Here's a small business success story built on IP rights. It involves a small group of software developers led by a college drop-out. Like many developers, they were hired to do programming for others on an hourly basis. One day, however, IBM knocked on their door, wanting an operating system for its new line of computers.
You probably recognize the small business I'm describing. The history of Microsoft, now one of the most successful companies in the world, provides a great lesson for how a small business can use IP rights to create incredible revenue and success. The story also demonstrates the genius of Bill Gates as an entrepreneur. He recognized that retained IP rights would be the company's ticket to success. As he said later:
"Our restricting IBM's ability to compete with us in
licensing MS-DOS to other computer makers was the key point of the
negotiation. We wanted to make sure only
we could license it. . . . We knew that if we were ever going to make a lot of money
on DOS it was going to come from the compatible guys, not IBM."
The DOS story illustrates one way small businesses can use IP rights to create success. Based on our experience with businesses of all sizes we see four key ways to make money with IP.
1. Charge a premium for your goods and
services.
Consider generic cola v. COKE. Why is one
worth more? Because Coca-Cola has used IP to enhance the value of a simple
commodity. It receives a premium because it has a secret formula and a
distinctive well-known brand. Generic cola has a formula, too, but its not
secret; it also has a name, but it is not distinctive. Anyone can make cola and
use the cola name. IP keeps COKE from being copied. The formula is protected as
a trade secret and the brand is protected as a trademark.
2. Earn additional revenue.
Consider the average software developer v.
Microsoft. The software developer is a knowledge worker paid for her labor. If
she doesn't work, she can't make any money. Without her work, her business has
no value. Microsoft uses IP to turn the product of many knowledge workers into
property that can be licensed and sold. Once that is done, Microsoft can make
money without further time and effort from the knowledge worker. Copyrights and
patents are the IP rights that keep others from copying Microsoft's products.
3. Increase market valuation.
The value of a commodity business is
typically the book value of its hard assets. The market value of an S&P 500
company is usually several times book value. The difference is largely the
value of IP.
4. Create marketable assets.
Markets exist for the resale of IP rights.
Ross Perot has invested in a $200 million IP fund based on patent assets. David
Bowie raised $57 million selling bonds backed by the royalties in his recordings.
Ocean Tomo, an intellectual capital merchant bank in Chicago, has created an
auction market where IP rights are traded.
These financial strategies let IP owners cash in on IP assets.
