IBM’s Formula for Success: Patents, Patents and more Patents

Earlier today IBM (NYSE: IBM) announced that it set a new U.S. patent record in 2011, marking the 19th consecutive year that the company has led the annual list of patent recipients. IBM inventors earned a record 6,180 U.S. patents in 2011, more than quadrupling Hewlett-Packard’s patent total and exceeding the combined totals of Apple, Amazon, Google, EMC, Hewlett-Packard, Microsoft and Oracle/Sun.

Leading up to this announcement I had the opportunity to chat with Manny Schecter, who is the Chief Patent Counsel for IBM, and someone I interviewed previously.  Whenever I talk with Schecter I always ask him whether it is a struggle to continue to have senior management at IBM buy into eye-popping research and development budgets.  Although I am sure I always sound like a broken record I am genuinely amazed.  Schecter replied, as he always does, “it is not a struggle… everyone at IBM is on board with being the industry leader.”  IBM spends nearly $6 billion annually on research and development and has now spent a generation as the top patenting company in the world.

IBM is rightfully proud, and I am astonished that they have been able to have such staying power. But where is the misstep?  Where is the naive short term concern over profits during a recession?  Why does IBM continue to behave like it has something to prove rather than become a fat cat?  I am a big fan of recommending that inventors and start-ups emulate successful companies, and there is an awful lot that can be learned from the single-minded focus on the R&D to patent to revenue cycle that goes on at IBM year after year after year.

With “set your clock by it” regularity, in the technology sector we see that the small companies of today become the large companies of tomorrow, giving way within a generation to the next wave of small companies on their way to becoming the  newest mega-giant tech darling. But that hasn’t happened with IBM.  Why?  If you ask me it is because of their approach to the innovation-to-revenue cycle.  In tough times the first thing cut by many corporate giants is the research and development budget, as if looking less will result in finding more.  That isn’t the IBM approach.  The company even allocates a portion of R&D spending for what some might call speculative projects, such as the now famous Watson Computer.

The reason that tech giants of today cease to be the dominant market forces of tomorrow is because they lose sight of what lead them to the top.  Taking their eye off the ball is too cliche and oversimplified.  What they do is fail to pursue the kinds of strategies that help them achieve success in the first place.  Many times this is because so many layers of corporate hierarchy insert between good idea and the person who can green light the project.  I’m not going to suggest that IBM doesn’t have a lot of corporate layers, or that they capture every good idea, but there is just no denying the reality that when you have a “patent everything” mentality you are going to sweep up an awful lot more than those companies that limit R&D and triage what to pursue.

So why doesn’t the industry learn from the IBM example and seek to duplicate it?  I put that question to Schecter.  Without missing a beat he said “I don’t worry about what others are doing.”  Profound.  I guess if you are the industry leader and you have your eye on the ball, understand what got you to where you are and what needs to be done to move forward on the charted course then spending any time thinking about what other are doing, or more specifically why they seem to be spinning their wheels, is pointless.

Schecter went on: “I suspect our business exectuves are more in tune with our IP strategy than with some of our competitors.  We also outspend our competitors in terms of research & development.”

It seems that everyone at IBM is on the same page and believes in the course charted, buying into the IP strategy and understanding that bad short term decisions lead to long term decline.  IBM is committed to getting more patents than anyone else by a significant order of magnitude, and they are committed to spending more on research and development.  You combine that tenacity with a focused, unwavering commitment by the business executives and it is no wonder that IBM has been one of the very few tech giants with sustaining power.

To get a sense for just how large a margin of victory IBM had over others in terms of the number of U.S. Patents obtained during 2011 let’s look at the numbers, provided by IFI CLAIMS Patent Services.

2011 U.S. Patent Leaders

1. IBM ~ 6,180 U.S. Patents
2. Samsung ~ 4,894 U.S. Patents
3. Canon ~ 2,821 U.S. Patents
4. Panasonic  ~ 2,559 U.S. Patents
5. Toshiba ~ 2,483 U.S. Patents
6. Microsoft ~ 2,311 U.S. Patents
7. Sony ~ 2,286 U.S. Patents
8. Seiko Epson ~ 1,533 U.S. Patents
9. Hon Hai ~ 1,514 U.S. Patents
10. Hitachi ~ 1,465 U.S. Patents

The more than 6,000 patents IBM received in 2011 represent a range of inventions that enable innovations and add value to the company’s products, services, including smarter solutions for retail, banking, healthcare, transportation and other industries. These patented inventions also span a wide range of computing technologies poised to support a new generation of more cognitive, intelligent and insight-driven systems, processes and infrastructures for smarter commerce, shopping, medicine, transportation, and more.

These 6000+ patents obtained during 2011 add to an already gargantuan patent portfolio, and IBM sure knows how to use its patents to generate revenue.  IBM is a licensing juggernaut.  Licensing of the IBM patent portfolio is routinely reported as being in excess of $1 billion annually.  So while there will be some who will quickly point out that quantity does not equate with quality, one thing is clear: IBM is extremely effective at maximizing the value of its own patent portfolio.  Schecter said: “If other companies were better at leveraging IP they might want to have more of it.”  That is no doubt true, and increasingly something that more companies seem to be figuring out.  With the recent extraordinarily valued patent portfolio purchases more companies are trying to figure out how to maximize the value of their efforts.

Even though IBM is clearly at the top of the industry curve with respect to maximizing its return on investment vis-a-vis its patent portfolio, Schecter says that the marketplace is an evolving one for everyone, including IBM. Schecter explained to me that the industry as a whole still has a way to go in terms of how they deal with IP assets, saying: “there is still a tendancy to think of IP secondarily to hard assets,” then later pointing out “We still don’t have good ways to value patents.  We still don’t have transparency in the patent system.”

“What if there were no Kelly Blue Book for used cars,” asked Schecter.  “If the marketplace for used cars were the same as the market for patents it would be very frustrating.  We tolerate this in the IP marketplace because we are in the early stages of the development of the marketplace.  What must it have been like 50 years ago when you would buy a used car?  The amount of information available for the ordinary person was pretty slim.”

But what is the solution?  Can we ever get complete transparency in the patent system when so many pieces and parts of the system happen behind closed doors?  Schecter explained that he doesn’t expect full transparency because licensing negotiations and litigation settlements go on privately, but at the same time there are avenues to increase transparency.  “The market still doesn’t have way to value patents, and there are still not good metrics on the types of rejections the patent office is giving… any improvement in metrics is an improvement in transparency.”  Schecter also cited the recent request for comment from the USPTO on transparency of patent ownership as potentially a step in the right direction, and said that patent claims being more understandable to the public, so they can know what is covered, would also be a step toward greater transparency in the system.

One of the things you have to admire about IBM is how they jump right into the deep end, rarely timid about anything.  For example, as the top user of the U.S. Patent System IBM is not bashful about taking positions on proposed rules, and Schecter told me that IBM is currently reviewing the latest set of rules to see which ones they may wish to comment on because as a heavy user of the USPTO they frequently have “something worth saying.” But the IBM boldness doesn’t stop in terms of innovation, patent or process substance.  IBM will be making a full PR assault using social media to get out the announcement of being No. 1 on the patent list yet again.  And the fact that Schecter took time to chat with me, he says, shows the evolution of the market and the growing importance of blogs.

My hunch is that it is the characteristic IBM boldness that separates them from the pack.  They want to be bigger, better and stronger than the competition and unlike so many there seems to be absolutely no resting.  It is easy to be hungry to get to the top, but quite another matter to stay there. Even with valuation difficulties and a marketplace that doesn’t come close to embodying efficient market principles relative to access to information, IBM has managed to figure things out nicely.