hksar ip trading

A Presenta*on at Hong Kong Business Associa*on of Hawaii -‐ Hong Kong/China Forum @ Hilton Hawaiian Village, Honolulu, HI (June 4-‐7, 2014)

Prepared by: Al Kwok Member, HKSAR “IP Trading” Working Group Founder, Interna*onal IP Commercializa*on Council

Governor & Co-‐founder, Savantas Policy Ins*tute President, CASPA PRD Chapter Founder, China Interna*onal Intellectual Property Services Former VP & CIPO, NetLogic Microsystems (“NETL”)

HKSAR IP Trading

A Report on HKSAR “IP Trading” Initiative – Redefining HKSAR's Future!

June 7, 2014 1

Evolution of Intangible Assets – U.S. Companies

Knowledge-based Economic Trend

June 7, 2014 HKSAR IP Trading

Mkt. Cap. / Intangible Asset: 1)  Apple: ~US$656B / >99% 2)  Foxconn: ~US$5B / <20%

2

Global IP Commercialization Market Trend�!  Past:

!  Traditionally patents regarded as internal assets and parts of trade secrets

!  Cross-licensing as a means to avoid infringement lawsuits and speed up product/market development

!  Trendsetting: !  In early 1990s, IBM started patent licensing and selling !  Over the years, the global market for patent trading

and licensing has taken shape !  Now:

!  IBM now makes US$1.5B per year from their patents !  Patent trade is a multi-billion dollar market !  Various IP transactions (incl. M&A) at hundreds of

billions !  Nortel for $4.5B, NetLogic for $3.7B, Motorola Mobility for

$12.5B

June 7, 2014 HKSAR IP Trading 3

Pillars for Knowledge-based Economy (KBE) IC IT IP

Hardware Network Know-how/Content Functionality Physical devices Connectivity Experience sharing Scalability Moore’s Law Metcalfe’s Law TBD!?

Scaling Factor 2X/18 mon. Value ~ n2 Value ~ XR (X, R >1) Disruptive Driver CMOS (IDT) IPv4/6, Internet,

QoS (NMI) Apple iTunes ->

“Unified IP Pooling” Driving

Product/Service Memories & CPU

=> SOC QoS, Mobile Multimedia

Standardization for scaling

Start Time ~1985 ~2000 ~2015? Mkt. Size (20 yr) ~$300B Trillions Zillions?

June 7, 2014 HKSAR IP Trading

•  Evolution of Knowledge-based Economy (KBE): IC -> IT -> IP •  Value of IP is based on its “Reusability” and “Ability to Share”:

•  The more it is reused, the higher its value is •  No physical limitation: IP can be used by many users at the same time

•  The impact of “free-market IP sharing” on KBE is immeasurable

4

Drivers for IP Commercialization�!  Semiconductor (Moore’s Law) & IT (Metcalfe’s Law)

Revolutions triggered Business Model Changes !  Shortened Product Lifecycles induce tech transfers to speed up

R&D !  Globalization of Business Competition in last 50 years

!  Time-‐to-‐market – means greater profit !  Customer demands for complete turn-‐key system-‐level solu*ons

!  Increasing product complexity – IP acquisi*ons to fill know-‐how gaps

!  Global Collabora*ve Innova*on – both in-‐house & outside !  Open Innovation Trend – a form of Collaborative

Innovation !  Independent innovation and cooperation/sourcing IP in parallel.

!  Professional Service Ecosystem for IP transactions becomes complete !  Patent application, lP consultancy, mediation & litigation, patent

development and planning, patent evaluation, patent monetarization and patent investment. �


Raising Values of a Product (IP is the Core) "  Price = Value to Customers =>

Price = Mftg. Costs + Services + Embedded IP License + Brand

"  Pre-sale services mean design-win efforts providing solutions to address customers’ problems "  This is the best sources of

innovation and ideas for the next-generation products

"  Post-sale services mean reducing customers’ costs of ownership, extending the useful lifetime of the product, generating recurring sales

"  Embedded IP licensing means the customers can use the product IP for their own product uplifting & differentiations - e.g., “Intel Inside”

"  Brand recognition means the customers recognize the product and its maker for superb quality, performance, reliability & services

IIPCC Confidential & Copyright Protected 6 Jan. 19, 2014

Manufacturing Cost (⽣生产成本)

Pre- & Post-Sale Services (售前及售后的服务)

Brand Recognition (品牌认可)

Embedded IP Licensing (隐含IP授权)

Incr

easi

ng V

alue

s ( 提⾼高增值

) Price = Values to Customers

(价格 = 给客户的价值)

>70%PM

~10%PM

>60%PM

>40%PM

Mkt. Cap. / Intangible Asset: 1) Apple: ~US$393B / >99% 2) Foxconn: ~US$3B / <20%

Demand Side

Demand Side

Demand Side

Supply Side

Profitability vs. IP Creation (Competitiveness)

HKSAR IP Trading June 7, 2014

Manufacturing Cost (⽣生产成本)

Pre- & Post-Sale Services (售前及售后的服务)

Brand Recognition (品牌认可)

Embedded IP Licensing (隐含IP授权)

Incr

easi

ng V

alue

s ( 提⾼高增值

) Price = Values to Customers

(价格 = 给客户的价值)

>70%PM

~10%PM

>60%PM

>40%PM Demand Side

Demand Side

Demand Side

Supply Side

OPEN

OPEN

PRIVATE

Trademarks

Utility Patents, Design Patents, Copyrights…

Trade Secrets (Know-how)

Only <20％ Know-how for Patents, the rest kept as Trade Secret 7

China (Demand-side) Situation: Challenges & Opportunities


HKSAR IP Trading

Stage of SME Development: China vs. US

Stage of development

Key asset / value driver

Domain knowledge

Human resource

development

Primary capital

sources

Scalability factor

Agriculture Farmland Family-recipe

Hands-on training Family Copy

Factory-cluster era

Low-cost labor

Task oriented

Hands-on training

Family & friends

Counterfeit & clone

Industrial era

Automated mass-prod. technology

Techno-logical

oriented

Profit-driven training

Traditional investors, govt. prog.

Standards, trade assoc.

Post-industrial

era

Business services/

know-how

(Business)Process oriented

On-job professional development

VC, Institution investors

Standards, IP & license

Knowledge based

economy

Business intelligence

“Integrated system”

“Learning ecosystem”

“Open source

platform”

“Knowledge sharing”

On average, US SMEs are at “Post-industrial” stage of development, whereas China (as an example for BRICS) SMEs are at “Factory-cluster” stage of development.

June 7, 2014 9

Challenges of IP Commercialization !  China’s global enterprises want to strengthen their IP

portfolio by acquiring international patents for global market expansion !  Lost opportunities due to lacking professional experience,

inadequate IP evaluation tools and indecisiveness through management layers in the decision-chain

!  The existing domestic IP trading centers, focused on Chinese patents and lack supporting professional services. !  Cannot sustain the IP commercialization profitable and unable to

meet international standard practices !  The value of China’s enterprises are mainly from tangible

assets. The financial sector lacks an objective, effective and internationally accepted evaluation metrics and system on intangible assets !  It’s difficult to realize the capitalization of intangible assets



Addressing China’s IP Service Needs

#  Supply-chain IP landscape mapping (per industrial sector)

#  Supply-chain IP protection assessment (per sector)

#  IP licensing/trading #  Defensive IP pooling

#  IP protection assessment #  Counter-measures against IP

infringement lawsuits #  Patent quality improvement #  IP portfolio development #  IP acquisition (tactical) #  Effective innovation

#  Strategic IP pooling #  World-class international IP

legal team #  Cross-license negotiation #  Long-term technology

roadmap for industrial standardization

#  IP landscape mapping #  Innovation/product/technology

roadmaps #  IP acquisition (strategic) #  Collaborative innovation #  Corporate culture for a

learning organization

Imm

edia

te

Long

-term

Individual Company Global/Platform

IP Business Models, Processes & Ecosystems


Critical Success Factors for IP Trading !  Trust

!  Buyer/Seller: Win-win, bonding collaboration… !  Infrastructure: Escrow, 3rd-party facilitators… !  Legal framework: Common Law, arbitration… !  Assurance: Going after the infringer, transparency,

indemnification… !  Confidentiality

!  Privacy (non-disclosure) - “not open bidding” !  Professional brokerage – accountable SERVICES

!  (“Product”) Quality !  Enforceability, claim strength (scope & integrity) !  Enabling – can realize the Productization Goals


IP Commercialization Vehicles !  IP Productization (产品化) - constructive use of IP

!  IP Licensing (知识产权授权) !  Must have adequate technical capabilities to use the licensed IP effectively

!  Tech Transfer (技术转移) !  “IP Licensing” + know-how transfer

!  IP Acquisition (知识产权收购) !  IP ownership + related intangible assets (like design work, schematics, source codes…)

!  Tech company M&A (科技企业并购) !  “IP Acquisition” + business (customers, products, tools & factory) + technical staff &

management team !  Intangible Asset as Loan Collateral (⽆无形资产作为贷款的抵押品) -

constructive use of IP !  The lender will hold the ownership of some qualified (被认证的) intangible asset as

loan collateral - IP valuation know-how is crucial !  IP Pooling (知识产权池) - constructive use of IP

!  Pool IP portfolios together for knowledge sharing to uplift the whole industry or strengthening the defense against infringement lawsuits

!  IP purchased as an Investment (but not used for product development) !  To cash out later for a profit if the market matures in favor of the purchased IP !  Developing countries should guard against any selfish use of IP as inhibitor

or blackmail by Non-Practicing Entities (NPE) or patent trolls


Global IP Market Players�!  Enterprises: Demand/Supply side (for productization)

!  Licensors, licensees, buyers and sellers !  Universities & Research Institutes: Supply side !  Individual Inventors: Supply side !  Trading agents—brokers: 3rd-party !  Professional services providers: 3rd-party

!  Legal consultancy services, litigation law firms, patent evaluation and software tool platforms etc.

========================================================================================================

!  Non Practicing Entities (NPE): Demand side !  Mainly engaging in patent trading/licensing in order to

make profit by patent litigations/blackmailing !  IP Investors (Patent Asserting Entities): Demand side

!  Private equity companies, patent investment fund June 7, 2014 HKSAR IP Trading 15

Guiding Principles for the Ecosystem !  Sincere win-win proposition between the trading parties

!  Full disclosure reduces risk for swift productization of licensed IP !  Absolutely no conflict of interest

!  Separation of roles for rule setting (overseer), execution (trading participants and enablers) and arbitration (arbiters)

!  No mixed roles (in a case) are allowed to avoid conflict of interest

!  Adequate check and balance !  Proper balance of the interests of trading parties !  3rd party enablers to check for abilities and monitor the efforts by

the trading parties to honor the deal and respective obligations. !  Transparency (verification by independent 3rd parties)

!  Full disclosure for IP listing (like IPO prospectus) by the IP seller and full disclosure on IP protection capability by the IP buyer

!  All steps in the process are auditable with supporting documents by independent auditors and/or the rule setting party.

!  Must add value at each process step !  All 3rd party enablers must create values to the trading parties

and ensure quality outcome of the trading June 7, 2014 HKSAR IP Trading 16

IP Trading Platform/Ecosystem !  Core Participants: sellers, buyers and enabling 3rd parties !  Value-adding enabling 3rd parties to facilitate win-win outcomes to

both IP seller and buyer and reduce risk !  Instead of win-lose paradigm without the 3rd parties !  The platform should be centered on risk reduction/management

!  Full disclosure (similar to IPO prospectus) to build trust and eliminate costly misunderstanding & misjudgments !  Fair assessment of the IP value & potential !  Fair assessment of the risk and liability !  Fair comparison to similar/competing IPs !  Implementation issues for the buyer to effectively use the IP !  Adequate supports from the seller to the buyer to realize the buyer’s

ROI – productization of the licensed IP for profit sharing !  All 3rd party enablers must add values in the process from start to

finish for the seller and buyer to realize their respective ROI, and collaborate to nurture the ecosystem !  Legal agents for buyers and licensers, technical assessors, IP

protection auditors, escrow agents…


Best IP Business Practices !  Up-front proper due diligence processes !  Government regulation discovery process

!  E.g., export/import controls and restrictions !  Risk assessment and management

!  Guiding technology transfer w/ proper IP protection !  E.g., IP hardening for licensee with lesser IP protection capability !  E.g., Trusted third-party design integrator to handle sensitive IP

!  Good visibility on how the licensed IP will be used !  Technology transfer plan and milestones

!  Proactive problem-solving !  Lining up 3rd-party enabling supports

!  Escrow arrangement(s) !  Control and manage legal costs (through arbitration)

!  Within 10% of the license cost !  Cap indemnification exposure (up to the license cost?!)


Technology Transfer/Transplant !  IP transfer is like organ transplant/artificial implant

!  Foreign IP will be embedded into the host product like a foreign organ or an artificial device implanted into the recipient's body

!  Compatibility is essential to avoid “body rejection”

!  Necessary proactive due diligence process, planning and execution to ensure success !  Pre-transaction (pre-operation)

!  Functionality (organ or device type), originality (source), quality (health), compatibility (blood type, allergy), etc.

!  The required transfer procedural review (operation planning) !  Transaction (transplant or implant operation)

!  Transfer process and procedure (transplant the organ or implant the device)

!  Post-transaction (post-operation) – lasting over 2 years !  Field data gathering (outpatient monitoring & check-up)


HKSAR IP Commercialization Promotion Efforts


HKSAR’s Role on GD-HK CEPA IP Platform !  Provide “Common Law” platform for IP

transaction !  One-Country-Two-Systems’ “Offshore Extension”

into CEPA Special-policy Pilot Zones !  World recognized arbitration process

!  HKIAC as an example (www.hkiac.org) !  Awards enforceable in many (~140) regions,

including China & Taiwan !  Easy access to enabling third parties !  Local pool of technical and legal expertise and

efficient support services !  Financial and IP Escrow Services


Hong Kong Recent “IP Trading” Efforts !  HKSAR “IP Trading” Working Group

!  Subgroups formed on “IP Valuation” and “IP Arbitration” issues

!  HKSAR IP Dept. & SIPO cooperation !  Hong Kong's efforts to establish an original

grant patent system with SIPO supports !  HKTDC’s BIP Asia Forum in December

!  Started in 2012 and continued annually !  HKTDC has built it into an int’l signature event

!  HKTDC’s on-line “IP Trading” Portal !  http://www.hktdc.com/mis/ipportal/en/


Thank You!

[email protected]

HKSAR IP Trading June 7, 2014 23

hksar ip trading

Economy & Finance

ip value of ip

product ip

cooperationsourcing

market ip sharing

hksar ip trading initiative

onal ip commercializa

various ip transactions

ip hardware network