Using Competitive Intelligence to Enable IP Monetization

I. Introduction

Personnel charged with managing an enterprise’s intellectual property (IP) are increasingly being asked to show some return for the often multimillion dollar expenditures on applications, registrations and attorneys’ fees. Such returns are only possible by undertaking some form of IP monetization efforts. Like most corporate efforts, however, there first must be a strategy in place. Yet, how can enterprises set an IP monetization strategy without first understanding the IP landscape in the relevant industry? More specifically, enterprises must be able to answer the following questions before even setting a strategy and embarking on any IP monetization efforts: Who are our potential licensees? Who are our potential enforcement targets? What are our best IP assets? Where do we start? What are best practices in the industry? What are the risks? What are the potential rewards? The process of answering these questions in order to form and execute upon IP monetization strategy is called competitive intelligence (CI).

II. The IP Marketplace

In the last 35 years, there has been a shift from a labor economy to a knowledge economy. Consequently, intangible assets (and thus, IP rights) have emerged as the most powerful asset class, overtaking more traditional capital assets such as real property, plant and equipment. Multiple studies have shown that a majority of the value of a U.S. publicly-traded company comes from intangible assets. In fact, one study has even placed the value of U.S. corporations included in the S&P 500 Index as coming 80% from intangibles. One scholar noted as far back as 1992 that “IP rights – especially those in the form of patents – will represent the most significant form of wealth in the new millennium.” [James W. Ely, Jr., The Guardian of Every Other Right: A Constitutional History of Property Rights 6]

The value of IP can clearly be seen in two recent and heavily-discussed corporate transactions. First, Google’s 2011 acquisition of Motorola Mobility for US$12.5B resulted in 44% of the purchase price (i.e., US$5.5B) being attributed to the acquired patent portfolio. Second, 41% of Cadbury’s enterprise value (i.e., US$10.3B) was attributed to its trademark portfolio when Kraft’s acquired the company in 2010. These transactions bolster the observation that the IP marketplace has matured with IP monetization achieving wide adoption and value recognition.

III. Corporate IP Realities

Given the IP marketplace’s maturation, the question becomes how can companies afford not to monetize their most valuable assets? That is, in a period where the value of US IP is approximately US$5.8T (38% of the U.S. Gross Domestic Product (GDP)), and accounts for over US$1T in U.S. exports, [see U.S. Chamber of Commerce, Global IP Center, IP Creates Jobs for America, 25 May 2012], many of corporate America’s IP counsels (both in-house and their law firm counterparts) must now “show and prove” to the C-level executives to whom they report. That is, given the increased awareness of IP in corporate boardrooms, IP departments are increasingly being asked to make the “cost center to profit center” transition. This typically involves moving past the paradigm of building an IP portfolio solely for defensive/freedom-to-operate purposes. This is because, as Rick Thoman, then the President and CEO of Xerox Corporation once said:

"The world’s most successful companies are aggressively promoting, protecting, and marketing their own intellectual property. … [T]he stakes are enormous – billions of dollars – for those companies that successfully mine and maximize the value of their patented ideas."

Accordingly, the landscape for IP transactions has changed in the past decade. Corporations have begun to realize the value of their IP and have begun aggressively exploiting these assets. For example, many firms are actively seeking to engage in patent licensing and sale activities. In some instances, patent monetization has become a major source of corporate income, surpassing traditional P&L’s (or business lines).

IV. IP Monetization

In light of the current marketplace, and against the (harsh) backdrop of corporate realities discussed above, IP monetization refers to the process of deriving value from patent, trademark, copyright, trade secret and other intangible assets through arrangements with external parties. Among the monetization options are licensing, selling, litigation and securitization. Looking at patents specifically, sales routinely involve a lengthy process. Recent developments in creating more flexible processes, such as patent auctions, can make the sale of patents a profitable, more streamlined experience. On the other hand, a well-executed licensing program can often maximize the value derived from patents when compared to other monetization options.

In short, such options include monetization through sale (i.e., private or public sale, or live or online auction), litigation, or (carrot or stick) licensing. At some point in any IP monetization effort, however, patent litigation in the U.S. federal courts will most certainly result – the option that has historically yielded the greatest financial rewards. This is because if a patentee is not willing to back their (stick) licensing demands with the threat (and eventual filing) of a patent infringement lawsuit, they amount to a “paper tiger” with little chance of achieving patent licensing revenue.

Avoiding becoming a paper tiger has high stakes and is expensive. Analyzing data from 1995 to 2012, PriceWaterhouseCoopers’ 2013 Patent Litigation Study summarized that patent litigation in the U.S. continues to rise amid growing awareness of patent value. Highlights of the report include the following key observations: (1) In 2012, there were 5,189 patent actions initiated – the highest of all time; (2) Annual median damages awards (in 2012 dollars) ranged from US$1.9M to US$16.5M between 1995 and 2012; (3) The median damages award was approximately US$4.9M over the period from 2007 to 2012; and (4) Patentees have an approximate two-third success rate at trial. Further, according to a survey by the American Intellectual Property Law Association (AIPLA), the average (i.e., mean) U.S. patent litigation costs for 2013 are presented in the table below.

The above table reflects fees and costs associated with outside and local counsel, associates, paralegal services, travel and living expenses, court reporters, copies, couriers, exhibit preparation, analytical testing, expert witnesses, translators, surveys, jury advisors, and similar expenses. Given the multimillion dollar potential gains and costs, undertaking IP monetization efforts without a proper, informed strategy is no doubt a fool’s game.

V. Competitive Intelligence and Business Strategy

Commenting on Google Inc.’s 2011 acquisition of Motorola Mobility Holdings, Inc. (and its 17,000 patents) for US$12.5B, two of the people who helped build IBM’s billion-dollar IP program stated: “[T]he Google-Motorola deal offers important lessons for CEOs. First [lesson is], make sure your intellectual property strategy serves your business strategy.” [Marshall Phelps and John Cronin, Mining Patent Gold: What Every CEO Should Know, Forbes.com (Sept. 9, 2011)] Thus, let us step away for a moment from the IP marketplace and formulation of IP strategy, and consider overall business strategy.

In 1979, Harvard Business School Professor Michael E. Porter – recognized today as a leading authority on business strategy – published an influential article which presented a “five forces” model for analyzing an enterprise’s competitiveness in a specific marketplace. The five forces include: (1) the threat of substitute products or services; (2) the threat of established rivals; (3) the threat of new entrants; (4) the bargaining power of suppliers; and (5) the bargaining power of customers. [How Competitive Forces Shape Strategy, Harvard Business Review (1979; 2 ed. Jan. 2008)]

Courtesy of Paul Gebel.

Porter’s five forces analysis is but one model (or framework) for assessing an enterprise’s competitive landscape in order to develop business strategy. It, however, efficiently illuminates the process and need for competitive intelligence (or “CI”). So, what is CI?

Generally speaking, CI is the process of looking at the many disparate elements in the business universe that affect an enterprise’s ability to compete. This includes changes facing distributors, suppliers, customers, and the industries indirectly related to the business in question. Thus, CI requires an understanding of the changes in the economy, with societal attitudes and demographics, technology, and regulations. CI reveals current business realities, and provides clues about what the near future holds. It provides informed risk and competitive advantage based on knowledge, not assumptions or predictions. In sum, CI is the process of going from a massive amount of data, to information gleaned from the data, to actually possessing actionable intelligence.

© 2014 by Raymond Millien. All rights reserved.

One can see that having a formal process to (ethically) gather and process CI is essential to setting business strategy in accordance with Porter’s five forces analysis or any other business strategy framework (e.g., SWOT analysis, PEST analysis, etc.). As one CI expert has noted:

Because so few companies actually do CI, the ones that engage in CI disrupt the usual competitor activities and gain an immediate and powerful advantage for themselves. This is how you ‘un-level’ the playing field: by doing what competitors don’t recognize or expect and by being proactive.

[Seena Sharp, Competitive Intelligence Advantage: How to Minimize Risk, Avoid Surprises, and Grow Your Business in a Changing World (John Wiley & Sons, 2009)] Thus, returning to the IP world, we now consider how engaging in IP-based CI program assists in monetization efforts.

VI. Using IP-Based Competitive Intelligence to Support IP Monetization

The beginning of any IP monetization strategy is due diligence on the enterprise’s own portfolio and that of its competitors. Such due diligence typically (and should) encompass: (1) ownership analysis; (2) maintenance records analysis; (3) completeness analysis; (4) encumbrance analysis; (5) employee/consultant records review; (6) prior-art research; (7) infringement/litigation analysis; and (8) freedom-to-operate determination. The last three of these due diligence tasks can be lumped into what is often referred to as “IP analytics” or “IP landscaping.” Regardless of nomenclature, IP analytics or landscaping is just a special case of what many in the business community would simply call “CI.”

More specifically, patent-based CI can help an enterprise identify:

1. Their competitors (i.e., potential targets for stick licensing);
2. Potential human capital (i.e., using inventor records to identify potential new hires or consultants);
3. Results of their competitors’ R&D efforts and direction;
4. Specific emerging technologies;
5. Clues about important developments (via patent quality indicators such as the number of filings, law firms used, number of citations, the existence of foreign counterparts, number of litigation, etc.);
6. Technology market trends (via expiring patents, patent clusters, whitespace analysis, the timing of filings, etc.);
7. Potential licensees (i.e., target for carrot licensing); and
8. Other various benchmarking data.

In order to perform patent-based CI, for instance, many free, “freemium” and paid cloud-based tool offerings, service/consulting companies, off-shore BPO providers, and traditional enterprise software providers exist. But, regardless of whether an enterprise engages in self-help patent analytics or uses a commercial service/tool providers, there are essentially four methodologies used to search for patents and thus extract CI from the resulting patent sets’ bibliographic data:

1. Text Segmentation (i.e., “Keyword”) Analysis using Latent Semantic Analysis (LSA), Latent Semantic Indexing (LSI), Subject–Action–Object (SAO)-based semantic analysis, or Boolean searching;
2. Classification Analysis (e.g., using the International Patent Classification (IPC) system);
3. Text Clustering (i.e., Topic Identification) using various TF-IDF, K-Means or Bayesian Naïve algorithms; and
4. Citation Analysis.

Of the four methodologies mentioned above, citation analysis – both backwards analysis and forward analysis – is worthy of further discussion. More specifically, backward (also called “reverse”) citation analysis refers to the set of (patent and other literature) documents that a patent cites. Forward citations, on the other hand, refer to the set of documents that cite a patent. That is, forward citations utilize the patent-in-question as part of their own backwards citations. Forward citations are always newer than the patent-in-question and change over time as new patents issue. In contrast, reverse citations are a static data set as they cannot change once a patent has issued. Further, both backward and forward citation analysis may be carried out one, two, three, etc. generations. A second generation analysis, for example, would uncover: patents that cite the same patents as the patent-in-question cites (reverse); and patents that are also cited by patents that cite the patent-in-question (forward).

Many who engage in patent analytics can become too enamored with citation analysis and rely on this methodology as the sole basis for their CI process. Such analysis, however, must always be used with caution. This is because the resulting data sets often can be misleading for various reasons. First, certain patents have become “favorites” such that they are cited by an examiner, group of examiners or a law firm in almost every case they handle. Second, forward citations vary over time and thus a purely quantitative analysis results in misleading conclusions (i.e., the age of a patent must always be considered when reporting and interpreting the number of forward citations). Third, studies have shown that the quality of information gleaned from citations varies by different jurisdictional patent offices (e.g., USPTO versus EPO). Lastly, it is often difficult to glean what the number of backward citations really reveals. Does it indicate a strong patent? Does it mean you have identified an incremental invention in a crowded field? Does it mean something entirely different? It depends. Thus, nothing can really substitute for an experienced practitioner’s careful analysis of any patent analytics (or, generally speaking, IP-based CI) methodology’s results. Only then can IP-related data become actionable intelligence to serve as the basis for crafting and implementing a monetization strategy.

Lastly, while the usefulness of IP-based CI cannot be seriously debated, it is important to realize that patent-based CI (or patent analytics) in particular has at least two important limitations: (a) it will not reveal any intelligence about start-up companies in the relevant industries because such firms may have no patent filings or their applications may not yet be public under the 18-month publication rule due to their newness; and (b) it will not reveal any intelligence about existing competitors operating in “stealth mode” (i.e., those who are opting out of the 18-month publication rule, working with a start-up who is listed as the assignee of certain patent assets or those utilizing IP holding companies thus avoiding assignee searches).

VII. Conclusion

In sum, the concepts presented herein are for education purposes and meant to be thought provoking. They are not intended to be all-inclusive treatment of, or treatise on, the use of IP competitive intelligence techniques needed to support a successful IP monetization program. The six-step “Action Plan” presented herein, however, provides a general framework for implementing CI as part of an enterprise’s IP monetization efforts. Lastly, regardless of the level of sophistication of the CI tools and processes implemented by an enterprise, nothing substitutes for good, old-fashioned IP counsel or other IP professionals analyzing each IP asset “by hand” to determine: the overall strengths and weaknesses of the IP asset; should the asset in question be sold; or should a licensing program be undertaken, assuring that certain rights over the IP remain with the enterprise. Clarifying overall IP strategy through the use of CI can help avoid costly mistakes and will aid in choosing the best monetization options for any IP asset under consideration.

In order to successfully implement the use of Competitive Intelligence (CI) into an IP monetization strategy, an enterprise must take the following six-step Action Plan:

1. Put Someone in Charge of CI - Like every other task important to an enterprise’s success, someone (whether from the Legal, Business Development or Marketing departments) has to be put in charge and be responsible to make sure CI is properly (i.e., ethically) gathered, disseminated and utilized. Without someone in charge, no one can be to blame if IP monetization efforts ultimately stall.
2. Set a CI Budget - Again, like every important function within an enterprise, a budget must be set. This is because, without a budget, every dollar spent on CI activities is simply over budget!
3. Select the Right CI Partners/Providers – Depending on available resources, budget, internal talent pool and technology space, it is important that an enterprise selects the CI service/consulting firm and/or CI tool that is the right fit to assists in achieving its IP monetization strategy.
4. Understand the Limitations of any CI Tool Utilized – After selecting and utilizing a CI tool, it is important that an enterprise not blindly accept the chosen tool’s results. That is, all tools have inherent flaws and do not provide 100% accurate data gathering results. Thus, recognizing these “blind spots” and compensating for them are critical.
5. Incorporate CI into your IP Strategy (and Eventually Align with Your Business Strategy) – It is not enough to put someone in charge, set a budget and expend resources on gathering CI data. An enterprise must systematically incorporate the results of the CI gathering process into its IP strategy formulation and execution. (No doubt this will require cross-functional team cooperation for many medium- and large-sized enterprises.)
6. Proactively Manage the CI Process – After a CI process is put into place, an enterprise must proactively manage the process by frequently reviewing and refining the CI tools and partner firms utilized. That is, like any other human or computer resource within an enterprise, it must be frequently and regularly evaluated against specific goals and objectives and corrective action taken when it falls short of expectations.

A version of this article was published in the March 2014 edition of IAM Magazine. This article reflects my current personal views and should not be necessarily attributed to my current or former employers, or their respective clients or customers.