HKSAR IP Trading


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HKSAR IP Trading

  1. 1.                      A  Presenta*on  at  Hong  Kong  Business  Associa*on  of  Hawaii  -­‐  Hong  Kong/China   Forum  @  Hilton  Hawaiian  Village,  Honolulu,  HI  (June  4-­‐7,  2014)     Prepared  by:    Al  Kwok                      Member,  HKSAR  “IP  Trading”  Working  Group                                          Founder,  Interna*onal  IP  Commercializa*on  Council                        Governor  &  Co-­‐founder,  Savantas  Policy  Ins*tute                      President,  CASPA  PRD  Chapter                      Founder,  China  Interna*onal  Intellectual  Property  Services                      Former  VP  &  CIPO,  NetLogic  Microsystems  (“NETL”)   HKSAR IP Trading A Report on HKSAR “IP Trading” Initiative – Redefining HKSAR's Future! June 7, 2014 1
  2. 2. Evolution of Intangible Assets – U.S. Companies Knowledge-based Economic Trend June 7, 2014 HKSAR IP Trading Mkt. Cap. / Intangible Asset: 1)  Apple: ~US$656B / >99% 2)  Foxconn: ~US$5B / <20% 2
  3. 3. Global IP Commercialization Market Trend !  Past: !  Traditionally patents regarded as internal assets and parts of trade secrets !  Cross-licensing as a means to avoid infringement lawsuits and speed up product/market development !  Trendsetting: !  In early 1990s, IBM started patent licensing and selling !  Over the years, the global market for patent trading and licensing has taken shape !  Now: !  IBM now makes US$1.5B per year from their patents !  Patent trade is a multi-billion dollar market !  Various IP transactions (incl. M&A) at hundreds of billions !  Nortel for $4.5B, NetLogic for $3.7B, Motorola Mobility for $12.5B June 7, 2014 HKSAR IP Trading 3
  4. 4. Pillars for Knowledge-based Economy (KBE) IC IT IP Hardware Network Know-how/Content Functionality Physical devices Connectivity Experience sharing Scalability Moore’s Law Metcalfe’s Law TBD!? Scaling Factor 2X/18 mon. Value ~ n2 Value ~ XR (X, R >1) Disruptive Driver CMOS (IDT) IPv4/6, Internet, QoS (NMI) Apple iTunes -> “Unified IP Pooling” Driving Product/Service Memories & CPU => SOC QoS, Mobile Multimedia Standardization for scaling Start Time ~1985 ~2000 ~2015? Mkt. Size (20 yr) ~$300B Trillions Zillions? June 7, 2014 HKSAR IP Trading •  Evolution of Knowledge-based Economy (KBE): IC -> IT -> IP •  Value of IP is based on its “Reusability” and “Ability to Share”: •  The more it is reused, the higher its value is •  No physical limitation: IP can be used by many users at the same time •  The impact of “free-market IP sharing” on KBE is immeasurable 4
  5. 5. Drivers for IP Commercialization !  Semiconductor (Moore’s Law) & IT (Metcalfe’s Law) Revolutions triggered Business Model Changes !  Shortened Product Lifecycles induce tech transfers to speed up R&D !  Globalization of Business Competition in last 50 years !  Time-­‐to-­‐market  –  means  greater  profit   !  Customer  demands  for  complete  turn-­‐key  system-­‐level  solu*ons   !  Increasing  product  complexity  –    IP  acquisi*ons  to  fill  know-­‐how  gaps   !  Global  Collabora*ve  Innova*on  –  both  in-­‐house  &  outside !  Open Innovation Trend – a form of Collaborative Innovation !  Independent innovation and cooperation/sourcing IP in parallel. !  Professional Service Ecosystem for IP transactions becomes complete !  Patent application, lP consultancy, mediation & litigation, patent development and planning, patent evaluation, patent monetarization and patent investment. June 7, 2014 HKSAR IP Trading 5
  6. 6. Raising Values of a Product (IP is the Core) "  Price = Value to Customers => Price = Mftg. Costs + Services + Embedded IP License + Brand "  Pre-sale services mean design- win efforts providing solutions to address customers’ problems "  This is the best sources of innovation and ideas for the next- generation products "  Post-sale services mean reducing customers’ costs of ownership, extending the useful lifetime of the product, generating recurring sales "  Embedded IP licensing means the customers can use the product IP for their own product uplifting & differentiations - e.g., “Intel Inside” "  Brand recognition means the customers recognize the product and its maker for superb quality, performance, reliability & services IIPCC Confidential & Copyright Protected 6Jan. 19, 2014 Manufacturing Cost (⽣生产成本) Pre- & Post-Sale Services (售前及售后的服务) Brand Recognition (品牌认可) Embedded IP Licensing (隐含IP授权) IncreasingValues(提⾼高增值) Price = Values to Customers (价格 = 给客户的价值) >70%PM ~10%PM >60%PM >40%PM Mkt. Cap. / Intangible Asset: 1) Apple: ~US$393B / >99% 2) Foxconn: ~US$3B / <20% Demand Side Demand Side Demand Side Supply Side
  7. 7. Profitability vs. IP Creation (Competitiveness) HKSAR IP TradingJune 7, 2014 Manufacturing Cost (⽣生产成本) Pre- & Post-Sale Services (售前及售后的服务) Brand Recognition (品牌认可) Embedded IP Licensing (隐含IP授权) IncreasingValues(提⾼高增值) Price = Values to Customers (价格 = 给客户的价值) >70%PM ~10%PM >60%PM >40%PM Demand Side Demand Side Demand Side Supply Side OPEN OPEN PRIVATE Trademarks Utility Patents, Design Patents, Copyrights… Trade Secrets (Know-how) Only <20% Know-how for Patents, the rest kept as Trade Secret 7
  8. 8. China (Demand-side) Situation: Challenges & Opportunities June 7, 2014 HKSAR IP Trading 8
  9. 9. HKSAR IP Trading Stage of SME Development: China vs. US Stage of development Key asset / value driver Domain knowledge Human resource development Primary capital sources Scalability factor Agriculture Farmland Family- recipe Hands-on training Family Copy Factory- cluster era Low-cost labor Task oriented Hands-on training Family & friends Counterfeit & clone Industrial era Automated mass-prod. technology Techno- logical oriented Profit-driven training Traditional investors, govt. prog. Standards, trade assoc. Post- industrial era Business services/ know-how (Business) Process oriented On-job professional development VC, Institution investors Standards, IP & license Knowledge based economy Business intelligence “Integrated system” “Learning ecosystem” “Open source platform” “Knowledge sharing” On average, US SMEs are at “Post-industrial” stage of development, whereas China (as an example for BRICS) SMEs are at “Factory-cluster” stage of development. June 7, 2014 9
  10. 10. Challenges of IP Commercialization !  China’s global enterprises want to strengthen their IP portfolio by acquiring international patents for global market expansion !  Lost opportunities due to lacking professional experience, inadequate IP evaluation tools and indecisiveness through management layers in the decision-chain !  The existing domestic IP trading centers, focused on Chinese patents and lack supporting professional services. !  Cannot sustain the IP commercialization profitable and unable to meet international standard practices !  The value of China’s enterprises are mainly from tangible assets. The financial sector lacks an objective, effective and internationally accepted evaluation metrics and system on intangible assets !  It’s difficult to realize the capitalization of intangible assets June 7, 2014 HKSAR IP Trading 10
  11. 11. June 7, 2014 HKSAR IP Trading 11 Addressing China’s IP Service Needs #  Supply-chain IP landscape mapping (per industrial sector) #  Supply-chain IP protection assessment (per sector) #  IP licensing/trading #  Defensive IP pooling #  IP protection assessment #  Counter-measures against IP infringement lawsuits #  Patent quality improvement #  IP portfolio development #  IP acquisition (tactical) #  Effective innovation #  Strategic IP pooling #  World-class international IP legal team #  Cross-license negotiation #  Long-term technology roadmap for industrial standardization #  IP landscape mapping #  Innovation/product/technology roadmaps #  IP acquisition (strategic) #  Collaborative innovation #  Corporate culture for a learning organization ImmediateLong-term Individual Company Global/Platform
  12. 12. IP Business Models, Processes & Ecosystems June 7, 2014 HKSAR IP Trading 12
  13. 13. Critical Success Factors for IP Trading !  Trust !  Buyer/Seller: Win-win, bonding collaboration… !  Infrastructure: Escrow, 3rd-party facilitators… !  Legal framework: Common Law, arbitration… !  Assurance: Going after the infringer, transparency, indemnification… !  Confidentiality !  Privacy (non-disclosure) - “not open bidding” !  Professional brokerage – accountable SERVICES !  (“Product”) Quality !  Enforceability, claim strength (scope & integrity) !  Enabling – can realize the Productization Goals June 7, 2014 HKSAR IP Trading 13
  14. 14. IP Commercialization Vehicles !  IP Productization (产品化) - constructive use of IP !  IP Licensing (知识产权授权) !  Must have adequate technical capabilities to use the licensed IP effectively !  Tech Transfer (技术转移) !  “IP Licensing” + know-how transfer !  IP Acquisition (知识产权收购) !  IP ownership + related intangible assets (like design work, schematics, source codes…) !  Tech company M&A (科技企业并购) !  “IP Acquisition” + business (customers, products, tools & factory) + technical staff & management team !  Intangible Asset as Loan Collateral (⽆无形资产作为贷款的抵押品) - constructive use of IP !  The lender will hold the ownership of some qualified (被认证的) intangible asset as loan collateral - IP valuation know-how is crucial !  IP Pooling (知识产权池) - constructive use of IP !  Pool IP portfolios together for knowledge sharing to uplift the whole industry or strengthening the defense against infringement lawsuits !  IP purchased as an Investment (but not used for product development) !  To cash out later for a profit if the market matures in favor of the purchased IP !  Developing countries should guard against any selfish use of IP as inhibitor or blackmail by Non-Practicing Entities (NPE) or patent trolls June 7, 2014 HKSAR IP Trading 14
  15. 15. Global IP Market Players !  Enterprises: Demand/Supply side (for productization) !  Licensors, licensees, buyers and sellers !  Universities & Research Institutes: Supply side !  Individual Inventors: Supply side !  Trading agents—brokers: 3rd-party !  Professional services providers: 3rd-party !  Legal consultancy services, litigation law firms, patent evaluation and software tool platforms etc. ======================================================================================================== !  Non Practicing Entities (NPE): Demand side !  Mainly engaging in patent trading/licensing in order to make profit by patent litigations/blackmailing !  IP Investors (Patent Asserting Entities): Demand side !  Private equity companies, patent investment fund June 7, 2014 HKSAR IP Trading 15
  16. 16. Guiding Principles for the Ecosystem !  Sincere win-win proposition between the trading parties !  Full disclosure reduces risk for swift productization of licensed IP !  Absolutely no conflict of interest !  Separation of roles for rule setting (overseer), execution (trading participants and enablers) and arbitration (arbiters) !  No mixed roles (in a case) are allowed to avoid conflict of interest !  Adequate check and balance !  Proper balance of the interests of trading parties !  3rd party enablers to check for abilities and monitor the efforts by the trading parties to honor the deal and respective obligations. !  Transparency (verification by independent 3rd parties) !  Full disclosure for IP listing (like IPO prospectus) by the IP seller and full disclosure on IP protection capability by the IP buyer !  All steps in the process are auditable with supporting documents by independent auditors and/or the rule setting party. !  Must add value at each process step !  All 3rd party enablers must create values to the trading parties and ensure quality outcome of the trading June 7, 2014 HKSAR IP Trading 16
  17. 17. IP Trading Platform/Ecosystem !  Core Participants: sellers, buyers and enabling 3rd parties !  Value-adding enabling 3rd parties to facilitate win-win outcomes to both IP seller and buyer and reduce risk !  Instead of win-lose paradigm without the 3rd parties !  The platform should be centered on risk reduction/management !  Full disclosure (similar to IPO prospectus) to build trust and eliminate costly misunderstanding & misjudgments !  Fair assessment of the IP value & potential !  Fair assessment of the risk and liability !  Fair comparison to similar/competing IPs !  Implementation issues for the buyer to effectively use the IP !  Adequate supports from the seller to the buyer to realize the buyer’s ROI – productization of the licensed IP for profit sharing !  All 3rd party enablers must add values in the process from start to finish for the seller and buyer to realize their respective ROI, and collaborate to nurture the ecosystem !  Legal agents for buyers and licensers, technical assessors, IP protection auditors, escrow agents… June 7, 2014 HKSAR IP Trading 17
  18. 18. Best IP Business Practices !  Up-front proper due diligence processes !  Government regulation discovery process !  E.g., export/import controls and restrictions !  Risk assessment and management !  Guiding technology transfer w/ proper IP protection !  E.g., IP hardening for licensee with lesser IP protection capability !  E.g., Trusted third-party design integrator to handle sensitive IP !  Good visibility on how the licensed IP will be used !  Technology transfer plan and milestones !  Proactive problem-solving !  Lining up 3rd-party enabling supports !  Escrow arrangement(s) !  Control and manage legal costs (through arbitration) !  Within 10% of the license cost !  Cap indemnification exposure (up to the license cost?!) June 7, 2014 HKSAR IP Trading 18
  19. 19. Technology Transfer/Transplant !  IP transfer is like organ transplant/artificial implant !  Foreign IP will be embedded into the host product like a foreign organ or an artificial device implanted into the recipient's body !  Compatibility is essential to avoid “body rejection” !  Necessary proactive due diligence process, planning and execution to ensure success !  Pre-transaction (pre-operation) !  Functionality (organ or device type), originality (source), quality (health), compatibility (blood type, allergy), etc. !  The required transfer procedural review (operation planning) !  Transaction (transplant or implant operation) !  Transfer process and procedure (transplant the organ or implant the device) !  Post-transaction (post-operation) – lasting over 2 years !  Field data gathering (outpatient monitoring & check-up) June 7, 2014 HKSAR IP Trading 19
  20. 20. HKSAR IP Commercialization Promotion Efforts June 7, 2014 HKSAR IP Trading 20
  21. 21. HKSAR’s Role on GD-HK CEPA IP Platform !  Provide “Common Law” platform for IP transaction !  One-Country-Two-Systems’ “Offshore Extension” into CEPA Special-policy Pilot Zones !  World recognized arbitration process !  HKIAC as an example ( !  Awards enforceable in many (~140) regions, including China & Taiwan !  Easy access to enabling third parties !  Local pool of technical and legal expertise and efficient support services !  Financial and IP Escrow Services June 7, 2014 HKSAR IP Trading 21
  22. 22. Hong Kong Recent “IP Trading” Efforts !  HKSAR “IP Trading” Working Group !  Subgroups formed on “IP Valuation” and “IP Arbitration” issues !  HKSAR IP Dept. & SIPO cooperation !  Hong Kong's efforts to establish an original grant patent system with SIPO supports !  HKTDC’s BIP Asia Forum in December !  Started in 2012 and continued annually !  HKTDC has built it into an int’l signature event !  HKTDC’s on-line “IP Trading” Portal ! June 7, 2014 HKSAR IP Trading 22
  23. 23. Thank You! HKSAR IP TradingJune 7, 2014 23