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The Choke Point for Tech Companies

TMF: I completely agree with you that Intellectual Property management has to become a core competency for companies that are players in the technology space, and maybe even in areas that aren't thought of as high technology. Is it mostly the big players that are doing this?

KR: Even some of the smallest companies have to do this, because without it, you don't have assurance that you'll be in business. Look at the biotechs today or the dot-coms in the late '90s, where a lot of investors just lost a lot of bucks. Nevertheless, if you look at the companies that have used the right techniques in terms of being positioned in the choke points of the industry, these are the companies in the biotech field that got sold off to the big pharma players, and in many cases got great returns for investors.

My favorite example of this in the medical technology area is Endovascular, which was a stent company. Do you know what a stent is?

TMF:  Yep. It's a tube that is implanted in an artery to keep it from becoming blocked (or something...).

KR: Okay, great. I don't know how old you are, but baby boomers are looking forward to these things. This is a potential $3 billion market. A couple of years ago, Johnson & Johnson(NYSE: JNJ) was out there beating their drum that they were going to be the big player in this market. Guidant(NYSE: GDT) wanted a piece of this market, too. Medtronic(NYSE: MDT) wanted in. These are some heavyweight players.

So one afternoon, Guidant announced that they received FDA approval for their stent. On Monday morning they had a lawsuit from Endovascular, this tiny company that happened to have a key patent. Now, keep in mind that there are five other stent companies just in the Bay Area that I know of that went under during this time. But Endovascular is different -- it's got a patent that turns out to be very strategic. The next week, Guidant announces it will acquire Endovascular for way too much money. Guidant now has a way to negotiate with Johnson & Johnson, and they did a deal to cross-license patents.         

J&J promptly went out and immediately sued two competitors. They got a quarter of a billion for Boston Scientific and then they sued Medtronic and got $330 million from them. J&J is determined to own this space, not rent it. And a small company, Endovascular, absolutely got to participate in one of the biggest medical technology plays of this decade, and their only key asset turns out to be a patent. Without that, they would have been left in the dust. That's where the choke point analysis comes in.

TMF: That's a great example in the medical technology area. Can you give us an example of a dot-com that did something right? 

KR: With the dot-coms, investors never really asked what they were investing in. If you think about it, with a startup Internet company, all you've got is computers, you've got people, you've got ideas, and you've got some money. If you take away the money, what have you got? Computers and equipment aren't worth that much, the people may be gone, and ideas, if they aren't protected, aren't going to go much of anywhere.

This choke point analysis that I talk about doesn't have to be that difficult. As an example, when we were writing the book, we noted Amazon's(Nasdaq: AMZN) one-click patent. Of course, I criticized Amazon in the book for not patenting one-click. Later they did patent it, and it turned out to be a great move.

TMF: Do you really think that the one-click was that important? I mean, Amazon's business value doesn't depend on the one-click patent. To my mind, if you are going to talk about Amazon's value, what you are looking at are the 30 million active customers, the company's brand, ability to grow, and its value as a business partner to other companies. I always kind of thought Amazon's one-click patent was just a gimmick.

KR: Right. It wasn't central to Amazon's value, but it was a strategic chess piece. And Amazon used it to slow the competition from having the same feature. Features are only good for so long. There may be some features that you can patent that are virtually permanent. But that's very rare. What usually happens is that you can exploit a new feature for only so long, and you want to try to capture as many customers as possible during that competitive advantage period.

That's what happened with Amazon. If everybody had been able to come out with the one-click feature at the same time, you might have seen a lot more proliferation of users to other websites. Personally, I used Amazon all the time, and the reason I didn't use, say, barnesandnoble.com(Nasdaq: BNBN) or some other retailer is that every time I got on another site, I had to get my wallet out and re-enter all my data. So for that one year, Amazon was the only one out there with one-click, and that year was critical in terms of Amazon being able to take market share. 

That's how I look at patents differently. The patent attorney says that a patent gives you protection for 17 years, and that may be true if you've got one of those seminal patents in a key area. But if not, why not run a choke point analysis and find out if I can capture even a small share of that time. Is it worth it? In Amazon's case it sure was.

TMF:  Do you think Wall Street analysts and others in finance could benefit from looking at patents more than they do?

KR: Sure, and there are some folks already doing it. I noticed that Michael Murphy, the biotech newsletter guy, recently devoted a whole biotech letter on patents. It wasn't something he was doing out of intellectual curiosity. He was considering patent portfolios in his investment analysis to help him figure out where to invest money.

TMF: You've talked about some of your clients, and mentioned some case studies in your book and in your article in the Harvard Business Journal of companies that have really done their homework on intellectual property and how it's paid off. How far are we from this being standard at all the Fortune 500 companies? At what point will every big company have a formal position, something like a Chief Intellectual Property Officer, to manage this?

KR: Like a lot of things, in many of the cases I have mentioned, it took a while for the companies to come on board, and once they saw the benefits, it happened overnight. Eventually, we'll be past the point that it takes management having this revelation that they need to be doing this, and it becomes just another thing that you do. 

TMF:  How many companies do you think are doing it now?

KR: Out of the Fortune 500, probably half of them.

TMF: That many? Would you care to mention any specific companies that are doing an outstanding job in this area?

KR:  Pitney-Bowes(NYSE: PBI) is one of the companies that is going out there and aggressively getting value for their intellectual property, even if it isn't core to their business. Xerox(NYSE: XRX) is another one that has gotten aggressive about it. Urban legend at Xerox is that they were getting $8.5 million in royalties and patent money three years ago, and now it is up around $100 million. At the industry-leading companies, I think they are all starting to do it, but they aren't talking about it.

« Back: Part 1

Zeke Ashton (TMF Centaur) wishes he had some intellectual property. At press time, he didn't own shares of companies mentioned in this interview. Find his portfolio at his  profile, and check out The Motley Fool's disclosure policy.


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