The Million $$ Question: Does IP provide good value to Businesses

Complete with brief case situations and illustrations, Lee Tatt Boon explains how IP can bring value to a business

 

The answer is obvious to many businesses, Intellectual Property or IP does provide good value. Unfortunately, there are many businesses that are skeptical or simply ignorant of the value and benefit that IP could provide to their organizations. The latter situation is evident from businesses which fail to invest money in the protection of IP for reasons ranging from being too costly to not knowing what IP really is.

 

THE REASONS WHY IP BRINGS VALUE TO A BUSINESS

As a starting point, there are generally four reasons why IP brings value to businesses and they are as follows:-

1) keeping business competitors at bay;

2) as a source of direct income;

3) enhancing export opportunities;

4) enhancing the business worth in the eye of investors & bankers.

 

THE EXPLANATIONS AND CASE STUDIES

1. Keeping business competitors at bay

In what manner does IP help to keep competitors at bay? The answer lies in the nature of protection accorded to IP rights. Almost every IP right gives the owner a way of excluding others from doing something that interferes with or competes against a vital part of the business.

By way of an example, if the IP right is in respect of a patent relating to a product, the owner has the exclusive right to make, import, offer for sale, sell or use the product. If the patent is for a process, the owner has the exclusive right to use the process as well as to make, import, sell or use the product obtained directly by that process.

In the event the IP right is in respect of a registered trademark, the owner will have the exclusive right to use the trademark in relation to goods or services registered. And if the IP right is in respect of a copyright, the owner will have the exclusive right to control:-

• reproduction of the work in any material form;

• communication of the work to the public;

• public performance of the work;

• distribution of the work to the public by way of sale or otherwise;

• commercial rental of the work.

 

In circumstances when an IP right is infringed, the infringers could be stopped resulting in the owner’s exclusivity or monopoly to exploit the IP right being preserved. The owners of IP rights and their businesses enjoy a competitive advantage in the market and considerable legal clout to stifle copycats.

 

 

An illustration of how IP helps to keep business competitors at bay is the case of Texas Instruments (TI) a renown US semi conductor company. [Source: “Investors learn to appreciate the value of IP” by Joff Wild” – IP Value 2005 - published by Intellectual Asset Management].

  • In the mid 1980s, TI was on the verge of collapse. The future was bleak; the company’s market share was dwindling rapidly; profits were also declining; and TI was facing stiff competition from a number of Japanese and Korean companies.
  • Luckily, TI had a patent portfolio and when a new CEO was appointed, he decided to focus on TI’s patent portfolio and it was discovered that many of their rivals’ products were using TI’s patent rights and no permission had been obtained.
  • TI then started a campaign against a string of competitors to assert TI’s IP rights and having established itself as an aggressive enforcer and by winning cases in court, TI recovered from the brink of collapse.
  • The key to TI’s recovery was the strategic way in which it looked at IP, in particular patents – securing protection, ensuring its competitors did not infringe TI’s IP rights and if they did, to immediately assert its rights, even if it meant going to court. TI’s patents helped TI to keep the competitors at bay and indeed kept TI in existence.

 

2. As a Source of Direct Income

The objective behind any business is to make money. Therefore, it is not surprising that making money from existing business assets is on the agenda of any business enterprise. It is not disputed that IP is an asset but how does IP help to generate income for businesses? IP can generate income for businesses in a number of ways:-

  • by licensing someone to manufacture a patented product.
  • by leasing the commercial identity of the business to another organisation to market products under the business’s brand name.
  • by franchising others to manufacture or sell the business’s goods and services.

 

As an analogy, licensing IP rights is like renting out a piece of real estate. The business retains the title to the property while collecting rent on a periodic basis in the form of royalties.

IBM is a good illustration of how businesses make money using their IP rights. [Source: “Investors learn to appreciate the value of IP” by Joff Wild” – IP Value 2005 - published by Intellectual Asset Management].

  • IBM is without doubt, one of the world’s most prolific applicant for patents in the US as well as worldwide.
  • IBM has a policy of registering the results of its R & D as patents.
  • IBM’s early strategy was to regard its patents as a defensive barrier to prevent rivals encroaching on its territory i.e. its patents were meant to keep away the competitors.
  • During the 1990s, things changed. Profits were down and the business was not growing. This led to a rethinking of the old strategy.
  • IBM’s new policy was not to view patents merely as a defensive barrier but to license technologies it developed that were not in competition with its core business.
  • Because of this change, IBM generates an estimated return of over US$1.5 billion a year from licensing which finds its way to IBM’s bottom line.

 

The above illustration is but one of many examples which show how IP helps companies and businesses to generate income. Some businesses may question IBM as being a good illustration because IBM is such a big company with deep pockets which the majority of other businesses do not have.

However, it must be agreed that IBM, like any other business, started small and grew over the years. Making money from IP assets is big business in the US and for the record, patent licensing revenues have increased from US$4 billion in 1980 to US130 billion in 2000 [Source: Intellectual Asset Management – Licensing in the Board Room 2005 – “To sell or not to sell” by James E. Malackowski]

 

3. Enhancing export opportunities

Businesses have to continue growing to sustain profitability and their existence. Although growth of a business can be achieved within the country where the business is operating, it can sometimes be constrained by various factors such as the population size or saturation in the particular category of goods or services that the business is keen to pursue. In such circumstances, the best way to move forward is to export the goods or services. Many businesses have done this to improve the profit margin.

Knowing that export opportunities are vital to business growth and development, what role does IP play in such a case? The role of IP cannot be underestimated in such a situation. Indeed, if a business were to venture to an overseas market, the warning will be that the business should not do so if its products will not be protected by the IP laws in the countries where the business will be exported to. IP rights are territorial in nature and if such rights are not adequately protected, the business will face difficulties in stopping the infringers or copycats in the foreign markets.

However, if the business were to protect its IP rights in the foreign markets, the situation will be different. For instance, if the business’s products enjoy patent protection in the foreign countries, the business will have various options to export its innovative products that may not be available otherwise.

  • The business can manufacture the products domestically and export the protected product directly or through intermediaries, knowing that no other company will be able to legally produce, sell or export the same products in the selected market without permission from the business owner.
  • The business can license its invention to a foreign firm that will manufacture the product locally in exchange for royalties or lump sum licence fees.
  • The business can set up a joint venture with other firms for manufacturing and commercialisation of the product in the selected foreign markets.

 

 

An illustration of how IP can help a smaller establishment by exporting its products overseas is by doing a case study on a Malaysian company, Watertec Sdn Bhd.

 

  • The company is in the water tap technology.
  • Its technology is simple, effective and protected by way of a patent in Malaysia.
  • Its technology is extremely useful in developing countries because the product is effective and affordable.
  • The company was persuaded to register its technology in most of the developing countries and exercised the first option i.e. to manufacture the patented product domestically and export overseas. The company is now successfully exporting its patented products to Sri Lanka, India, Cambodia, Thailand, Vietnam, Indonesia, Laos, Brunei, Philippines, China and Bangladesh.

The same beneficial effects would also be present if the IP right concerned is a brand or trademark of the business. If such a brand or trademark is registered in foreign countries:-

  • the business will be able to maximize product differentiation, advertising and marketing.
  • the business will be able to enhance recognition of its products in international markets.
  • the business will be able to establish a direct link with the foreign customers.

 

From the above, it will be safe to conclude that expanding the protection or exploitation of an IP right into foreign markets will result in:-

  • the business having a higher revenue as it is now able to capture a bigger market.
  • the business generating better customer loyalty.
  • the business acquiring a better image internationally.

 

4. Enhancing the business worth in the eyes of investors and bankers

For any business to grow, there is sometimes a need to attract investors to participate in the business and its ventures as well as to persuade bankers to loan money to the business for expansion. In this regard, the role of IP cannot be questioned. IP, if legally protected, is a valuable business asset which may significantly:-

  • improve the market share of the business.
  • raise the profit margin of the business.
  • raise the value of the business.

 

How does IP really enhance the worth of a business? The answer lies in the nature of IP rights. Since IP is a form of property, it can be monetised by way of sale, licence, collateral or security for financing and seeking equity from investors and venture capitalists.

It is for these reasons that IP should be looked upon not just as a legal asset but also as a financial instrument.

 

 

CONCLUDING REMARKS

There cannot be any doubt that IP provides good value to businesses if the IP rights are properly identified, protected and managed. The significance of IP to businesses cannot be demonstrated better than the given case studies of IBM and Texas Instruments Inc. If these companies believe in the value of IP, the message is clear that all businesses should also do so.

 

 

LEE TATT BOON ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 
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