Bergenstråhle IP Insights

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1 Bergenstråhle IP Insights At Bergenstråhle we combine the power of technology, law and business development into helping our clients achieve Return on Innovation. We do this in the domain of intellectual property, helping innovative companies to capture their most strategic assets through IPR, to restructure their IP strategies and processes to support new business models and to understand and communicate their commercial value. IP Insights is our tool to share such knowledge with the business community.

2 2. IP s impact on the digitalisation of industry Why intellectual property has a key role to play in the digitalisation of industry sectors Competitiveness has always been a fact of life within business, but the dynamics that we are witnessing today due to the trend of digitalisation is unlike anything else in corporate history. As a result, competition within any industry can no longer be compartmentalised to a specific geographical market, to a specific industry sector or to the size of the company. It s a new game, a more crowded playing field and a faster clock. Being on the forefront of intellectual property (IP), we have witnessed first-hand how industry sectors are diverging more and more due to technology advancement, particularly through the increased role of software and data. As a result many industries are in the process of realigning their business models and R&D-focus to capture this opportunity. In this paper we therefore take a closer look at the implications of this trend on the new role of intellectual assets in industries influenced by digitalisation.

3 3. Corporate profits are moving to knowledge-intensive industries The corporate world has seen a tremendous growth of profits since the 1980s, according to a recent McKinsey study on the global competition for corporate profits, due to new market opportunities, increased purchasing power from emerging markets, but also due to declining costs through outsourcing, technology advancement and more efficient production methods. As the effects of such measures have slowly decreased for capital-intensive industries, the implications of digitalisation have started to blossom. As a result many incumbent industry leaders have noticed that their profit margins have slowly started to move away. Looking at profit margins for different industry sectors, the study notices a shift from heavy industry to knowledge-intensive industries such as pharmaceuticals, media, finance and information technology. The top three most valuable companies in the world are the technology firms Apple, Google and Microsoft. Of the world s top ten, six are technology companies creating their wealth through innovation, software, algorithms and data. Information and technology companies have over the last 30 years gone from $600 billion to $6 trillion in revenue, and over the past ten years the market capitalisation of these companies have almost doubled from $3.7 to $6 trillion.

4 3. 4. Not only that, the sectors that are investing heavily in intellectual assets such as R&D, brands, software and algorithms also have the highest profit margins today. At the same time, the profit strategies for industrial firms focusing on operational efficiency has proven less effective. Their revenues are however, as large as ever, make them an attractive target for the agile and efficient business models of technology firms able to turn existing business models upside down through digitalisation of products and services, as well as by building digital platforms for turning data into strategic insight and customer value. The Frankfurt International Motor Show in September saw much discussion focusing on this very issue; namely, who will control the data of tomorrow s cars. Over the last two years the motor show has had an emphasis on automated driving and connected vehicles. Among others, Daimler CEO, Dieter Zetsche, made a point of referring to Apple and Google as frenemies. Friends for now, when it comes to connecting vehicles and providing customer value through the established car industry s brands, but possibly serious competitors tomorrow, should cars become a mere physical platform for gathering strategic data and delivering data enabled customer value.

5 5. The increasing steps of the technology companies in to the automotive industry, in this case, prompted the German car makers to join forces to strengthen their IP position through the acquisition of Nokia s HERE technology portfolio. This acquisition, which was analysed by the UK based IP analytics company Aistemos*, shows the steps the consortium took to quickly strengthen their patent portfolio to protect revenue at risk. The automotive consortium s IP position before acquisition The automotive consortium s IP position after acquisition of HERE Automotive consortium HERE Automotive consortium Uber Target Apple Glasshouse Google Microsoft Uber Target Google Apple Glasshouse Microsoft Revenue at risk Facebook New entrant or failing Tom Tom Pioneer Bosch Hunter Revenue at risk Facebook New entrant or failing Tom Tom Pioneer Bosch Hunter Strength of patent portfolio Strength of patent portfolio Reverting back to the findings of the McKinsey study, profits have shifted towards knowledge intensive industries, and there are strong incentives for many core industries to relocate their R&D spending towards the digital domain of the technology firms to stay competitive and regain profits. The study suggests strategies for how to compete in this landscape, such as encouraging firms to be proactive rather than reactive, to be lean and agile when assessing and pursuing opportunities, to have a long-term vision and investment horizon, and to focus on intangible assets. In this paper, we would like to take a closer look at the last recommendation, the focus on intangible assets and what this implies from an IP perspective. * Full report

6 6. Intangible assets are the value drivers of the knowledge-intensive industry Intellectual assets matter in all industries It certainly matters to the incumbent industry leaders that was referred to in the segment above; some of them being the most patent active companies in the world, holding patent portfolios consisting of several thousands of patents. It also matters to the technology companies, many of them also holding massive patent portfolios. 1 McKinsey & Co interviewed 300 manufacturing leaders in January 2015 regarding their level of preparation for what s often referred to as Industry 4.0, the next phase in the digitization of the manufacturing sector. So, we are seeing that these companies are investing in intellectual assets, in this case particularly in patents, but volume and value do not necessarily have to coincide. It has been shown however, that innovative companies within capital- -intensive industries that focus on highly profitable product segments such as advanced industrial machinery and premium automobiles capture a larger profit share than the industry median. As innovation performance is a key factor for profitability, the fact that industrial companies, in a recent survey 1, reported that they expect to replace nearly 50 percent of their machinery and equipment over the next decade should open up new opportunities for knowledge-intensive companies, using software and data driven services to enhance customer value to capture a piece of the manufacturing value chain.

7 7. 3. The key intangible asset in this example is data, and particularly the software and algorithms that collect, analyse, enhance and creates value based on this data. Better data, gives better insight, and creates possibilities for stronger innovation and captured customer value. From an IP perspective data, software and algorithms are strategic and commercial intangible assets of a company. Data in this case is a typical trade secret that should be managed and structured so that it s securely controlled by the company, whereas software and algorithms are typical assets which should be controlled through copyrights, patents and as trade secrets. As most industries are becoming data driven, value is increasingly being created in the form of intangible assets such as patents, brands, trademarks, and copyrights. As such, intangible assets represent the backbone of the profitable knowledge-intensive sectors. In 1999, 17 per cent of the profits generated by Western companies came from knowledgeintensive sectors, today this number has doubled to 31 per cent. Consequently, many traditionally non-digital industries are therefore looking to start investing in creating new classes of intellectual assets, but how does this implicate their IP strategy and in consequence also their ability to capture and create value out of these new assets?

8 8. Four cornerstones for realigning IP strategy with a digital business strategy For a non-digital company making a transition to a data-driven business model, i.e. redefining its R&D focus from typically mechanical, electronic and material technology to increasingly focusing on innovations through data-enhanced or data-based products and services, this by definition requires a shift to new intellectual asset classes. Similarly to realigning R&D and product development with the new business goals, realigning IP development to meet this new focus is a fundamental task. Align the IP-strategy with the new business strategy To be valuable, an IP strategy must be aligned to strengthen the business strategy, helping to capture the highest attainable value based on the company s commercial offer and secure its place in the market not to be blocked by new entrants. Typically, the objective of an IP strategy is for the company to assert control and package its intellectual assets to best serve its strategic or commercial objective. This requires transparency and alignment of goals for the IP and the commercial activities. If this is not done the company runs the risk that the investments of realigning the business model is not captured from an IP perspective. This can lead to that key assets are never identified, are leaked, or are in other ways not captured to support the business strategy. Executing on the new business strategy will bring the company closer to already established and IP rich markets such as connectivity, data processing and software. The commercial success depends on that the company has an IP strategy that is aligned and prepared for this shift to a more aggressive IP market, so not to be blocked or have the margins squeezed by costly royalty payments. The redefinition of the business strategy should therefore pay attention to also assure that the IP strategy is aligned to match the new business model.

9 3. 9. Assure capable and sufficient IP resources to handle new asset classes To define and implement the new IP strategy as well as to act on the implications thereof forming a functional process and workflow, sufficient and suitable resources must be made available. This involves realigning existing and developing new processes for increasing awareness of new forms of valuable intellectual assets particularly in the digital domain, for assessing and identifying key IP assets, for structuring and packaging such IP to fill its strategic purpose, and for assuring that such IP is actionable for the specific role it has been assigned. It should be recognised that this is not within the normal capacities of the IP department to do this. Therefore additional resources for process development IP creation and management should be deployed. Identify opportunities and act proactively to minimise IP risks in the competitive landscape Companies in many traditional industry sectors are facing a new competitive climate. This results both from technology companies moving into new industry domains, but also from traditional industries identifying new business opportunities resulting from digitalisation. Regardless of which, the competitors are no longer only the usual suspects, and the technology shift is creating a new source of competition. As a result, moving into new domains pose both new risks and new opportunities, which e.g. derives from the risk on infringing third parties rights, or using innovation to capture a new profitable market position. As a result companies should redefine and engage actively in competitive intelligence to capture their new landscape and be in a position to early on identify and act on IP-based risks and opportunities. Being proactive in how IP risks are handled may shift them into becoming opportunities; i.e. a possible infringement scenario can become a collaboration. However, especially the connectivity field is to a large extent commercially driven by patent licensing and to proactively handle and prepare for this is crucial for the companies moving in to this field.

10 10. Be ready to acquire IP to stay ahead Making a shift from a non-digital business and innovation model to data-driven or data-enhanced products and services is not done overnight, and is perhaps not even manageable through organic innovation growth. The most profitable firms in knowledge-intensive industries use M&A activities to scale up the IP portfolio and strengthen the value proposition. This is particularly present in the software industry. Since speed and efficiency is of the essence, both from a competitive and most likely also from a C-level perspective, companies looking into taking a leading position in the digital domain, should actively assess M&A opportunities to grow or strengthen their IP portfolio through company or project acquisition. Six steps to pay special attention to Recognise that key asset classes are changing from traditional areas to software, algorithms and data when moving to data-driven and dataenhanced domains Assure that the company has the right IP competencies and IP partners to handle both the transition (process and project management) as well as the new intellectual assets that will be the foundation for future growth Identify the new internal domains where intellectual assets are created and held, and assure that key staff involved is aware of where and how key assets are created Pay attention to new forms of IP risks that are associated with developing software, e.g. contamination through use of open source software Assure that you possess appropriate tools to identify key intellectual assets in the digital innovation portfolio, it might not be the ones that you were used to Identify IP risks and potential disruptors that may pose a direct threat to the margin by patent licensing. Act proactively to minimize these risks through patent acquisitions, supplier indemnities and IP risk insurances

11 11. Authors Joakim Hernström - joakim.hernstrom@bergenstrahle.se Mats Eriksson - mats.eriksson@bergenstrahle.se Johan Örneblad - johan.orneblad@bergenstrahle.se About Bergenstråhle & Partners Bergenstråhle & Partners is a Scandinavian full-service IP firm. With our core competence in intellectual property, we view ourselves as an innovative, entrepreneurial and business oriented IP consultancy. Our vision is to help companies that view innovation at the core of their value proposition to maximise the business value from their intellectual assets. We do this through a range of services from IP creation & management, legal & litigation, process & strategy to commercialisation & valuation. We are convinced that this perspective and offer helps our clients achieve a clear Return on Innovation.

12 Bergenstråhle & Partners in 1 minute Consultants specialised in Intellectual Property Management We help innovative companies to protect and increase the value of their intellectual property. Legal, engineering and business skills Valuable knowledge is the knowledge that creates profitable business, and therefore we use our engineering and legal skills to identify opportunities and our business skills to evaluate them. Patent, design and trademark protection (IPR) Our consultants combination of experience from national and European patent offices, IP-focused industry and IP law ensures a comprehensive view on opportunities and risks. 40 specialists with global customers, a European focus and based in Sweden - Stockholm, Gothenburg, Värnamo and Jönköping. Contact info@bergenstrahle.se Stockholm Ringvägen , Stockholm Gothenburg Lindholmspiren 5A , Gothenburg Värnamo Lasarettsgatan Värnamo Jönköping Gjuterigatan Jönköping