COMMUNICATING THE VALUE UE YUURINTELLECTUAL PROPERTY TO WALL STREET

A properly-constructed IP story can benefit a company and its stockholders.

Chris Rose, John Cronin and Rachael Schwartz

OVERVIEW: Companies and their shareholders standto benefit from consistently developing and promotingtheir intellectual property portfolios with a structured IPstory. An IP story shows how a company developed IPthat supports important products and technologies, withclear linkages from the market opportunities to patents.Companies that follow this approach stand to 1) supporthigher stock prices, given the incredibly high valueplaced on intangibles in today's market. 2) maximizereturn on investment in their IP by supporting strategictechnologies that are linked to market needs, and 3) leadthe corporate world with best-in-class IP management.

KEY CONCEPTS: intangible assets, intellectualproperty, intellectual asset management, corporatevaluation.

Many companies may be undervalued on Wall Streetbecause research analysts do not factor the true value ofintellectual assets into their assessment of these firms.Over the last three decades., intangible assets haveballooned to approximately 85 percent ofthe S&P 500'svalue, up from 38 percent in 1982 (1.2). Because intel-lectual assets represent such a significant portion of a

company's worth and. typically, intellectual property(IP) comprises the largest part of those intellectual assets,it is important that a company communicate the impor-tance and value of IP to analysts, shareholders andpotential investors. However, most companies haveneither internal processes for identifying the mostvaluable patents in their portfolio nor an expertise incommunicating the value of their IP to Wall Street.

How are stocks valued? For the most part, a company'sstock price is determined by how investors and analystsbelieve the company will perform in the future. Valueinvesting, one common way to select stocks, involves thereview of financial ratios of comparable firms to findcompanies whose ratios hint at future success. Often,these ratios do not account for the strengths or weak-nesses of IP. A company that uses IP in a strategic waywill increase its likelihood of future success, and thusshould use its IP strengths to positively impact stockprices.

It is important to recognize that IP can be directly linkedto the future success and revenues of a company. Whenutilized effectively, IP can provide:

Chris Rose is a consulting manager ofipCapital Group.Williston. Vermont. Since joining the practice in 2001. hehas assisted clients who wish to develop intellectualasset management practices that improve their return onIP investments. He has particular expertise in the devel-opment of IP strategies that are aligned with corporategoals- He holds a B.A. from the University of Vermontand an M.B.A. from San Francisco State University.crose@ipcg.com

John Cronin is managing director and chairman ofipCapital Group. Capitalizing on his long study ofcreative and inventive thinking processes, businessstrategy development, and transaction negotiations, hehas created the ipCapital System® methodology, whichextracts and documents invention, identifies opportunityand risk, drives transactions to completion, and creates

significant market value from IP. He holds a B.S.E.E.M.S.E.E. and a B.A. in psychology from the University ofVermont. jcroniii(£t^ipcg.coni

Rachael Schwartz is a senior manager of ipCapitalGroup. She guides clients who wish to align their IPactivities with their business strategy or use IP to gainleverage in transactions. She also leads the developmentof IP story materials that communicate the value of IP, toincrease investor confidence, fester strength in contractnegotiations, and facilitate licensing and asset sale. Shereceived an M.B.A. in strategic management andmarketing from the Wharton School of Business oftheUniversity of Pennsylvania. rschwartz(ja) ipcg.com

Their article is based on John Cronin 's presentation tothe Industrial Research Institute Annual Meeting, May2006, Colorado Springs, Colorado.

Research • Technology Manageiiient11K95-63()«,'()7'S5.™ V 2(H)7 Inilusinal Rf.warcli Insiimtc. Inc.

• A unique competitive advantage, which allows thecompany to secure a market and gain significant marketshare.

• Significant licensing revenue, both within acompany's core markets and in ancillary markets.

• A stronger negotiating position, which allows thecompany to secure stronger contracts with suppliers,customers and partners.

Companies can impact their stock prices positively byfirst synchronizing their IP to their business goals and,subsequently, by communicating the processes utilizedto protect their most valuable current and futureproducts. For example. Color Kinetics Incorporated {anipCapital Group client) develops solid-state lightingsystems. The company has spent considerable time andresources to develop a sizable patent estate that consistsof about 50 patents and 150 pending applications in itstechnology space. Color Kinetics' having done this workto build the estate is good, but what is better is that itconsistently promotes the breadth and strength of its IPportfolio to analysts and the public. This message issinking in. For example:

• Analysts who cover the company have mentionedIP matters as drivers for the ratings of Color Kineticsstock {3).

• Many profiles of Color Kinetics mention its IPstrategy in their corporate overviews {4.5).

Color Kinetics' emphasis on communicating the value ofits IP and IP strategy (along with solid financial perfor-mance) seems to be working. Since its IPO in mid-2004,the stock price is up about 70 percent, while the overallNASDAQ has been fairly fiat (6).

While Color Kinetics has done a good job of puttingtogether pieces of a puzzle that convey how IP supportsthe business and contributes to corporate growth, it couldgo a step further. A more structured way of communicat-ing this type of information is to use an IP story, which isa presentation that introduces a company's IP and links itdirectly to the value that it provides.

An IP story presentation describes the IP. shows how iteffectively protects the key inventions of interest, andshows how those inventions are necessary for develop-ing a superior product that meets a key market need. Thislinks the paper patents directly to the value in the mar-ketplace and the company's bottom line. To ensure thatthe IP story is developed effectively, business, legal,technical, and marketing executives need to worktogether to ensure alignment of their different interests.Additionally, the IP story can include a financial analysislo quantify the contribution a company's IP may make in

An IP storyintroduces a

conipany's IP andlinks it directly to the

value it provides.the future, based on how the IP will support thecompany's ongoing strategy.

Linking IP to Value and Business Goals

The structured relationship between business objectivesand intellectual capital requires continual diligence andorganization. !P-savvy companies include these linkageswithin their framework and in their overall !P strategies.Because IP is an intangible asset that increases in valuewhen it is aligned properly with a company's businessmodel and strategy, the size ofthe portfolio doesn'talways matter. A company that has 50 valuable patentstied to a profitable market may be in a stronger IPposition than another company that has 500 patents thatare misaligned with current business goals. Mostbusiness managers aren't aware of which patents arecritical or core to their business (and part of their com-petitive advantage) and which patents should beabandoned or could be monetized via sale or out-licensing.

Beginning from the top of the pyramid in Figure I,companies lay out detailed strategies for meetingbusiness objectives that allow them to achieve their long-

Products

Technology

Inventions

Intellectual Property

Intellectual Capital

Figure 1—Busine.'i.s goals are supported byintellectual capital and IP.

March—.April 2007

term goals. The products that a company sells inspecified markets have attributes that meet the needs ofthose markets. For example, the products must have acompelling price/value proposition in order to differen-tiate and capture market share.

Generally, this differentiation comes from, or is enabledby, some type of technology that is embedded in theproduct or the process used to create the product. Theinventions enable the technology that makes the productpossible. Those inventions within the IP portfolio areprotected with a mix of patents, trade secrets and publi-cations. Finally, intellectual capital is at the bottom ofthepyramid and includes all the knowledge and ideas thatare not yet enabled or documented. It is important thatthere be clear and easily communicable linkagesbetween each piece of this framework. For example, it isimportant that patents are clearly linked to the specifictechnologies which enable them, and that there is suffi-cient IP fully protecting the technology.

The data and analyses that create and explain linkagesfrom the top ofthe pyramid to the bottom are used as thebasis of an IP story. Understanding these linkages shouldbe of critical importance to top business and engineeringmanagers as well as C-level (CEO, CFO, COO, CTO,CMO, etc.) officers and their boards. How many boardmembers or C-Ievel officers know how many patents are

critical to their company's core business? Too often, theanswer to this question is zero. When the answer is zero,it is a good indicator that the quality ofthe communica-tions concerning the value of IP may be inadequate.

If 85 percent ofthe value in the S&P 500 is accounted forby intangible assets, and IP is a large part of those assets,it is important that a formal reporting structure for under-standing the value of those assets be developed.Currently, corporate officers regularly study the balancesheet and income statement at board meetings, but theimportance and relevance of IP, above and beyond thenumber of patents and patent applications, is often over-looked. After a company develops an IP portfolio that isaligned with the overall business goals, the next step is tocommunicate the nature and the strategic importance ofits IP to all stakeholders. Doing so more effectively wiilpromote the company's strategic goals and advantagesand can help to raise the stock price.

Company X's IP Story

Consider an IP-savvy consumer products company.Company X, that successfully introduced a new productinto an ancillary market because it knew that certainaspects of its technology enabled several new products inthat space. Further, Company X expected to continue tosee strong returns in the future, because it has a strong IPportfolio across this new space. Unfortunately, Company

Technology

Company s Patents

Products

Ti T^ T3

P4

I4

P i

I5

P

Pa

P4

•Market

Figure 2—A preliminary IP assessment shows that IP and business goals are notaligned. Company X's patents only support technologies T,. Tj and T^.

Research • 1 echnology Management

X's stock has underperformed recently, and the companybelieves that the financial markets do not realize that themarket opportunity exists. To communicate this newvalue. Company X creates an IP story that describes itsongoing strategy and illustrates this new opportunity.

In the development ofthe IP story, the business goals thatled to this market opportunity are identified andexplained. Company X illustrated why the market oppor-tunity was growing and would continue to increase insize as well as how a changing business environmentdefmed a specific market need. The size ofthe marketwas estimated, along with the description ofthe marketopportunity. Further, the IP story described how its newproducts address this market need, the key differentiatorsof Company X's products, and the estimated percentageofthe market share that these new products will capture.The IP story then explained the technologies that enabledthis product and, more specifically, the inventions thatenabled the technology.

The linkages between the market, the technologies andIP are demonstrated in Figure 2. The new market oppor-tunities are shown as Ml and M2, and these marketopportunities are addressed with products PI, P2 and P3(for MI) and P4 (for M2). The products are supportedwith technoiogies TI—TIO.

In looking at the distribution of patents across all tech-nologies, and determining which technologies were

supported by patents. Company X was disappointed tolearn that its patents only supported T1, T2 and T4. Thismeant that Company X's previous thinking about thestrength of its own portfolio was incorrect. It had a lot ofwork to do! On the bright side, this mapping exerciseallowed the company to understand the gaps in its IPportfolio and develop a plan to fill those gaps, to supportthe new market opportunity.

Armed with this information about its portfolio.Company X used a variety of different tactics to fill thegaps in its portfolio. By recognizing which technologiessupported specific products, it was able to identify tech-nology areas that were most important to the newproducts. For example, T4 supports all the new products,so it follows that this would be a very important technol-ogy to protect with IP. Similarly, other technologies thatsupport more than one product (such as T5, T6) are otherimportant areas to protect.

Because these linkages were identified with such clarity.Company X was able to fill the gaps with inventions in asystematic way. For example, to fill the gap in the patentsthat support technology T6, the company chose a mix oflicensed patents (from an outside source) and inventionsprotected as trade secrets. In a series of invention extrac-tion sessions. Company X developed new IP acrossmany ofthe technology areas (TI, T2, T3, T4, T5, T7,and T8), with a particularly heavy concentration of

T, Tj T3 T, T, T, T, T3 T, T,

Products

Company's Patents

Licensing Opportunities

Enabled Publications

Trade Secrets

Provisions Is

New IP

Pi

P2

Pa

P4 P4

Market

Figure 3—IP is strategically developed to support business goals. The breadth andstrength ofthe new portfolio is communicated to key stakeholders via {in IP .

March—April 2007

inventions in the higher-value technologies (TI, T4andT5).

This process of filling gaps in an IP portfolio represents anew approach to the development of stronger, resilient IPportfolios. Company X is managing its IP portfolio bydirecting inventors to develop IP in particular places inthe framework. This is in contrast to what happens inmany organizations, where inventors develop IP aroundthe "cool technology" that they have discovered.Company X's inventors develop IP to support strategicgoals ofthe organization.

By communicating the distribution of its inventionsacross the technologies in a graphical format. CompanyX readily showed that it has excellent IP coverage acrossthe technologies that are needed to support the productswithin this new market opportunity. This representationdemonstrates that the company has a systematic processfor identifying areas that need invention. Additionally,the IP story communicates how this portfolio has beendesigned to keep Company X's competitors out ofthemarket.

After the patent applications were filed and Company Xpublicly disclosed plans to move into the new market, ittold its IP story—including Figure 3—to Wall Streetanalysts as part of its regular communications (quarterlymeetings, eamings calls and the like). Telling the IPstory for this product and other new product launchesconveys that Company X is a leader in the proactive andsystematic management of one of its most valuableassets—its IP. As such, the company's value increasesrelative to its competitors' value because of this leader-ship position.

Three Benefits

Companies and their shareholders stand to benefit fromconsistently developing and promoting their IP portfo-lios with a structured !P story. The story described hereshows how a company developed IP that supports

Company X'sinventors devoloji IP

to support theirorganization's

strategic geais.important products and technologies, with clear linkagesfrom the market opportunities to patents. Companies thatfollow this approach stand to 1) support higher stockprices, given the incredibly high value placed on intan-gibles in today's market, 2) maximize retum on invest-ment in their IP by supporting strategic technologies thatare linked to market needs, and 3) lead the corporateworld with best-in-class IP management. ®

References

1. Litan. Robert E. and Wallison, Peler. 2000. Corporate Disclosure inthe Intemet Age. Financial Times. 24 May http://wn-w.hr<}()kii]gs.eiiu/views/op-ed/litan/20000524.htm (accessed August 15. 2006).2. Lev. Barucli. 2001. That Uncertain Something. In CIO Online.15 March. hftp://www.cio.com/archive/031501/lev.html (accessedAugust 15,2006).3. Analysts at Adams Harkness. http://www.newratings.com/analyst_news/artick'_95()949.htmi (accessed August 15, 2006).4. CBS Market Watch. 2006. They employ a market-driven intellec-tual property strategy . . . hltp://www.marketwatch.com/ioois/qiiotes/profile.asp?.symh=CLRK&siteld=mkrn' (accessed August 15).5. Yahoo Company Profile. 2006. The licensing business licenses itstechnology, as well as enables its partners to access its intellectualproperty portfolio that covers a range of digital technologies andmethods of eontrolling LED sources for various applications, http://finance.vahoo.c()m/(i/pr?s=CLRKlacces?,ed August 15).6. Based on IPO price of $ 10 in June 2004 and price on 08/15/06 of $ 17.Yahoo Finance. Color Kinetics, Inc. (CLRK.). http://fmance.vahoo.com/q/bc?t=5y&.s=CLRKi&}=on&z=m&q=}&c=&c=%5'E!X!C(accessed August 15, 2006).

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