INTERVIEW WITH EMMETT J. MURTHA

Emmett J. Murtha is President and Chief Executive Officer of Fairfield Resources International, Inc. in Stamford, Connecticut. He formed Fairfield Resources International in 1997 after 35 years with IBM Corporation. The firm serves clients interested in developing, organizing, and leveraging their intellectual assets, as well as in related strategy development and licensing transactions. At IBM, Mr. Murtha was Director of Licensing and responsible for IBM's worldwide licensing policies and practices and led a group responsible for a substantial program of in and out licensing of technology. He was President of the Licensing Executives Society in 1999-2000 and is on the editorial boards of The Licensing Journal and Patent Strategy and Management. He is also a member of the Advisory Board of the Intellectual Property Management Institute.

LER: Emmett, thanks for giving us this time. Your career has been focused on technology licensing for a long time and I am sure that you have seen some rather dramatic changes.

Murtha: Yes that's true. Twenty years ago at IBM we were focused mostly on securing freedom of action for IBM and handling incoming requests for the licensing of IBM technology by others. In recent years, that emphasis has shifted strongly toward a proactive program to seek out licensees not only for patents, but also trademarks and a much more creative approach to exploit technology both inside and outside of the business.

LER: In addition to this change in the focus, what has happened with respect to just the sheer volume of licensing?

Murtha: Well, I can give you an illustration of that. In 1990 the U.S. Patent Office granted about 100,000 patents. In 1999 inventors were granted about 170,000 patents, indicating an annual growth rate of a little over 6 percent. Information from various sources about intellectual property royalties shows they grew from about $15 billion in 1990 to $130 billion in 2000, or a growth rate of just under 25 percent annually.

LER: A 25 percent growth rate is certainly impressive and it certainly isn't that high simply because there are more patents out there to license.

Murtha: That's right. That growth reflects the growing interest of IP owners to exploit their technologies outside of their business as well as within it. There has also been much significant growth by universities, hospitals and research institutes as well.

LER: How has the population of the top U.S. patent issuers changed during that time?

Murtha: The members of the top 10 have changed in interesting ways and, I think, for interesting reasons, during the past 10 years or so. There have also been significant changes in the rankings within that group. As an example, IBM was ninth in 1990, moved up to first in 1993 and has ranked number one in the annual number of U.S. patents issued ever since. This is central to IBM's strategy of being the leading IP licensor. Canon has been a long time resident of the top 10, as have Hitachi, Toshiba, Motorola, and NEC, all innovative companies, determined to leverage their technology. Others such as Kodak, Philips and GE have been in and out of the top 10 over the years, while Lucent, Samsung and Micron Technology have replaced them.

It is no accident that all of these companies are in the information technology field, where IP is extremely valuable and those without it are heavily taxed by those with valuable inventions.

LER: It has been our experience in valuing intellectual property that very few patents have significant value. Is that true with respect to licensing as well?

Murtha: Yes it is, and I think that is simply a reflection of the other side of the same coin. In fact, my best information indicates that only about 3 percent of existing U.S. patents are ever licensed, at even at a top licensor. Only about 5 percent of a large portfolio has real value. Unless someone else wants to use it, a patent has no real value.

LER: Why are 97 percent of patents not licensed?

Murtha: I think the majority of patents are not licensed because the technology they embody is not really useful, not feasible to commercialize, or simply not marketable for a variety of reasons. Obviously, some patent owners choose to monopolize the technology rather than licensing it out, and so those valuable patents are "off the market" with respect to licensing. Finally, many, many patent owners are sitting on sizeable portfolios with no real idea if they are valuable or not.

LER: The business of licensing is a fast moving one, isn't it?

Murtha: Yes, increasingly so. My experience suggests that the economic life of an average patent is only about five years from the date that it issues. Coupled with that, nearly two-thirds of U.S. patents are not renewed 11 years after they issue. That is, their owners don't consider it worthwhile to invest the annuity fee in a patent that has become technically obsolete. This is a major waste of resources which could be avoided if an assessment of licensing or monopoly value has done before filing.

LER: It would appear, then, that there is a relatively short window of opportunity to exploit patented technology.

Murtha: Yes, that's true. If you also consider the fact that identifying potential licensees and negotiating the licensing transaction can be a time consuming process, the period for collecting royalty revenues can be rather short.

LER: But the rewards can be substantial, can they not?

Murtha: They certainly can. Companies such as Texas Instruments, Dow Chemical, Lucent, Canon, and IBM generate billions of dollars annually in patent licensing royalties. These are companies who treat licensing as a business. There are many others, including Hitachi, Qumcom, and Allied-Signal/Honeywell, while companies such as PitneyBowes, Boeing, Siemens, and Interdigital are focusing seriously on increasing their IP revenues.

LER: How do you differentiate them from other companies?

Murtha: In most companies, licensing is a fairly casual offshoot of other activities. The companies I mentioned, as well as some others, have developed teams of skilled licensing people and dedicated these groups as profit-making business units. Their activities are endorsed and supported by top management. They research non-core and unrelated businesses for licensing opportunities and they are constantly in touch with their own technology portfolio and with the business units within their own organization.

LER: Is it difficult to get top management to sign on to such a program?

Murtha: In many cases, it has been a difficult process, almost a culture change in some cases, though this is changing dramatically. The successful exploitation of patented technology means generating profits from assets that aren't on the balance sheet. Those profits, in the form of royalty income, go almost straight to the bottom line, and they are usually in the form of cash, which CFOs love. That is the sort of situation that gets the attention of managers and stockholders both.

LER: Where do you see technology licensing going from here?

Murtha: I see a continuation of the recent explosive growth, and in more industries than IP. There is such a tremendous gulf between the practices of the companies I've just talked about and most major other companies of Fortune 500 size throughout the world. This gulf represents an immense opportunity for the profitable exploitation of technology. We need to develop skilled intellectual asset managers, and company management must come to the realization that a heretofore-unrecognized revenue source may exist in their organization.

LER: Emmett, thanks very much for sharing your views with us.