Strategy & Competition

IBM May Not Be the Patent King After All

No one beats IBM (IBM) on patents. For 17 years running, Big Blue has been granted more U.S. patents than any other applicant, raking in an ­unprecedented 4,914 in 2009. That tally is more than the number of patents granted last year to Microsoft (MSFT), Hewlett-Packard (HPQ), Oracle (ORCL), Apple (AAPL), Accenture (ACN), and Google (GOOG) combined. IBM's worldwide portfolio now covers more than 40,000 inventions for everything from microprocessors for video games to the ­erasable read-write CD.

Nonetheless, a study conducted for Bloomberg BusinessWeek by Ocean Tomo, a Chicago intellectual property consulting firm, concludes that IBM's collection of U.S. patents over the past five years ranks only eighth in value. No. 1 is Microsoft, which ranked third, with 2,906 patents issued last year.

"The arms race approach doesn't pay off," says Mark Chandler, general counsel of Cisco Systems (CSCO). "It doesn't do you a lot of good just to have a lot of patents."

IBM maintains one of the last university-like laboratories in American business and, based on outlays through the first three quarters of 2009, the company spent $5.8 billion on research and development last year, or 6% of its total revenue. Aside from protecting its products and services from imitators, IBM's patents produce considerable income: Fees from licensing and custom-developing intellectual property for other companies through Sept. 30 were on track to top $1.1 billion in 2009. "Their patent department is a profit center," says Bruce Lehman, former head of the U.S. Patent & Trademark Office and now chairman of the International Intellectual Property Institute, a Washington think tank.

The race for patents is not merely a matter of bragging rights. Pfizer (PFE) relies on a single set of patents covering cholesterol drug Lipitor for a fourth of its total sales, an estimated $11 billion last year. Qualcomm (QCOM) collects almost all its revenue—$10.4 billion in 2009—from selling licenses for and making the chips containing its patented 3G mobile-phone technology, known as CDMA.

too many service-related patents?

IBM may be shortchanging itself, according to the Ocean Tomo study. To determine the firepower of companies' patent portfolios, the consulting firm analyzed five years of patents awarded to the world's 1,000-largest public companies by revenue. Among the dozens of measuring sticks Ocean Tomo used to judge the significance of a company's breakthroughs were the number of prior patents cited, patent renewal payments, and litigation.

In all, Microsoft's portfolio was assessed at 3.3 times that of IBM's. "This is something that IBM people won't accept, but it's accurate nonetheless," says Steve Lee, president of Ocean Tomo's patent-rating division. He says IBM's portfolio includes a large number of service-related patents, which do not command as high a price as the video-game and software patents that heavily weigh in Microsoft's portfolio.

"The ultimate value is not some rating," says Manny Schecter, IBM's chief patent counsel. "It's the leverage we are able to get from the patent [licensing] negotiations."

At Microsoft, Horacio Gutiérrez, the company's chief intellectual property officer, says patents are treated not as a profit center but "as a currency that you use to trade to another company" for its patents. Volume is an important gauge of a company's innovation, he adds, but "only if they are high-quality patents."

LeVine is a correspondent in BusinessWeek's Washington bureau.

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