Special Guest — Tech Pioneer Marshall Phelps, Who Established IP Businesses at Microsoft and IBM
IP legend Marshall Phelps joins host Bruce Berman to deliver a masterclass on IP strategy from a business perspective on Episode 5 of Season 3 of the podcast, Understanding IP Matters.
In the 1990s, as vice-president of IP business and licensing at IBM, Phelps’ group generated as much as $2 billion annually by establishing partnerships and focusing on R&D (IBM rarely sued). In 2003, he was personally recruited by Bill Gates to head Microsoft’s IP business, where he was instrumental in helping it become one of the most profitable IP focused businesses ever. He has taught IP strategy at Cornell, USC, Duke, UC Berkeley, and in Japan.
Using numerous colorful anecdotes, Phelps shares actionable advice about what is required to make open innovation successful, both internally and with external partners. The benefits of IP licensing are not self-evident, he explains, especially to those who have been taught to view patents as a defensive tool and a resource to be hoarded. Year after year, it’s necessary to sell the many reasons why IP licensing is good business for everyone, including the company’s leadership, employees, partners, consumers and investors.
Key Responses
Patents today, especially those that cover software and business methods, and other inventions are more uncertain and difficult to enforce than ever. What can businesses do to swing the pendulum back to a more 1990s-like environment?
Marshall Phelps: “Looking at the world from the prospect of enforcement-only is too narrow. You have to convince the licensees that they’re doing this for their own good. That, in a sense, you’re doing their R&D for them. All this is, is a cheaper way for them to get the product, if you will, than if they had to start from scratch and do it themselves and then run the risk of litigation or something down the road.
It’s really not that hard to convince people of that. But — it’s a very hard lesson for people to learn that that’s the way they should do it. Because the forces of nature are stacked against that [perspective], if you think about it. The legal department says, what the hell, we’ll sue the bastards. The finance people say, let’s close them down.
If you say, no, I want them to have this and use it, provided there is a nice little loop back [in revenue] to us because of how good this stuff is. (And we’ll learn from that too).
Our only job is: We have to stay one step ahead of them. And boy, that’s a risky call to make for people…. You have to keep your foot on your own accelerator or it won’t work, because they’ll lose confidence. They’ll say, Jesus… you’re giving our stuff away.”
You’ve worked with copyrights and trademarks and trade secrets as well. Know-how — or you might call it consulting — is a big part of what IBM was selling. How did IP rights enable the consulting part of IBM?
Marshall Phelps: “If you don’t have IP rights, consulting about things that you’re building and they’re using that you haven’t protected is a high-risk proposition.
This is exactly the same problem that Microsoft had. They wanted to do this kind of work with customers, but they didn’t want to stick a document in front of them and say, please sign this, because they thought that wouldn’t be well-received. It wasn’t a small problem. We spent a lot of time convincing customers that it made sense to [license our IP].
How did we do it? We didn’t turn this over to just lawyers. When we had a negotiation about one of these types of things with a customer, we took the researchers with us. We’d stick the researchers up in front of a whiteboard and have them explain what they were working on and why this is important and what’s going to come next. That kind of thing — and that’s a much better sales call.
We turned it into a real business proposition, not a legal one. Necessarily, obviously, there’s a legal component to it, but there was a business proposition to it as well.”
A lot of people who worked for you or with you are now IP luminaries in their own right, including Brian Hinman of Philips, now at Aon; Dan McCurdy who heads RPX now; David Kappos, former USPTO director; Louis Carbonneau of Tangible IP; Horacio Gutierrez, formerly a GC at Spotify and now GC of Disney. What were the most important lessons these people learned from you?
Marshall Phelps: “The most important lesson was probably the importance of making this a collaboration within the company first. I think legal departments have a tendency to be islands of themselves, and then they wonder why they don’t have more influence in the company. Well, the reason is, nobody knows them.
Every one of those people who you mentioned would be quite adept at working this process, talking to people and all that. Getting in bed with the finance people to say, here’s why we’re doing this, because every year the finance people changed and you would get the same arguments about, why are we doing this?”
More Highlights
Listen to the entire episode to learn about what working will Bill Gates was like; why accounting firms continue to resist having to put a valuation on IP; how Microsoft benefitted by changing its IP strategy 180 degrees from looking inward to being open and building relationships; and much more.
To make IP licensing work, “you have to sell internally as much as you do externally,” Phelps emphasizes.
