IP Portfolio Optimization

Taylor HawesCFO & GM, IP & LicensingMicrosoft Corporation

March 3, 2010

IP Overview and technology patent landscape

Dynamic macro environment

IP optimization framework

Financial objectives for portfolio optimization

Portfolio optimization benefits

Conceptual value matrix

Case study: investment valuation

Case study: competitive landscape

Discussion Summary

IP Overview and Technology Patent Landscape

U.S. Technology Patent Landscape

Patents Leveraged for Multiple Purposes

Total: 1,800,00

0

Top 100 Tech:

~300,000

Tech Patents: ~700,000

Secondary Market: ~20,000

Microsoft:

Protect R&D Innovation

Influence Standards

Cross-License Collaboration

Patent Monetization

Risk Mitigation

Four IP Categories

Patent

Trade Secret

Copyright

Trademark

Dynamic Macro Environment

IP & Licensing Goals Competition

•Capital market uncertainty

•Global legislative and political landscape

• Earnings commitments and margin management

Economy Secondary Market

•Relentless global competition

•Open source environments

•Rapid innovation of product life cycles

• Emerging technologies

• Top 5 patent filer for quantity and quality

• Tighter IP and business strategy alignment

•Maximize return on investment

•Monetize where appropriate

•Maturing secondary market

•Ramp in number of assertions

• Investment options to strengthen portfolio

IP Optimization Framework

Develop taxonomy and playbooks to execute tactics and goals

Discern between financial, defensive and competitive value

Design portfolio optimization techniques given constraints and

objectives

METHOD OF OPTIMIZATION

INVESTMENT VALUE

GOALS AND TACTICS

F R A M E W O R K

Financial Objectives for Portfolio Optimization

Current

Top Patent Issuance and quality

Invest in Secondary Market

Aggressively defend Microsoft in litigation

IP investments by business groups assessed independently

Optimized portfolio investment by business division

Measure value trade-off in alternative strategies

Use alternative vehicles to minimize cost of litigation

Uniform measurement for ease of comparison and decision making

Quantitative discipline that enables optimized results

Manage Costs

Consistency

Investment Tradeoffs

Patent Portfolio

Optimized

Portfolio Optimization Benefits

Financial ClarityFunding weighted by highest ROI tactics and goalsInvestment return segmented by type of value with associated riskCompare similar IP investments for tradeoff potential

Efficient ExecutionTactics are targeted and aligned to highest priority goals by relevancyPlaybooks ensure consistent and comprehensive completionBest practices are leveraged across business groups

Conceptual Value Matrix

Organizes investments into categories for clearer

communication

Provides a clear correlation between tactics and type of value

created

Measures investments by assets and liabilities resulting in

closer relationship to the income statement and balance sheet.

Defensive Risk

Conflicts

Internal Investment

External Investment

s

Assets / Liabilities

Financial

Enterprise Value Creation

$

$

$

$

$

$

$

$

$

Investment

Cost

Tactics Map to Matrix

$

$

$

Competitive

$

Total

$

$

Cost & Financial Value

Competitive ValueDefensive & Risk ValueDetermine potential

internal cost and damages if patents owned and asserted by a 3rd party:

- Number of assertions- Probability of assertion- Potential settlement cost- Legal fees- R&D feature work-

arounds

Moderate risk on return

Connect the technology acquired to business success:

- Market share- Time to market- Average selling price- Cost efficiencies

High risk on return

Cost represents the initial payment and subsequent cash outflows (e.g. maintenance fees)

Transactional cash inflows comprise financial value:

- Patent purchase price- Outbound licensing

revenue

Low risk on return Conclusion

$66M is a positive return, but will turn to breakeven without the high risk competitive value. There is significant risk to this investment.

Defensive Risk

External Investmen

t

Financial

Enterprise Value Creation

$10 $30M $16M($50M)

Investment

Cost Total NPV

$66M

Competitive

$65M

Case Study: Valuing a Patent Purchase

Portfolio Gap Analysis

Patent Filing RateRisk Assessment

Evaluate the size of the revenue pool associated with patent counts from each technology area.

Determine whether products with material revenue are exposed or protected relative to the competitor(s) using a weighted ratio.

Combinations of technology areas comprise products.

To determine the correct volume of patents to file, the portfolio life cycle is charted (below).

Depending on desired issuance levels, the number of patents to be filed in future years are calculated.

Analyze how well our portfolio aligns to one or more competitors for existing and emerging technology areas.

Product Category

Exposure Ratio

Product A 3.0 : 1

Product B 0.5 : 1

Product C 1 .0: 1 Quality of patents is an important variable and is an overlay to the quantity analysis above.

Case Study: Competitive Landscape

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