As the saying goes “if you build it, they will come”. However, in today’s knowledge based economy, ‘building it’ yourself is not necessarily the strategy that will create the highest return on investment. Instead, higher margin returns are increasingly owned by those who license or sell intangible assets, either instead of, or in addition to, solely deploying (building) products.
This has largely been driven by a paradigm shift in innovation and commercialization, which has led to many companies evolving their business strategies to aggressively leverage their intangible assets and attack those who trespass on them.
Today, most business’ look to unlock intangible asset value through three core business models:
Deployment – which involves turning the idea/intangible asset into a product (or service), which is then manufactured, marketed and distributed;
Sale – which involves selling your idea to a third party (who then either licenses it on or deploys it themselves).
Each of these business models require different levels of inputs, being risk, resources and time; and generate very different levels of output. Fundamentally the more you put in, the more you get out, with a very rough rule of thumb being that for every dollar you make selling intangible assets outright, you will make $3 licensing them and $9 deploying them. However that’s not the end of the story.
Deployment: greater risk, higher rewards
When it comes to business models, deployment tends to be the most input hungry but it can also produce the highest economic output. However, “output” represents a business’ absolute return, rather than the margin or overall return on investment.
The significantly higher inputs required for a deployment model mean that even though it might generate absolutely more outputs, when compared to the risk, resource and time required, business’ may find that they are better off licensing or selling an idea.
In fact some of the highest margin industries in the world such as content generation (Disney, Hollywood), software (Microsoft, Apple) and design (LVMH, Prada) are based around sale or purchase of intangible assets.
To license or sell?
Beyond deployment, licensing or sale of assets can create powerful benefits. For small companies with innovative intangible assets but limited capital or market access, sale or license of those assets can be extremely lucrative.
For example, we assisted a small company to license a unique dairy packaging. The business had a culture of coming up with innovative ideas, but did not have the capital available to manufacture or sell large volumes of units. In this instance, we negotiated a licensing agreement for the packaging, which led to royalties being paid on over a billion units.
In another example, we worked with a failed start up to sell its intangible assets. The sale generated a 45X return to shareholders – vastly more than the company could have ever made if it had launched the technology itself and proving that there can still be value in intangible assets, even when a company fails.
Sale and licensing can also prove to be a lucrative path for larger, established company’s too if they have intangible assets that are either not being utilized or fall outside core business. In these instances, selling or licensing those intangible assets is an extremely effective model for generating additional revenue or releasing capital back into the business.
For example, in the early 1990’s IBM’s enormous patent spend led it to switch from a protection-focused intangible asset posture to actively licensing these assets. Within three years it intellectual property unit moved from being a net-cost center to generating over $1 billion in net earnings. IBM would needed to have sold $20 billion worth of product to generate the same level of earnings.
So what should companies do?
In the first instance, companies need to increase awareness and understanding of the intangible assets they hold, beginning with answering:
What intangible assets do we own?
What is the extent and nature of the intangible asset risks we face?
What is the impact of our intangible assets on the company’s performance?
How can we unlock our company’s intangible asset value?
Addressing these questions will help companies take a more measured view of how they manage and utilize intangible assets. Then, when the organisations innovates, invests in new R&D, develops a new brand or acquires a company, management can objectively assess the intangible asset position of the new initiative and determine what strategy to utilize in order to unlock value from the asset – whether than be deployment, sale, license or a combination of these approaches.
Don’t just default to deployment
So what approach to take? Despite the lower inputs requirements and the significant advantages license and sale can deliver, deployment remains the default setting for virtually all companies. Often entrepreneurs, inventors want to ‘see the idea through’, whether or not this strategy will provide the biggest return on investment in the long run.
Across our offices we see roughly 20 new ideas a week – fewer than 5% of those companies approach us with an initial strategy to license or sell their intangible assets – they almost universally focus on deployment. Most companies have never even considered they could potentially generate a far stronger return on investment by adopting a different model.
One of the most effective ways to assess which model is going to best suit a business is by analysing the intangible asset themselves. Some forms of intangible assets lend themselves more to one model or another.
For example content (such as a movie or music) or code (software) are typically protected by copyright and lend themselves more to licensing. But these assets can also be sold, and if the right buyer can be found, then a sale may be more lucrative in the long-run.
Other intangible assets such as know-how or confidential information tend to lend themselves more towards deployment, but these assets can also be licensed. Likewise, brand (protected by trademarks) can be one of the most valuable intangible assets and extremely lucrative when licensed. A strong patent can be usefully leveraged via any of the three approaches.
A combination of the models can also generate powerful advantages and business flexibility: for instance, deploying in one territory or market segment and licensing in another. Another option can be to sell your intangible asset and license it back for use in your own industry while the buyer uses it in others.
Although the default strategy for most companies is to deploy, in today’s business environment this should no longer be the case. Today, high margin returns are increasingly owned by those who license or sell intangible assets, either instead of, or in addition to, solely deploying products.
Paul Adams is CEO of EverEdge Global, one of the world’s leading intangible asset specialists. Paul has seven times been named one of the world’s top intellectual property strategists. He can be contacted at firstname.lastname@example.org
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