General IP Strategy, In-House IP, Patent Strategy, Startup IP, Trademark Strategy

A-PLuS – IP in a Value-Growth Mindset

[Before you read this post, read the IP Strategist disclaimer]

Acquiring IP assets should never be the end goal.  IP is a vehicle, and IP strategy is the road.  Without IP, an organization spins its wheels or must constantly change course. But when used properly, IP can drive an organization ever forward with sustained competitive value.

Over many strategy discussions with many companies, I have developed the “A-PLuS” approach: Acquire, Protect, Leverage, Sustain.

APLuS

Without IP (the inside path), organizations spend time and resources to distinguish themselves from their competitors. Then, they work to eek as much value as they can out of those distinctions before getting copied by competitors. As there is little recourse to stop others from trading on their time, resources, and hard work; the organizations must continually seek new distinctions and hope their customers are loyal.

With IP (the outside path), an organization must still spend time and resources to distinguish itself. But those distinctions are protected, providing recourse against copycats, and multiple paths to value leveraging (e.g., including by trading on the IP itself through licensing of IP assets and in other ways). With IP, the leveraged innovative value of each distinction can be sustained and re-leveraged.

Each stage of the A-PLuS approach will be explored in future posts. For now, they are summarized below.


ACQUIRE. It is a goal of any business to distinguish itself to consumers and to leverage those distinctions into business value.  For example, a company may provide superior technology, a unique customer experience, a respected brand, or other reasons why customers go to them and not to someone else.

In many cases, the distinctions are developed in house: a company researches and develops technology, builds brand recognition and loyalty over time, etc.  Organization that are best at developing IP assets in house typically spend considerable time, attention, and resources on creating a culture of innovation.  This can involve incentivizing inventors for their contributions, promoting value creators, focusing top-level attention on innovation, establishing procedures for identifying innovations early and often, mining for innovation throughout the organization, maintaining organization-wide visibility into where innovation is happening, and many other behaviors.

In other cases, the distinctions are appropriated (brought in from outside the organization). For example, many organizations purchase assignments to IP assets, engage in licensing of IP assets, look for mergers or acquisitions involving IP rich targets, or otherwise find ways either to gain rights to third-party IP or to bring that IP in-house.

Innovative value is protectable and, therefore, sustainable value. Bobby Axelrod said it well (Billions, Season 2, Episode 5):

“What is it that you do that you’re the best in the world at? You offer a service you didn’t invent, a formula you didn’t invent, a delivery method you didn’t invent. Nothing about what you do is patentable or a unique user experience. You haven’t identified an isolated market segment. Haven’t truly branded your concept. You want me to go on? So why would an investment bank put serious money into it? I all but told you ahead of time, but you wouldn’t listen. Now you’ve heard it, but it’s too late. YOU. WEREN’T. READY!” 

So before embarking on any IP journey, it is critical for organizations to critically explore three threshold questions:

  1. What currently distinguishes you in your market?
  2. What do you want to distinguish you, and how do you plan to get there?
  3. How valuable are those distinctions?

PROTECT. Various factors can inform protection of different types of distinctions. There are 4 traditional categories of IP assets: (1) patents; (2) trademarks; (3) copyrights; and (4) trade secrets. Each comes in a variety of flavors. For example, patents can be provisional or non-provisional, utility or design, domestic or foreign, etToolsc. I also consider a category (5), which I call “quasi-IP.” Quasi-IP can include any source of intangible value that operates in an IP-like manner for a particular organization, but is not a traditional form of IP. For example, an organization’s quasi-IP can include hard-won or unique contractual relationships with manufacturers and sellers; famous or infamous board members or executives; large networks of active users or large network effects; low barriers to customer entry or high customer switching costs; etc. Each category and flavor of IP (including quasi-IP) has advantages and disadvantages that depend on highly nuanced factors relating to whether, when, how, why, and where the IP is being used.

Good IP strategy must focus on what should be protected, rather than on what can be protected.  If your goal is to find technology to patent and brands to trademark, you probably will. As the saying goes: “To a man with a hammer, everything looks like a nail.” But such an approach is likely short-sighted, haphazard, and misaligned with sources of business value.

This is where the most valuable IP counsel rise above all others. Those with a value-growth mindset begin with the “whether” and the “why.” And only after deciding that a particular distinction should by protected (i.e., that it would be valuable to do so), they move on to the “how,” “when”, and “where.”


LEVERAGE and SUSTAIN. Leveraging turns potential value into actual value. As shown in the A-PLuS approach diagram, even unprotected (or unprotectable) distinctions can be leveraged.  But it is usually only a short time before competitors come in and copy the distinction, turn the distinction into a commodity, or otherwise blur the distinction; thereby undercutting any further opportunity to leverage the value of that distinction. For example, it is typically difficult to protect a restaurant’s menu, dining room appearance, and business model with IP.  So, unless the restaurant can build a brand, it generally must rely on quasi-IP (such as loyal diners, a well-known chef, rave reviews, etc.) and/or on constant re-distinguishing to outpace its competitors.

IP allows an organization to sustain the leveraging by drawing property lines around its innovative value. Leveraging can be one or both of: (1) direct-value leveraging; or (2) indirect-value leveraging.

(1) Direct-value leveraging. This is what most people think of when leveraging an IP asset. Unfortunately, many are under the impression that the only way to leverage an IP asset is through litigation. Indeed, that is one form of direct-value leveraging, and being known as a litigious organization can certainly give added teeth to that organization’s IP portfolio. However, litigation is often very expensive and fraught with risk, both to an organization’s checkbook and to its reputation.

Another form of direct-value leveraging is monetization through complete or partial sale of the asset. A complete sale of an asset is generally known as an “assignment” and can be effectuated, for example, by assignment agreement with another organization; as part of a merger, acquisition, or asset transfer; or in other ways. A partial sale (or partial transfer of rights) is generally known as a “license” and can be effectuated, for example, by a license agreement between the asset owner and another party that confers upon the other party rights to use the asset exclusively or only non-exclusively, in all or only some geographies, perpetually or only for a limited time, in all or only some markets, etc. (though, ultimately, the asset owner remains the asset owner).

Large jury awards from IP litigation and large purchase prices for IP-rich companies lead people to think that such direct-value leveraging is where organizations find the true value of IP. In my experience, that is typically not the case (at least for operating companies). For example, most companies spend more on litigation (especially factoring the cost of distraction to employees, executives, and stakeholders; potential loss of goodwill or share price; etc.) than they ever make.

That said, licensing (or even targeted assignment or spin-out programs) can be very lucrative ways for organizations to monetize their IP portfolios. For example, Qualcomm operates effectively as two companies: a semiconductor manufacturing segment, known as Qualcomm CDMA Technologies; and an IP licensing segment, known as Qualcomm Technology Licensing. In 2015, the IP licensing segment accounted for less than 1/3 of the company’s revenue, but earned almost 3/4 of its operating income. Notably, each time Qualcomm spends its R&D budget, it potentially gets a double pay-back by selling the technology in a product and by licensing the technology as an IP asset. Other companies, like IBM and Disney, similarly make a large portion of their income from IP licensing programs.

For start-ups, such non-litigation, direct-value leveraging can also be extremely valuable. For example, many start-ups are pre-revenue or do not yet have significant tangible assets (e.g., inventory, etc.), such that their IP assets are the primary contributor to their book value. Some investors will put high value on quasi-IP, but many will not invest in a company that cannot demonstrate protectable distinctions. So many valuations in investment rounds and exit strategies (e.g., acquisitions) are based on a valuation of the start-up’s IP portfolio.

(2) Indirect-value leveraging. Though I have no hard data to support this assertion, I am confident that the many types of indirect-value leveraging provide much more value to most IP owners than the direct-value forms of leveraging. One category of indirect-value leveraging is threat-avoidance (or at least threat-mitigation). For example, many competitors peacefully co-exist within frameworks of express agreements (e.g., cross-licenses, covenants not to sue, co-existence agreements, etc.) or implied agreements (e.g., a general sense that suit would lead to mutually assured destruction). Another category of indirect-value leveraging is street cred. For example, IP can create the impression of technological superiority, or product or service superiority, which can be invaluable for drawing and retaining loyal customers; high-caliber employees and executives; and critical investors, board members, and strategic partners. A third category of indirect-value leveraging is market control. For example, having distinctions protected by IP can provide a basis for organizations to control price (e.g., by setting product prices, increasing margins, undercutting competitors, etc.) and to participate in critical organizations (e.g., by gaining seats in standard setting organizations, being part of government lobbying efforts, etc.


Though each stage of the A-PLuS approach is generally discussed in this post, real-world application of such an approach is highly dependent on context, such as competitive landscape, budget, company image, etc. Used properly, each stage of the approach can help use IP assets as tools for achieving sustained, leveraged value from an organization’s innovative distinctions. In the end, it is not about having IP; it is about using a value-growth mindset to apply the right IP to the right distinctions in the right way.

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