Rembrandts in the Attic: Unlocking the Hidden Value of Patents.

Reviewed by John D. Trudel

This book is perhaps the first of a new genre -- books that treat the protection of intellectual property as integral to corporate strategy and economic policy. Though it has some of the flaws often found in pioneering works, and though it contains one glaring omission, it is worth reading. It discloses the secrets surrounding the use of patents in business competition today and shows how leading firms such as Gillette and IBM use patents to boost profits and enhance their success. The authors are commended for making a breakthrough; moving an esoteric and arcane subject into the mainstream and getting Harvard Business School Press as a publisher are significant accomplishments.

For 200 years the U.S. had the world’s best patent system. It was open and fair, and it helped spawn 95% of the commercial innovation in the world.¹ The Japanese, for example, attribute the U.S.’s phenomenal success at creating prosperous new industries (Silicon Valley, the Internet, the PC, semiconductors, and on and on) singularly to its patent system. Indeed, 99% of the U.S. manufacturing base and 50% of its exports exploit patents.² It should, therefore, be no surprise that knowledge assets are fiercely contested during trade negotiations, and that the post Cold War era is becoming one of Patent War.

If this book had come out a year earlier it might have changed history, but in late 1999 the U.S. Congress totally rewrote the laws on patents. The legislation to rewrite the U.S. patent system had been blocked for years. A quorum of America’s Nobel laureates (including all those in economics regardless of political stripe) wrote the Senate requesting extensive open debate and warning of potential lasting economic harm. That debate never happened and the law finally passed. Thus this book has the problems of an early work, and is also outdated.

Critics say the new legislation sells-out the U.S. patent system to accommodate Japan, and that it removes oversight and invites improper influence.³ Advocates claim the American Inventor's Protection Act of 1999 was reform needed to help inventors.⁴ Whatever labels and spin one prefers, how fairly the new law will treat emerging firms is a area of major concern. Software and Internet companies want to be shielded from junk patents that may block them from doing business -- for example, the infamous Amazon patent on clicking a mouse to place an order on the Web.⁵ Conversely, new ventures and independent inventors want to own their innovations, and venture capitalists want their investments protected. Anything that might compromise that ability threatens them. In any case, the book omits discussion of this controversial new law.

Still, while the new law may impact the ability of some firms to implement a patent-based strategy, the book’s other points are valid. It correctly sees intellectual property as a strategic asset and competitive weapon of enormous value. Indeed, without patents, the future of a business may easily be owned by someone else. Consider what Intel would be like without its patents on microprocessors; or Disney without the rights to Mickey Mouse or Fantasia; or Monsanto’s dilemma as its patents on Roundupâ expire. Indeed, the new knowledge-based economy makes intellectual property important as never before. IBM, for one, gets a billion dollars a year in free cash flow from patent licensing. And there has been an explosion of patents in recent years. Microsoft, for example, had only one patent a decade ago; now it has some 800.

The book does tend to make intellectual property issues seem genteel. That’s wrong. Unreported, for example, was IBM’s aggressive strategy of using its massive arsenal of patents to pressure customers into buying its OEM products. That gets IBM over $30 billion a year. As N.C. Wellman of Cisco said, "They get you to [agree to] buy more products from them, [so] they will issue a cross license."⁶ The game is hardball, and the stakes are high.

IBM and Microsoft get it. They led the lobbying to rewrite U.S. patent law. They say they acted to help inventors. I say they used political influence to tilt the playing field for their advantage. That was a clever move that exploited the inattention of their competitors.

Even now, surprisingly few CEOs even know the rules have changed, and fewer grasp the implications. Most U.S. firms are careless about intellectual property assets. Despite notable exceptions such as Microsoft, IBM, and Intel, most large companies are inept in this area. Many ignore patents or make them a clerical exercise, a box for project managers to check and for lawyers to process. Worse, top management routinely delegates policy matters on intellectual property to its lobbyists and lawyers. That helps explain why half of all U.S. patents go to foreign firms, and most of the rest go to small firms, universities, and individual inventors. ⁷

One of the authors of this book formed a software company that makes mapping software to chart "patent space." It is a spreadsheet for patent issues that tracks and analyzes patents for strategic planning purposes. That tool helps managers visualize opportunities. For example, one hot technology is digital video. Using the author’s mapping techniques, one can see that Intel has twelve patents in image analysis, but only three in digital audio and cryptographic encoding. Intel’s patents aid video conferencing, but they miss the areas that help video gaming. Another hot area is E-Commerce transactions: Citibank holds 12 patents and IBM 7. A surprising amount of the high ground on this is Japanese-owned.

The Japanese have tracked the intellectual property activities of individuals and firms for decades. They are notorious for "bracketing" their patents. For a simple example, imagine that you patent a wagon and that is a hot market. Japanese firms would patent a red wagon, a blue wagon, a green wagon, a wagon with wire wheels, and a dozen other types of wagons. Dare to market your wagon and you’ll find yourself at a real disadvantage. Computerized intellectual property mapping tools greatly facilitate such strategies. They could easily be used to track patent applications (formerly held in confidence, but no longer), and to preempt disruptive upstarts by blocking or delaying their pending patents.

In any case, using patents for strategic clout demands companies shift their focus and organizational structure. Companies must make patents a corporate issue, instead of a project or a techno-legal issue. Most will use outside consultants (such as me) to effect those changes -- so to create more value from new products and services. We and our clients should search the corporate attics for Rembrandts. The threats and opportunities are real. The rewards are high!