.
Edge 3: International Dimensions to Intellectual Property
No discussion of intellectual property at this moment in history is complete without reference to its international dimensions. The global business network—comprised of connected marketplaces, human beings who travel back and forth, and information that flows over networked technologies—has already had dramatic implications for how intellectual property must be managed. The world’s economies and cultures are increasingly interconnected. Intellectual property flows across national borders as well as markets in new and more profound ways than ever before.
It’s instructive to consider the view from China. No one can say for sure whether a culture of intellectual property protection will arise over time. Will China be like the United States in changing its views when it becomes a net exporter of IP? Or is the cultural heritage so strong as to ensure a different outcome in future years?4
To listen to the government of China, the answer is fairly straightforward. The state is pursuing a national intellectual property strategy that includes the extension of rights in intellectual property and greater enforcement. In speeches delivered in China and at international forums like Davos, Prime Minister Wen Jiabao has repeatedly described the state’s commitment to the development of a stronger, tighter regime of intellectual property protection over time. He has likewise stressed the extent to which the development of global markets for intellectual property is a crucial competitive element for any state in the coming decades.5
Some of the finest legal minds in China are considering this problem, in big law firms and at the best law schools. It’s important to listen to what academics and practitioners in Beijing and Shanghai are saying about it. The mantra of “just increase enforcement” does not resonate. We in the United States can pound our chests about the need to enforce our rights as much as we like, and sometimes it will work—especially when linked to trade sanctions. But we cannot force another government, and particularly lo-cal provincial ones, to carry out the enforcement of laws that they don’t consider a priority.
Russia provides a similar example to China. Intellectual property rights are less consistently enforced in Russia than they are in the United States. This difference plays out, for example, in the struggle to become the top online social network in Russia. The leading locally developed social network, Vkontakte, or VK.com, boasts seventy-five million members globally, primarily in Russia or among Russian speakers from other parts of the world. Much of the usage of VK relates to sharing media of interest with your friends. Often, these movies or songs are subject to copyright. Facebook, by contrast, has a policy of keeping copyrighted movies and music off the site. Though fast growing in Russia, Facebook has a big challenge in terms of competing with a locally developed firm that takes a less stringent view about intellectual property protection, consistent with local (though not all global) norms.
So what is to be done? One approach is to consider alternative modes to profiting from knowledge and information. Another is to push the sword-and-shield approach to its fullest extent: to continue to fight for the full enforcement of rights established in the United States or Europe. If you take this approach, it’s crucial that you take a practical view: there will be leakage, at least for the foreseeable future, in China and other states that don’t have the same background, culture, and legal system that we do. At a bare minimum, price this leakage into your models.
Edge 4: Work with—or Become—a Company That Helps to Solve IP Problems
One of the biggest hassles with respect to intellectual property is figuring out how best to enforce your rights in a global economy. In some parts of the world, piracy is more common than compliance in terms of intellectual property law, especially among consumers. Big companies like Microsoft devote a great deal of energy in the form of senior staff time to the task of increasing compliance with its intellectual property rights around the globe.
Even if you are not precisely in the business of creating intellectual property, you might consider ways to benefit from the problems associated with intellectual property creation, management, and enforcement. It stands to reason that as economies become increasingly knowledge based, the importance of intellectual property management as an asset class will take on greater significance. This pat-tern points to a burgeoning field. Consider the problems that I’ve raised in this book. Organizations need expert help in managing, enforcing, and even strategically sharing their intellectual property to take advantage of increasingly open marketplaces and interoperable business ecosystems.
There is also increasing legal pressure on companies to protect the intellectual property of others. This notion is called intermediary liability. YouTube, now a subsidiary of Google, has run into this problem in an expensive way. Holders of intellectual property have sued YouTube on the grounds that the video-sharing site has not done enough to protect the intellectual property rights of third parties. For instance, Viacom has sued YouTube because of the number of episodes from popular sites such as Comedy Central that have popped up online. Viacom, among other rights holders, criticizes what it considers YouTube’s willful blindness to the copyright infringement happening on the video-sharing site. Viacom’s lawyers want YouTube to take steps to police and limit the amount of infringing material hosted on the wildly popular site, but has failed—so far—to press its claims successfully in court.
There is a shortage of expertise in key areas of this field. One example of a type of business that stands to benefit from the growing importance of intellectual property is that of developing ways to detect when someone’s intellectual property is being used online without permission and studying trends in piracy. Various companies are in this line of business. BayTSP helps organizations monitor the agreements they have with others for the monetization of intellectual property online. Attributor tracks content that you own as it is republished across the Web, serving organizations like the Associated Press. Affine offers a technology that can recognize your brand logo or the face of a celebrity as they appear in videos on social net-work sites. Each of these companies provides a service that helps intellectual property owners to monitor how others are using their content and, where appropriate, enforce their rights in the case of unlawful usage.
A more dramatic example is what Steve Jobs did with respect to the music recording industry. In crisis from changes wrought by the information economy, the recording industry was struggling to maintain its revenue sources and profitability after Napster and peer-to-peer file-sharing service became popular globally. Jobs—a computer guy—came up with the iPod and the iTunes Music Store as attractive, legal alternatives to stealing music. In effect, Jobs helped to create a huge and viable market for downloads of individual songs and albums. In the process, he also aided his own company to open up a series of new hit product lines, from the iPod to the iPhone and the iPad, built in no small part on the innovations that Apple brought to bear on the problem of digital music. Jobs built on the intellectual property of others and added his own genius to the mix. In helping to solve one big intellectual property problem—at least partially, anyway—Jobs created a new business ecosystem in which his own company would dominate for a decade or more. In fact, Apple now has one of the largest market capitalizations of any technology company in the world—and is one of the world’s most valuable companies by any metric.6
A Double Bottom Line for Intellectual Property: Strike a Profitable Balance, and Be Ready to Change
The hardest challenge that the CEO or senior manager faces in terms of intellectual property strategy is balancing the natural desire for control against the opportunities as well as challenges afforded by openness. These strategies are often in tension—a tension that may be impossible to resolve in full. But the creative use of a range of strategies in different circumstances can help an organization in myriad ways. These strategies can generate near-term profits for your organization while positioning you for a dynamic information-based global marketplace.
Organizations have traditionally created value primarily through innovations within the organization. Your employees innovate, you then build a market around what they have created, and finally you defend that market. Today, that’s still true to some extent. And it may well even serve as the cornerstone of your overall intellectual property strategy.
But it shouldn’t be the sum total of your approach. It is increasingly the case that many relevant innovations are made by others. The most familiar example is innovation by academic laboratories in the life sciences, which are licensed and exploited by private organizations. The open-source movement in the software field (think of the software that runs most servers, for instance, which is built on open-source technology) is another familiar story. As we’ve seen, much of the Web 2.0 environment online runs on a combination of open-source software and an interoperable series of Open APIs. Today, in some industries, the most interesting innovators are the organization’s competitors and customers. These are all instances where strategies that are not simply about full exclusion can reap huge benefits for organizations of all stripes.
The costs and benefits associated with intellectual property protection and litigation are growing over time, as organizations apply for far more patents each year in more markets and more industries. The quality of those patents, many critics argue, is low—and not getting better anytime soon. Likewise, entire industries are built online at the margins of the copyright law, where multibillion-dollar investments (think of Google’s acquisition for $1.4 billion of YouTube, the most prominent Web-based distributor of video content) bring potentially crippling liability with them. Organizations stand to gain tremendously from the innovations of their customers or members of relevant communities, as the open-source movement has shown, if the CEO can determine how to be open to listening to and incorporating these suggestions.
It is essential to focus on the big picture. Organizations in most industries connect together to form an ecosystem. As the intellectual property business grows in size and reach, the impact of the innovation of one organization increasingly affects what another organization may do. An organization’s competitors may innovate in ways that erect roadblocks to a CEO’s progress in important markets. Sometimes the threat comes from a third party seeking to profit from intellectual property development directly. A tide of innovation—where organizations are cooperating in some contexts rather than only competing—frequently can lead to higher returns for all market participants along with better choices, lower prices, and greater benefits for consumers. Such systems of interoperability are often greased by the use of innovative intellectual property strategies.
What’s missing in many organizations is a nuanced and coordinated view of this increasingly challenging topic. The CEO or senior manager needs to ask their team these questions: What intellectual property assets are available to my organization, how can I secure and build on them, and how can they be monetized in a way that makes sense for the near and long term? The answers to each are almost certain to be dynamic—changing with each passing year. Your strategy, in turn, needs to be just as dynamic and for-ward thinking.
Fundamentally, business leaders need to recognize the fact that in our networked information age, it is not only sometimes hard to enforce scarcity when it comes to ideas and forms of expression but also not the best idea in all cases. Powerful forces—cultural views in other parts of the world, widespread social norms (good and bad), and certain real benefits to open-information environments— are making it hard for the full exclusion approach to work over time. Full exclusion has its place. But it is not tenable in all cases. And it’s not always the best way to think about and exploit intellectual property. Organizations big and small—from Microsoft and Merck to start-ups around the world—are beginning to see it this way.
You already know that your organization needs to innovate in terms of how you develop products or services. If you take away one concept from this book, it’s this: you also need innovate in the development of your intellectual property strategy. Your organization can benefit in the near term from flexible, dynamic intellectual property strategies while positioning itself for success in the growing, shifting global knowledge economy, but only if you take intellectual property strategy seriously and seek out opportunity at the edges of the economic system.