When I speak to business owners, entrepreneurs and CEOs, they
often want to know how a small businesses can capitalize on intellectual
property.
They wonder, is IP protection
for big firms only?
What difference does
IP make to them?
Sure, it's nice to know
that IBM earns billions each year in royalty payments on its IP portfolio, but
what about the rest of us?
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.
The programmers didn't have anything on hand to fit the order,
but were aware of another small firm, Seattle Computer Products, with a
suitable program called "the Quick and Dirty Operating System." The programmers bought QDOS for $75,000,
renamed it DOS, and licensed it to IBM for an advance of several hundred
thousand dollars.
The profits didn't stop there, however, because the
programmers wisely gave IBM a non-exclusive license, leaving themselves free to
license DOS to others.
By 2006 the revenues of this once small software company had
grown to $44.3 billion. Quite a return
on its early $75,000 investment.
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 it's 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.
Small businesses can benefit from these
strategies by turning more of their business assets into valuable IP assets.
Unfortunately, many ignore simple, inexpensive steps to secure these rights,
leaving others - like Apple, Microsoft, and IBM - to charge ahead. What are you
doing with your IP to secure your business success?
For more ideas on how your business can use IP to create incredible success, visit www.GuidingRights.com
