© 2006 Henry Chesbrough 1
Open Innovation and Open Business Models:
A new approach to industrial innovation
Presentation to Joint OECD/Dutch Ministry of Economic Affairs
Conference on “Globalization and Open Innovation”
Dec. 6, 2006Henry Chesbrough
Haas School of BusinessUC Berkeley
© 2006 Henry Chesbrough 2
Agenda
• Open Innovation• Open Business Models• Implications for Managing IP• Policy Implications
© 2006 Henry Chesbrough 3
The Current Paradigm: A Closed Innovation System
ResearchResearchInvestigationsInvestigations
DevelopmentDevelopment New ProductsNew Products/Services/Services
TheMarket
Science&
TechnologyBase
R D
© 2006 Henry Chesbrough 4
CurrentMarket
InternalTechnology
Base
R D
The Open Innovation Paradigm
Technology Insourcing
New Market
Technology Spin-offs
ExternalTechnology
Base
Other Firm’s MarketLicensing
5 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20
Robert Kirscbaum, DSM: Research & Technology management, July – August 2005
License in
Spin in
Acquire
DivestSpin out
License out
“The creation of new businesses is a highly dynamic process, best represented as a horizontal funnel” (passed in iterative steps)
Open innovation in practise
6 C 2002 Henry Chesbrough EIRMA SIG III, 2005-10-20
Closed innovation
Our currentmarket
Our new market
Other firm´smarket
Open innovation
External technology insourcing
Internaltechnology base
External technology base
Stolen with pride from Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004
Internal/external venture handling
Licence, spin out, divest
© 2006 Henry Chesbrough 7
CurrentMarket
InternalTechnology
Base
R D
IBM & Open Innovation
Technology Insourcing
New Market
ExternalTechnology
Base
Other Firm’s Market
Java,Linux
Sun, and others’ eqmt
$1.9 B licensing,OEM for semi co’sODM for others
Global Svcs
© 2006 Henry Chesbrough 8
CurrentMarket
R D
Is this just for High Tech?Procter &Gamble
New Market
“Use it or Lose it”
ExternalTechnology
Base
Other Firm’s Market
TechnologyScouts
InternalTechnology
Base
VentureAcquisitions“Spinbrush”
LargeAcquisitions“Gillette”
© 2006 Henry Chesbrough 9
The Logic of “Open Innovation”
• Good ideas are widely distributed today. No one has a monopoly on useful knowledge anymore.
• Innovation is now done within networks of firms, rather than within a single firm
• Not all of the smart people in the world work for us.
© 2006 Henry Chesbrough 10
Agenda
• Open InnovationOpen Business Models
• Implications for Managing IP• Policy Implications
© 2006 Henry Chesbrough 11
Which Would You Rather Have?
• A Better Technology
Or,
• A Better Business Model
© 2006 Henry Chesbrough 12
Go with the Business Model
• Business Model > Technology– Ability to profit from technology– Ability to scale technology– Ability to continue innovating technology– Ability to acquire technology
© 2006 Henry Chesbrough 13
IBM: Its Closed Value ChainV
alue
-Add
ed A
ctiv
ities
Materials
Chips, devices
Computers
Operating Systems
Applications
Productivity SW
Atoms
Solutions
Value Chain
All IBM – pre 1993
© 2006 Henry Chesbrough 14
IBM’s Open Business ModelV
alue
-Add
ed A
ctiv
ities
Materials
Chips, devices
Computers
Operating Systems
Applications
Productivity SW
IBM Chain OEM Market
Materials
Chips, devices
Computers
Operating Systems
Applications
Productivity SW
Integration
Atoms
Solutions Other Integrators
© 2006 Henry Chesbrough 15
IBM’s Open Source Business Model
• Spends about $100M each year on Linux– 50% for general improvement– 50% for specific improvements for IBM gear
• Others spend another $800M a year • IBM creates value through Linux
– Also donates development tools, patents• IBM captures value through value-added
services and software “up the stack”
© 2006 Henry Chesbrough 16
Agenda
• Open Innovation• Open Business Models
Implications for Managing IP• Policy Implications
© 2006 Henry Chesbrough 17
The Role of IP in the Business Model
• A business model has two functions:1. Value creation2. Value capture
• IP is critical for value capture in many business models
• IP can also be valuable in creating value– Setting standards– Intellectual commons– Defining the space for the innovations of others
© 2006 Henry Chesbrough 18
Fig. 4.1Evaluating Technology Alignment with Patent Coverage
Patent Coverage
Technology Coverage
UnusedProtectionRegion
ProtectedRegion
Unprotected UseRegion
Party 1
© 2006 Henry Chesbrough 19
Fig. 4.2Complex Technology Alignment with Patent Coverage,
when Two Parties Have Conflicting Claims
Patent Coverage
Technology Coverage
Party 1
Patent Coverage
Technology Coverage
Party 2AssertionRegion
ImpairedRegion
InfringementRegion
© 2006 Henry Chesbrough 20
Fig. 4.3Complex Technology Alignment with Patent Coverage,
when Second Party does not Practice Technology
Patent Coverage
Technology Coverage
Party 1
Patent Coverage
Party 2Now Irrelevant AssertionRegion New Infringement
Region
InfringementRegion
© 2006 Henry Chesbrough 21
Fig. 4.5IP Mapping Value Chain Analysis: Printers
Controllers
Print Heads
Lasers
Sensors
Repair and ServiceEquipment Installation Consumables Operation
Enabling Technology
Manufacturing
Integration
Site Prep
Assembly
Ink
Paper
Testing
Connectivity
Programming
Monitoring
Quality Control
Scheduling
Diagnostics
Testing
Procedures
Parts
= Moderate IP risk
= Strong IP position (possible assertion opportunity)
= High IP risk
= Low IP risk
© 2006 Henry Chesbrough 22
The IP Management Life Cycle
Stages in the Technology Life Cycle
Emerging
Growth
Maturity
Decline
Time
Perfor
man
ce
Figure 4.6
Become the standard
Compete withinthe standard
Grow thestandard
Harvestthe standard
© 2006 Henry Chesbrough 23
Managing IP for MS Windows
Mature market in USWindows has won the war to be the standard So strongly enforce copyright to prevent piracyEvery illegal copy of Windows is money lost
Growing market in ChinaWindows and Linux still battlingSo do NOT enforce copyright (not yet)Every illegal copy of Windows is one less for Linux
IP Management Must be Driven by the Business Model
© 2006 Henry Chesbrough 24
The IP Management Life Cycle
Stages in the Technology Life Cycle
Emerging
Growth
Maturity
Decline
Time
Perfor
man
ce
Figure 4.6
China
US
Become the standard
Compete withinthe standard
Grow thestandard
Harvestthe standard
C 2002 Henry Chesbrough 25
Example of recorded reassignment:
“Intellectual Ventures LLC, a technology development and licensing start-up formed by Microsoft veterans Nathan Myhrvold and Edward Jung, has won the bidding for General Magic Inc's portfolio of patents and other intellectual property, paying $300,000.”(Wall Street Journal, May 29, 2003)
REASSIGNMENT INFORMATION
Date Recorded: July, 25 2003Assignor: General Magic Inc. (Date signed 04/23/2003)Assignee: Intellectual Ventures Patent HoldingReassignment Kind: Assignment of Assignor InterestNumber of Patents reassigned: 20
© 2006 Henry Chesbrough 26
USPTO Patent Reassignment DataPatent Reassignments - 1980-2003
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
RY
=200
3
RY
=200
2
RY
=200
1
RY
=200
0
RY
=199
9
RY
=199
8
RY
=199
7
RY
=199
6
RY
=199
5
RY
=199
4
RY
=199
3
RY
=199
2
RY
=199
1
RY
=199
0
RY
=198
9
RY
=198
8
RY
=198
7
RY
=198
6
RY
=198
5
RY
=198
4
RY
=198
3
RY
=198
2
RY
=198
1
RY
=198
0
• Rising faster than base of patents itself, from 0.1% to 4.0%
C 2002 Henry Chesbrough 27
Main Reassignment Kinds• Assignment (of assignors interest)• Security agreement/termination
• Government interest assignment• Executive order 9424, confirmatory license• Merger• Change of Name• “Other”
• From the examination of semiconductor class:– Change of Address– License– Confirmatory license– Conveyance of patent & trademarks– Correction to an error in the patent number– Release by secured party– Release of security interest in patents and tradem– Release of security interests– Security interest– Termination and release of assignment of security– Transfer by operation of law– Amended and restated patent and security agreement and mortgage
Offered as an option in thePTO 1595 form
C 2002 Henry Chesbrough 28
Reassignments in Semiconductors (H01L): 2003
Affiliated Co61%
License1%
Merging2%
Other6%
Securitization23%
Ind. Inventors1%
Impure & Autonomous
3%
Pure & Autonomous
3%
29
Security: US 5149397
• Two reassignments for this patent:Reassignment KindAssigneeAssignorDate
Security InterestJPMorgan Chase BankXerox06/25/2003
Security InterestBank OneXerox06/21/2002
Patent: “Fabrication methods for micromechanical elements”, originally assigned to Xerox corporation. Application date: 1991.07.03. Date issued: 1992.09.22
© 2006 Henry Chesbrough 30
What’s Going On?
• “Your findings are consistent with what I have seen. That is, I have seen more security interests being taken in a company's patent rights (typically to collateralize debt). ”
• The beginnings of a secondary market for IP.
© 2006 Henry Chesbrough 31
IP Secondary Markets in the Future
• Orphan recovery programs• Failed Startup IP auctions• “Use It or Lose It” corporate policies• Bounties and Finders’ Fees• Sale-Leaseback programs• Patent roll-up strategies• Patent commons areas
© 2006 Henry Chesbrough 32
Agenda
• Open Innovation• Open Business Models• Implications for Managing IP
Policy Implications
© 2006 Henry Chesbrough 33
Policy Implications
• Case Study: US economic malaise in the 1980s– Auto’s– Steel– Consumer electronics– Shipbuilding– semiconductors
© 2006 Henry Chesbrough 34
US Resurgence in the 1990s
• New companies, new industries– PCs, networking, software– Internet– Biotechnology– New kinds of semiconductors
• Note that the troubled firms in the troubled industries did not improve much
© 2006 Henry Chesbrough 35
Closed v. Open Policies
• Focus on expanding domestic market
• Protect local champions from foreign competition
• Subsidize largest domestic firms
• Limit foreign students and foreign direct investment
• Focus on SMEs• Focus on universities• Focus on IP policies• Stimulate greater
competition among largest firms
• Stimulate greater information exchange and coordination
© 2006 Henry Chesbrough 36
Getting the Institutions Right
• Public research funding– The foundation of the innovation system– Focus on excellence, meritocratic award criteria
• IP– Clear, effective, but limited protection
• Universities– Meritocracy in research funding– Allow professors to engage with industry– Compete for “best and brightest” students– Enable research to move into industry
© 2006 Henry Chesbrough 37
The Challenge of Indirect Policies
• No clear constituency• Time delay from policy change to results• Interaction among institutional factors, not a
single factor solution• We underestimated strength of US innovation
system in 1980s– We may be underestimating its weaknesses today
• Note that Japan has regained ground, with a very different institutional structure than US
• Note that OECD estimates China’s R&D > Japan
38