The Musings of Metis

Part 2: Exploitation of IP assets in China

This is a follow-up article to the blog posted two weeks ago which followed the week of the Business of Intellectual Property Asia Forum (BIP Asia) and continues the analysis of China’s progress with intellectual property.

Rome was not built in a day and the same is true of China’s progress with intellectual property. In terms of exploitation of IP assets it is abundantly clear that China is far behind the West. There are signs of development, however, and perhaps it is not too premature to say that China is beginning to wake up to exploit what it already has. The Americans have demonstrated to the Chinese how to exploit IP as China currently, according to America’s Bureau of Economic Analysis, pays a staggering $2 billion a year in licensing and royalties to American firms. This stranglehold is loosening though as Chinese companies, as the Economist observes, are now seeking to apply for patents abroad rather than license in technology with 1,225 Chinese patents granted in the USA in 2008 compared to just 90 in 1999. This is a clear sign of things to come as China becomes aware of the potential to dominate significant technological areas globally.

Until China has the right intermediaries to exploit what they have in terms of IP assets, however, then the country will be left short-changed in the knowledge economy. Companies such as Metis Partners, who are experts in the assessment, exploitation and monetisation of Intellectual Property, are required to tap into a growing asset class. To become a net-exporter of IP the model of Japan is one which is often cited as they acquired IP and technology in the short term in the 1960s and 1970s and went on to develop a strong IP foundation.

The tools to assess and monetise such transactions are, however, missing in China and it is telling that for IP rich companies there is no way of assessing just what their IP position is which inevitably results in further infringement and confusion. So how can China get this experience? The only viable way just now is to collaborate with Western intermediaries and perhaps franchise the knowledge which the West has accrued at such expense. Considering that the Communist Party did not allow patents until 1985 it is astonishing just how far they have come in 26 years and understandable that they lag behind.

Once China has the tools to properly exploit, assess and monetise their IP assets then perhaps we can speak of a date at which they will become the economic superpower. As noted in the previous blog entry, dates such as 2016 and 2019 have been asserted as the possible moments when China will surpass America as the world’s economic superpower. In light of their Intellectual Property situation, however, these dates seem artificial and are based on the tangible world of factories, employees and cash. As we have seen the global economy is shifting towards a knowledge-based economy and if China does not start to understand its IP better then the chance to become the world’s superpower may yet be lost. Only time will tell. As the Chinese might say, “A single day of sub-zero temperature is not enough to create three feet of ice.” In other words, Rome was not built in a day.

Part 1: An Introduction to IP in China

In the week of the Business of Intellectual Property Asia Forum (BIP Asia) 2011 there is surely no better time to explore the development of Intellectual Property in China.

There is a Chinese proverb that, translated literally, means “If you have money you can make the devil push your grindstone”. In other words: money makes the world go round. An investigation conducted by the Economist suggests that 2019 will be the date in history at which China surpasses America economically while a recent report published by the International Monetary Fund suggests the moment could come as early as 2016. If the 2016 date is accurate then there are but five years left of American dominance. But are these dates reflective of the increasing importance of Intellectual Property (IP) to the global economy? With the value of intangible assets in publicly-held companies in the US being valued at an astonishing $14.5 trillion and global licensing income reaching $180 billion it is right to ask whether the slowly awakening China can ever catch up as the world tilts from being dependent on capital resources to IP.

A recent article in the Intellectual Asset Magazine suggested that in respect of intellectual property assets the Chinese are light years behind the rest of the world in being able to exploit what is undoubtedly a rich vein of an ignored asset class. They lack so-called “intermediaries” which denies them access to, as the article points out, “top class strategic, analytic and valuation advice”. Metis Partners are such an “intermediary”: business analysts and specialists in the assessment, exploitation, monetisation and sale of IP assets. IP assets can constitute as much as 80% of the value of a business and undervaluing them, as China has done for so long, is a risky business in the 21st century.

As was quite evident recently in the imitation Apple stores being discovered in the city of Kunming, ironically, by an American blogger China has long been viewed not as an innovator but as a serial imitator. The Chinese consider imitation to be flattery and their conceptions of privacy do not resonate with Western notions of the private sphere and the public sphere – indeed the Chinese do not have a word for privacy. Alongside such farcical imitations are some staggering statistics: in 2010 1.2 million applications were received by the State Intellectual Property Office (SIPO) with 814,825 granted. China is expected to leap ahead of the USA and Japan in terms of patent applications by the end of 2011. These figures, however, fly in the face of economic reality for what is the value of these patents if they are not being properly exploited and lying ignored on balance sheets or copied on the streets with ease? Consider this quote from the Wall Street Journal from May 2011:

“Rampant piracy means Microsoft Corp.'s revenue in China this year will only be about 5% of what it gets in the U.S., even though personal-computer sales in the two countries are almost equal, Chief Executive Steve Ballmer told employees in a meeting here.”

This quote sums up the current state of play in China quite well as they run their horse and cart through the established world order. Microsoft products are available on Chinese streets for $2 and $3 although China will one day become Microsoft’s biggest potential market. IP in China is a great paradox: on the one hand it will soon surpass America and Japan in patent applications but on the other hand they display a ruthless lack of respect for the established IP of the West and inside their own country.

In respect of infringing IP the Chinese clearly have a lot to learn although they have clear precedent in history as the Economist from April of 2009 observed: America infringed patents on a colossal scale in the 18th century as they first started to develop. Perhaps this fertile period in China, where infringement occurs on an industrial scale, is but a foreshadowing of a future where China holds all the playing cards. Let us not forget that the Communist party did not allow patents until 1985.

This blog is presented in two parts – next week will discuss the exploitation and monetisation of IP assets in China and how companies like Metis Partners and other “intermediaries” are really needed.

WHAT IN THE WORLD GOES ON OVER THERE?

I wanted to take this opportunity share the growth of Metis Partners with you. As we expand our business internationally, Europe is a frontier we have already begun to develop but the really big opportunity is Na Na Na Na Na Na America!!!

Therefore I am delighted to tell you we have established a partnership with a new Metis Associate, Paul Kallmes who is based on the West Coast of the USA. You can read more about him on our website but I thought it would be better to hear from him first hand on “What goes on over there?”......- Stephen Robertson

A SERIES OF MUSINGS ON MAKING SENSE OF THE MANAGEMENT OF INTELLECTUAL PROPERTY IN THE USA

INTRODUCTION: The management of intangible assets is a complex task in any environment but the business climate in the US can make it seem well-nigh un-navigable to those not familiar with practices over there. Given the expense and time-frames required to build out intangible assets portfolios, it’s no wonder that there is confusion over the best approach to take. Among the many confounding factors facing foreign companies that may want to use intangible asset portfolios to protect their positions in American markets (and many domestic ones already in it) are a badly backed-up and often inefficient patent office, a highly litigious mindset in American executives, little patience for the long latency periods in IP, and a general lack of true understanding of the strategic development and deployment of intangible assets.

Nevertheless, any company that wants to do business in the US must at least consider the role that IP may play in their markets and be prepared to act accordingly. It is easy to waste significant amounts of time and money and it is the stated intent of these postings to help people understand some of the primary considerations of IP development and deployment in the US. Mixing experience, opinion, speculation, data, and maybe even some humor, we hope to give people a sense of what they might encounter in IP-related issues when doing business in the US. We assume that anyone reading this knows at least something about IP and its management but even if not, hopefully any reader can glean something useful from it.

IP in the US: One hears a good deal of talk about intellectual property and its value as a strategic asset, especially in light of recent high-profile patent battles and acquisitions by the likes of Apple and Google. In general, however, IP is not treated as strategically as most other assets, in part because of the reasons listed above. At the risk of offending some of my American colleagues, I think it is safe to say that most people don’t really understand intangible assets and their management. This can lead to a reduced focus on building IP assets and extracting value from them. Often it is only when confronted with some kind of immediate risk, such as a lawsuit or infringement by a competitor that IP jumps to the forefront of people’s attention but at that point it’s a little late in the game.

It is understandable that other concerns will push unfamiliar activities like IP management out of the way, especially in young companies where there are always far more tasks to do than people to do them, but IP is not one of those things that can’t generally be left for attention later on. Patent landscapes can be altered at any time for reasons – patent expiration, new issuance, M&A activities, USPTO rule changes, legal judgments – and it is not a good idea to be caught out. A failure to protect IP early and properly can leave a company at a disadvantage that may not be possible to overcome. If IP really is a strategic asset, then management needs to treat it as such.

IP as a repository of value: Recent trends in business have opened new avenues for value to be created through IP. For example, the rise of an auction model around patents has people thinking differently about the value that IP can contain. In addition to the established methods such as lawsuits and licensing, IP can be used as collateral and in debt restructuring. The long lifetimes of intangible assets allow for different plans to realize returns and should, in theory at any rate, act as a counterbalance to the shorter-term thinking that dominates most aspects of business. Those companies that invest the time and resources to identify and protect their intangible assets early on may create a sustainable competitive advantage over time. In fact a well-built portfolio can operate as a separate business unit, linked to but decoupled from operations, a tactic that sends a strong message about the IP owner’s belief in the strength of the asset (not to mention taking advantage of favorable tax regimes). The recent high-profile battles over telecom patent portfolios shows that when a company wants to make a quick inroad into a space, acquiring lots of patents is clearly a high priority. While not every company has the kind of assets that an Apple or a Google does, there is always room for this kind of thinking for companies in virtually any technology or market space.

Summary: Whether or not the management of a company believes that there is value in their intangible assets, it is inarguable that they ignore their IP at their peril. And not just at the outset: IP demands continuous attention, much the same as a company tracks, say, its cash flow. The risks, benefits, costs and liabilities associated with proper IP management will be discussed in future posts; for the moment, suffice it to say that IP is the next frontier in value creation and realization, and that any company planning to make a mark in the US needs to consider its own IP needs. Failure to do so is to add additional layers of risk that no company needs.

Upon the Shoulders of Giants

The time comes in every organisation where the leader needs to step down and pass the reins to another. In Apple Inc. this event could not have had greater focus with the world’s business press headlining on the resignation of Steve Jobs as CEO.

What the event has highlighted is the importance of a company to ensure its brand and reputation are not tied up with one individual but have anthropomorphic characteristics with the company appearing as a “living, breathing thing”. The jury may be out on Apple, with the sudden drop in share value followed by a bounce back recovery. Was the recovery as a result of confidence in Tim Cook, Jobs’ successor or was it as a result of share acquisition during the dip? What is noticeable is the increase in shareprice of Apple’s competitors. Is this the time for them to gain valuable ground?

At Metis we insist organisations look at the association between the personal brand of their key people and the company’s own brand, between the individual’s know-how and how this impacts on the company’s reputation. By identifying exactly where the balance exists and identifying what drives real competitive advantage, we can help the organisation plan for continuity during transition and develop knowledge transfer to support the succession of future leaders.

Are your key people single points of contact? Will your brand competitiveness be impacted if they move on? Have you sufficient know-how transfer policies in place to mitigate the risk? What actions have you taken to ensure successful succession? What will the market make of it and what might be the impact on customers or revenues? Interested to know.

Innovation is?

The cover story of the May edition of “CNBC Business” took a critical perspective on innovation and its relevance to business. The article, contributed to by a number of high profile commentators including Chris Barez-Brown, Kjell Nordstrom and Vijay Govindarajan claims innovation is at the top of business agendas right now because everything else has been done: cost cutting, customer relationships, engagement.

But what is innovation? It is suggested few companies have a firm grasp on what innovation really is or means for their enterprise. Leaders often confuse innovation for creativity. “Innovation is not creativity” says Govindarajan, “it is commercialising creativity”.

“Creativity is messy and intense, while most executives prefer order and predictability” contributes John Hagel, co-chairman of Deloitte’s Center for the Edge based in San Jose in the heart of innovative Silicon Valley. Yet often in the tech industry, Chief Innovation Officers are appointed, put in a corner and told to innovate.

These statements support Nordstrom, economist and author of “Funky Business” claims that “innovation is a form of creative destruction” and when big companies acquire smaller, innovative firms, after a few years only a brand is left, “the innovators have either been shackled or they have moved on”.

So how can this be addressed? Nordstrom refers to Novartis as a good example and outsourcing of innovation as the answer. In return for a stake in the company, innovative collaboration is shared: whilst one party does the research the other focuses on its core strengths - the application of the innovation and exploitation of economies of scale in the marketplace.

Here at Metis we value innovation as one of the ten key areas of hidden company value, areas where IP assets are often under-exploited. Innovation, as the article suggests is not a standalone activity: it relies on each of the other areas including brand, relationships, processes and most importantly strategy. Where we see value being created is in collaborative IP development: one company licensing its IP assets to another who in turn can give the former the market traction or way through barriers to entry it cannot breach on its own.

Have you looked outward for innovation? Are there synergies to be developed in your relationships or are you committed to doing on your own?

Is Brand Restoration Insurance a Good Investment?

An interesting article was posted by FT.com last week where it discussed the advantages and disadvantages of brand restoration insurance offered by AON. The full article can be found here.

We will have read recently of a number of companies who may have benefitted from such insurance: BP and Toyota for example and the insurance is all very well for larger companies who can afford the premiums but what about smaller companies? The crux of the article lies in the following paragraph:

“Brand and reputation are the sum of the investment of management time and energy in the invention, manufacture, marketing and distribution of successful products and services. Reputation management may sustain and promote your brand in good times and crisis management may help salvage some of it when they turn bad. But bosses who neglect the building blocks of their company’s success will find in a crisis that they have no reputation to defend, no matter how much insurance or advice they have bought.”

Before companies invest large sums of money in insuring their brand and reputation, they must first have brand and reputation worth protecting. This occurs through a long term commitment and through consistency in approach and if properly managed as the company’s “most valuable asset”, the need for insurance may not be needed.

Is this insurance really needed, or has it been created as a consequence of a cut-throat, win-by- any-means marketplace? Is good housekeeping the better option? Perhaps the “insurance premium” might be better spent building the brand value inside the business with employees, partners and suppliers to secure the equity? Do you agree?

Electrical giant Dixons calls on Metis Partners to market two of its best-known brands

Glasgow-based intellectual property (IP) asset specialist Metis Partners has been appointed by Dixons Retail plc (Dixons) to market and sell the IP assets, of two of the multinational electrical giant’s best-known and longest-established brands, Saisho and Miranda.

The sale is a coup for Metis Partners, and enhances its reputation as the destination of choice for organisations seeking to generate a return on IP assets such as brands which may have benefitted from significant investment in the past but are no longer critical to future strategy. By using Metis Partners, they can generate a significant return on these assets that would be otherwise written off.

Dixons, which spans 28 countries and employs more than 40,000 people, called on Glasgow-based Metis Partners to find buyers for its Saisho own-brand product line, including audio, TV and video products, and Miranda, the internationally recognised camera and photographic equipment brand.

The Saisho brand has created nearly £27 million in sales since it was first introduced by Dixons in 1982 as a technology range which over the past few decades has become a household name. Assets for sale include goodwill in the brand and reputation in addition to 16 trade marks providing international protection.

The Miranda brand, originally created by a Japanese company more than 50 years ago, was acquired by Dixons in 1981 and was used on SLR cameras, compact cameras, lenses and other photographic equipment. It has generated more than £29 million for Dixons across its product range. Assets in the sale include goodwill in the Miranda brand and reputation as well as 20 international trade marks.

Stephen Robertson, CEO of Metis Partners, said: “These are significant brand names which have served Dixons well over the years. They have benefited from enormous advertising and media exposure within the retailer’s campaigns and we expect there to be keen interest given the outstanding levels of consumer recognition attached to them. "We believe Saisho and Miranda will be of interest to companies suffering the brand provenance gap (lack of recognition and heritage) where companies are selling high quality tech products / services but are unable to charge a premium for them. This is often because they are not being sold under a recognisable brand - companies in this situation could buy Miranda or Saisho and “hop” onto the brand recognition and brand recall that already exists in the market for these brands.”

All offers and / or notes of interest should be directed to Nat Baldwin at Metis Partners by 4.00pm on Thursday, 26th May, 2011.

For further information, please contact Nat Baldwin at Metis Partners, Trinity House, 33 Lynedoch Street, Glasgow, G3 6AA. Tel: 0141 353 3011.

‘Beauty is in the eye of the beholder’ – obtaining value from brand sales

We have watched with intrigue at the brand auction that has taken place across the pond carried out by Racebrook Marketing Concepts on behalf of Michael Reich, CEO of Brands USA Holdings (reported here by the New York Times). It is perhaps critical to note that what was actually being sold were royalty free, fully paid, exclusive licenses (that bidders were told can be turned into full ownership when a Statement of Use is filed) rather than trade marks themselves. In other words the seller does not own the given trade mark (as pointed out in the linked New York Times article) but effectively a right in a trademark application.

Whilst we might be tempted to stand up and applaud Mr Reich for this ingenious method of turning a profit (we will assume) from the sale of such rights, we should be clear that there are other more lucrative methods that those who own brands (be it corporates with unused non-core product brands or orphan brands searching for a home after a merger or acquisition) can sell them.

Here at Metis Partners we have had significant success selling brands for our clients in the form of impressive returns. A recent notable success was the sale of the MFI brand (to be precise this was the sale of various MFI related trade marks and domain names out of insolvency) for £250,000. However, it is not just household names that are capable of achieving significant returns as a sale of lesser known brands this year such as Powwow Water (previously a Nestle Water brand) and Kshocolat (a premium chocolate brand) have proved.

Metis Partners believes that when selling a brand, there are two main focuses. Broadly speaking this can be summed up as – “selling the right stuff to the right people”: Selling the right stuff: As much data as possible must be gathered on the brand and the related assets as possible. Whilst the legal aspects are important here, it is essential to focus on the commercial value add and this is achieved by asking the question – what information would I want and what assets would I want to acquire if I were the buyer (baring in mind that not all buyers are the same)? To this end - are there other assets apart from trade marks that can be sold? Domain names, as Mr Reich/ Racebrook realised (domains were purportedly included in every sale) are a good starting point, but there may be less obvious assets that are capable of being sold: product packaging, website content, databases and unregistered rights in logo’s to name a few. These all add value and will ensure that as high a price as possible is sought.

Sell to the right people in the right way: Branding is all about perception and beauty is very much in the eye of the beholder. In order to achieve the best return possible the brand must be marketed to the right people. To do this, Metis Partners both spreads the net wide by using its international network of contacts but also focus on the specific market by carrying out market research and analyses and asking the simple question – who would this brand be valuable to?

Coming back to Mr Reich and Racebrook: Did they sell the right stuff? Arguably not given that the trade marks themselves were not sold, and bar the domain names, it does not seem as though any other collateral was sold. Importantly it does not appear as though the “story of the brand” was narrated either.

Did they sell to the right people in the right way? Again, arguably not. They seemed to rely heavily on, as Neil Wilkof’s article states –“media hype” and it is hard to belive that Racebrook carried out the kind of focussed marketing required to attain best value given that 150 brands were up for sale on a single day.

In summary, selling brands via the auction route is perhaps best suited to selling many brands where either time or resource is limited but it is undoubtedly not the manner through which to gain the best price. To do this as we have shown the focus must be on selling the right stuff to the right people.

Some Say....

There are rumblings around the racetrack. Some say its protection of identity. Others, that it is the right of licence payers. We only knew he was called the Stig!

No longer.

The BBC had taken legal action to block publication by HarperCollins of the book which would unmask the faceless mystery driver and well established merchandising image.

The BBC claimed he had been bound by a confidentiality agreement and that revealing who he is would spoil viewers' enjoyment of the popular Top Gear programme.

However, after more than a day of private legal submissions, lawyers for HarperCollins emerged to say the case had concluded in their favour and the identity of the Stig was revealed.

So this case may raise questions in your business: is your brand and identity secure? Have you fully protected some of your core intangible assets by trade mark copyright or design right? How important is the identity to your company? Can you live without it?

I’m sure that the mystique of the Stig will continue, just look at the merchandising collateral and after all he had African, American and other nationality cousins. Didn’t he?

Coffee to Go?

In an interesting article in a recent Financial Times, two opposite perspectives on licensing were demonstrated.

The article related to Oracle’s patent and copyright infringement claim against Google for the inclusion of elements of the Java software (now owned by Oracle after its purchase of Sun Microsystems earlier this year) within the Google Android smartphone operating system.

It appears Java has become the victim of a sea change in licensing strategy surrounding its use. When owned by Sun, Java was “promoted” as the enabler for internet applications, a tool set where developers could rapidly build solutions for an ever widening, cross platform user base. As a consequence, it is unlikely for you not to have Java somewhere on your systems if you use a PC, mobile phone or netbook. “Freely” licensed use of Java established its position as the tool of preference and core to internet business and in return Sun gained kudos.

Now, under the ownership of Oracle, Java has become embroiled in the battle for smart phone supremacy. With sales of Android-based smartphones overtaking Apple’s iPhone in the last quarter, and the inclusion of Java code in the operating system. The FT article suggests Oracle see a threat to their existing Java licence revenues whereby it would lose the power to “charge a royalty on new handsets”. As a consequence, the Java strategy has moved from collaborative to protective, with multiple copyright and patent infringement claims being raised in San Francisco.

While the outcome is yet unknown, there remains a risk that Google, if forced to pay for the use of Java, could start to charge for Android, challenging Google’s Android business model and new handset providers may look for cheaper alternatives or open up the opportunity for Apple to regain the initiative or another player (Microsoft?) to enter the arena.

As the article states: “at the time it bought Sun, Oracle executives said they would tread carefully in how they exercised their Java rights, since a heavy-handed approach could undermine the software’s standing as a de facto industry standard”, but has the temptation of new revenues as a result of the growth of mobile apps been too great?

The bottom line is this: when you establish a patent portfolio, you must seriously consider how you intend to utilise it. Do you intend to actively pursue each infringement or do you view a collaborative approach to be more attractive, sharing profit through a well thought out licencing strategy?

Is Java now both a headache as well as an opportunity?