2/3/2002 7:16:00 PM
By Lesley Craig and
Lindsay Moore
In modern discussions regarding the value of intellectual property, terminology can often become confusing. To prevent misunderstanding, it’s important to differentiate between “intangible assets,” “intellectual capital” and “intellectual property.”
During the early 1990s, with the emergence of corporate growth through mergers and acquisitions, the term “intangible assets” arose to refer to all the non-physical assets within an organization, such as its brand or its patents. This new distinction between physical and intangible assets allowed brands and patents to be recognized as valuable, and despite their intangibility, to receive a valuation in business negotiations.
Toward the latter 1990s, driven by the emergence of the new economy, intangible assets and knowledge-based assets were formalized into what is now known as “intellectual capital.” Thus, intellectual capital should be understood as including all intangible assets, such as a brand, and all knowledge-based assets such as patents and trademarks.
Despite these developments, intellectual property portfolios, consisting of patents, trademarks, copyrights, licenses, and trade secrets, still frequently are overlooked both as sources of monetary value and financial gain.
In truth however, they are a valuable intellectual capital asset to be included within corporate net worth, especially in the face of a divesture or acquisition. They need to managed and leveraged to provide new sources of income and to enhance competitive advantage.
Intellectual Capital
While many organizations are becoming aware of the tremendous dollar value within their brands in the form of brand equity, fewer enterprises realize the wealth located within their intellectual property holdings.
When viewed as intellectual capital, intellectual property is now valued and assigned specific dollar value. Just as physical assets, such as plant, property and equipment, possess a dollar value, so too do the patents, trademarks and copyrights of intellectual property possess similar specifiable value.
In fact, often the biggest assets an organization holds are its less tangible, intellectual capital assets.
During 2000, the market-to-book ratios of Fortune 500 companies increased to 6.3:1, suggesting that for every dollar of physical assets on the balance sheet, the market recognized $6.30 worth of other intangible assets. On average, in successful organizations, brands, intellectual property and the like are two to three times the value of physical assets.
Intellectual property holdings are valuable corporate assets, and may make up a great portion of the total worth of an organization. Bench-marking and tracking this value can make it a part of the success of an enterprise.
Leverageable Assets
Intellectual property, while possessing value in and of itself, can also be leveraged to provide improved financial performance and enhanced competitiveness. Organizations that learn how to manage their intellectual property with strategic vision discover new sources of income and competitive advantage in the marketplace.
During the decade from 1990 to 1999, IBM leveraged its patent portfolio, increasing its annual royalty income by an astounding 3,300 percent, from $30 million in 1990 to nearly $1 billion at the end of 1999.
Additionally, because such income is free of manufacturing or significant operating costs, the majority of IBM’s $1 billion per year is free cash flow that falls straight to the bottom line as profit.
To match such a level of net profitability, IBM would have had to have sold an additional $20 billion worth of its manufactured products per year. In other words, it would have had to have grown its worldwide business by 25 percent — which would be a rather Herculean task.
How could an enterprise leverage its patents so dramatically? Through the simple realization that patents are assets, and that just like physical assets, it is the responsibility of management to exploit the asset base of the organization.
How can this legally protected intellectual capital be leveraged? Here are a few of many ways:
• Map patents, and build patent walls (called “clustering”) around successful products, services and methods to prevent encroachment and ensure competitive advantage.
• Position patents to potential licensees to tap the earnings potential of intellectual property assets and create royalty streams.
• Engage in cross-licensing to obtain income from under-utilized holdings, and to gain needed intellectual property in return.
• Obtain patents around a dangerous competitor’s holdings to prevent its further market access (called “bracketing”).
Simply put, protect that which is most vital and adds the greatest value to your enterprise, and then, as with any other business asset, turn around and require these intellectual property assets to generate business-building returns.
The new challenge before today’s CEOs and executives is to realize that patents, trademarks and copyrights are no longer merely legal matters. Today they are the assets of enhanced corporate net worth, and the stuff of strategic thinking and new competitive advantage.
Learning to exploit intellectual property assets for strategic and financial gain is essential in today’s knowledge-driven enterprises. Those who turn this ability into a core competency and a competitive advantage are likely to experience the greatest success.
Lesley Craig is the managing attorney of the Denver Office of Townsend and Townsend and Crew, an international intellectual property law firm.
Lindsay Moore is the CEO of KLM Inc., a management consultation firm located in Boulder.
Copyright © 2002 Lindsay Moore and Lesley Craig. All Rights Reserved.
