Thursday, October 06, 2005

More on the True New Economy.

Extracting gold from patents can bolster the bottom line

By Kevin J. O'Brien International Herald Tribune

MONDAY, OCTOBER 3, 2005

BERLIN The Dutch brand Philips is found on millions of televisions, stereos and other electronic products in living rooms around the world. Almost as ubiquitous are the products of the French manufacturer Thomson, which is known for its televisions, professional video equipment and TV set-top boxes.

Yet last year, these consumer electronics makers did not profit from making consumer electronics. Instead, Thomson got 75 percent of its operating earnings - 325 million of the total of 434 million, or $390 million of $522 million - by licensing its technology to other companies. Philips would have lost money on its consumer electronics business last year if not for 478 million in licensing income.

Squeezed by low-cost Asian manufacturers, niche competitors like Apple Computer and ambitious interlopers like Samsung Electronics, the industry's historic leaders are increasingly dependent on selling ideas rather than products, and at profit margins that are far wider than in the cutthroat world of consumer gadgetry.

"Intellectual property is playing an increasingly important role for our group," Rudy Provoost, head of Philips Consumer Electronics, said in an interview. "It's just a fact of life in our business now that you have to cultivate and protect IP."
The question is whether the traditional approach of developing, owning and mining patents for revenue has a future in a world where copies and knockoffs are increasingly simple to make, license fees easy to avoid and a certain part of the next generation more comfortable with "sharing" than with owning.

To be sure, the technology industry is still dominated by proprietary manufacturers like Sony, Philips and International Business Machines, which are more aggressive than ever in pursuing patents and patent infringement. This year, IBM is expected to file around 3,250 patents - the most of any company in the United States, said Robert Sutor, vice president for standards and open source at the company.

Companies say they license as a way to stay ahead of the swift mimicry of new technologies and designs that can turn a sales
sensation into an inexpensive commodity within months.

That is one reason Thomson last year licensed the rights to its RCA brand to TCL, a Chinese company, and why it charges others for using its critical technologies in the MPEG-4 video compression and MP3 audio compression formats.

"The so-called commoditization cycle - turning an innovation into a commodity - is in some cases shorter than a year," Jean-Charles Hourcade, chief technology officer at Thomson, said in an interview. "It is very difficult to base a strategy on pure product manufacturing any more." Today, Thomson is focusing on broadcast equipment and services.

Compared with manufacturing, licensing promises lower risk and higher income. Thomson in 2004 kept 81 cents of every euro in licensing sales as profit, but only 10 cents of every euro from sales of broadcasting equipment and services.

The French company's lawyers oversee enforcement of 45,740 corporate patents from 6,720 inventions, according to Thomson's 2004 annual report. Last year, Thomson filed 588 new patent applications and closed 878 licensing agreements with other companies.

At Philips, licensing income rose 61 percent in 2004, to 478 million, as the company profited from its ownership of CD and DVD technologies, among others. The Dutch company made licensing a priority in 2002, when it created a 500-member department to exploit the value of its 100,000 patents, 22,000 trademarks, 11,000 design rights and 2,000 Internet domain names.

"What you are seeing is that many global electronics companies, out of necessity, are turning to licensing to protect their investments," said Andy Morgan, an industry expert in London at the accounting firm PricewaterhouseCoopers.

Not all manufacturers are as aggressive as Philips and Thomson. Sony, for example, had sales from licensing of ¥31.4 billion, or $277 million, in the year that ended in March 2004 - less than 0.5 percent of the Japanese company's ¥7.16 trillion in total sales, said Yoshihide Nakamura, senior vice president in charge of intellectual property at Sony.
While Philips and Thomson say licensing brings a welcome second source of income, some experts say the dual strategy is a sign of weakness.

"Thomson has basically announced that they are no longer interested in being a consumer electronics company," said Jason Mauricio of Arete Research, a private research firm in London. "They have basically licensed out their TV screen business. That is the threat that faces Philips, Sony and all the rest."

The most sustainable business strategies, Mauricio said, involve developing, making and selling products, rather than merely collecting royalties on patents that will eventually expire.

Danny Rimer, a partner in London at Index Ventures, a fund company that has 750 million invested in technology companies, said businesses based solely on licensing had limited futures.

"Most entrepreneurs view IP as a defensive mechanism and not as an opportunity for creating a business," Rimer said.

"Companies having the greatest challenges adapting to the new world are banking on exploiting IP weaknesses."

By releasing 500 software patents free to the public this year, IBM is wagering that it will earn more by letting outsiders innovate from its technology than it would by just collecting licensing fees, Sutor said. IBM's move prompted Sun
Microsystems, Computer Associates International and Nokia to take similar action.

As electronics makers bulk up their staffs of patent attorneys, some experts say consumers may end up suffering as lawsuit-prone corporations cast a chilling effect over small, independent inventors. In 1984, companies filed 19 infringement lawsuits for every 1,000 patents filed in the United States, said Dietmar Harhoff, a professor of copyright law at Ludwig Maximilian University in Munich; by 2000, the rate had nearly doubled, to 32 lawsuits per 1,000 patents.

Some inventors, however, are quick to note that without copyright protection, they would have little incentive to innovate.
Roland Moreno, a French inventor who said he had earned more than 100 million in royalties from his patent on the smart card, said, "Inventors need an incentive to create and should be rewarded for innovation."

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