IP Strategy Structure & Incentives

Intellectual Property:
Strategy, Structure &
Incentives
Paul Henderson
Managing Director, Clarify LLC
Berkeley MBA 2008
paul.henderson@ClarifyLLC.com

12/31/2010 Clarify, LLC 1

Disclaimer

Legal
JD advice

12/31/2010 © Clarify LLC, 2010 All Rights Reserved 2

“Without leaning too heavily on the legal stuff, it
would certainly be interesting to understand
from a business perspective how companies
think about what IP they can or should not
outsource, and how they can maintain control
over the parts they do outsource.”


Outline for the talk
The opportunity
The ‘problem’

Barriers to
entry How
How TO Pragmatic
+ NOT to
do it steps
Intellectual do it
property


Doing it right: a simple example


What is patent #
5,327,752 worth?

ASP: $29.95

Whsl: $12.00

Royalty: $5.00
Mfg. cost: $3.50


Q: How much attention does your company
pay to managing its intellectual assets?

Intellectual
Enterprise
value: Assets
Intangible
$36B
assets

Book Value
Discounted Intellectual
value of
$9B expected
Property
future cash
flows

© Clarify LLC, 2010 All Rights Reserved 7

Why does this matter?

“Anyone with a glue pot can get
into the shoe business.”
- Phil Knight

“The tools of
creativity have
become
democratized.”
- Ray Kurzweil

12/31/2010 Clarify, LLC 9
© Clarify LLC, 2010 All Rights Reserved

Q: If anybody can
make a product, how
can anybody make
money at it?

An economist’s view: barriers to entry

Bruce Greenwald – Competition Demystified 2005


Some common barriers to entry:
 Economies of scale
 Inability to gain access to specialized technology
 Existence of learning/experience curve effects
 High switching costs
 Brand preferences and customer loyalty
 Capital requirements
 Access to distribution channels
 Regulatory policies
 Tariffs & international trade restrictions


Where can we get
barriers to entry?


IP strategist’s view:

=


Intellectual Assets vs.
Intellectual Property

Intellectual Assets
People/Talent Experience
Processes Relationships
Culture

Intellectual Property:
Patents Trademarks
Copyrights Trade Secrets


The myth of “patent protection”


IP rights are ‘negative rights’


The best defense is…


Copyrights: What you need to know
• Fixed in a tangible
medium
• Notice: ©2010 John Doe
- not required, but
recommended
• Registration - not
required, but
recommended
• Beware of ownership
problems with software
consultants


Trade secrets are:
• Information that is not generally known
• That has value derived from secrecy
• That the owner reasonably tries to keep secret


What can IP get for you?
Barriers: Patents Copyrights Trademarks Trade Secrets
Scale 
Access to tech   
Learning curve  
Switching costs  
Brand  
Capital  
Distribution  
Regulatory 
Trade/tariff 


Not all barriers to entry confer
competitive advantages (& vice versa)

Barriers Competitive
to entry Advantages


12/31/2010 Clarify, LLC 23

Something
somebody
wants

One of these is not like the others

Company 1 Company 2 Company 3
Revenue $58B $124B $65B
Gross profit $9B $27B $26B
Net profit 2.7% 7% 21.5%
margin
Enterprise $21B $101B $253B
Value


HP’s strategy (in a haiku):

Good enough products
Buy it all from ODMs
Ship lots of volume


Not
Customers
Customers


HP’s value chain “Shift Left” strategy
Repair
Test
Validation
Design Support
Raw
materials Distribution
Assembly

What could
Components
possibly go
wrong?


Pause to ponder:

What were the incentives of
the managers who made
these decisions?
What are the incentives of
ODMs?

Look at how incentives align
• Leverage the • More fully utilize • Leverage technology
CM/ODM

volume of other existing capacity with other customers
customers • Adapt the product to
• Make a profit fit the mfg. process

Aligned Supportable Conflicting
HP

• Make a profit • Push more • Control supplier’s
responsibility to the use of technology
supplier • Restrictive contract
terms


What if you are
outsourcing some
or most of your
value chain?


Your genius idea


Monetizing the iPhone ecosystem
Profit
$4
Pools: 70%
$.50 ? 30% 30% ? 40%

iPhone product

Retail channel

Ads
Application SW

Content
Components
Materials

Service
Connector Apple iTunes store iAds
royalty stores
Auth chip Patents App store ATT rev.
Patents TM share
Copyright Copyright
Trade secret

How much can we make for ourselves?

Retail Price: $99 You get: Apple gets:
Channel margins $39 $60
Program $ - $10 $10
Connector royalty -$4 $4
Auth chip royalty -$0.50 $0.50
Total: $24.50 $74.50

Your Margin of 24.5% has to cover COGS and SG&A
Oops.


Apple’s strategy (in a haiku):

Products people love,
Control the ecosystem,
Take all the money


Where are the control points in an
ecosystem?

Interfaces

Why aren’t there knockoff printers?


Think about 3 kinds of structure:

1. Ecosystem / value chain
2. Product architecture
3. Organization & process architecture


Incentives

Everyone in the entire ecosystem
must have incentives for them to act
in the way that you want them to


If you must expose your IP, consider:

Means
Motive
Opportunity

Pragmatic steps:
Trade secrets:
• Remember that all relationships are ‘forever, for now’
• Mark confidential documents ‘confidential’
• Review your policies and documents that cover the handling of
confidential information (especially ‘work made for hire’)
• Make it clear who owns what in Joint Development Agreements

Patents:
• You can’t assert a patent that you never file
• Set up structures (patent review board) and incentives
($100/disclosure, $1000/patent) to motivate inventors to disclose

Copyrights & Trademarks:
•Mark your stuff, monitor misuse and act on it


Do patents matter for
startups?
No Yes
 Many VCs treat it as a checklist  Can matter a lot at a liquidity
item event
 Takes years for a patent to issue  Some VCs recognize that IP may
 Technology is changing quickly be the only thing of residual
 Costs time & money value
 Applications become public  Psychological barrier to
competitors
 Can’t have a valid & enforceable
patent if you don’t file one


IP Strategy Structure & Incentives

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