Coming to Grips with an IP Business Model

 

By Roya Ghafele, OxFirst

Email: info@oxfirst.com

 Executive Summary

To come to grips with a business model for IP is a dire necessity for any firm seeking to compete on the edge. The many business opportunities afforded by IP extend beyond its ability to protect and enable a firm’s performance. IP can in and by itself constitute a business opportunity. Particularly firms operating in forward looking technology spaces cannot ignore the business dimension of IP. The need to thoroughly establish a business model for IP is given by the sheer growth opportunities enabled in many technology sectors.

 

What is a business model?

At its simplest form, a business model consists of generating value for somebody else. In return one receives some sort of compensation that allows to keep oneself going. How much one adds value to someone else’s undertaking and how much one can request in return for this service or product offering, differentiates a strong business model from a weak one.

This understanding of a business model is commensurate with the findings put forward in the academic literature, which argue that the main elements of the business model are the creation of value and the implementation of strategy to capture revenue from the established value. As such, the business model can be seen as a mediating structure between a host of different input factors and various economic outputs. The success of the business model relies on its adequate appraisal of the market environment.

The internal dynamics of a business model rely on two key elements: value creation and value appropriation. The business model establishes the organizational, procedural and operational means by which a firm creates and appropriates value in its target market.

Value creation involves all of the resources and processes deployed towards the achievement of a given strategy. In that respect intellectual property can be a key internal resource a company can rely on. Value appropriation again describes the revenue logic of the firm’s operations. Also here, IP can play an important role.

While these insights are generally established in the field of management, they have so far found insufficient application in the area of intellectual property law. This is somewhat astonishing as business model innovations have been at the core of the very technological revolutions that intellectual property is supposed to protect.

Take the example of cloud computing. Cloud computing allows for an infinite amount of data storage and processing capacity on demand. As such, it constitutes a major value proposition for businesses. Yet, the intellectual property that reads on such services remains more or less entangled with a traditional IP paradigm. IP is often used to protect the goods and services offered. If the IP actually meets up to this requirement remains more often than not unknown. This is explained by the fact that patent validity can only be tested through court proceedings. If the IP is not upheld, then in such a scenario the IP has not lived up to its expectations.

Applying a Business Model to IP

The existing body of IP management suggests that the role IP can assume in a corporate context can extend beyond this single value proposition. Patents can be used to block other market participants from entering the market, but they can also serve to enhance the firm’s reputation. Patent attorney often emphasise on the strategic function of patents to assure a firm the freedom to operate. 

Other than the important signalling function that IP can offer, it can also be an instrument of revenue generation. Often, this is achieved through the licensing and sales of IP.

Source: OxFirst research

From the lens of the business model, the way IP can be instrumentalized can be categorized into three broad areas.

           1)  Competition management

       2) Marketing Function of IP

       3) Generating Income from IP

While in the first two approaches the IP serves primarily to protect and enable a business model based on the delivery of products or services, it is the third approach that allows to most closely associate the IP itself with a business model.

If IP is being used for keeping competitors at bay or for enhancing a firm’s perception, then the IP is not directly used to drive business. Rather, it assumes a support function. It is only when the IP becomes subject of the business activity in itself, that one can speak of an IP business model.

In these instances the business model centres around the IP itself and allows to establish a corporate function for intellectual property that can be detached from the trading activities of the company per se. Trading on the grounds of intellectual property assets can have several advantages. For one, it is much less costly and complicated to ship intangible assets around the planet. For two, the trade in the underlying rights to a technology can enable a firm to enter into joint ventures, collaborative exchange or other forms of open exchange, while foregoing the many hassles associated with a full fletched merger or acquisition.

Why one cannot ignore the IP business dimension

Developing strategic relations on the grounds of IP can be much easier to achieve than on the basis of tangible items. This is explained by the nature of IP rights. With the further differentiation of business models, I tend to believe that companies will be forced to consider more thoroughly what type of business goals they would like to achieve through their IP. This requires a more systematic investigation into the business proposition of a firm’s IP. At present, there is too much intellectual property gathering dust. In the current crisis, firms simply can’t afford to continue doing so.