Open Innovation and Open Business Models: A new approach to industrial innovation

Presentation to Joint OECD/ Dutch Ministry of Economic Affairs Conference on Globalization and Open Innovation Dec. 6, 2006 Henry Chesbrough
2006 Henry Chesbrough

Haas School of Business UC Berkeley

Agenda
Open Innovation Open Business Models Implications for Managing IP Policy Implications

2006 Henry Chesbrough

The Current Paradigm: A Closed Innovation System

Science & Technology Base

The Market

Research Investigations

Development

New Products /Services

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R
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The Open Innovation Paradigm

Licensing
Other Firms Market

Internal Technology Base External Technology Base

Technology Spin-offs

New Market

Current Market

Technology Insourcing
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Open innovation in practise

License in Spin in Acquire

Spin out License out

Divest

The creation of new businesses is a highly dynamic process, best represented as a horizontal funnel (passed in iterative steps)
Robert Kirscbaum, DSM: Research & Technology management, July August 2005
5 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

Closed Open innovation

Other firms market

Licence, spin out, divest Internal technology base

Our new market

Internal/external venture handling External technology insourcing External technology base

Stolen with pride from Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004
6 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20

Our current market

IBM & Open Innovation

Other Firms Market

Internal Technology Base External Technology Java, Base

Linux
2006 Henry Chesbrough

$1.9 B licensing, OEM for semi cos ODM for others

New Market

Global Svcs Sun, and others eqmt

Current Market

Technology Insourcing
D
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Is this just for High Tech? Procter &Gamble

Use it or Lose it Internal Technology Base External Technology Technology Base
Scouts
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Other Firms Market

New Market

Current Market
Venture Acquisitions Spinbrush D Large Acquisitions Gillette
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The Logic of Open Innovation

Good ideas are widely distributed today. No one has a monopoly on useful knowledge anymore. Innovation is now done within networks of firms, rather than within a single firm Not all of the smart people in the world work for us.

2006 Henry Chesbrough

Agenda
Open Innovation 9 Open Business Models Implications for Managing IP Policy Implications

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Which Would You Rather Have?

A Better Technology Or, A Better Business Model

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Go with the Business Model

Business Model > Technology
Ability to profit from technology Ability to scale technology Ability to continue innovating technology Ability to acquire technology

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IBM: Its Closed Value Chain

All IBM pre 1993
Solutions Value-Added Activities
Applications Productivity SW Operating Systems Computers Chips, devices

Atoms

Materials

Value Chain
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IBMs Open Business Model

Solutions Value-Added Activities
Integration Applications Productivity SW Operating Systems Computers Chips, devices Materials Other Integrators Applications Productivity SW Operating Systems Computers Chips, devices Materials

Atoms

IBM Chain
2006 Henry Chesbrough

OEM Market
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IBMs Open Source Business Model

Spends about $100M each year on Linux
50% for general improvement 50% for specific improvements for IBM gear

Others spend another $800M a year IBM creates value through Linux
Also donates development tools, patents

IBM captures value through value-added services and software up the stack
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Agenda
Open Innovation Open Business Models 9 Implications for Managing IP Policy Implications

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The Role of IP in the Business Model

A business model has two functions:
1. Value creation 2. Value capture

IP is critical for value capture in many business models IP can also be valuable in creating value
Setting standards Intellectual commons Defining the space for the innovations of others
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Fig. 4.1 Evaluating Technology Alignment with Patent Coverage

Patent Coverage

Technology Coverage

Unused Protection Region

Protected Region

Unprotected Use Region

Party 1
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Fig. 4.2 Complex Technology Alignment with Patent Coverage, when Two Parties Have Conflicting Claims
Patent Coverage Technology Coverage

Party 1
Patent Coverage Technology Coverage Assertion Region

Party 2
Impaired Region

Infringement Region

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Fig. 4.3 Complex Technology Alignment with Patent Coverage, when Second Party does not Practice Technology
Patent Coverage Technology Coverage

Party 1
Patent Coverage

Now Irrelevant Assertion Region

Party 2
New Infringement Region

Infringement Region

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Fig. 4.5 IP Mapping Value Chain Analysis: Printers

Enabling Technology Equipment Installation Consumables Operation Repair and Service

Controllers

Manufacturing

Site Prep

Ink

Programming

Diagnostics

Print Heads

Integration

Assembly

Paper

Monitoring

Testing

Lasers

Testing

Quality Control Scheduling

Procedures

Sensors

Connectivity

Parts

= Moderate IP risk = Strong IP position (possible assertion opportunity) = High IP risk = Low IP risk
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The IP Management Life Cycle

Figure 4.6

Stages in the Technology Life Cycle

Maturity P erfo rm a n c e Decline

Growth Emerging

Time

Become the standard

2006 Henry Chesbrough

Grow the standard

Compete within the standard

Harvest the standard

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Managing IP for MS Windows

Mature market in US
Windows has won the war to be the standard So strongly enforce copyright to prevent piracy Every illegal copy of Windows is money lost

Growing market in China

Windows and Linux still battling So do NOT enforce copyright (not yet) Every illegal copy of Windows is one less for Linux

IP Management Must be Driven by the Business Model

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The IP Management Life Cycle

Figure 4.6

Stages in the Technology Life Cycle

Maturity

US
P erfo rm a n ce Decline

China
Growth Emerging

Time

Become the standard

2006 Henry Chesbrough

Grow the standard

Compete within the standard

Harvest the standard

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Example of recorded reassignment:

Intellectual Ventures LLC, a technology development and licensing start-up formed by Microsoft veterans Nathan Myhrvold and Edward Jung, has won the bidding for General Magic Inc's portfolio of patents and other intellectual property, paying $300,000. (Wall Street Journal, May 29, 2003)

REASSIGNMENT INFORMATION Date Recorded: July, 25 2003 Assignor: General Magic Inc. (Date signed 04/23/2003) Assignee: Intellectual Ventures Patent Holding Reassignment Kind: Assignment of Assignor Interest Number of Patents reassigned: 20 C 2002 Henry Chesbrough

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USPTO Patent Reassignment Data

Patent Reassignments - 1980-2003
100000 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 RY=1980 RY=1981 RY=1982 RY=1983 RY=1984 RY=1985 RY=1986 RY=1987 RY=1988 RY=1989 RY=1990 RY=1991 RY=1992 RY=1993 RY=1994 RY=1995 RY=1996 RY=1997 RY=1998 RY=1999 RY=2000 RY=2001 RY=2002 RY=2003

Rising faster than base of patents itself, from 0.1% to 4.0%

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Main Reassignment Kinds

Assignment (of assignors interest) Security agreement/termination Government interest assignment Executive order 9424, confirmatory license Merger Change of Name Other From the examination of semiconductor class:
Change of Address License Confirmatory license Conveyance of patent & trademarks Correction to an error in the patent number Release by secured party Release of security interest in patents and tradem Release of security interests Security interest Termination and release of assignment of security Transfer by operation of law C 2002 Henry Chesbrough Amended and restated patent and security agreement and mortgage

Offered as an option in the PTO 1595 form

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Reassignments in Semiconductors (H01L): 2003

Pure & Autonomous 3%

Other 6% License 1% Merging 2%

Impure & Autonomous 3% Ind. Inventors 1% Securitization 23%

Affiliated Co 61%

C 2002 Henry Chesbrough

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Security: US 5149397
Two reassignments for this patent:
Date 06/21/2002 06/25/2003 Assignor Xerox Xerox Assignee Bank One JPMorgan Chase Bank Reassignment Kind Security Interest Security Interest

Patent: Fabrication methods for micromechanical elements, originally assigned to Xerox corporation. Application date: 1991.07.03. Date issued: 1992.09.22

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Whats Going On?

Your findings are consistent with what I have seen. That is, I have seen more security interests being taken in a company's patent rights (typically to collateralize debt). The beginnings of a secondary market for IP.
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IP Secondary Markets in the Future

Orphan recovery programs Failed Startup IP auctions Use It or Lose It corporate policies Bounties and Finders Fees Sale-Leaseback programs Patent roll-up strategies Patent commons areas
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2006 Henry Chesbrough

Agenda
Open Innovation Open Business Models Implications for Managing IP 9 Policy Implications

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Policy Implications
Case Study: US economic malaise in the 1980s
Autos Steel Consumer electronics Shipbuilding semiconductors

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US Resurgence in the 1990s

New companies, new industries
PCs, networking, software Internet Biotechnology New kinds of semiconductors

Note that the troubled firms in the troubled industries did not improve much
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Closed v. Open Policies

Focus on expanding domestic market Protect local champions from foreign competition Subsidize largest domestic firms Limit foreign students and foreign direct investment
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Focus on SMEs Focus on universities Focus on IP policies Stimulate greater competition among largest firms Stimulate greater information exchange and coordination
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Getting the Institutions Right

Public research funding
The foundation of the innovation system Focus on excellence, meritocratic award criteria

IP
Clear, effective, but limited protection

Universities
Meritocracy in research funding Allow professors to engage with industry Compete for best and brightest students Enable research to move into industry
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The Challenge of Indirect Policies

No clear constituency Time delay from policy change to results Interaction among institutional factors, not a single factor solution We underestimated strength of US innovation system in 1980s
We may be underestimating its weaknesses today

Note that Japan has regained ground, with a very different institutional structure than US Note that OECD estimates Chinas R&D > Japan
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