IP is the Wealth of the Shift Age
[Note: A version of this column recently appeared in the Shift Age Newsletter. Please feel free to sign up for a free subscription.]
I have been writing and speaking that IP is the wealth of the Shift Age for the last six years. And over the last six years, this reality has become ever more apparent. Recent headlines make this crystal clear.
In the Agricultural Age, those who owned the land created wealth. In the Industrial Age, those who created and controlled production created wealth. In the Information Age, those who created technology and brought it to market created wealth. In the Shift Age, those who create or own Intellectual Property will create wealth.
Nine times I have spoken of this and have had a CEO or business owner tell me they had recently sold their company for more money than they had ever thought possible based on multiples of revenue or profit. The reason was that the strategic buyer had a clear perception of the ability to scale up the seller’s IP and paid for that opportunity.
IP now represents more than 80% of the market cap of the S&P 500 in the United States. People are finally understanding that corporate wealth – and revenue – is increasingly based on what Intellectual Property the company owns.
One of the recent examples of this is the Microsoft-AOL transaction. Microsoft paid AOL more that $1 billion U.S. for 800 patents, or $1.3 million per patent. Microsoft wanted the patents as they related to the Internet and most important, to smartphones and mobile operating systems. AOL, moving toward a more pure content-intensive business, monetized this incredibly valuable collection of IP assets from its earlier iteration to fund its new direction. Both sides won.
What is interesting is to look at the motivation of Microsoft. Microsoft became a giant on the power of a near monopoly of PC-based software. The Internet transformation put the company back on its heels, lessening its dominance with increasingly Web-centric businesses and individuals. Now that the world has, is and will continue to rapidly move toward mobile devices and platforms, Microsoft again finds itself playing catch-up.
If one thinks about the businesses and revenue streams of the mobile business, Microsoft is behind in all the traditional categories. The carriers own the revenue stream of access. Google and Apple dominate the operating systems, apps and software platforms of the smartphone business. Apple, Samsung, Motorola/Google, HTC and others lead in the device business. Microsoft doesn’t make phones and has a single-digit share of the OS market in mobile. So, essentially, the company is not a factor in any of these standard revenue streams of mobile. That is why its purchase of AOL’s patents, on the heels of other patent deals in the last couple of years, is so brilliant.
Smartphones utilize dozens of patents for the device and for the OS. It is one of, if not the most, cross-licensed technology businesses relative to patents. It is also one of the most legally contentious areas of patents. Microsoft, with its huge and expensive purchase of AOL’s patents, on top of all its other recent patent purchases, has essentially created a huge revenue stream of licensing revenue in the mobile arena. The company is rapidly moving to the position of being paid for almost every smartphone’s technology or OS. Using its huge amount of available cash, Microsoft has effectively created a new revenue stream from a business in which it has not been successful, let alone dominant.
Microsoft doesn’t have carrier, device, or OS revenue, but it now is creating a huge stream of IP revenue – a patent-protected source of revenue not at risk due to the perpetually and rapidly changing mobile marketplace. No costs of production, no costs of marketing, no costs of software development – just a huge investment into patents. A quintessential Information Age company is developing Shift Age revenue. Brilliant!
Welcome to the Shift Age!