Rembrandts in the Attic: Unlocking the Hidden Value of Patents by Kevin G. Rivette, Rivette, David Kline

From the Publisher

By now just about everybody in America has seen or heard about the increasingly popular Public Broadcasting System (PBS) program called "Antiques Roadshow." And anybody who's watched a few episodes is by now familiar with the show's recurring themes and variations: A 67-year-old retired airplane mechanic from Tacoma, Washington, places a landscape painting on the velvet-covered card table; one of three likely scenarios unfolds. The appraiser informs the guest that:

1. Unfortunately, he paid US$1,750 for what turns out to be a reproduction worth about $25.

2. The painting he purchased at a garage sale for $1.50 is worth just about that, but the frame -- made by Louis XIV's royal picture framer -- is worth $75,000.

3. The good news is that the piece in question is worth about $2,500. The bad news is that had it not been cleaned, it would be worth $250,000.

The authors of Rembrandts in the Attic suggest that companies in this knowledge age should haul out and dust off their patents as part of an overall strategic thrust toward maximizing intellectual property. And they present some pretty impressive numbers to support their claim that patent portfolio development "represents the greatest financial opportunity since the leveraged buyout mania of the 1980s."

In the most stunning example of "found money" cited by Rivette and Kline, "IBM currently makes $1 billion in net annual recurring revenues from its once-unused patent portfolio." If your eyes glossed over that sentence, you might want to reread it: That was net annual recurring revenues of $1 billion -- or "one-ninth of the company's yearly pre-tax profits, flowing straight to the bottom line." As recently as 1990, this same portfolio was generating a mere $30 million.

IBM's not the only one. Simply by performing an intellectual assets audit, Dow Chemicals "achieved an immediate savings of $50 million in taxes and maintenance fees on unneeded patents that were pruned from the portfolio." The audit paid off in other ways. By introducing, as it were, these assets to the people in the company who were in a position to leverage them, Dow made intellectual property a major component of its strategic decisions. As a result, "patent licensing revenues have skyrocketed from $25 million to more than $125 million."

But Dow also proves that patents are a double-edged sword that can be just as easily wielded by the competition: Avery Dennison Corp., a relatively small concern (a mere $3.5 billion in annual revenues) established a patent "beachhead" that forced Dow to dismantle one of its business units -- or face potentially costly infringement litigation. Rembrandts in the Attic includes several stories of Davids who beat their respective Goliaths to the Patent and Trademark Office (PTO).

This story also underscores a related point: you don't have to be big to profit from patents. The authors summarize one such story this way: "Five people. Two computers. One patent. That's all it took to make $50 million." Cadtrak was barely making it in workstation business when it decided to employ a patent-driven business model. They laid off 100 employees and focused on licensing deals for their patented "selective erase" process, a graphics processing technology that has been written into the EGA and VGA graphics specifications.

As company owner Bill Emmerich puts it, "basically every computer sold at that time was using our technology." If a company didn't pay for a license, it paid a heavier price, as Commodore found out the hard way. "We took them to court," says Emmerich, "and got a permanent injunction barring sales of their computers in the U.S. When that happened, their creditors called in their loans and they went bankrupt. That little patent of ours put Commodore out of business."

Patents, it turns out, are a recently rediscovered corporate weapon. "For most of this century," say Rivette and Kline, "intellectual property played only a minimal role in shaping the commercial and strategic fortunes of American business. Patents were for the most part used defensively, if at all, and few companies outside the pharmaceutical, biotechnology, or certain other sectors ever thought of them as strategic assets."

But that's rapidly changing, thanks to some changes in intellectual property law, the rise of the knowledge economy, and skyrocketing price-to-book ratios on Wall Street. (After all, market capitalizations of 30 times higher than book value have to be based on something. They are -- on intellectual assets: on patented devices and processes as well as copyrighted material, trademarks, trade secrets and other proprietary information, such as customer profiles and contacts.

But this book focuses specifically on patents because -- outside of the entertainment and publishing industries -- patents provide the soundest form of protection and hence represent the most valuable form of intellectual property.

Surprisingly, it took Silicon Valley companies a long time to appreciate the value of patents. Microsoft, Apple and others were content to merely copyright their software programs as well as the technologies that went into them. Not any more. Ten years ago Microsoft held only 1 patent. Today that number is approaching 800.

Favorable rulings have also made it possible to patent concepts that hadn't in the past merited patent protection. The best example of this is Dell's patent of its business model, which its competitors must presumably cease and desist from emulating (the patent's legitimacy has yet to be challenged).

Rivette and Kline do more than explain why patents should be an important part of strategic planning. They outline specific methods for figuring out just what you have, what you should acquire (through R&D or M&A) and how to outflank potential competitors. That way you'll never hear: "I'm afraid that the last ten years of research, production and marketing efforts are worthless. Of course, had you patented these inventions and business processes . . ."

New York Times Book Review

Along with the proliferation of new patents, it seems, comes a proliferation of new patents books. The one with perhaps the best shot at the business best-seller list is Rembrandts in the Attic. The authors, Kevin G. Rivette and David Kline, emphasize the strategic importance of intellectual property by giving example upon example in which patents (or their lack) have been crucial to the fortunes of such companies as Texas Instruments and Kodak.

PatentWatch - Rich Belgard

Like it or not, patents have become a major force in business. Rivette and Kline illustrate the importance of senior-level management's involvement in the intellectual property strategy of a successful corporation, and present a road map to a solid patent strategy.

What People Are Saying

C. Richard Kramlich
In this highly readable book, Rivette and Kline show how to enhance your company's value by using intellectual property as an offensive weapon.

Rick Thoman
The world's most successful companies are aggressively promoting, protecting, and marketing their own intellectual property. As underscored in Rembrandts in the Attic, the stakes are enormous-billions of dollars-for those companies that successfully mine and maximize the value of their patented ideas.

Stephen P. Fox
A wake-up call for senior executives everywhere.

Bob Howe
Intellectual capital, such as patents, is the fuel that powers innovation. Rembrandts in the Attic is a must-read for any CEO interested in innovation and intellectual capital."

Product Details

• ISBN: 0875848990
  
• ISBN-13: 9780875848990
• Format: Hardcover, 240pp
• Publisher: Harvard Business School Press
• Pub. Date: December 1999
• Sales Rank: 85,442

• Table of Contents
• Read an Excerpt

Table of Contents

Read an Excerpt

Chapter 1: The New Competetive Battlefield

Even the old saw about there being "no patents on Wall Street" has now gone the way of the passbook savings account. On July 23, 1998, the Federal Circuit U.S. Court of Appeals set a major new precedent when it upheld the patentability of Signature Financial Group's "hub-and- spoke" system, which enables multiple mutual funds (the "spokes") to pool their assets into a single portfolio fund (the "hub") for investing, thereby generating both economies of scale in administering the fund as well as the tax advantages of a partnership. With this ruling, the court established for the first time the principle that trading practices and investment strategies could be patented. And it settled once and for all the debate that has raged for 18 years-ever since Merrill Lynch received a patent in 1982 for its cash-management account-over whether there is, indeed, a place for patents on Wall Street.

The decision naturally sent shock waves throughout the financial community. "Patent War on Wall Street!" screamed one headline. Business Week complained, "What's Next-A Patent for the 401(k)?" But like it or not, warned one report, the ruling is sure to force "an immediate re-evaluation of the intellectual property strategy of every major company in the banking, insurance, and financial industries doing business in the United States .

Patent Asset Management: A New Corporate Strategy Issue

Capital formation and asset exploitation, of course, are major strategy issues for CEOs, so it's no surprise that management consulting firms have begun to devote considerable resources to helping Fortune1000 clients develop IP management capabili- ties. When Coopers & Lybrand (since merged with Price Water- house to form PriceWaterhouseCoopers) announced its new IP management practice in late 1997, it noted that globalization, shortened product life cycles, and the high rate of technological change "pressure high tech companies to take a closer look at exploiting and protecting their intellectual property rights. Yet many companies are completely unaware of [their] true value and potential competitive advantage. "

Not any more. The research and consulting firm Delphi Group reports that 75 percent of businesses surveyed identify intellectual asset management as a new corporate strategy issue. 17 And according to PriceWaterhouseCoopers partner Aron Levko, who manages that firm's Intellectual Asset Management Practice, "Companies are taking the first steps to organize the disparate pieces of their intellectual assets" in order to transform these into CC engines of corporate growth."" Even allowing for a certain amount of exaggeration born of self-interest, it is clear that the management of patent assets is becoming a major new strategy challenge for corporate America. In addition to the firms mentioned previously, Arthur Andersen, Arthur D. Little, McKinsey & Co., KPMG Peat Mar-wick, and Deloitte & Touche are also launching IP management practices.

From Academia to the Low: Patents Mean Business

Intellectual property asset exploitation has also become a hot topic in the halls of academia, a realm that generated $611 million in licensing fees from university- owned patents in 1997-an 89 percent jump over 1993. University patents also helped jumpstart 333 new entrepreneurial ventures that year. Debates rage, of course, over the potential conflict of interest between academic freedom and the desire to profit from the research fruits of that freedom. But however these conflicts are ultimately resolved, universities are unlikely to go back to the days when research ideas were regarded solely as items of academic, and not also economic, interest.

Meanwhile, never ones to ignore a potential profit (or, for that matter, a potential loss), insurance companies have also gotten into the act. Dallas, Texas-based Summit Global Partners has joined with underwriters Lloyd's of London to offer coverage against patent infringement lawsuits. "There are thousands of new companies that are creating all sorts of new products, and many are being challenged on the grounds that they have infringed on someone else's patent," explains Summit Global's managing partner for intellectual property risk management, Ronald Reshefsky, who expects such coverage to also help firms attract venture and other investors...