Marshall Phelps helped put IP on the corporate map during his well-documented career at IBM. Now corporate Vice-President and Deputy General Counsel at Microsoft, he explains why his next goal is to educate academia
Although now a key driver for most corporate IP strategies, few businesses considered IP to be an asset that could be exploited for profit when Marshall Phelps joined IBM. In those days, IP was merely viewed as a legal overhead or, at best, a service function and rarely featured on the radar of senior management. All that changed during Marshall’s 28-year career at IBM, during which time he is credited as having revolutionised the way in which companies manage their IP portfolios and, in particular, profit from their IP through licensing.
‘I made a perfect pain of myself when I first started at IBM,’ Marshall explains. ‘The company was struggling. It was bloated with employees, its product cycle was down and it was on the verge of serious financial difficulties. I kept arguing that the company’s IP was under-exploited, that it should be viewed as an asset, that instead of trading it on a like-for-like basis, we should measure its worth and then charge an appropriate price.’
Phelps recalls that incoming CEO Lou Gerstner was at first skeptical of the idea; he had been involved in a patent dispute with Procter & Gamble over soft chocolate-chip cookies in his previous role at RJR Nabisco. Phelps changed Gerstner’s mind by opening an IBM computer and marking all the components that came from other companies. ‘In the end, Lou just said, fine, go and do it then. But I bet you can’t make a billion by 2000,’ says Marshall. ‘I made twice that and the model for IBM’s IP licensing programme was born.’
A new approach to IP
While Marshall refers to that breakthrough as his ‘one good idea’, his work at IBM stemmed far beyond managing its licensing programme; under his influence, senior management began to view IP in a completely different light.
‘Back then IP was purely seen as a negative right and in some industries it still is. But the idea of using patent and trademark rights to stop others competing in your marketplace is short-sighted,’ he says. ‘Look at a Blackberry or a piece of Microsoft software. There are thousands of pieces of IP in a single technological product, and it’s virtually impossible to stop someone from working around your technology. Allow them to license that technology, however, and you both win.
‘It’s no accident that computer and telephony systems look so similar. Inter-operability between systems is good for the user, but it’s also good for the companies that create them. What’s the point of re-inventing the wheel?’
Marshall came out of retirement to join Microsoft in June 2003 where he has helped to establish the company as an emerging patent leader. He has accelerated the number of patent applications at Microsoft and has already played a key role in three ground-breaking cross-licensing deals with Sun, Siemens and SAP.
The idea of using patent and trademark rights to stop others competing in your marketplace is short-sighted.
‘Microsoft operates on a different level than IBM,’ emphasises Marshall. ‘Microsoft at its heart is just about IP. It’s not just a question of making money from patent licensing. Our goal is to build industry relationships and partnerships and to become a highly respected R&D company. We’re already the biggest spender on R&D in the world and that isn’t likely to slow down.’ That spending translates into around 3,000 patent filings a year, which, in turn, guarantees Microsoft’s patent licensing programme. ‘You can’t license patents if you don’t own any,’ he says. ‘In a networked world where everyone’s technology must work together, patents have become the reigning currency – which isn’t to say that you should just get patents for the sake of getting patents.’
Pushing the politics of IP
But filing patents comes at a cost – one that is ill-afforded by smaller companies without the bank balance of a corporate giant such as Microsoft.
‘If it’s expensive for Microsoft and its peers, then what chance do small- and medium-sized enterprises (SMEs) have?’ says Marshall. ‘You may say: “Why do you care? You’re all right.” But Microsoft is nothing if not IP, so we have to care, and if the system isn’t working, then we have to do something about it. We have to take the responsible position.’
That doesn’t mean replacing the current system or the current structure. For Marshall, it’s important that industry works with governments and the existing patent and trademark offices to make the system more accessible to others, as well as to improve it for their own needs. ‘Often the answer is simple,’ says Marshall. ‘But it can be a political gamble, which explains the reticence for ideas like reducing the costs of filing for SMEs and developing nations.
‘We need to figure out how to harmonise systems around the world. PTOs all use the same databases, so why can’t they be trusted to share research or resources? We’re a worldwide economy, so we need a worldwide system to match.’
Marshall discounts arguments that some economies are not set up to protect or enforce IP Rights. ‘Look at China,’ he says. ‘That’s the ultimate emerging economy. They already have pretty good IP protection laws in place; it’s in the area of IP enforcement that they’ve struggled and counterfeiting has become a terrible problem.
‘But China doesn’t want to be viewed as a country peddling cheap knockoffs. The argument has always been that they are too large a country to manage IP enforcement – that it’s much easier to enforce the laws in the cities, but it’s more lax in rural areas. However, they’ve managed to pull everyone in line for the 2008 Olympics now that they see the potential revenue that can be made from the event.’
The future of IP
Each type of industry has its own business model for IP and no two views are necessarily the same, as Marshall is quick to point out. ‘Different industries drive different opinions and different levels of importance in the company structure,’ he says. ‘Bill Gates knows as much about IP as any lawyer I’ve ever found – and he likes it. But I know that on the whole, it’s rare for IP to be on a CEO’s radar.
‘That’s partly because of the difficulty of valuing it. IP is uncharted for senior management, as it’s not on the balance sheet. Legislation like SarBox [the Sarbanes-Oxley Act of 2002] is still only factoring in the element of risk. But the role of IP valuation didn’t exist 10 years ago, so it’s only a question of time before someone sits down with the accounting board and sorts out a more consistent way of managing the process.’
Marshall predicts a step change in the way we manage IP in the coming years – most of it at the hands of the future business professionals now graduating from our universities. ‘We can no longer talk about IP from an ivory tower; we need to talk about it in an academic setting,’ he stresses. ‘Tomorrow’s business leaders should know as much about it as we do now, and they should be working with the scientists of the future to ensure that innovation and IP continue to evolve and improve.’
This article first appeared in IP Review, issue 18
