A founder of patent analysis software and consulting company Aurigin Systems and the co-author of Rembrandts in the Attic, Kevin Rivette is one of the movers and shakers in the world of maximizing intellectual property value. We recently interviewed Kevin on how technology companies are using their intellectual property as the strategic weapons of the 21st century business battlefield.

TMF: Kevin, why don't you start by telling us what it is you do and how you got into the intellectual property area and why you find it so interesting?

Kevin Rivette: We're kind of a software/consulting company, and we provide a software platform for analyzing patent portfolios, and we do it in a way that no one else does. We use iterative data mining to interpret patent data. The information we provide isn't for patent attorneys per se, it's more for the strategist who needs to evaluate mergers and acquisitions, strategic directions that should be taken in R&D, competitive intelligence, technical intelligence, and so on. 

TMF: So you provide a system that helps people who are looking to mine direct economic value from patent portfolios?

KR: There is more to the story than just trying to get the most money out of your intellectual property portfolio. You also want to know where your competitors are relative to you. With our software, you get a sense of where the market is going. You have to remember that every patent, if you look at it in a non-legal sense, represents about a one million dollar investment for a company. So if I want to find out where my competitors are going, I may want to find out where they are putting their resources, because at the end of the day, business is nothing more than resource allocation.

Our software can show where an entire industry is focusing its intellectual property investment. We present this visually by generating a topographical map of the industry. This allows a user to take a look at any technology area and plot where any company is relative to its competitors. What's interesting is that by doing this over time, you find out whether you are convergent or divergent to what the rest of the industry is doing.

Once you have that information, the questions start. Why is my management investing here when the rest of the industry is three rows over and down to the left? It may be because we are a lot smarter than everybody else -- or it may not be. It may identify areas where a lot of investment went in and no products came out -- and you might want to know that before you go down the same road. These are some of the things we can do with patent analysis that have never been before. In this way, we are completely different than every other patent site or software system available

We use patent information to create business analysis. The patent database is the largest technical database in the world. One of the requirements of a patent, when you write the application, is you have to answer important questions. You have to describe the problem you are trying to solve. You have to cite those who have tried to solve it before, and describe why this invention is different, and finally, there has to be some description of why and in what situations my solution is useful. There must be a description of what your new twist on this solution is, and why it is of value.

When you've got an enormous database that gives you all these details, you can really use that information in creative ways. For example, the patent database contains the names of all the inventors. This seems like a simple thing, but it can be incredibly powerful information if used in the right way. For example, if you're an individual investor in a technology stock, wouldn't you like to know if the key inventors of the technology are still with the company or if they've just moved to your competitor down the street?

You know, I read your IP article ("The Trouble with Intellectual Property") and I liked it a lot, where you talk about defensibility of patents. But there is more to it than that. Patents augment the value of a company. But even for IP companies, at the end of the day, you've got to have a product or you've got to at least have engineers developing a product that can be sold. Even if that product is only technical know-how. So you have to have a development team working to extract any value from the patents. Using patent analysis, I can tell you who the development teams are.

This can be an important point in acquisitions or new ventures as well. One of our customers is a really big chemical company. This client was recently at the table creating a joint venture with a small technology concern. The idea was that our client would invest money, and the other company would contribute their technical know-how and a development team.

By using our system right there at the table to analyze this company's patents, our client was able to ask whether a certain person would be on the development team. The answer was no. So they asked about another guy. The answer was no. Finally, our client was able to get some of the top inventors of the technology involved in this joint venture, none of whom were originally going to be involved, just by the smart use of patent information.

In the knowledge economy, the idea is becoming the product. We've got the old mantra of technology companies that was "innovate or die." Business executives are always talking about "we've got to innovate or die." I'd like to suggest a new mantra for both corporate players and individual investors: "Innovate, protect, and leverage." And that's exactly what investors should be looking for when they are looking at these types of companies. Don't just look at the patents. Make sure that there is something that can be leveraged, and make sure the company is able to protect it.

If you want to buy acreage somewhere, you can either buy the 10 acres where they are going to put in the new shopping mall, which is really nice and gets a great return, or you can buy 10 acres in some remote location where nobody's going to be for the next hundred years. Both represent 10 acres. But only one is located where everybody wants to be. In other words, if someone wants to put in a shopping mall on your 10 acres, you occupy the choke point in their strategy. To get their shopping mall, they have to pay you. The same principle applies in the technology business. And it's not just the high-tech companies and the biotech companies.

We have a client that makes garage door openers, which is a very competitive business. You wouldn't think of them normally as a high-tech company. But if you look at what they are doing, and use what we call "choke-point analysis," this client concentrates on what they are doing that is innovative and new. And in this industry, once you have something new, everybody else has to follow it. There isn't a whole lot to differentiate yourself from your competitors in the garage door opening business. So it is a space where it makes sense to concentrate on protecting what you've got with patents. You can use patents to either protect your space with it or, if everybody else is looking to do it, reap some money with it.

Another great example of this is Gillette(NYSE: G). When I was writing the book, I talked to Don Tobin at Gillette when they were coming out with their Mach 3 three-bladed razor. And he told me that they had gotten over 35 patents on that product. I was excited for him and congratulated him on getting a patent for the three-bladed razor. He said, "Well, we didn't get the patent on the razor." I laughed, and asked Don, "OK, what did you get the patent on?" 

He told me that the three-bladed razor was originally patented in 1922, but at that time they couldn't produce them. The blades had to be so thin, and so sharp, and had to be produced at such high quantity. Gillette has to produce about a billion blades a year, at a low enough price-point to sell. So what they protected was the manufacturing process they had to develop to produce those blades. That totally changes the equation. Because if anybody else wants to get into that market and create a three-bladed razor, if they can't use some of the manufacturing processes that Gillette developed, then the price point is going to be too high, or the quality is going to be too low to compete. So Gillette concentrated their patents around the choke point of the business.

So as an investor, you want to try to analyze whether 1) Do they have the right engineering team, and 2) Are they moving down the right path versus everyone else? There are many examples in the chemical and biotech areas where you can plot over time and determine whether your company is an innovator, a fast second mover, or a laggard. You can see it through our topographical maps, and you can see it through the citation reports. This may make a big difference in your investing decisions.

Those are just some of the things I find interesting about the intellectual property arena.

Next: Part 2 »

Zeke Ashton (TMF Centaur) has run out of intellectual property. At press time, he owned shares of no companies mentioned in this interview. He does own stocks; check out his  profile, and check out The Motley Fool's disclosure policy.