Current Issues and Future Trends for Large Corporate Licensing Programs
The 2003 Annual Meeting of LES (USA & Canada) began with a plenary session featuring the leaders of nine large, successful corporate licensing programs. The panelists represented a cross-section of industries in the United States and Europe: Amgen, Boeing, Eli Lilly, Ford, IBM, Motorola, Philips, Procter & Gamble, and Thompson. Each panelist was the senior executive responsible for leading the IP function of at their respective corporation. The program was moderated by the President of LES USA & Canada. Prior to the annual meeting, a list of 15 possible questions for discussion was sent them to each of the panelists. The panelists ranked these question A, B, C, D or E, with A representing the highest level of interest. The ranking were compiled them so that we could focus first on the questions with the highest level of interest. The discussion in San Diego also included some additional questions submitted by the panelists and by the audience.
Below is an edited transcript of the Leaders of Corporate Licensing panel discussion in San Diego.
An Introduction of the Panelists
Moderator: Let us begin by having each of the panelists introduce themselves and say a few words about their licensing operation.
William Coughlin: I am Bill Coughlin. I lead Ford Global Technologies. It is a centralized subsidiary of the Ford Motor Company. The goal is basically to put together the people who protect the IP, enforce it, and hopefully commercialize some of it. It is really a full-featured subsidiary. We have a couple of financing guys in IP and so forth. The idea is to make the connections between the people who connect with the customers and the creators of the IP in one centralized place.
Beatrix de Russe: I’m Beatrix de Russe, working with Thomson , a French company, which used to be in the consumer electronics products through the recognition mainly of RCA. Now we are more focused in the video trend through the acquisition of Technicolor. We established our licensing activities as a strategic business unit, an SBU, which is comprised of 180 people everywhere in the world. We have a very big licensing income in the range of more than $500,000,000 per year. I think we are very successful with our licensing, generally speaking.
Scott Foraker: Good morning. I’m Scott Foraker, Vice President of Licensing at Amgen. Amgen is the world’s largest biotechnology company. My group is responsible for in licensing of new products and technologies. At Amgen we do not believe that we have a monopoly on innovation. Quite the contrary, when you look at the amount of spending in R&D, even though we are arguably the industry leader in spending and R&D, at least on a percentage of our revenue basis, it pales in comparison to the dollars that are spent on R&D worldwide at universities and elsewhere in the private sector. So, our charge is to supplement our internal pipeline of products with products, new products and technologies from the outside, taking advantage of all this innovation that occurs outside the walls of Amgen.
John Motsinger: Good morning. I’m John Motsinger. I am Director of External Industry Relations at Motorola. Motorola is in the electronics business. Two fundamental parts of our business are telecommunications and semiconductor. I am proud to count as partners and customers a good number of companies up here represented. My role at Motorola is managing those competitive spaces that we operate in and utilizing our technology and licensing across the industry across the world.
Gene Partlow: Hi, I am Gene Partlow. I am Vice President of an intellectual property business for the Boeing Company. I am also President of the Boeing Management Company, which is an intellectual property subsidiary. We manage Boeing’s intellectual property, including patents, technology, trademarks, copyrights. In collaboration with our business units, we look for an opportunity to maximize the value of the company’s intellectual property through licensing and sale.
Ruud Peters: Good morning. My name is Ruud Peters, CEO of Phillips Intellectual Property and Standards, the organization that is responsible for managing Philip’s worldwide intellectual property portfolio. We have an organization of roughly 480 people spread over more than 20 offices worldwide. We deal with the whole range of IP, including patents, trademarks, designs, and technology. We are also responsible for standards, setting the standardization. We, for example, set standards for CD, DVD, and various other fields. We use our IP portfolio to create as much value for the company as possible. We have extensive licensing activities, both in the patent fields and in the technology licensing field, mainly focused on consumer products, semiconductor devices and lighting projects.
Gerald Rosenthal: Hi. I am Gerry Rosenthal, Vice President of Intellectual Property and Licensing at IBM. I manage IBM’s IP portfolio, everything from the creation of that intellectual property to the licensing sale or divestiture of that intellectual property. I do that on a worldwide basis. In addition to that, as Ruud said, I also manage standards for the IBM Corporation, are involved in standards activities.
David Thompson: Dave Thompson, Eli Lilly & Company Pharmaceutical Company. I have responsibility for, in addition to licensing, corporate strategy, our M&A group. We have two small venture funds and our alliance management group. If you look at our licensing activities, I would say it’s probably 80 percent in-licensing, and we are somewhat unique, 20 percent out-licensing. With respect to deal flow, we will look at about 1,500 things a year, do about 300 confidentiality agreements, 100 negotiations, and 50 deals
Jeffrey Weedman: Good morning. I am Jeff Weedman. I am Vice President of External Business Development and Global Licensing with the Procter & Gamble Company. Our group is responsible not just for licensing, but for a range of activities. We split our work--about half of it is outbound, where we look to extract value from our patents, our know-how, and our trademarks. But, increasingly, our work is very focused on the inbound as we try and fuel our innovation pipeline. We also have responsibility for our technology donation program. And, something that we do not talk a lot about, but I am happy to tell you today, we also have responsibility for our corporate outsourcing efforts within my operation.
The Greatest Challenges Facing Corporate Licensing Programs
Moderator: There was one question that I asked of this group to which they all gave an A rating. We will start with that question. And it is what are the greatest challenges for your licensing program?
Jeffrey Weedman (P&G): As I think about it, there are challenges that are both internal and external. I think the internal challenges may be unique to P&G. We traveled an awful long way in changing our culture to be a company that, and, by the way Ruud, I borrowed this from your CTO, just so you know, he had a line that said, our innovation took off when we moved from not invented here to proudly found elsewhere, and I found that line elsewhere, just for the record. But that is a real cultural change for P&G. We are a company that is somewhat derisively known at times as the Kremlin on the Ohio. And so having us focus on bringing in other people’s ideas, bringing those in early and letting those compete with our own internal innovation has been a challenge. We have made great progress, but I think there is still a long way to go. I think externally one of the issues that we face is people do not naturally think of P&G as a preferred partner. The fact that we were the Kremlin on the Ohio, when people would bring ideas to us it was the proverbial Hotel California, the ideas check-in and they never check-out, people never hear about it. And, so, getting the word out that P&G is very interested in identifying terrific products, technologies, trademarks, getting to us early so that we can evaluate them is one of the challenges that we continue to face.
David Thompson (Eli Lilly): This will sound strange to you actually, maybe it will not for those of you who are in healthcare, one of the biggest challenges that we have is the escalating price of innovation. If you have been watching what is going on in the marketplace right now, the pharmaceutical industry is an industry that is characterized where the larger players are severely short of innovation. As a result of that, what they are doing is bidding up significantly what they are willing to pay for innovation, particularly things that are close to the marketplace.
So, for us, as a company that does not believe in M&A and fundamentally believes in partnering and innovation, where we are going to participate along the value chain is an interesting exercise. And, also, how do you win without just money, because money is a commodity. And one of the things that we are trying to do is build our alliance management capabilities, which in our particular industry, partnering is a very important element, so, that is one of the things that we are doing. But that is our biggest challenge--a shortage of innovation and lots of money chasing it.
Gerald Rosenthal (IBM): Well, my mission at IBM is to make my company a premiere creator of intellectual property value. The challenge that I face in doing that is making sure that every employee in the company understands that the activities that they are involved in every day potentially involve the creation of intellectual property and therefore educating them on the necessity for protecting that so that we, in IBM, can get value for our intellectual property when we decide to.
Ruud Peters (Philips): The electronic industry is rapidly changing. We see now that the communications, IT and CE industry is coming together and that whole convergence changes the value chain drastically. That means that we now see many more interactions with players that we have not met before, with different practices and different cultures. Also in the IP field we have to manage all these relationships in a way that secures Philips IP in a proper way, such that we preserve the value of that piece of the company. That is really a challenge.
Gene Partlow (Boeing): Boeing has been a creator of technologies for a long time in commercial aircraft, military aircraft and space, but has not always had a culture of leveraging the intellectual property that comes out of that process. So one of the biggest challenges I face is similar to what Gerry mentioned, trying to impress upon everybody within a very large company that intellectual property has a lot of value only if we protect it, only if we look for opportunities to leverage it as a product, similar to the other products that we sell to the public. So that’s my internal challenge.
I have to say the external challenge is then taking this vast array of technologies that come out of a large aerospace company and finding outlets to many of your companies where you can leverage some of that technology that we have come up with. It is a very inefficient marketplace, trying to take creative ideas and find solutions in other industries.
John Motsinger (Motorola): Again, I would like to underscore the comments just made, which is that in the field in which you operate on a daily basis, you do have a fairly effective marketplace for what I will call in-band licensing, others may call it core, non-core, various tiers of licensing. For in-band activities for us, it is a rather efficient marketplace where the efficiencies sort of break down. Where we see complexity today is in those fringe areas in out-of-band licensing, whether it’s out-licensing or in-licensing, and how to get the marketplace more effective and more efficient in either a distribution channel for those technologies or a channel for the intake of those technologies. I know another, a number of panelists have had that issue. The other issue that we have, I alluded to it earlier, is we really operate in a highly co-dependent marketplace. We participate in the space and defense industries. We participate in the automotive space, in consumer electronics and I count a number of co-panelists here as both customers, partners and competitors. In managing that complexity, particularly internal to Motorola and dovetailing all those strategies, it is very complex and presents enormous difficulties for developing strategy and executing strategy. Scott Foraker (Amgen): I think that our challenges have changed over time. I think that in the ‘90’s, probably our biggest challenge was one that was internal, and that was the not invented here syndrome was alive and well at Amgen. I believe that that has been broken down to an extent where it was my greatest challenge when I took my current job in 1999 and has now become one of the smaller challenges that I have to deal with. It is terrific that our culture has embraced new products and technologies. I am really pleased about that. So now the new challenge for us, I think, has been as we have become more and more successful we have quite a number of new product and technology opportunities. David mentioned about 1,500 hitting his inbox. We have had about the same each of the last two years, and this year it is exploding to the point where I expect that number is going to be closer to 2,200, 2,300, 2,400 opportunities by the end of this year. And so the challenge for us is to sift through, in some meaningful way, all of those opportunities to separate the wheat from the chaff because there is plenty of chaff out there. We are confronting that challenge in a number of ways, including sharing best practices among our prospectors and how they evaluate products and technology, so we make sure that we have shared learning across our groups that are responsible for evaluating these new product and technologies. And we are also employing other means to make sure that we tackle this challenge head on, including state-of-the-art databases and other electronic forms that we use in our evaluation process.
Beatrix de Russe (Thomson): Our major challenge is to continue to grow our business; I mean to continue to grow our licensing income in the more and more difficult environment where you have more and more licensors on the market, trying to license the patents to our competitors. And you also have companies which are moving from one place to the other. Our licensing policy has always been to assist manufacturers of products, and now you see the manufacturers of products evolving from countries like Europe and the US to Southeast Asia, and many to China, where it is extremely difficult to do licensing. We are also facing more and more licensing in exposure, whether in the US, because of small patent owners we try to maximize their income, and also everywhere else in the world where we sell our products. Probably for the future, the major challenge we are facing is the emergence of standards which are attempts to get royalty-free licenses or the establishment of pools which in any case the royalties are minimal.
William Coughlin (Ford): Well, if you bought a car recently, you ought to know that there is a price war going on in the auto industry. Quite frankly, pedaling technology is somewhat inconsistent with, at least at times, introducing new technology. So, for example, we have roll stability control, which you can find on a Volvo XC90, and it is going into the Lincoln line next. If we try to get our colleagues and other companies to use that technology, well, it adds to cost. So, there’s a reticence out there for just about everybody. I have got to find a way to offer $3,000.00 cash back, I think, for every license. [LAUGHTER].
But, internally, career development is I think a challenge for us, particularly in a cost-cutting environment. The department is going for a haircut every once in a while, so making sure that everyone feels valued and has got a good career path is a challenge.
Important Factors for a Successful Licensing Progam
Moderator: All our panelists run very successful licensing programs. What are the important factors for a successful licensing program?
William Coughlin (Ford): From a macro standpoint, I think the culture of the industry, the auto industry I think is really good at in-taking technology from suppliers. But, beyond that it gets a little tough. For us, part of the challenge of being able to be successful, we want people to think about Ford first in that regard. I think on a micro level, having a reinvestment mechanism in your company so that the business units are aligned so they can see value, they can get value back, when you come to them and say, hey, can we license this out, I think is good.
Additionally, we find persistence pays off. It takes maybe 18 months to do a license deal and then even longer to get the money coming in. So in dealing with big companies, persistence and creativity to do a deal is really important.
Beatrix de Russe (Thomson): I think the culture of the company is extremely important. Everybody in the company is sensitive to the importance of IP, which has been centralized, something like ten years or more ago. I think the centralized management of intellectual property is also extremely important. You need also to have, of course, patents of extremely good quality, that you can license them, with a good team of negotiators. What, unfortunately, the top management does not realize always is that you need to leverage long-term versus short-term. I think value creation is extremely important and is not only limited to cash income.
Scott Foraker (Amgen): I think the most important factors are, one, probably creating a culture that embraces new products and technologies from the outside. Another thing that I think is critical is establishing relationship with the folks that potentially you are doing deals with, assessing the cultural compatibility of the two companies and their ability to work together, coming to a common understanding of the value and the sharing of the value, what is the size of the pie and how is that pie to be split fairly between the two companies. And I think, finally, speed. I think in our industry, in the healthcare industry, the average licensing transaction is about nine months from beginning to end. We are working hard to take that number down substantially as far as our contribution to that industry average. We have done a couple of large transactions this year, one of which we did in 13 days from beginning to end, and the other of which we did in less than three months from our first meeting with the company. So, we are seeing a lot of value being placed on speed and the people that we are working with, and our ability to quickly assess and conduct due diligence and negotiations and execute a transaction. John Motsinger (Motorola): I would like to talk about a couple of different aspects so that we are not repeating the same elements here. One of the things that we focus on is how to convert the energy and the toil that takes place in R&D labs to product and market share and then convert that market share into mind share and eventually into brand equity. Those are difficult things to manage, but, in the end, having the goods to go to market, having the brand equity with which to go to market, is all important. One of the things that I assume this audience is hoping to hear are financials. Financials are something we are all living with increasingly these days, with the change in accounting rules. Ordinarily Motorola would not talk about numbers. We like to keep that sort of a well-kept secret. But, with the financial accounting rules today we are operating in a different environment. So let me scale it for you a little bit. It is a $27B company. We put a significant amount into R&D; about 15 percent of it goes into R&D. Of that 15 percent, about 10 percent of that is channeled into IP reinvestment. The revenues that we realize directly from licensing are about 2 to 3 percent of sales. That is very significant depending on what profit margin your businesses are operating at; that may be a very significant fraction of operating earnings. As a result, this has received a lot of focus. A number of us have spent significant time with finance people, which has not been the case in the past. And, increasingly, we are spending a fair amount of time with finance folks for that reason.
Moderator: Gene, I know that you headed the licensing operation at Lucent before you went to Boeing. Based on your dual track career so far, what have you found to be the most important factors?
Gene Partlow (Boeing): It really boils down to two things for me. One is, if you are going to have an out-licensing program, there is no substitute for leading the industry, leading technology. Certainly we had that at Bell Labs; we have that at Boeing. But it is not only having great technology, but a culture that will protect it and look for opportunities to use it. This July I happened to find my corporate place in watching the Tour de France. Lance Armstrong was fun to watch as he was out in front of the pack. But as I watched some of the close-up photos in that race, you notice his team played a very important part. I kind of saw my role as being on that U.S. Postal Service team, protecting Lance Armstrong from all those other important competitors, making sure Lance wins the race. So we are a centralized organization that, yes, is a profit center, but is working very collaboratively with the main businesses of Boeing. That internal collaboration is just crucial for having a successful licensing operation.
Ruud Peters (Philips): I think that there are a number of essential elements for being successful in the licensing business. The first is that you have good IP, good technology to sell. Because you are selling a product and you can only find a good marketplace for good product, you can sell it and get a good profit. You can only get that if you are within a company that invests and has a culture of driving innovation.
Secondly, I believe that it is extremely important that all the IP, all the technology, is owned by the corporation. Only in that way you can create a maximum value out of it because if you have it, the ownership in the businesses, then it only leads to optimization of the profits of one business and maybe to the disadvantage of another business.
Thirdly, I think that if you set up a licensing activity, that it should have the full support of your Board because without that support it will never work out in a proper way.
Fourthly, you should have good people that understand the product, that know the market, and can do a good job for you. Gerald Rosenthal (IBM): I think I am going to be very redundant to some of my predecessors here, but, clearly, it helps to have the material that you want to license. And to do that you have to be an innovation leader in your industry because that is where you get the material from that we as a business try to license out.
The way you get it, as other people have mentioned, is it really starts with what is the culture of your business? Does the business understand from the CEO on down the value of intellectual property and the importance of intellectual property to the business, and are they transmitting that message to every employee in the company? Does the Board discuss intellectual property at its proper time? Does the operating committee of the business discuss intellectual property on a regular basis? And if your company does that, then they do understand the importance of the intellectual property.
So the next thing is then is to capture that value and understand what you have and to put the processes in place so that you know what you have got and what its value is and who are the likely people that you want to license it to. So, I really do think it boils down to culture. And the second thing, as Ruud mentioned at Philips, we at IBM have all of our intellectual property owned by the corporation and I manage it on behalf of the corporation. That is how we are able to optimize the value when we license. When the business units themselves have the ability to go out and do what they want, you are really sub-optimizing the value of the intellectual property.
David Thompson (Eli Lilly): Real simple, senior management support but let me categorize what I mean by that. The negotiators and the groups that are responsible for either selling or buying have the support of senior management so that when you are negotiating with us we do not have to go back and check and see if it is okay. Now, because we have some very senior people working in our area, we have, because of our previous success, a tremendous amount of latitude to do that. And when we have that latitude, we can move very quickly and, as other folks have said, bring things to conclusion, and hopefully that is a competitive advantage.
The other thing-- I think everybody has it on this dais here--is just very senior people. The folks that we have, interestingly enough, none of them are lawyers by training. They are all basically operational people. In our group, the legal function supports it and it is dedicated to that. So, strong operational understanding of the business, because we are usually interfacing with entrepreneurs whose life and death is running their business. Understanding what their issues are makes it very, very critical to being successful. Jeffrey Weedman (P&G): In real estate they say its location, location, location, and I think I agree with everyone here that on the outbound it is inventory, inventory, and inventory. You have got to have it to take it out. We spend a lot of our time looking to bring things in also. One of the things that we think is essential for success is to have a very deep understanding of what the unmet consumer needs, the unmet technology needs, and the unmet know-how capabilities that we have internally to drive our innovation. So that when we see things, we know that they are on the list to bring things in.
As we look at it, we have become more successful as we move from transactional, when it is time to do a deal, up to the strategic, where we have a very good understanding of what is needed, where can we take things, what adjacencies do we want to get into. And that move from transactional to strategic has really powered our growth.
How Success Is Defined
Moderator: How is success defined for your program?
Jeffrey Weedman (P&G): Well, I think that there are a couple of ways we define success. We clearly look to see that our internal clients, the business units, the corporate functions, are having their needs met. We have several ways of gauging that.
First of all, I visit with each of them each year and ask them whether they want to continue to sign up to have support from my group, and they get to pay the budget. That is a very good torture test. Do they like what they are getting? Are they willing to keep us gainfully employed? Like the old song, “your love, it gives me a thrill, but honey, show me the money.” And that is a piece that is very important to us. But we also look at defining value very, very broadly. It is not just the cash that comes in this year. We look for value in all sorts of ways. We look for things, whether it is litigation minimization, whether it is capital avoidance, whether it is the ability to bring in technology cheaper, more efficiently than we can do it ourselves, all of those things provide value. We have a pretty robust cross-checking system so that the business units are agreeing with our numbers and it is not just funny money. But when all is said and done, if you do not deliver the value, we do not have a reason to exist. Our organization has embraced it. We report it that way. I even put my people who are supporting different business units on the bonus structure of the business unit that they are supporting, not on my bonus structure. David Thompson (Eli Lilly): Ours is pretty traditional. For those of you in the healthcare, our group covers everything from discovery all the way up through launch. Not all pharmaceutical companies are set up that way. We cover everything. Along the value chain, we separate out into technology early and then anything that is in manufacturing. Obviously if it is in manufacturing, we have specific areas that we are going after strategically, both in terms of therapeutics and in terms of valuations. What we also do is measure how quickly we turn things. So, non-financials, ten-day turnaround, and, by the way, if it is not working out there, you come tell me, but if it is a really long line, I am going to disappear. But, by ten-day turnaround I mean anybody that approaches us will hear back from us in ten days. Now, I am not going to kid you and say that everything is done in ten days, but you at least know what is going on. So we will call you back and say, here is what it is, here is what we are trying to do on the inside of it. The other thing we do is we just got through an exercise with the Board next month where we examine every single deal done in the industry in the last four years and said, how many of them were we aware of, how many of them did we have a chance to participate in? If we chose not to participate, why didn’t we? And, of those we that chose not to, were there any mistakes? There were a few. So, what it is all about is really, really measuring what you do and there are a lot of other things we do, but, let me stop there. Gerald Rosenthal (IBM): Ours are pretty straightforward and simple. I get a financial measurement every year. I am responsible for bringing in a certain amount of income to the corporation, bottom line income every year. And the second measurement, I am responsible for making sure that we are getting the intellectual property, that we are filing, that we are capturing our inventions and that the business understands the need to protect those inventions and innovations once we get them. And that protection is everything from making sure that we have captured everything to making sure that nobody inadvertently gives it away or licenses it out without realizing what they are doing. That is a real challenge in running it when you have a business the size of ours, to make sure that everybody is on the same page and understands the necessity of doing that. The measurement of success for me is at the end of the year when I can turn to the business and say, we did not inadvertently give away, or license out mistakenly, or get proper value for our intellectual property. Ruud Peters (Philips): Our organization’s performance is measured on the basis of a number of financial and non-financial parameters. We are organized as a business group with its own profit and loss responsibility. I make yearly commitments to the Board of Management with respect to the money that I will bring in through licensing. We report on a monthly basis to the Board and have quarterly meetings. We also measure all of the value generated through the portfolio through merger acquisitions, transactions, and also through license-in transactions that we do and where we hope to create value for the businesses by getting these technologies in at favorable terms and conditions.
We are also responsible for capturing the IP within the company, seeing that we get better filing done and seeing that we are getting them from the right sort, focused on the right activities.
Gene Partlow (Boeing): We operate as a subsidiary and so I have an internal Board of Directors. On that Board of Directors is the Chief Financial Officer, the Chief Technical Officer and the General Counsel. So, how am I measured? Well, financials, long-term economic profit is my target, both current year and building an annuity going forward, keeping the Chief Technical Officer happy by building the intellectual property, the patent portfolio, the disclosures that we get from inventors have tripled over the last three years and so we’re growing that portfolio. For the General Counsel, we try to stay out of trouble. [LAUGHTER].
John Motsinger (Motorola): I already spoke to financial measures and certainly we are preoccupied with a number of those, but there is another way to measure--licensing is but one distribution channel to market. It is one of a number of alternatives that can coexist as a channel to market. One of the ways to define success there is in terms of market occupancy. Whether we are talking about a large market share in productization, or whether we are talking about a large market share or mind share in terms of licensing activity. So how you grow that market share, how you occupy that market. And we measure things like the size of the occupancy in that market space.
Scott Foraker (Amgen): We expect about 30 to 50 percent of our business to come from in-licensing of new products. Because of the long lead times in the life sciences industry, it is hard to measure by revenue in the short-term. So what we do is we look at the quantity and quality of the deals that we do and try to measure those, and we do have metrics around those by which we measure ourselves each year. The quantity is pretty easy. You just have to decide on what the appropriate number is. The quality is a lot more difficult and more subjective in measuring, and there is no perfect way to do that. We look at several measures. The primary one that we use is we try to measure the value, the impact to the business, both long-term and near-term. We also do what David said that Lilly does, which is to examine transactions each year with our Board of Directors at the end of the year in our main therapeutic areas of focus to determine whether we had a seat at the table with respect to those deals. What did we think of those deals, why did we pass on those deals, to make sure that we are holding our feet to the fire at the Board of Directors level to make sure that we are thorough and competent in our jobs. Beatrix de Russe (Thomson): Sometimes measurement of success is very easy; it is the income which you bring to the company. So, like Philips and IBM, we are measured on our financial reserves. We disclose these quarterly through the market and we also have a report. But, internally, it is more of a daily report than a quarterly report. So, we have very strong pressure to bring the income which has been forecasted, not by us but by department heads.
We are also measured on the number of patents, which we file per year. They say that last year you filed so many patents, so why did you file only this number of patents? You should increase it. So, increase by 10 percent, 20 percent, depending on the year. So I am fighting against that trend because for me the quality of patent is definitely much more involved than the quantity of patents. But this is, of course, easy measurements, income and number of patents.
William Coughlin (Ford): Well, after listening to everybody yesterday and this morning, I have a new standard of success, and, quite frankly, that is to stay off the quarterly forecast that a number of my colleagues are on. [LAUGHTER] I like the freedom we have and it is good. We are implementing a balanced scorecard in our group this year. Aside from the financials, if you dig a little deeper, it is what are we doing to reduce the cost base for the company and what are we doing to help sell the cars?
IP Valuation Techniques
Moderator: What IP valuation techniques do you use most often?
William Coughlin (Ford): Well, as you know, there are a whole host of different methodologies out there. We are flexible in terms of what it takes to make the deal. So, that is not my particular expertise, but, quite frankly, if it is a cost sharing, if we are reducing some of these costs then you are looking at negotiating what the cost share is. Beatrix de Russe (Thomson): We have been in this licensing business for so long that we have a strong history. We know the level of royalty which a product can bear, so we adapt ourselves to this level of royalty and we know that we have to share with other patent owners so that is not too difficult to establish.
Scott Foraker (Amgen): We use the traditional discounted cash flow that everybody else uses. But, in addition to that, we also employ option analysis and use that quite frequently. We will look at other valuation methodologies as well, take into account cost, time to market, etc. So, I would say, for the most part what we do is a combination of discounted cash flow and option analysis.
John Motsinger (Motorola): I would have answered this differently 10 or 15 years ago than I answer it today. Ten or 15 years ago we were dealing in marketplaces that were highly proprietary, not driven by standards, not driven by regulation, and to borrow a line from a credit card company, the valuation there is priceless. That has since changed significantly. We operate in, not an officially regulated environment, but through standards, through an interconnected value chain. There is a significant contribution from others outside the industry that put pressure on the kinds of returns that you can get. Modeling those available margins and where those margins are distributed is complex and significant. We are all operating, whether officially or unofficially, in sort of a controlled and regulated market. All the pricing really is done relative to that. We use many of the same option models, discounted cash flow and so forth, but then you have to temper it by reality. You are operating in a market space that is increasingly crowded and in businesses that have margin pressures on them. And that is real. That affects us every day in every deal. Gene Partlow (Boeing): The intellectual property marketplace is a lot like a fish market, the way I look at it, the value is in the eye of the beholder, it changes over time. So, we use all of these valuation techniques and I find that no one is good enough. There are rules of thumbs, there are benchmarks in the marketplace, and there are discounted cash flow techniques. But, ultimately, it comes down to what kind of value is created in the exchange. That just takes hard, face-to-face work.
Ruud Peters (Philips): The valuation technique that we use basically comes down to discounted cash flow methods, where we take into account various factors like the maturity of the technology, whether it is emerging technology or mature technology. We also take into account the lifecycle of the technology as we can foresee it. But I agree with Gene, in the end it all comes down to testing the marketplace and see what is the value of your product. Gerald Rosenthal (IBM): Well, similarly, despite all the theory and books being written on the subject, it really does come down to what the market will bear. The market will bear different things at different times. In the go-go days of the mid-’90’s, you got very high value because there was a lot of money to be spent and people taking a lot of risk. When the economy turned soft and the money was not available and the venture capitalists were not willing to spend, there was not as much money out there to do it, so the value decreased. I do not think you will see that in any of the theoretical models. I think what you really have to do is understand what the marketplace is out there, what the money that is available, what you are willing to do as the economy changes to get value for it and then be sure you have the best negotiators negotiating the best deal for you.
David Thompson (Eli Lilly): My experience in big pharma is the same. I will add one thing, just because it is a little bit unique on the healthcare side. We are doing a lot of out-partnering, which you did not used to see large pharmaceutical companies do. So we have done 50 deals over the last few years. We tend to say, cash is king, but as we have moved farther and farther and farther back in the development cycle, where you are back either to small companies or venture capitalists, we are now exploring the concept of equity as a way because for us the whole key is to keep the assets moving. If the asset has value that we cannot do something with it either because it is too small, out of scope, or whatever, keep it moving. Some of the earlier stuff, just because of the nature of our industry, you cannot always have completely cash. So that is one of the things that we are exploring. Jeffrey Weedman (P&G): I think the use of valuation techniques is often over-valued. If you think about it, they are really nothing more than confidence builders, so when you go out to ask for something you are not embarrassed to ask for something that you ordinarily would go, wow! [LAUGHTER]. The thing that we have moved to is a lot less reliance on valuation techniques and a lot more market based, get out there and talk to people. It is a very humbling experience how often we are wrong internally in terms of how we think value is going to come from a technology. There are things that I would, if I could, put my own money in because it is really good stuff, and I cannot find anybody externally that agrees with me. There are also a lot of times when there are things that do not hit our radar screen and we get them out there and a feeding frenzy erupts.
If I were smart enough to be able to judge those things without going external, life would be a whole lot more simple. So we spend a lot of our times getting people out of their offices, getting out, talking to people in the marketplace, let the market tell you how it is valued rather than spending a lot of time doing a lot of financial analysis that may have absolutely no bearing on the marketplace.
Guidelines for Licensing or Not Licensing IP
Moderator: Do you have guidelines on what IP may be licensed and what IP must be kept proprietary? If so, what can you tell the audience about those guidelines?
Jeffrey Weedman (P&G): Well, our organization really took off when we made two fundamental changes internally. One was, we made everything available for external commercialization. Before that rule changed, we spent so much time negotiating internally--can we go talk to someone about something--and it was really intramural warfare. It was silly. Everything is available, but that does not mean we have to do a deal on everything. We take a look at what we think are the things that are going to provide the most strategic advantage, and we have been able to develop internally a clearance process that is pretty straightforward, very objective, and allows us to get to a decision.
Procter people are very polite, and if you have exceptions, I would prefer not to know about it. And, so, they never say no, but they have a million ways to pocket veto. So when everything is available, it changes from, should it be available to, when is the best economic occasion to make it available? The second change we made is since the revenue goes back to the business unit, they have an economic incentive to participate in it. So everything is there. We do deals with people formerly known as competitors. For the consumer goods industry that is a real change. It is not a big change for a lot of the businesses these days, but it’s all available.
David Thompson (Eli Lilly): I think it probably varies by industry. In the pharmaceutical industry has tended, at least historically, people did not out-partner; they did not out-license. They would rather let it sit than create value. We have a dedicated group that does nothing but out-partnering. We have changed the culture of the company such that what is actually happening now is that we have out-partnered a fair number of assets that, historically, they would have stopped.
Now the scientists see that they are actually being delivered into companies who passionately care about it. And that is pretty cool. So, all of a sudden, you have to understand their business, because these scientists can work on things for seven or eight years, and then it goes nowhere if the company decides not to do it. It has really transformed and made the out-partnering piece of this business quite interesting and quite supportive.
Gerald Rosenthal (IBM): We really break it into two pieces. As far as the patent portfolio goes, we have an open license and practice, and we always have, and we do license our patents on a fair and reasonable basis to all comers. On the technology or know-how side, it is a bit different. It is a timing issue. It is when is the right time to make the technology available to others, since very often those others are our competitors?
The issue here is, and this is really what has changed since we have started to license our technology, it really forces our development people and engineers to stay one step ahead. They know that at some point we are going to license the current technology, so they may need to have the next generation of technology ready to go so that we can always license the end line as one technology because we have got the next level of technology ready to come into our products. And so it is really bifurcated between patents and technology.
Ruud Peters (Philips): We have similar guidelines, as explained by Gerry. In the patent field we are very liberal; we have an open licensing policy, because we operate with many of our businesses in very open markets where the technology becomes public sooner or later anyhow. So, we are prepared to make that available to third parties on fair and reasonable terms. There are a few exceptions. For some products we feel that we have a new position in the marketplace, and there we would like to keep that unique position. There we are very restrictive in licensing our patents to third parties. With respect to technology, we are basically open for licensing, but, of course, depending on the circumstances, depending on the maturity of the technology, that we do it in an earlier or later phase of the development of that technology.
Gene Partlow (Boeing): One of our biggest and most influential customers is the U.S. Government. We do a lot of classified work for the U.S. Military. You cannot have that. You cannot even know what it is. Outside of that, our patents certainly are available for licensing, technology is available for licensing, and it all depends on the business case. If it makes sense to license the technology, the company makes more bottom line profit that way, we .will license it. We will license it to direct competitors. On the other hand, if it is market sensitive, it is a key differentiator for us in the marketplace, it may be better for us to keep it inside, keep it inside at least for a time, and we will do that. The economics drive everything in that regard. Sixty to seventy percent of the value of a commercial airplane, for instance, is delivered by our supplier base. We put millions of things together to make a commercial airplane. We are constantly working on technologies jointly with our suppliers. We license that technology pretty freely. It is going on all the time.
John Motsinger (Motorola): In our case, it is highly market dependent. There are market segments that are highly co-dependent and their licensing becomes more the rule than the exception. However, as I alluded to earlier, it is all about market occupancy. If you occupy a very significant part of the market, if you have a very large market share, economists will tell you that you do not want to license, all you do is undercut your own market presence. We rarely have that luxury these days, but you have to start with that fundamental, where are you positioned in the market? What kind of market occupancy do you have? As I said earlier, licensing is merely one channel to market and you have got to evaluate the efficacy of any of the channels to market and see where it fits in. Over time, your value proposition may migrate from the role that productization plays in your market occupancy to then licensing and what role that plays in your market occupancy.
Scott Foraker (Amgen): We do not have any strict guidelines in terms of what products or technologies we would out-license. We do have a small, dedicated function within my group to do that. There are two reasons why we do not have any strict guidelines. One is that we are primarily a buyer of technology and products, and not a seller. That has to do primarily with our evolution as a company, as a fast growing company with the money to invest in new products and technologies. And, second, it has to do with the fact that in the healthcare industry, it is tough when you talk about out-licensing because the industry is littered with examples, as science evolves, and our understanding of science evolves, as to different applications for new products and technologies. Most of you probably know that Viagra was being developed for something completely different than what it ended up being developed for. It was not working in the primary indication, but something else was happening. [LAUGHTER] Our industry is littered with examples of that, and to some extent people are loathe to let go of something until they have a complete understanding of the possible utility of that product. That being said, we have, in the last couple of years, done a couple of creative deals where we did not completely let go of the thing. We will give it to a partner to develop for a niche indication, or that has some type of development expertise that we do not have and we do not care to build at the time. We will let them have the product and essentially we will get an option back. We will pay them fair value for what they have done and they will continue to have financial participation in the product going forward. But, we will as well, and we also are able to get commercial control of that product if we decide to exercise the options. So, we have come up with creative ways of solving the problem when we are comfortable with out-licensing.
Beatrix de Russe (Thomson): At Thomson we differentiate between three types of intellectual properties. For patents, it is a no-brainer. We have to maximize our licensing, and therefore we license our entire portfolio--35,000 patents. But, when it comes to trademarks and technology, it is a different story. As to trademarks, we sometimes identify a company, which is willing to use one of our trademarks. We go to the brand manager and we ask him, can we license this trademark? “Oh, of course not, we are not using it but we want use it definitely for the company.” So, it’s very difficult to license our trademarks. As to technology, we sometimes license technology to third parties, but it is a very, very limited activity for us. So, basically, we mainly license only our patent portfolio. William Coughlin (Ford): We actually advertise a relatively broad range of technologies to show that Ford is really truly open to this. Quite frankly, the only restriction that we have that’s practical is after market parts. We only sell parts through dealers, so, that, we need to work through.
Moderator: Thank you. We have received a number of questions from the audience. A panel of experts has reviewed the questions and ranked them in order of likely interest to the greatest number of attendees. The first question is how can a licensor best help a potential licensee “separate the wheat from the chaff?”
Scott Foraker (Amgen): Well, I guess since I used that term, I’ll try to answer. That’s a great question. I think there are some things that a potential licensor can do. The first is to be as transparent as possible with respect to the product or technology that you are pitching, and that is, the good and the bad Do not play hide the ball and hide the bad. We will find it eventually. It will take us longer, and it will be a more inefficient process as the result. It is helpful to us if we just know the good and the bad, the warts up front. Nothing is perfect; everything is going to have warts at varying degrees. So that transparency, I think, is absolutely critical. It also, by the way, helps establish your credibility as a potential licensor as well. We become wary of the potential licensors where it takes us time to find the warts. And, so, transparency, I think, is probably the number one thing. The second thing that I would say is provide as much information as you possibly can. Make it as complete as possible so that we are able to analyze it quickly. And, after all, a quick answer, even if its no, is probably a more satisfactory result for a potential licensor and the buyer of the product or technology as well.
John Motsinger (Motorola): Perhaps if I could amplify on that a little bit. When someone comes to market their technology as a licensor, it is natural to think it is not in your best interest to place it within the spectrum of alternatives that are available. Yet, every technology has a particular attribute which positions it in the right place in the market, whether it is cost, whether it is quality, whether it is some other parameter. And to position it across the spectrum of alternatives gives a much better positioning for it and a much better likelihood that it will be examined for its niche in the marketplace.
And, again, this is sort of counterintuitive, but it also properly places it in the spectrum of things that are available and where it fits in from a value point of view for yourself. It helps place it among competing alternatives, and really causes you to question how am I pricing this, where is its opportunity, what is its lifecycle, where does it exist? Is it early on where really this opportunity is in incubation or an excubation opportunity? Or, is this an end of life situation? Is this a situation where you are driving for low cost? And I think placing it along the continuum of where it fits in among competing alternatives puts you in a better position to market and sell it.
Moderator: Let me ask the next question from the audience. Are business method patents a threat or an opportunity for your company? Gerald Rosenthal (IBM): Business method patents are a real issue today. The courts have decided that they are legal, and as long as they are legal, I guess we are all going to be filing and issuing them. The problem is that too many of the business method patents are nothing more than implementations of things that existed for many, many years, and put on a computer or whatever. And those should not be patentable. If the business method patent does not define a true innovation, then it is our belief they should not be patented. So I think that there is a real danger out there today. And I think a lot of this litigation that we are seeing is because of the fact that when the patent office started to issue business method patents, they really did not have a database of prior art to look at and determine whether or not these patents should have been issued.
Moderator: Unfortunately, we have run out of time today. I want to thank all of our panelists for participating in our panel discussion today. It has been enlightening to learn what is on the minds of the leaders of a cross-section of very successful corporate licensing programs.
(1) Mr. Sobieraj is an attorney and a shareholder in the law firm of Brinks Gilson & Lione, in Chicago, IL. He is the immediate past president of the Licensing Executives Society (USA & Canada), Inc.
Reprinted with permission from les Nouvelles, Journal of Licensing Executives Society, Volume XXXVIV, No. 2 in June 2004.