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Introduction
Government used to be a loose coalition between the industrialist/producers and the politicians.
The system worked reasonably well.
“We’ll create lots of jobs” – said the industrialists – “if you’ll give us permission to do X and Y so that we can make lots of Z and sell it to the consumers”.
Of course the governments eyeing all that potential PAYE (payroll) taxation from the job creations and the sales tax from the consumer sales – said YES of course we can….
As Governments said YES to development proposals, the work force grew. The population were all employed and everyone was happy. (OK, comparatively).
The shareholders of the industrialists wanted higher returns, the industrialists looked to see where they could cut costs and increase revenues.
The promised jobs turned into requests for government job support handouts….
Alterations in accounting methods to minimise taxation started to appear…..
We’ll fix that said the lawyers… We have a scheme that will take care of it all. We call it the bottom of the harbour scheme.
That one didn’t last long, but the fallout resulted in the Asprey report which recommended a couple of new “policing taxes”;
In 1985 a capital gains tax was introduced and in 1986 the fringe benefits tax was introduced. The primary motivation behind these base broadening measures was to address gaps in the income tax base, which had led to growth in tax avoidance and evasion activity.
So the “bill” for the lawyers and accountants “scheming” in the late seventies was delivered to all Australians by 1985 in the form of extended taxation consequences.
Lawyers of course are a bright bunch… can’t keep a good lawyer down, they soon came up with a new whiz bang scheme…
“Patent Royalties” said the industrialists lawyers, Trademarks, copyright….. that’s where the next big increased revenues will come from.
Chapter 1. Royalty Revenues
We often read the refrain, Copyright and Patents enhance innovation.
I am able to find several references that suggest that Patents, Trademarks and Copyright are a growing (11 billion in 2007) business for the legal profession.
Yet I am unable to find a single (empirical) paper from an economist that proves this popular industry theorem. (Stan – stay out of thios one – I’ll get to you eventually.)
Let us review a few industry (annecdotal) claims about Licensing Royalties, surely these will give us some insight into the real value of patents.
Patent Revenue Claims from :
Licensing Royalty Revenues Invention
royalty payment revenues earned by inventors and other intellectual property owners
Example no. 1
$5.5 trillion. Value of U.S. intellectual property as estimated by IBM. “Patent research and recognition is some of the driest work that goes on here. But the U.S. Patent and Technology Office is the guardian of the nation’s intellectual property, which IBM says is worth $5.5 trillion.” (Jim Landers, “Trouble impending in patent process,” The Dallas Morning News, May 1, 2007)
Example no. 2
$500 billion. Annual patent licensing revenues forecast for the U.S. for the year 2005. “In 1990, it is estimated that in the United States alone $15 billion in revenue was derived from patent licensing. In 1998, that shot up 700 percent to $100 billion. It is [predicted] that by 2005, patent licensing revenues will top half a trillion dollars
annually. Amazingly, most American businesses are ignoring an astonishing $1 trillion in intellectual property asset wealth. This is thought to represent the most fertile, yet most ignored, ground for development by corporate chief financial officers. An increasing number of business leaders at companies such as Microsoft,
Lucent, Intel, Dell and Dow Chemical are regarding intellectual property as the new core of the modern business enterprise and a major factor in their success.” Patent licensing statistics.
Intellectual Property (IP) licensing revenues statistics. (Arlen L. Olsen, Contributor, 518-220-1850, “Patents are big
moneymaker these days for companies,” The Business Review – Albany, Friday, August 11, 2000)
Example no 3
$120 billion in royalty revenues generated annually from patent licenses. “Nationwide, an estimated $120 billion is generated each year from patent licenses, up from $15 billion in 1990. With so much at stake, patent disputes increasingly are ending up in court at the expense of the patent holders. According to a University of Texas study, nearly half of those court-examined patents are ruled invalid.” Patent licensing revenue. (Megan Barnett, “Patents pending”, U.S. News & World Report, June 10, 2002) How do you find a manufacturer to license your product?
Example no 4
$100 billion worldwide licensing market. “Licensing is a $100 billion retail market worldwide, with $70 billion in business in North America alone, says Murray Altchuler, executive director of the International Licensing Industry Merchandisers’ Association (LIMA).”
(Cynthia E. Griffin, “License to profit: make your play for a piece of the $100 billion licensing market,” Entrepreneur, January 1, 1997) Find answers to your questions about the
licensing industry.
Example no 5
$1.5 billion in licensing royalties collected by IBM in 2001. “Intangible assets like patents, trademarks, copyrights, and trade secrets are a rapidly growing piece of the U.S. economy.
Since companies collect fees from those who want to use their patented products, the economic rewards from patenting are enormous. IBM, for instance, was awarded 3,411 patents and collected $1.5 billion in licensing royalties in 2001 alone.” Top licensing revenue. How much money does a company get from licensing its product? (Megan Barnett, “Patents pending,” U.S. News & World Report, June 10, 2002)
So IBM’s share of that 5.5 trillion dollars US patent licensing value is 1.5 billion. Hmmmm.
I attended one of those informative talks last year. You know the type, “The Future of the Net and Computers and Communications”.
It was an excellent talk/presentation given by a member of the International IBM Research team.
One item stuck with me all the way through the talk and for the last six months.
On one of the slides, we were told that in 2008 of 53.1 billion services revenue, only 1.2 billion was license fees for patent royalties. (It would appear that royalties are going down – especially as they made 1.5 Bn in 2001)
So let me rephrase that, IBM,………-
Let me use their words:
World’s largest information technology research organization
• More than 3,000 scientists and engineers at 8 labs in 6 countries
• IBM spent $6B on R&D in 2008
• Patent leader for 16 years straight
• 5 Nobel Prize Laureates
focusing on:
have only managed to amass enough intellectual property to annually bill less than one sixth of their annual R&D expenditure.
Doesn’t seem like a very good business model to me.
But what do I know…..
Then again 6B R+D – 1.2B Royalty Income = 4.8B tax deduction. (The 9% differentiation in the pre-tax-post-tax distribution had to come from somewhere).
if a small Australian company tried that on with the ATO, [IRS] they would soon get audited…. quick smart. Although to qualify their claim, they do have 40,000 patents in the US alone.
ACTA is supposed to be about protecting intellectual property.
(A small analogy detour.)
However if one of the worlds largest and most profitable companies can only amass annual billings of 1.2 Billion for patent licensing, then I fear that our politicians have been considerably mislead by the industry lobbyists insisting on draconian anti-civil rights legislative changes.
Lets break it down to numbers.
The industry pundits are attempting to convince your legislators to agree to interdict your internet traffic to protect a business that makes less than 1000 movies per year. The average revenue from those thousand movies is only 26 billion dollars.
Therefore the borders of all countries will be closed to electronic devices passing through freely (without inspection) for a mere 26 billion dollars. Or less than four percent of Australia’s GDP.
Or just over twenty times the billing of IBM patent licensing revenues.
So I guess that means that if Australia wanted to shut down all the worlds borders against the illegal trafficking in fake Merino wool products (i.e.: jumpers and suits stating on the label – made with genuine Australian merino wool – when they were not), the worlds governments would agree. Imagine being asked to produce
receipts at the border for the clothes that you are wearing and being asked to produce the receipts of your tailors purchases to prove that the wool really is from X or Y..
I don’t think the public would stand for it.
Yet we are being asked to approve a commercial organisation demanding exactly that for every piece of content being carried through customs on electronic devices.
So the reason we are throwing all logic out the window by listening to the content industries claims of “poor me, poor me” is ???
It used to be they only gave the keys of a city to visiting dignitaries when great achievements were about to be agreed on.
Our politicians are about to give the individual keys to your homes, computers, phones, mp3 players and travel luggage to a commercial mob that will no doubt get paid bonuses for every piece of equipment they confiscate.
I’ve heard of retrograde thinking but this surely qualifies any politician that agrees to such a scheme to an automatic entry in the Darwin awards.
(Back to IBM)
Now IBM is an interesting Company. They have consistently over the last Century come up with the goods to satisfy the largest corporations
and governments of their ability to deliver computing results.
They even managed to get most of us into Personal Computing.
However, they saw the writing on the wall a number of years ago and reorganised their structure to deliver services. Consulting, analysing, reporting and software development.
But we all know what I think of consulting….. that little lady at the markets making candles is adding real wealth to the economy by making her own candles.
IBM used to make things, now they just provide solutions.
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IBM slashes
How do you increase margin whilst your revenues are decreasing?
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WSJ Article; 75% of [IBM’s] EPS growth is a no brainer with a favorable exchange rate of the USD versus other low wage currencies
By taking jobs away from the established economies |
So sacking 12,400 Americans and an almost equal number in Europe (over the last decade) is merely a MARGIN EXPANSION…..
We talked about IBM rebalancing jobs in the EU last month when they shut down 3000 jobs in Hungary (and laid off two of my relations). We mentioned it because the Tera Report seemed to feel that all those manufacturing IT jobs had been destroyed due to file sharing….. and sometimes – ok – most times, jobs are destroyed because shareholders expect the boards of the companies they invest in to do better this year than last year….
So are IBM picking on Europeans?
No, it was a global exit from the manufacturing business that prompted the decision. IBM are now a company that doesn’t make anything.
Guns for hire that charge fifty-three billion per annum for consulting services.
So what does the Australian Government think about that ?
In Kevin Rudd’s words …
“I said when I became Leader of the Opposition, that I never want to be the Prime Minister of a country that doesn’t make anything anymore. I’m determined that there is a strong future for manufacturing in this country.”
Of course, there is a place for services. Otherwise, who would hire all the old consultants?
Intellectual property, correctly used is the wealth of the nation.
However, it is more the knowledge of how to implement that intellectual property than the claims on various patent filings.
As long as the nation is manufacturing, adding value to raw materials and is using the intellectual property to enable that transition.
IBM last year made 55 billion from services. Enabled in part by their intellectual property patents.
There fore the value of intellectual property in IBM’s case could be represented as 50 to 1. or 1/50th of the value of it’s services division.
There is a place for intellectual property, but it would seem from the successful IBM business model, it is only a very small portion of the whole story.
Unless of course intellectual property is only used to litigate.
In that case, the value of intellectual property is a myth and it should be given a lot less attention that it currently receives.
We need to build an environment where industry make things, because It is profitable to do so.
The Australian innovation patent is a good first step.
Allowing one industry to dominate our legislative and judicial systems at the cost of other industry being able to operate is tantamount to drafting a future plan for the bankruptcy of the nation.
Telstra is an excellent example of a company that was allowed to control the economy of the whole of Australia via it’s charging regimes and anti-competitive business practices.
The present Government having realised that, have elected to dismantle Telstra into small, manageable divisions that won’t be able to hold the country to ransom by billing outrageous charges that restrict the flow of commerce.
It is unfortunate that many Australians still do not view the business practices of Telstra over the last twenty years as the single biggest reason why we are so far behind the rest of the world in terms of access provisioning of broadband infrastructure.
Let’s hope that the content industry are recognised for the schoolyard bullies that they are before we inadvertently completely give away all of our civil rights.
If I were the Government, I would be mandating that there will be no more legislative protection offered until, all content is available, digitally, legally. Ubiquitously via all digital services in all countries. THEN if there is a problem that can’t be controlled by alternative commercial means – by all means let’s legislate something… but until then … Meh!
We have discussed the many methods that content could be delivered legally via the file sharing networks.
The content industry, fractured and divided, even amongst themselves, is not all that interested. Even though their revenues from digital sales far outweigh traditional box-office numbers.
The numbers? Sure. Digital sales (where product was available digitally) equal 175 to 1 of box office sales.
Physical units? Sure. Physical sales last year equaled only 124 times box office sales (and dropping).
When they become interested, and creative about finding solutions, rather than just relying on antiquated methods (sue the bastards); that is when Governments should step in to protect their interests.
However, certainly not in any manner that is designed to export any more currency out of Australia.
In other words, there needs to be a creative parity in our content industry with money generated in Australia to be retained in Australia as much as possible.
I leave you with a children’s nursery rhyme that would appear to sumarise the above quite well..
Tinker, tailor, Soldier, sailor, Rich man, poor man, Beggar-man, thief.
The END
POSTCRIPT
Umm Koltai – I’ve been thinking…
What? It’s late – go home already….
I’ve been thinking about all those IBM patents….
The 40,000 U.S. patents which are being added to at the rate of approximately 3,000 per year…?
Yeah, them, so, anyway, I was wondering…. 1.2 billion from 40,000 patents. That doesn’t seem like very much to me …..
I wouldn’t mind it.
Well, yeah but who pays for the renewals of all those patents?
IBM, I guess….
So Koltai, who runs the patenting division?
Um a lawyer? I expect.
Yep, and do you have any idea of what it costs to register an international patent worldwide these days ?
Um between fifty thousand and about two hundred thousand dollars – depending on whether you want just five countries or the lot.
Close enough.
So how much do 40,000 patents cost to renew every year?
All countries?
Yes – all countries…
Are you sure you want to know?
Yes I’m sure….
OK, well that would be about $2,000,000,000 to $8,000,000,000 depending on whether or not you want just five countries or the lot.
Oh. But IBM only made 1.2 billion….. So you mean that patenting has no possible chance of returning anything to the inventor.
Well I guess not if you want to register it globally….
Well if the worlds largest Technology Company in the world cant do it….. how the hell are we going too ?
OK – forget the patent – let’s just make something, anything and sell it…..
Hey – how did everyone get on before patents?
Err, um, well they just copied each other. And then what ?
Well err, they had to innovate constantly to turn out better mousetraps so the consumers would keep buying the new models…
Isn’t that what everyone already does ?
Well yes… but there’s an important middleman that would be out of a job if we went back to the old way of doing things….
Who’s that?
The lawyers.
So Koltai, are you saying that Government is now a coalition of the politicians and the lawyers ?
I guess I am saying that legal jurisprudence has taken over from the former innovation industrial age producers.
At the cost of jobs?
Yes.
References:
Licensing Royalty Revenues
Invention royalty payment revenues earned by inventors and other intellectual property owners
http://www.inventionstatistics.com/Licensing_Royalty_Revenues.html
The BIG Picture: Innovating to Create a Smarter Planet
Dr. Matthias Kaiserswerth – Director, IBM Research – Zurich – Speakers Notes PDF
Global IP protection online
Tuesday, 11 December 2007 19:57
http://www.smartcompany.com.au/information-technology/global-ip-protection-online.html
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