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This chapter is from the book

Virtual Reality: Patenting, IP, and "Asset-Lite"

The asset-lite approach to innovation offered a pitch different from that of either corporate venturing or spinnovation. The pitch went something like this: Don't do it (innovation commercialization) either inside or outside. Don't do it at all. Go virtual. Let someone else do the heavy lifting. In the New Economy, intellectual property (IP) is where the real value resides. Build your company around IP assets, set up smart and aggressive legal and financial structures (e.g., patent and licensing deals), and the checks roll in. The lure of the IP licensing, asset-lite model was its contention that you don't have to actually do much of anything tangible—just own and control the key intellectual assets and related intangibles. Create a virtual company that rakes in the cash from licensing while minimizing real cash investment in rusty property, plant, and equipment in order to maximize return on assets.

Even if you were on the other side of the licensing equation (i.e., the licensee), the IP licensing model still seemed to make sense. You could reap the benefits of others' discoveries by minimizing your own R&D at risk and simply in-license their IP as needed instead. The virtual, asset-lite, IP licensing model seemed like a win-win for both sides.

The reality is that almost no companies were able to radically transform themselves or otherwise build a core foundation around an IP licensing model. Few firms have been able to build a sustainable and scalable innovation strategy centered around IP alone. Most pure IP-based companies, even those that do it profitably, remain small niche players. If raw IP alone were such a mother lode, after all, U.S. research universities would be swimming in royalties. They're not. Even in the heart of the hi-tech economy, the technology licensing receipts of the most elite tech universities constitute less than 1–2 percent of their total revenues.

The pure IP, asset-lite model has considerable limitations. By itself, raw IP has limited value. Knowledge might be power, but it doesn't deliver profits. The bulk of revenues and profits in any industry come from "doing," not just "knowing." Customers pay richly for solutions, not abstractions. Moreover, over the long term, it's difficult to separate knowing from doing. Without actually getting intimately involved in the details of commercialization and competition, it's difficult for an IP-only company to stay in the game—to innovate the next generation of technology and ideas. The bottom line is that improved exploitation of IP offers significant but typically marginal benefits at best, however rich they might seem in the abstract. On the other side of the equation—i.e., as an IP licensee—depending mostly on in-licensing of key innovations from others can leave a company vulnerable to major, unforeseen costs, constraints, and uncertainties.

Both in-licensing and out-licensing therefore require careful strategic and financial consideration. An aggressive and structured IP plan is a necessary complement to, but not a substitute for, a more comprehensive innovation strategy. In the vast majority of cases, an asset-lite IP-based innovation strategy alone simply won't do the heavy lifting that's required to create and capture most of the potential profits of innovation.

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