The Three Ways To License Patents

Jun 13 2014, 12:32pm CDT | by

Elon Musk announced this week that Tesla Motors would license its patents to other manufacturers in good faith. “The world would all benefit from a common, rapidly-evolving technology platform,” he wrote.

While the announcement was a surprise, it fits in with one of the three basic patent strategies tech companies have used for years. In fact, the third way is probably the most successful in the long run. So what are the three methods:

License for Royalties. Despite the recent proliferation of non-practicing entities which buy patents for their lawsuit value, the technology industry sports a long and history of companies and individuals that opt to license technology rather than try to make or manufacture products. Stanford’s endowment earned billions by licensing PageRank to Google. ARM licenses chip technology to some of the largest companies in the world, but doesn’t make chips. DVD players became a worldwide sensation because the consortium of companies licensed it to a broad spectrum of manufacturers.

Thomas Edison? The world’s first patent troll. The “make or not” distinction is pretty hollow. If an invention will die because the owner doesn’t have the capital to build a factory or take something to market, it’s better to license. Licensing isn’t easy either: it can take years of meetings.

Turn it into a Public Relations Ploy. Last year, Twitter announced that it would not use its patents to file lawsuits against third parties unless it was, well, sort of important to sue them. The anti-patent crowd gushed obsequiously, but largely overlooked one embarrassing fact: Twitter didn’t own any patents. In fact, it only had one patent application on file.  It’s sort of like promising not to colonize the moon.

Twitter isn’t alone. IBM grabbed headlines in 2005 when it issued 500 patents to the open source community. It’s a drop in the bucket. IBM gets thousands of new patents and licensing brings in over $1 billion a year. IBM didn’t give away the crown jewels: they gave away technology that was more valuable as a marketing tool.

And…

License to Create a Standard. This is the option Tesla chose in opening up its patents. Under the standard strategy, a company holding intellectual property benefits by being able to remove impediments to greater market acceptance.

Back in the late 90s, Apple invented an input-output standard called FireWire. The performance was terrific but it insisted on high royalty fees. Intel, meanwhile, came out with USB. It wasn’t initially as fast, but it was free. USB became ubiquitous and gave PC manufacturers a way to upgrade their product lines and more easily turn laptops and desktops into a central entertainment hub.

How do you know when to license for cash and when to license to create a standard? It depends less on the elegance and complexity of the technology and more on whether or not it’s central to the ultimate success of the product. A FireWire-enabled PC isn’t much different than a USB-enabled one. A bigger problem is that FireWire might have added $20 or more onto the price. By contrast, the DVD consortium had to license: the entire capabilities of the product were wrapped up in the IP the inventors brought to the table. (Chinese manufacturers and academics call the experience “The DVD Mistake” and believe China should have come up with its own standard.)

So back to Tesla. Are people buying their cars because of better battery management or charging interfaces? No. They want a Model S so everyone asks them about it when they show up for a wine tasting event at the Rosewood Hotel. General Motors could adopt the technology to improve the range of the Volt, but it won’t dent Tesla’s market share.

Instead, the patents can help prevent annoyances. Office building owners potentially won’t have to worry so much about whether or not they are installing an EV charger that is incompatible with some cars. Battery and car manufacturers can use the patents to reduce R&D budgets.

It is also important to note that car manufacturers in particular hate licensing. They will buy components—Tesla has cut deals in the past to sell battery packs–but resist purchasing abstract rights. Tesla probably had little chance of licensing, making number one not much of a possibility.

At this juncture, it remains difficult to tell if anyone will take Musk up on the offer.  Car companies are notorious for being wary of technology not adopted within their four walls. Toyota is phasing out its deal to get battery packs from Tesla. But the deal gives the company another dose of good publicity and holds open the promise of eliminating a few potholes in the road.

 
 

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