Rembrandts in the Attic: Unlocking the Hidden Value of Patents

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 . . ."