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. 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. 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. 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. 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. 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. 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. China (Demand-side) Situation:
Challenges & Opportunities
June 7, 2014 HKSAR IP Trading 8

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. 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. 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. IP Business Models,
Processes & Ecosystems
June 7, 2014 HKSAR IP Trading 12

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. 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. 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. 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. 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. 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. 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. HKSAR IP Commercialization
Promotion Efforts
June 7, 2014 HKSAR IP Trading 20

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 (www.hkiac.org)
! 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. 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
! http://www.hktdc.com/mis/ipportal/en/
June 7, 2014 HKSAR IP Trading 22

23. Thank You!
al@iipcc.org
HKSAR IP TradingJune 7, 2014 23