Qualcomm's Edge

Companies like chip manufacturer Qualcomm confuse some journalists, particularly those who might consider sales of product the principal source of a company's revenue.    If operating revenue (from chip sales) goes down during the course of any one year, how is it that overall revenue increases over the same time?

The answer is through leveraging innovation.

The reality is that Qualcomm has long considered itself not as a mere producer, but as a licensor of enabling technologies.   Anecdotally, in 1999, the company came to the realisation that it didn't have to produce any products in order to be a profitable company.  In fact, it realised that it could actually make money from competitors' sales.

Late last year, Engaget posted some photos of Qualcomm's "Patent Wall" in its San Diego headquarters (see below).   The pictures were interesting to me, and not for reasons related to interior design.  It is clear that the company places significant value on its intellectual property.   

The Engaget article containing the pictures below suggests that the patents on the wall comprise only about 10 percent of the total patent portfolio owned by Qualcomm, which apparently numbers around 13,000 patents in total.  If only a quarter of those are of strategic value, this is all the explanation we need.  Strategically leveraged IP safeguards the overall revenue position of the company regardless of the fluctuating world of of sales performance and operating revenue.  

Strategic Factors Affecting Licensing Negotiations

Recently we looked at how a party's market role or position might affect the tone of a negotiation.   In this post we'll take a first look at a number of other strategic factors that can influence the shape of a licensing deal.    This is a very broad topic, so we will list these generally first.   In our next post, we will take a look at some industry examples.

For the sake of clarity, we'll assume below that you are doing the licensing. If you're a licensee, simply reverse the analysis.

Living in the Cloud

Cloud services have proliferated the IT services industry in the last few years or so, and it's easy to see why.   There are numerous advantages to offering and using cloud services as opposed to out of the box software solutions.   For service vendors the model enables a steady income stream and a quick way to fix bugs and get improvements to customers.   For providers, it's a way of diversifying existing IT services and enabling income that wasn't previously available.   For service users, the model offers better tax deductibility due to the switch from CAPEX to OPEX, usually a better overall reliability, and if properly researched, it can reduce the overall IT maintenance spend.

Collaboration Conundrums

We know.   It's hard enough satisfying your own shareholders, let alone trying to satisfy someone else's. The thought of trying to get another enterprise to work with you on a long term development project involving multiple IP rights can be daunting.

But however difficult collaborations are, sometimes you can't afford to ignore the opportunities they present.  We can't give collaborations and collaboration licensing an exhaustive treatment in this post, but we thought we'd put pen to paper and give you a summary of some selected issues that need to be considered when putting together collaboration deals.

Value through Transactional Constructs

Now, finally we’ve arrived at the third category of ways to overcome the value problem.

Those of us who are waiting until the accounting profession develops an accurate measure for valuing IP could be waiting a while for the reasons we've already discussed.   The main issue is that it’s almost impossible to get value metrics that are truly accurate.
   

It could be that in looking for firm and unshakeable metrics, we’re barking up the wrong tree. 

Value through use of strategic structures

We’ve been exploring the topic of intangibles and value the last few weeks.   So far, we’ve discovered that:

·                Intellectual assets are difficult to value because they are generally developed in a unique environment and designed to meet unique challenges..

·                One of the ways to value these intangibles is to “buy out” of thinking that relies on double entry book-keeping, and choose alternative valuation methods that focus on aspects of the asset that favour your market position.

However, it’s not necessary to buy out of the concept of double entry book-keeping.   In fact, one school of thought tells us that if transactions drive a market’s understanding of value, then it’s a better approach to swallow transactional thinking hook, line and sinker.

IP Ownership - is it really all that it's cracked up to be?

When negotiating a collaboration agreement, one of the issues that often causes a headache is who is to own the IP.   In many cases, it is a debate that doesn’t need to happen.  As we saw a couple of weeks ago, this issue can be so divisive that the negotiating parties lose perspective and fall into the joint ownership trap.

The Joint Ownership Trap

Parties contemplating a collaboration will often enter heated negotiations about who is to own future IP. To resolve the deadlock, they sometimes adopt a halfway position that results in "joint ownership" of newly developed IP. This can result in several problems.

Software Escrow Arrangements

So what would happen if your IT contractor went into liquidation?   It could be your IP horror story.   In a disturbingly high number of cases, IT services contracts specify that where software solutions are custom-made for an enterprise, they are owned by the contractor, not the enterprise.   This means that in a liquidation scenario, ownership of the software will vest with the liquidator.

Your new IT contractor will need to have access to your software, and preferably a license to tinker with the source code.   Without these things, not only does switching contractors become an impossible transition, but any modifications to your software solution may lead to a breach of the liquidator’s IP.