Nathan Myhrvold has a fascinating piece in the Harvard Business Review. In it, Myhrvold sets out the argument for the role his company, Intellectual Ventures, aims to play in creating a new marketplace for inventions. Along the way, he makes an observation about managing risk in a patent portfolio:
“Such large scale also provides another important ingredient: upside potential. Some inventions will be successful—and a few will be blockbusters. Even if only one patent in a portfolio of, say, 2,000 patents is really successful, it could generate $1 billion in revenues, returning many times the cost of the entire portfolio.”
Perhaps it is a coincidence, but Myhrvold’s numbers here parallel the historical ones reported by Stanford, that about 1 invention in 2,000 generates significant income. I expect other universities have similar experiences.
If this is the case, it points to a tough lesson. If one is going to use a patent accumulation model, then one has to work at scale to develop a profile to capture even a single “big hit”. To build a patent portfolio of 2,000 patents, one would have to have 100 patents issue per year, for 20 years. To get there, assuming that one has to file more applications than patents actually issue, and estimating something north of $10K per full utility patent application, one would need to budget something around $40m for this effort. And for that, one is looking for one plum on the tree.
There are other ways to work patents, but universities have largely adopted the patent accumulation model. They have done this more by backing into it than as a deliberate strategy. First, they moved from voluntary presentation of inventions to compulsory management. With the volume of disclosures up, they moved from personal treatment to process management. From process management they moved to explanations for why so many disclosed inventions were never licensed for value. Thus we have the “problem faculty” and the “funding gap” and the lack of “innovation capacity” in industry. All campfire stories to explain why a model so simple that even a senior administrator can understand it isn’t producing the desired level of income.
Myhrvold’s piece, though, points up a different possible explanation. These universities are for the most part working with less than a therapeutic dose of patent work. With a total portfolio of maybe 500 patents, a university simply has not made sufficient investment to expect a significant outcome from a patent accumulation strategy. Again, there are other strategies, but in an accumulation strategy, scale clearly may be a defining feature.
There are two other limitations to the accumulation model. The first involves university royalty sharing schedules. These schedules may be the single most damaging thing about university management of IP. At their best, they look like an advance in royalty sharing over corporate models that might give a token acknowledgment for a patent issuing. At their worst, they disrupt the norms of scientific collaboration, pit individuals and departments against one another, and line administrative pockets with slush funds rather than doing something significant on the margin, such as reinvesting in innovation programs or contributing visibly to the community.
If one is running an accumulation program (again, universities are in denial about this, but it’s a cheese shop kind of thing–they back into it retaining all the excuses they can), then one has to adjust royalty sharing so that everyone participating in the program benefits when that plum is found–it can’t be that thousands of inventors contribute so that a program is robust enough that one team wins out and takes substantially all of the reward for ten to twenty years of effort. The program has to spread the wealth. One way to do this would be for the university to set aside a significant portion of its own administrative “take” on licenses that earn more than $10m–perhaps 10 pts of the gross or 1/3 of its share–and allocate that as a royalty share to all inventors who have contributed to the program in the ten (or twenty) years preceding that milestone. Doing so would acknowledge that an accumulation effort is a numbers game, and by providing an opportunity for all to gain, one creates an incentive for all to be working to the success of others in the same pool. Present royalty sharing programs work against this outcome. Another reason why university patent management programs are so stone cold stupid.
If accumulation requires scale, and requires incentive programs that distribute the upside to all participants, then one can see that improving these programs is not about transparency or orderliness or diligence or more expertise. It is about investment at scale and broad incentives on return that allow vast swaths of the portfolio to be put into play in big lumps, of 100s of patents at a go. Improving an office by a meticulous review of tidiness simply fails if there’s not a therapeutic dose of asset to work with.
A second limitation to a university accumulation model is its provincialism. Myhrvold points this out as a critical inefficiency in patent marketplaces as “a balkanization of the inventors and inventions required to tackle big problems”. It’s each university for itself, most running an accumulation program at such small scale it cannot possibly succeed, and yet each unwilling to contribute its patents into pools that would be at sufficient scale and with sufficiently uniform means of access that industry and investors could obtain what they wanted, even if they were deeply committed to respecting the rights of inventors.
So while university TLOs work to tighten up their intake of inventions to work their under resourced model, they are also making the overall patent landscape all the more fragmented because they demand local control over all inventions having any prospect of income. In doing so, they are caught in the middle, building too slowly to reach a 1,000 or 2,000 patent minimum, and not allowing individual inventors or inventor teams to work a different model, one in which they do not try to market a number of unrelated patents at once, but rather aim to combine a highly specialized set of patents with their other expertise, contacts, and intangible assets and make a go of things. That is, in the entrepreneurial model, one doesn’t need 2,000 patents to bound the risks. Instead, one may not need any patents at all, but if there are a few, they are aggregated with other assets, rather than with more and more patents. In the entrepreneurial model, an accumulating technology transfer office working below the minimum therapeutic dose can only present as dead weight, stone cold stupid (repeated for emphasis), the wrong pathway, where inventions go to die. This may be stark and graceless to say, but perhaps only with this edge does one start to see how limiting, and potentially damaging to innovation–and therefore to the public trust pertaining to university research–the patent accumulation model of commercialization actually is in the hands of university administrators unable to work at scale.
There’s no doubt that patent commercialization has its place, and it’s clear that accumulation plays can bring out significant results. Most university licensing successes, however, have come about not as a result of the accumulation model, but for other reasons that cannot be attributed to compulsory disclosure, ownership of inventions as a condition of employment, humpier and humpier oversight and patent review committees, or more transparent processes by which an invention is managed, or bigger and better databases, marketing materials, or nicely appointed offices. All that is rot. Or, more refinedly, all these attributes are artifacts of a rationalized model universities have slipped into, but which does not account for much of the licensing success they enjoyed in the past, which came about with approaches they have largely abandoned as their operations have come under the control of administrators seduced by simplicity and money-lust (or worse, mere compliance) taking precedence over more complicated scholarly norms, entrepreneurial approaches, and public (rather than university-administrative slush funds-as-the-best-public) benefit.
If universities want to work the accumulation model themselves, they need to put out the $40m minimum (half the cost of a new lab, say) to get into the game. A few are doing that. The rest need to radically alter their game. They will need to aggregate portfolios and license them out in tranches of 100s of patents. They will have to make it easy to get access to patent rights without negotiating with multiple institutions, patent by patent, royalty by royalty. They will need to revise their royalty sharing policies so that everyone wins when anyone does. They will need to stop the cheese shop rhetoric that the model is fine but everyone else isn’t cooperating to make it successful.
Even better, most universities should skip the accumulation model entirely, check their over-simplified view of innovation at the door, and change their approach. Use specialty agents, give investigators and their inventors more responsibility, focus on putting things in play as commons–for science, internal use, as standards–rather than incessantly (under the duress of policy) trying to make an auditable buck off of every potentially patentable rabbit dropping scraped from a lab floor. Any of these other approaches can advance university interests, better position research for impact, and demonstrate to the public the continuing value of university interest in innovation.