SAN FRANCISCO (The Red Herring) -Patents are big business. In 1998, insiders expect IBM to generate $750 million from its patent portfolio -- twice what it collected just four years earlier. Texas Instruments, which earned $800 million from its patent portfolio in 1995, could earn even more.
Small startups are also getting into the act. Despite the fact that Amati Communications lost $12 million on sales of $13 million in fiscal 1997 (ended July), Texas Instruments paid $395 million for the company in November because of Amati's DSL patents. Similarly, many industry observers say that the only reason Microsoft shelled out $425 million for tiny WebTV last August was to acquire WebTV's strong patent portfolio.
Patents have become especially valuable in the last 15 years because foreign treaties and legislation like the Most Favored Nation Act of 1983 and the Trilateral Agreement of 1983 have established uniform standards for the protection of intellectual property. As a result, patent litigation is at an all-time high. In a high-profile lawsuit last year, Digital Equipment sued Intel for infringing on its patents on the Alpha chip, a high-performance microprocessor for workstations and servers. The dispute was resolved only when Intel agreed to purchase Digital's Alpha manufacturing operations for an estimated $700 million. The semiconductor manufacturing equipment giant Applied Materials is also well known for filing patent litigation. Critics call the company a monopoly in part because of its aggressive policy of patent enforcement (see "Applied Knowledge").
The patenting business can be labyrinthine. To secure and maintain each patent, a company must establish that no other similar work--or "prior art"--has been done anywhere else in the world. It must also determine which technologies are worth the effort and expense of patenting. And aside from paying the authors of these technologies (it is not unusual for employees to receive revenues from a company's patents), companies must keep their patents up-to-date, track what businesses are licensing them, and make sure they receive payment.
With so much money at stake, you would think that most corporations and startups would have constructed elaborate systems for managing the patents they own as well as the patents they license. But many have not. For example, until last year, Oracle, which has a market cap of $26 billion, had only 16 patents and no patent lawyers on staff. (By contrast, Microsoft, which has a market value of $192 billion, had over 450 patents and a phalanx of patent lawyers on staff.)
Managing patents can be problematic for many reasons. First, patents are incredibly complex documents: by law, the definition of a claim in a patent filing can be only one sentence long. Imagine trying to work your way through a single sentence filled with cutting-edge technical information stretching over many pages.
In addition, finding a good patent lawyer is tough. Most patent lawyers must have graduate degrees in both engineering and law, and they must have substantial experience in preparing patents before they can pass the government-administered patent-lawyer exam--a test that 80 percent of all candidates fail each time it is administered. As a result, fewer than 1,000 patent lawyers are accredited every year.
And until recently, most companies kept their patent information locked away in file cabinets. Not only have they lacked a convenient way to access and examine their own patent information, but they've had no means to share it across the entire corporation. As a result, many companies have very little idea what patents they even own.
Patent care
SmartPatents, a 50-person startup in Mountain View, aims to remedy this problem with an enterprise software system that helps companies manage their patent portfolios.
There are plenty of companies in the marketplace that allow corporations to research patent claims over the Web, including Lexis-Nexis, MicroPatent, and IBM (whose Patent Server is free). One level up, Derwent, a subsidiary of Britain's Thomson Group, provides clients with synopses of patents that incorporate commentary. And for anywhere from several thousand to several hundred thousand dollars, companies can also use Manning & Napier Information Services, which can instantaneously compare 20,000 patents and research prior art all over the world, including Russia and China.
SmartPatents maintains that it has created a "knowledge management system" that can serve as a platform for many of these services. A knowledge management system is generally defined as software that captures important information within an organization, codifies it so that it is easily accessible, and provides a means by which it can be disseminated widely. One example is help-desk software.
In the SmartPatents system, customers buy server and seat licenses to a software "workbench" that is Web-enabled and compatible with Windows 95 and Windows NT. For the base price of $50,000, they receive a search engine and bibliographic data on the 2.2 million U.S. patents that have been filed electronically since 1971, European patent information, and a select number of complete (as opposed to merely bibliographic) patent records. SmartPatents has formatted bibliographic data so that it is easy to access, search, and manipulate throughout an enterprise. Depending on its needs, a corporation can purchase SmartPatents modules containing its own complete patent records as well as patents belonging to other companies.
The Inventors Club
Companies that registered the most patents with the U.S. Patent and Trademark Office in 1997.
1. IBM (1,724)
2. Canon (1,378)
3. NEC (1,095)
4. Motorola (1,058)
5. Fujitsu (903)
6. Hitachi (902)
7. Mitsubishi (893)
8. Toshiba (862)
9. Sony (860)
10. Eastman Kodak (795)
With these tools, a company can create a patent database that can be searched across a corporation as well as locally. (Accessing data online can be time-consuming and nonsecure.) Because the SmartPatents workbench product plugs into other enterprise software systems, in the future users will be able to make payments and issue invoices in accordance with their particular accounting procedures, the company says. They can also make extensive annotations to their patent files and share both the patent information and the annotations across the enterprise.
But SmartPatents is aiming to offer a strategic tool, not just a way for corporations to protect themselves against lawsuits. "I could give a rat's ass about the law," says Kevin Rivette, SmartPatents' CEO and a noted patent lawyer. "It's business that I care about."
Property tacks
In the latest version of SmartPatents' software, customers will be able to purchase modules enabling them to group their patents and others' into "decision trees." This feature could provide them with a strategic perspective on their patent portfolios that they might have lacked in the past. For instance, a company might determine that a competitor has cornered an area of technology and change its research budget accordingly. In laying out the evolution of inventions, the software could yield the names of key scientists that a company might wish to snap up. And SmartPatents' modules might give a company a better idea of where competitors are encroaching on its territory by showing which of the company's patents its competitors are citing.
The company has sold its new workbench to six customers, including Hewlett-Packard, Dow Chemical, Clorox, and Lucent Technologies. Lucent became the first SmartPatents customer during its difficult divestiture from AT&T in 1994. Charles Malley, the manager of Lucent's intellectual property division, says that SmartPatents has not replaced other sources of information like Derwent or Lexis-Nexis, but it has allowed Lucent to "centralize a lot of the processing in a common environment." He says that unlike IBM, which has developed its own software system to manage its patent portfolio, Lucent is in no hurry to create its own software to keep track of its 9,000 patents. Malley has heard horror stories about companies that have tried to author their own systems. "The technology just keeps moving out from under you," he says.
Patential wealth
Hadley Reynolds, an analyst with the Delphi Group, predicts that the market for knowledge management software will grow from $150 million today to $1.5 billion in 2000. He thinks that SmartPatents could do well because it has identified a "tight vertical." Bill Hills of the Aberdeen Group is even more enthusiastic. "People talk about intellectual property in general terms, but this is a company that allows you to do a nuts-and-bolts analysis of patent revenue streams," he says. "Nobody has developed a tool or a system like this."
But Ron Shevlin of Forrester Research thinks the entire sector is overhyped. "'Knowledge management' is to the late '90s what 'reengineering' was to the early part of the decade," he says. Shevlin calls the current definition of knowledge management "mushy" and claims that companies like SmartPatents should really be compared to document management companies like Documentum. He expects that groupware packages like Lotus Notes and tools from document management companies like Introspect and DataWare Technologies will eventually subsume SmartPatents' functionality.
Bob Barrett of Battery Ventures, a SmartPatents investor, acknowledges that gauging customer demand will be difficult. Asked if corporations really need patent management software, he replies, "I'll be very candid with you: I think that's the real question--how big is this market?" SmartPatents expects to generate revenues of $6 million to $10 million this year.
To be sure, SmartPatents will have to spend a great deal of effort educating its potential customers. Jeffrey Forman, who works in IBM's international property law MIS department and is a patent lawyer as well, thinks that SmartPatents' system could be a tough sell. First, he says that few companies outside the pharmaceutical and chemical industries are accustomed to spending a lot of money on information. In addition, he claims that stratification in the patent field among companies like Lexis-Nexis, which provides "first level" data; Derwent, which offers "value added" data; and SmartPatents and Manning & Napier, which deliver integrated services, could be confusing to corporations. On the one hand, SmartPatents could "open people's eyes to the value of patents," he says; on the other hand, he thinks that SmartPatents could cause corporations to ask themselves why they should not try to manage their patents themselves.
In response, Barrett says he sees SmartPatents as a platform for patent information. Rivette and Dan'l Lewin, the company's president, echo this claim when they talk about offering push applications that can deliver updates on patents that have changed hands.
Outsmarting the competition
SmartPatents' race has just begun. The company could soon find itself competing against major accounting firms like Arthur Andersen and Coopers & Lybrand, both of which offer consulting services to assist corporations with the management of their patent portfolios. SmartPatents does, however, have an exclusive alliance with Price Waterhouse, which announced a worldwide merger with Coopers & Lybrand last fall.
As a pioneer in its marketplace, SmartPatents practices what it preaches: the company already has 13 patents of its own. But it is hard to imagine that SmartPatents' patents will present a significant entry barrier in a market for information that is so readily available.
SmartPatents predicts that its system will become institutionalized in the same way that PeopleSoft's enterprise software has captured the human resources market. But with so much money at stake, SmartPatents will have to make sure that it is not too smart for its own good.
SmartPatents at a glance
CEO: Kevin Rivette
Location: Mountain View, California
Phone: 650/237-0900
Web: www.smartpatents.com
Ownership: Private
Founded: 1992
Employees: 50
Product: Patent management software
Partner: Price Waterhouse
Competitors: Manning & Napier, Lexis-Nexis, MicroPatent, Derwent, IBM, Arthur Andersen, Coopers & Lybrand
Financing: $9 million
Investors: Battery Ventures, individuals
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