Procter & Gamble’s

decade ago, Procter & Gamble’s paper-towel production line in Albany,

Georgia, used to jerk to an unexpected stop more than a hundred times

daily, costing the company thousands of dollars each time in wasted product

and lost production time. To solve the problem, P&G developed a suite of

sophisticated technical and statistical tools that not only helped managers

predict such assembly line snafus but also prevent them. This “reliability engineering”

technology has given the company an important competitive advantage

over rivals, as it has helped P&G boost manufacturing efficiency by more

than a third and save billions of dollars in the years since it was introduced.

It came as quite a surprise, therefore, when Procter & Gamble announced

in the summer of 2000 that it would henceforth license this same technology

to any and all bidders — including its own competitors. The company is

known, after all, for being fiercely protective of its proprietary innovations

(witness the forced bankruptcy of rival diaper-maker Paragon Trade Brands

in 1998 after P&G won a patent suit against it). Yet suddenly P&G was offering

(for a price) to share with other companies not only its reliability-engineering

tools but its entire stock of 28,000 technology patents as well.

Although Procter & Gamble’s decision stumped industry analysts at the

time, the company’s move is actually part of a larger trend (see also Henry

Chesbrough’s article, “The Era of Open Innovation,” p. 35). P&G, in fact, is

only one of a small but growing number of Fortune 500 firms such as IBM,

BellSouth, Boeing, Rohm and Haas, and Motorola that are moving away from

a strict reliance on the “exclusivity value” of their patents and other intellectual

property — that is, their power to exclude or hinder competitors — and

are instead seeking to tap the often-enormous financial and strategic value of

their core technology assets by licensing them to other companies, including

competitors. The practitioners of this strategic licensing, as it is called, are betting

that any loss of market exclusivity that may result from making available

their “crown jewel” technologies will be more than offset by the financial and

strategic benefits gained.

Mining the Value of Intellectual Property

Strategic licensing is emerging against the backdrop of intensified

efforts by corporate America to maximize the return on its intellectual

property assets, which now account for 50% to 70% of the

market value of all public companies.1 Patent licensing, for example,

has become a growth business — revenues have skyrocketed

from only $15 billion annually a decade ago to more than $100

billion today2— as companies have sought to tap the value lying

fallow in the 70% to 80% of corporate technology assets that typically

never get used in core products or lines of business.3

Until recently, companies either limited their licensing to

technologies that were not central to their main business or

licensed core technologies only to companies in noncompeting

industries. P&G’s licensing of an enzyme used in Tide to a contact

lens maker for use as a nonabrasive lens cleaner is a good

example of the latter. But with pressure mounting on companies

to shore up their recession-battered bottom lines by any and all

means, executives have now turned their attention to the stored

value within their organizations’ crown-jewel technologies.

The strategy is not without risk. “It’s a delicate balancing act

in which the business case varies in each situation,” says Daniel

M. McGavock, managing director of intellectual-property consulting

firm InteCap, which helps Fortune 500 companies execute

licensing and other IP “value realization” programs. “On the

one hand, you don’t want to abandon your patents’ ability to

exclude competitors from your market. But on the other hand,

you could be talking about hundreds of millions of dollars in

new revenue from strategic licensing, not to mention a host of

strategic benefits.” The challenge, he says, is to ensure that any

strategic-licensing effort is undertaken only with the utmost care.

“Companies must have a rigorous process in place,” says

McGavock, “that enables them to evaluate quantifiably both the

risks and costs as well as the potential benefits of any strategiclicensing

initiative for the whole enterprise.”

To judge from the results of such initiatives to date, the most

powerful benefits are economic. No company demonstrates this

better than IBM, which earned an astounding $1.7 billion from

technology licensing in 2000 alone.4 These revenues came with a

98% profit margin and accounted for roughly 20% of the company’s

net income in that year. Although no other company can

match IBM’s success in profiting from strategic licensing, others

are certainly trying. Motorola, for example, launched its own

program in July 2001 with the announcement that it planned to

sell its most advanced cell-phone microchip sets, software and

production tools to any company that wanted them — even to

major rivals of its own handset unit. According to Ray Burgess,

director of strategy and marketing for Motorola’s semiconductor

operations, the licensing and other leveraging of this cell-phone

technology could help to add as much as $10 billion to the company’s

annual revenues by 2005. Purchasers of the technology meanwhile, will be able to reduce their costs and design time and

bring their own phones to market more quickly.

Of course, by forgoing the exclusionary barriers that its cellphone

patents could otherwise have erected against rivals, the

company does risk some loss of market share. But as the New

York Times noted, Motorola is betting that “any increase in the

competitive pressures on its handset business, the company’s

largest unit, will be more than offset by billions of dollars in new

revenue and healthy profits for its chip business.”5

Pursuing Strategic Advantage

The benefits of strategic licensing are not just economic.

Everyone interviewed for this article pointed out that licensing

can also be a powerful means

...