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[February 11, 2013]
BUSINESS MODELS AND PATENT STRATEGIES IN MULTI-INVENTION CONTEXTS [Ivey Business Journal Online (Canada)]
(Ivey Business Journal Online (Canada) Via Acquire Media NewsEdge) To win the competitive battle in multi-invention contexts, it is crucially important that a firm develop and align its patent strategy with its business strategy and model from the beginning - not merely on an ad hoc basis or as an afterthought. These authors describe three strategies that firms can deploy to achieve such an alignment.
More than ever, commercializing new technological innovations means drawing on multiple inventions that are spread among a number of organizations. However, doing so successfully requires that companies choose the right business model, and manage their patent strategies prudently and proactively, and in alignment with their business model and company strategies in order to develop and maintain their competitive advantage.
MULTI-INVENTION CONTEXTS AND INNOVATION In many industries, companies are faced with a "multi-invention problem": the development of new, commercially viable products requires the combination of ever- larger numbers of inventions. At the same time, ownership over these inventions - through patents and other forms of intellectual property (IP) - is becoming increasingly fragmented. Smart phones and their use implicate thousands of patented inventions. Little surprise then that Apple, Google, HTC, Microsoft, Motorola (now owned by Google), Nokia, and Samsung are all suing each other over the alleged infringement of smart phone patents. Or take biotechnology, where innovators must assemble large portfolios of patented genomic information, research tools, other inventions, and license rights from other innovators in order to conduct research and to bring new medical solutions to market.
In multi-invention contexts such as these, rarely does one person or one company invent and patent all the components necessary to create a commercially viable, multi-invention product. In some rare cases, a pioneer may be far out ahead of the pack and control all or most of the technologies in the first-generation product. However, once a pioneer has proven its commercial viability, others rush to imitate and improve on the product idea, and inevitably, ownership over key technologies becomes scattered among multiple entities.
Thus, in order to be successful in multi-invention contexts, an innovator has to obtain the rights to inventions from different sources, some of whom may even be competitors. Success requires that the innovator structure its business model and manage its patent strategies to combine all the inventions necessary to create value, and at the same time, to appropriate value from the combinations they create. This is a non-trivial challenge for managers, requiring both expertise and foresight, in addition to planning and execution.
BUSINESS MODELS FOR COMMERCIALIZING MULTI-INVENTION PRODUCTS In combining inventions, innovators typically must choose between integrated and non-integrated business models. An integrated model entails assembling as many of the required complementary technologies and commercialization assets as possible within the same innovating firm. For example, in electronics, integrated device manufacturers (IDMs) often design and build entire products in-house. Under a non-integrated (or "open innovation") model, the innovator combines their inventions with those of others through a series of component or licensing market relationships. For example, many semiconductor companies develop designs for chips but outsource the manufacturing of them. They then market the chips to downstream assemblers of end-use products.
Ultimately, the distinction between integrated and non-integrated business models (or open and closed innovation) is a matter of degree. Thus, Apple pursues a more integrated model in the smart phone market than does Google with its Android ecosystem. But, Apple itself has licensed technology from others and focused primarily on product design and software. It has outsourced virtually all of its components and manufacturing.
Moreover, another important distinction among non-integrated business models is the degree to which they rely on licensing as opposed to component transactions. By this we mean that some firms buy components containing IP for which the component manufacturer has already secured a license.
So, which business model is superior - a more integrated (closed) one or a more non-integrated (open) one And what about licensing versus component-based approaches in non-integrated business models Quite simply, there is no universal answer. To commercialize an innovation effectively in a multi-invention context, an innovator must weigh the advantages and disadvantages of integrated and non-integrated (and licensing and component) models and choose the arrangement that is most appropriate for the specific multi-invention product that it is commercializing.
A significant challenge with an integrated approach is that it is very difficult to stay at the cutting edge of innovation across a broad front in multiple, fast-moving technology domains. Even for a pioneer, maintaining a comprehensive technological advantage across multiple fields can be difficult, if not impossible. The larger and more diverse the set of technology domains and the quicker they are progressing, the more an integrated model will struggle to remain competitive. The resulting disadvantages for innovating with multiple product variants and features, and for cost efficiencies, are becoming evident in Apple's smart phone business.
That said, the more technologically interconnected the multi-invention offering, the bigger is the challenge to coordinate with other firms and pursue an open innovation model. Apple's smart-phones illustrate the advantages of a single firm coordinating a well-integrated product offering, where product features mesh smoothly and work seamlessly. While Apple makes sure its devices work well, it doesn't hesitate to rely on externally generated technology. Its R&D-to-sales ratio is lower than its competitors, signaling that it spends its R&D dollars judiciously, and relies on innovation both from external providers as well as from within.
By contrast, perhaps the biggest complaint against Android phones is that the user experience is not uniformly good, and that applications often don't work as well on all phones. Non-integrated models also spark disagreements about the value of the inventions contributed by different firms and/or strategic conflict between partner organizations that have dissimilar or opposing goals. The recent Apple v. Samsung patent law suit revealed disagreements between partners Google and Samsung in the decisions Samsung made about designing features on its phones that Google believed were too close to Apple's own features. In an earlier generation of smart phone technology, Research In Motion's initial pursuit of a more integrated model with Blackberry avoided many of the costs of coordinating with other players, many of whom may have disagreed about the potential market for mobile e-mail, and the true value of RIM's technology. Clearly, in this case, the integrated approach wasn't associated with durable marketplace success.
THREE PATENT STRATEGIES AND THEIR ALIGNMENT WITH BUSINESS MODELS While selecting the best business model is important, this will not on its own enable an innovator to navigate and profit from innovation in multi-invention contexts. Additionally, companies need to implement a patent or "appropriability" strategy that is well aligned with their chosen business model. Patent strategy is an important component of appropriability in many (but not all) multi-invention contexts. Broadly, patent strategies can be classified into three generic forms - proprietary, defensive, and lateral leveraging. In turn, these strategies are carried out through the firm's actions in the domains of patenting (related to obtaining patents), licensing (related to sharing patent rights), and enforcement (related to patent litigation).
1. In a proprietary strategy, the firm seeks to stake out and defend a proprietary market advantage. To accomplish this, the firm must obtain patents that uniquely and effectively cover a market opportunity, minimize imperfections in its patent coverage, aggressively enforce its patent rights, and license only in exceptional cases. In short, patents are used to defend a product market position. Revenue from licensing is eschewed. This is perhaps the most straightforward way in which a firm can use patents to support innovation. However, in a multi-invention context, pursuing a proprietary patent-based strategy for every piece of technology is likely to be prohibitively expensive. Nonetheless, firms that employ a non-integrated model in particular may need a proprietary strategy to protect key high-stake technologies that are critical for the company's competitive advantage. For example, ARM Holdings, the British semiconductor design company that dominates in the field of mobile phone chips, has studiously accumulated a portfolio of patents around its core technology and vigorously enforced them against rivals. Apple's aggressive protection of certain core patent-protected design features in smart phones and smart pads also appears to reflect a proprietary approach in its patent strategy, with respect to these core areas.
2. In fast-paced, multi-invention contexts, some enterprises - particularly those pursuing more integrated business models - may simply desire the freedom to design and innovate without being constrained by the patents owned - or likely to be owned - by others. Put differently, these enterprises may not wish to use patents to gain a competitive advantage, but nonetheless need strategies to ensure that they are not held up by others' patents and are not put at a competitive disadvantage by those patents. These patent strategies are called defensive strategies , as the primary goal is design freedom. One way to achieve design freedom is to simply avoid infringing on others' intellectual property, for example, inventing around known patents by using different technological solutions from those owned by other entities. Because of this an innovating firm may develop a portfolio of patents to be used as bargaining chips with other patent holders in preemptive cross-licensing arrangements To enhance this strategy, a firm may need to not only patent inventions important to itself, but also those inventions important to others. These patent arsenals may then become effective counter threats to encourage other patent holders to cross-license, to stave offimpending patent litigation, or to fight back with the firm's own counter claims of patent infringement. In semiconductors, firms such as Texas Instruments historically amassed a large portfolio of patents that they use as bargaining chips for cross-licensing arrangements when they need freedom to operate. If they don't need such freedoms, then they can license for revenue enhancement. However, patent defense based on large patent portfolios may not always be effective, for example, when blocking patents are held by entities without commercial operations or if access to patents in the firm's portfolio is not needed by these rivals. Research In Motion's experience with being sued by NTP Inc. is illustrative, as RIM was forced to cough up $612.2 million to settle the case, lest its Blackberry email service be shut down by a court injunction enforcing NTP's patents. RIM was unable to put pressure on NTP to settle for less because the latter had no commercial operations of its own that needed access to any of RIM's patents. In response to Apple's patent suit, Samsung countersued and asserted certain patents against Apple.
3. When freedom to operate or proprietary protection is not a priority, patents may be licensed for cash payments or used to gain valuable concessions from other firms. Such lateral leveraging strategies rely on using the patent's power to prevent others from using the invention, which in turn enables the firm to collect revenue, to influence a technology standard, or to clinch business deals. Firms like IBM have earned substantial licensing revenues and other consideration by leveraging their patent rights into royalties and business deals. Innovators pursuing integrated business models to commercialize multi-invention products may employ lateral patent-leveraging strategies somewhat differently from those pursuing non-integrated models. For example, the former may be better positioned to directly profit from licensing royalties due to their large and relatively less proprietary patent portfolios. By contrast, non-integrated firms may value more highly the ability to influence component or licensing decisions by potential partners, or even the direction of technology standards.
BEING PROACTIVE Multi-invention contexts will remain a feature of high technology sectors for the foreseeable future. Recent advances in biotechnology, semiconductors, software, computing, communication, the internet, and nanotechnology all exhibit multi-invention characteristics. To maximize chances of success in multi-invention contexts, innovators must evaluate alternative business models for combining multiple inventions, and choose the most effective model - or degree of openness - for the given context. At the same time the innovator must choose a patent strategy that aligns with its choice of business model and its overall strategy and goals.
While the multi-invention challenge and the examples we have discussed all highlight the importance of a well-aligned patent strategy, this is often forgotten in the rush to commercialize products. It is typically more risky and costly to fill, at a later stage, the resulting strategic lacuna in the innovator's ability to consistently appropriate returns. A striking recent example is Google's costly acquisition of Motorola Mobility, a significant motivation for which appears to have been the patents owned by Motorola Mobility that helped Google address its own patent strategy concerns in smart phones. While Google was (arguably) successful in backfilling some of its patent strategy needs through this acquisition, it was a fortunate (and expensive) happenstance for Google that the company was available for sale. To win the competitive battle in multi-invention contexts, a firm must proactively develop and align its patent strategy with its business strategy and model from the beginning - not merely as an afterthought.
This article is based on a longer paper titled "Innovating in Multi-Invention Contexts: Mapping Solutions to Technological and Intellectual Property Complexity" published in the Summer 2011 issue of the California Management Review. The original won the Review's award for Best Article of the Year.
 David Teece was an expert witness in the Apple v. Samsung patent case in the Northern District of California. However this article does not draw on his expert testimony.
The Authors: Deepak Somaya Deepak Somaya is Associate Professor of Business Administration and Stephen V. and Christy C. King Faculty Fellow, University of Illinois at Urbana-Champaign.
David J. Teece David J. Teece is the Thomas W. Tusher Professor at the Haas School of Business at the University of California, Berkeley. He is the author of over 200 books and articles on business and economics. His most recent book is Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press, 2009.
Simon Wakeman Simon Wakeman is Associate Professor, ESMT European School of Management and Technology, Berlin.
(c) 2012 University of Western Ontario
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