Tag Archives: R&D

“Secrets” is required reading for informed managers and investors

In an information age that worships data and transparency, the trade or business secret has never been more valuable.  

“Secrets” is an essential guide to understanding, using and profiting from trade secrets, or “know-how,” perhaps the most misunderstood of intellectual property rights.

What I like best about James Pooley’s new book, subtitled Managing Information Assets in the Age of Cyberespionage, is the way he explores the ontology of proprietary business information – what it means, how it has come to exist, and how these secrets can be protected and monetized. He reminds us that even “negative” information can have significant business value.

A Silicon Valley veteran, Pooley has served as a lawyer, manager, diplomat, professor and writer. From 2009 to 2014 he was Deputy Director General for Innovation and Technology at the World Intellectual Property Organization (WIPO), an agency of the United Nations, where he ran the international patent system.

His seminal Trade Secrets for lawyers and Trade Secrets: A Guide To Protecting book_sideProprietary Business Information, first published in 1982 and aimed at business managers, are leading books in the field. Both have been reprinted.

Preferred Protection

Pooley says that despite the attention paid to patents, trade secrets are the preferred method of IP protection for R&D-intensive companies, and are relied upon at more than twice the rate of patents. He says that there are good reasons to have trade secrets:

“They’re cheap: you don’t have to pay for government certification. They’re broad, covering many things that patents can’t (indeed, they cover just about any business information, like sales data and strategic business plans), and unlike a published patent, you don’t broadcast to the competition what you’re doing.”

Enforcing a trade secret typically falls under state law, and there is no Patent Trial and Review Board or history of adverse judicial decisions to challenge their existence.

“Secrets” provides readers much practical advice, including forms for confidentiality, non-confidentiality and consultant agreements. It is a handy and deceptively insightful book, and will open the eyes of even experienced managers. The book includes sample non-disclosure and other agreements, and suggests best-practices and safeguards that should be put in place before an employee leaves a company to discourage him or her from using or sharing proprietary information.

In reading this book we are remind us that secrets falling into the wrong hands can destroy a project, or even bring down a company. The same technology that enables seamless communications, also makes data theft easy, cheap and increasingly difficult to detect.

Chart of IP rights (JPEG)

Know-How & Patents

Trusting employees, competitors, consultants with classified information, such as the specialized know-how, especially those that bring inventions or patents life, is a high-wire act that managers need help balancing. “Secrets” provides valuable guidance to managing those critical first-steps.

Trade secrets come in many forms. At some companies, patent licenses are effectively “given away,” because they facilitate lucrative technology licenses or know-how sales that enable a licensee to practice an invention more profitably. Just ask IBM. Know-how, sometimes marketed as “consulting,” is frequently the high margin, cash generator that get’s overlooked – the proverbial tail that wags the dog.

For more information about “Secrets,” to order, or for a free digital sample, go here.

Image source: veruspress.com; J. Pooley 

 

 

 

Poor ROI from top R&D companies is a red flag, says Forbes columnist

Which companies are truly (disruptively) innovative and which are merely using their R&D to maintain a low-growth franchise has become the subject of worthy debate.

Forbes columnist Alan Hartung, believes that some of the largest tech companies – not coincidentally some of the biggest R&D spenders and patent holders – are the worst investments for shareholders. And he has data to back it up.

In a compelling column here Hartung argues that big companies want to spend to keep themselves in business, not to break new ground and grow significantly. Companies best suited for that are sometimes spending their R&D dollars more wisely.

Moribund tech leaders try invest in startups, Google and even many others do, or buy companies through M&A like Pharma companies do, but they tend to wait to secure others’ success rather than initiate their own, similar to when they were start-ups. .

“Most big R&D spenders are not really seeking innovations” says Hartung, a business growth expert.  They are spending money on historical programs, following historical patterns and trying to defend and extend the historical business.  In other words, they are spending vast sums attempting to sustain (or recapture) historical success.  And, as the list shows, largely doing a pretty lousy job of it.

A more effective formula for innovation/IP management today could be expressed something like this:

R&D + IP rights (+ M&A) = >ROI

Top R&D Spenders

biggest-corporate-spenders

IP rights without the right timing and reliability do not mean much. It appears from Hartung’s timeless 2012 story that in most cases extraordinary R&D spending is no guarantee of success. In fact, he thinks it is an indication of weakness. The really great innovations are not necessarily about spending more. Besides, much of R&D is accounting anyway, with little R and a very big D when it comes to costs.

  • Microsoft is #5, spending $9 billion and nearly 13% of revenue,” write Hartung.  “For this massive investment customers and investors in 2012 received —- updates to the aging operating system and office automation software.  Updates which failed to register favorable reviews by industry gurus, and are considered clear updates – but far from innovative.  And Nokia, which is so floundering some consider it a likely bankruptcy candidate, is #7! Despite spending nearly $8 billion on R&D in 2011 Nokia is now completely reliant on Microsoft if it is to even survive.”

Innovation and IP Needs

It’s difficult to believe that a business today, no matter how smart or solvent, can fill all of its innovation and IP needs internally. Hartung is suggesting that companies that believe they can by outspend each other on R&D are effectively chasing their own tail. That’s why they are bad investments.

Image source: BusinessInsider.com

Higher R&D does not necessarily result in more or better patents

It is unclear that companies with the most significant increases in R&D spending are securing more, better quality or valuable patents. 

A random study of the R&D spending and U.S. patent granted three years following of 12 leading technology companies conducted by Brody Berman Associates shows that costly corporate research spending does not necessarily result in more patents or those with greater impact.

Cisco’s annual R&D spend, for example, increased 11.3% from 2010 to 2013, to just under $6 billion, yet the number of patents granted to it over that period was down 21% to about 900.

Google’s R&D increased 110% to $8B annually over that same period, but its patents granted were up 573%. According to Envision IP the majority were in US classes 455, 709, 370, 715 and the much observed 705. (See chart below.)

USPTPOclassificaUntitled

Granted there are many reasons why one company receives more patents than another: Is the business building its portfolio or merely maintaining it?  Does it do business in a mature or maturing sector? Is it planning to use the patents defensively or to monetize them through out-licensing?

2010 2013 R&D JPEG 1

2010 2013 Patents Granted JPEG 2

 

Microsoft’s R&D was up to about $10.5B in 2013 from 2010, but its patents received were down 14%. Is MSFT investing in fewer, better quality patents, or was the decrease merely the luck of the draw? Everyone except Cisco spent more on R&D, but not everyone necessarily received more patents for doing so. Qualcomm’s R&D was up 96% and its patent grants were up 220%. IBM’s $6B+ R&D, a 3% increase, resulted in 16% more patents. Were these of lesser quality than Microsoft’s. It would be interesting to compare.

Intel conducted the most expensive R&D of the group, nosing out MSFT for the spending lead. For its some $10.6B in 2013, a 60% increase over its 2010 budget, it received 12% fewer U.S. patents, or about 1,700. One would hope they are better patents. “The number of reverse citations for Intel increased from an average of 25 in 2010 to 30 in 2013,” says Maulin Shah of Envision IP.

“A higher number of reverse citations may indicate the relative validity of a patent – the more art that is cited on the patent and during prosecution lessens the pool of available prior art that may be used to challenge the validity of the patent based on prior art grounds later.

The trend suggests that a business, no matter how solvent, cannot necessarily “buy” valuable patents or generate meaningful innovation by spending more on R&D. A lower yield per R&D dollar spent may mean better quality patents, but, then again, it may not. More research needs to be done on R&D and how best to measure return on it.

Patents remain a “numbers” game, more focused on quantity than quality, but these R&D/delayed grant figures indicate that the trend is far from universal among large technology companies.

*****

“The cost for IP varies per industry sector,” a revered former head of IP business and strategy told me recently, “but also within a sector it depends on whether a company is a technology leader, fast-follower or in catch-up mode.

“Cost is further determined by the patent efficiency (number of patents filed per million dollar investment in R&D), which relates also to patent quality. If you analyze this you will see some significant differences in numbers (and patent quality), and also in patent cost. Some followers or late entrants have a high patent efficiency (high number of patent filings per million investment in R&D) just to create large numbers (quantity over quality).”

ForwReverUntitled

“With technology leaders there is mostly a kind of non-linear relationship between the number of patent filings and R&D budget (decrease in patent efficiency with increasing R&D budget).

“It generally also holds that companies with less than average R&D budgets in their sector of industry (followers, new entrants) will have higher third-party IP costs, whereas companies with higher than average R&D budgets (technology leaders)  will generally have higher benefits from their own IP.”

Image source: Brody Berman Associates, Inc.; Envision IP, LLC

Despite Limiting Dubious Rights and Behaviors, Patents are More Uncertain than Ever

It’s unclear whether attempts by lawmakers and the courts to rein-in invalid patents and bad patent-holder behavior have succeeded in improving the system.

Whatever the case savvy investors will be looking for a silver lining.

Recent United States Supreme Court and federal district court decisions and new laws making it harder to enforce patents have failed to provide a clearer definition of what is patentable.

Tested patents — including those that surmount USPTO examination hurdles and that the Patent Trial and Appeals Board elects not to review or that survive it — are likely to be more valuable than ever. Fewer, more thoroughly vetted patents are likely to be a more significant factor.

The increased time and cost necessary to enforce patents may actually improve the profit picture for NPEs unwilling to settle too quickly and with sufficient asset quality and capital to prevail. Many NPEs, however, will be knocked out of the box by higher hurdles, which is not necessarily bad, especially if their strategy is merely to bring nuisance suits for their early settlement value. Astute IP investors — and not always the obvious ones — will more than likely benefit from depressed IP prices, higher legal costs and a longer time horizon for resolving disputes.

Likely Scenarios

In “Turning Uncertainty Into Opportunity,” in the September IAM Magazine, published shortly, I look at what are some of the scenarios likely to play out in the IP investing space, especially for PIPCOs, or public IP (licensing) companies, most of Question Themewhom are feeling increased pressure.

“With patents affecting more businesses in new ways, an increase in tech M&A means more dollars will be spent on IP and the R&D that underlies it,” I write in the upcoming The Intangible Investor. “Learning to live in a world with even less patent certainty is difficult for both businesses and inventors. For investors, it presents an even greater challenge.

“Adversity of this nature may turn out to be a welcome surprise for some, presenting a foundation for new opportunities. Those rights (and holders) that are not destroyed by the patent system may indeed be made stronger by it. Is this not what free markets are all about?”

Still Rewarding

“Even if patents are less certain, holders with the right combination of quality, capital and patience will continue to be rewarded. New hurdles will not dissuade serious direct IP investors from continuing to play – nor will it stop strategic or defensive investors from stockpiling patents. Those with the best patents will dig in deeper for still rewarding if more delayed and less headline-worthy outcomes.”

The September IAM will be published in early August. Click here for subscriber access.

Image source:

Low R&D Cost Per-Patent is a Poor Indicator of Good Return

Patent Yield-Per-R&D Dollar Varies Widely by Industry, Technology & Business Model

For most businesses obtaining patents and costly R&D go together like love and marriage – you can’t have one with out the other. Or can you?

The cost of R&D that underlies a particular invention varies greatly by industry, business model and area of technology. In pharma, for example, a lot of R&D typically yields a handful of patents. Those that are valuable are very much so.

In the IT industry, however, some patents can be generated with relatively little R&D. Software patents and algorithms, for example, often do not require the same level of costly research as chemical or bio-pharma inventions or those in the semiconductor space. They still require a lot of thinking, planning and awareness of prior art.

The most efficient patentees may not hold the best quality rights. Similarly, those with the most expensive patents have no guarantees about their value or the return they may generate. 

Some IT companies that spend significantly on R&D generate abundant numbers of patents (e.g. IBM, $6b 2008 R&D; 6,146 patents in 2011), while others who spend more modestly, and file more selectively, generate patents at a higher average cost per patent (Qualcomm, $2.3b R&D; approximately 1,000 U.S. patents). Do those who spend larger sums on R&D and file more actively secure better or more valuable inventions or rights, or those that generate greater return? Probably not.

(CLICK ON GRAPHS TO ENLARGE THEM)

Return on IP (ROIP)

Patent yield or efficiency is easily ignored. It is, however, central to return on IP (ROIP) that a company generates. More R&D and more patents (at a lower cost per patent) are very limited indicators of success, but it would be inaccurate to say they mean nothing.

A lot depends on the purpose of the R&D: Is it  to obtain patents that provide design and sales freedom? To reveal ideas for new products? To generate licensing income? All of the above?

The first Brody Berman-researched graph above employs a three-year delay between R&D spent and patents issued, to provide an idea of  the role prior research might have played in current patent issuance.

IBM is off the above chart (literally) in terms of R&D spent ($6 billion) and patents obtained, with almost three times as many U.S. patents secured as it’s closest U.S. competitor and even higher spending rival, Microsoft.  On the other hand, Apple spent a fraction of the R&D ($1.1b) and received about a 1/10 as many patents.

 

Could IBM, the most “efficient” patent generator among large companies, secure the $500m or more in annual patent licensing revenues it does typically with fewer patents and less R&D? Would its design freedom be seriously hampered with fewer patents? How significant a role does quality play in its portfolio? (In IBM’s case, I’m told, it depends on who you ask.)

Why don’t more U.S. businesses create the massive patent wall that IBM does? Surely, they can afford it. (The short answer: It is only one way of generating IP return, and for some businesses not necessarily the best.)

Bigger or Better?

What is to be learned from all of this? That the manner in which companies obtain patents, or the volume they produce, is not necessarily tied to patent quality or return. The bigger portfolios are not always better, but frequently can be relevant because matters, especially to operating companies contemplating  enforcement against large holders. Infringed parties immune to counter-assertion, like NPEs, increasingly key players in patent monetization, are less likely to care.

Companies (and shareholders) need to look carefully at not only how many patents a business produces and what they cost, but what those patents provide in term of direct and indirect return. For most companies it remains a mystery.

*     *     *

Businesses are encountering new ways of directing R&D dollars, securing patents and monetizing them. Generating them the old-fashioned way – internally from R&D — may or may not be the best method. More patents at lower cost does not necessarily mean higher productivity or better business performance.

Business that deploy patents as part of their business strategy need to be clearer about their true costs and real return.

Illustration source: Brody Berman Associates; referenceforbusiness.com

C-Level Execs, Investors Play a Bigger Role in Patent Calls

“Build, License, Buy or Steal?”

For many businesses abundant R&D and patent filings provide a good foundation for innovation and sales freedom. But that may be changing.

Information technology companies are learning what Big Pharma realized some years ago: a strictly internal pipeline rarely is sufficient to fill all of most business’ IP needs. This is  especially true in fast-growing consumer industries like mobility and social networking.

After the Nortel auction, Motorola sale and a spate of momentum changing patent litigation, traditionally tangibles-oriented executives are learning to be less sanguine about their IP resources.

Says Bruce Berman in his bi-monthly column, The Intangible Investor: “When it comes to patents, it is sometimes more efficient to secure what is needed from others rather than roll the dice on what a business might be able to generate internally or get away with legally.”

This month’s The Intangible Investor, “Build, License, Buy or Steal,”  looks at how the decision to create, rent or acquire patents is becoming less confusing for some cash-rich companies.

It looks like a new role for C-level executives and activist investors may be emerging, now that IP value is on their radar.

Does this mean that highly significant patent portfolio or IP-based acquisitions will not get done without them? Should they?

A new level of IP/financial oversight will likely be good for most large businesses. Let’s hope we are right.

Image source: http://www.iam-magazine.com


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