IP Strategy Structure & Incentives

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  • 1. Intellectual Property: Strategy, Structure & Incentives Paul Henderson Managing Director, Clarify LLC Berkeley MBA 2008 paul.henderson@ClarifyLLC.com12/31/2010 Clarify, LLC 1
  • 2. Disclaimer Legal JD advice12/31/2010 © Clarify LLC, 2010 All Rights Reserved 2
  • 3. “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.”12/31/2010 © Clarify LLC, 2010 All Rights Reserved 3
  • 4. Outline for the talk The opportunity The ‘problem’ Barriers to entry How How TO Pragmatic + NOT to do it steps Intellectual do it property12/31/2010 © Clarify LLC, 2010 All Rights Reserved 4
  • 5. Doing it right: a simple example12/31/2010 © Clarify LLC, 2010 All Rights Reserved 5
  • 6. What is patent #5,327,752 worth? ASP: $29.95 Whsl: $12.00 Royalty: $5.00 Mfg. cost: $3.5012/31/2010 © Clarify LLC, 2010 All Rights Reserved 6
  • 7. Q: How much attention does your company pay to managing its intellectual assets? Intellectual Enterprise value: Assets Intangible $36B assetsBook Value Discounted Intellectual value of $9B expected Property future cash flows© Clarify LLC, 2010 All Rights Reserved 7
  • 8. Why does this matter?“Anyone with a glue pot can getinto the shoe business.” - Phil Knight12/31/2010 © Clarify LLC, 2010 All Rights Reserved 8
  • 9. “The tools of creativity have become democratized.” - Ray Kurzweil12/31/2010 Clarify, LLC 9 © Clarify LLC, 2010 All Rights Reserved
  • 10. Q: If anybody can make a product, how can anybody make money at it?12/31/2010 © Clarify LLC, 2010 All Rights Reserved 10
  • 11. An economist’s view: barriers to entry Bruce Greenwald – Competition Demystified 200512/31/2010 © Clarify LLC, 2010 All Rights Reserved 11
  • 12. 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 restrictions12/31/2010 © Clarify LLC, 2010 All Rights Reserved 12
  • 13. Where can we get barriers to entry?12/31/2010 © Clarify LLC, 2010 All Rights Reserved 13
  • 14. IP strategist’s view: =12/31/2010 © Clarify LLC, 2010 All Rights Reserved 14
  • 15. Intellectual Assets vs. Intellectual Property Intellectual Assets People/Talent Experience Processes Relationships Culture Intellectual Property: Patents Trademarks Copyrights Trade Secrets© Clarify LLC, 2010 All Rights Reserved 15
  • 16. The myth of “patent protection”12/31/2010 © Clarify LLC, 2010 All Rights Reserved 16
  • 17. IP rights are ‘negative rights’12/31/2010 © Clarify LLC, 2010 All Rights Reserved 17
  • 18. The best defense is…12/31/2010 © Clarify LLC, 2010 All Rights Reserved 18
  • 19. Copyrights: What you need to know• Fixed in a tangiblemedium• Notice: ©2010 John Doe- not required, butrecommended• Registration - notrequired, butrecommended• Beware of ownershipproblems with softwareconsultants © Clarify LLC, 2010 All Rights Reserved 19
  • 20. Trade secrets are:• Information that is not generally known• That has value derived from secrecy• That the owner reasonably tries to keep secret © Clarify LLC, 2010 All Rights Reserved 20
  • 21. What can IP get for you?Barriers: Patents Copyrights Trademarks Trade SecretsScale Access to tech   Learning curve  Switching costs  Brand  Capital  Distribution  Regulatory Trade/tariff  © Clarify LLC, 2010 All Rights Reserved 21
  • 22. Not all barriers to entry confercompetitive advantages (& vice versa) Barriers Competitive to entry Advantages © Clarify LLC, 2010 All Rights Reserved 22
  • 23. 12/31/2010 Clarify, LLC 23
  • 24. Something somebody wants12/31/2010 © Clarify LLC, 2010 All Rights Reserved 24
  • 25. 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 Value12/31/2010 © Clarify LLC, 2010 All Rights Reserved 25
  • 26. HP’s strategy (in a haiku): Good enough products Buy it all from ODMs Ship lots of volume12/31/2010 © Clarify LLC, 2010 All Rights Reserved 26
  • 27. Not Customers Customers12/31/2010 © Clarify LLC, 2010 All Rights Reserved 27
  • 28. HP’s value chain “Shift Left” strategy Repair Test Validation Design Support Rawmaterials Distribution Assembly What could Components possibly go wrong? 12/31/2010 © Clarify LLC, 2010 All Rights Reserved 28
  • 29. 12/31/2010 © Clarify LLC, 2010 All Rights Reserved 29
  • 30. Pause to ponder: What were the incentives of the managers who made these decisions? What are the incentives of ODMs?12/31/2010 © Clarify LLC, 2010 All Rights Reserved 30
  • 31. Look at how incentives align • Leverage the • More fully utilize • Leverage technologyCM/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 12/31/2010 © Clarify LLC, 2010 All Rights Reserved 31
  • 32. What if you are outsourcing some or most of your value chain?12/31/2010 © Clarify LLC, 2010 All Rights Reserved 32
  • 33. Your genius idea12/31/2010 © Clarify LLC, 2010 All Rights Reserved 33
  • 34. Monetizing the iPhone ecosystemProfit $4Pools: 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 secret12/31/2010 © Clarify LLC, 2010 All Rights Reserved 34
  • 35. 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.12/31/2010 © Clarify LLC, 2010 All Rights Reserved 35
  • 36. Apple’s strategy (in a haiku): Products people love, Control the ecosystem, Take all the money12/31/2010 © Clarify LLC, 2010 All Rights Reserved 36
  • 37. Where are the control points in anecosystem? Interfaces12/31/2010 © Clarify LLC, 2010 All Rights Reserved 37
  • 38. Why aren’t there knockoff printers?12/31/2010 © Clarify LLC, 2010 All Rights Reserved 38
  • 39. Think about 3 kinds of structure: 1. Ecosystem / value chain 2. Product architecture 3. Organization & process architecture12/31/2010 © Clarify LLC, 2010 All Rights Reserved 39
  • 40. Incentives Everyone in the entire ecosystem must have incentives for them to act in the way that you want them to12/31/2010 © Clarify LLC, 2010 All Rights Reserved 40
  • 41. If you must expose your IP, consider: Means Motive Opportunity12/31/2010 © Clarify LLC, 2010 All Rights Reserved 41
  • 42. 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 it12/31/2010 © Clarify LLC, 2010 All Rights Reserved 42
  • 43. Do patents matter forstartups?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 © Clarify LLC, 2010 All Rights Reserved 43
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