Monday, November 30, 2009

Markets for IP and innovation

In discussing open innovation with some visitors today, we got to talking about markets for innovation — which are similar to (but not the same as) markets for IP.

There are two modes of open innovation, outbound and inbound, and the outbound mode depends on being able to monetize the innovation. Maybe if you’re IBM you can rely on indirect monetization (NB: IBM Global Services) but most companies need more direct monetization. Inbound OI works as long as there is a supply of innovations, which might be motivated by money or by non-monetary incentives.

So I was asked, how do firms find innovations? In other words, how are markets organized? We know from economics that markets play a number of important roles, including search, matching buyers and sellers, providing feedback/constraint on claimed quality/performance and price-setting.

From easiest to hardest, I think there are three types of innovations that might be sourced via open innovation:

  • components, such as semiconductor chips
  • IP, such as non-exclusive (or exclusive) patent rights
  • custom innovations, such as Threadless or other user-generated content
Search can be difficult, but is greatly improved due to the Internet. As with any market, matching a price to quality/features is the hard task, particularly for new or thinly-traded goods.

To me, the advice given for one of these markets for innovation would not necessarily apply to the others, because they are sufficiently different that lessons from one might not transfer to the others.

Similarly, there are two (or three) different IP business models. For some companies (such as Dolby or Qualcomm) IP licensing is the primary business model and thus revenues have to cover all IP development costs. For others, the IP revenues are incidental or supplemental, and “success” here means incremental revenue but not necessarily enough to justify the R&D in the first place.

A subset of the incidental case (or perhaps a separate case) is the salvage case, as when Xerox is unloading the Xerox PARC patents to boost the bottom line because they never figured out what to do with them in the first place. A salvage operation is particularly misleading as a role model, because usually the IP is being sold for a fraction of its original cost on the theory that some revenue is better than nothing.

So a word to the wise: don’t believe a consultant if he tries to sell you a one-size-fits all innovation market (or IP licensing) strategy. One size does not fit all.

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