Should Indian IT dive into IP licensing?

For an industry caught between plain vanilla software services and high-end products, the IP licensing model is not only attractive in terms of financial returns, but also builds competitive advantage. IP licensing is definitely the road ahead for smart Indian IT companies, says Srikanth R P

Get a load of this—IBM, the world’s largest IT company, generates close to $1 billion a year just from licensing its intellectual property (IP). Texas Instruments’ licensing revenues generate around $800 million a year. The Economist estimates that the total licensing market is estimated to be a humungous $100 billion. While the likes of Big Blue, TI and many others use Indian bases and talent to develop IP, very few Indian companies derive revenues from licensing their IP. Fact is, this number is probably even fewer than the number of Indian software product vendors, who themselves are on the list of endangered species.

But licensing IP to gain revenues is a concept that is definitely catching on in the Indian scenario and a host of smart Indian IT companies such as Wipro, Sasken, Geometric Software, Ittiam, Aftek Infosys and Mistral Software, among others, are all leveraging IP to boost revenues.

Why IP licensing?

The strategy of licensing IP is also perhaps the best way for Indian software companies to walk the middle road between software services and products. For instance, while Indian organisations and analysts keep harping about ‘moving up the value chain’ and suggest an aggressive foray into products, very few cases of successful Indian products exist in the market. While moving into products obviously sounds attractive, the reality is far different. Few Indian organisations have the marketing skills or the financial strength to succeed in this high-risk market. The IP licensing strategy however does not need the level of marketing expertise or financial strengths that a product strategy requires and is comparatively a low-risk strategy. But unlike plain vanilla software services, IP licensing not only helps generate revenues but also gives players a significant competitive advantage over others.

This realisation is slowly dawning on Indian IT players too and can be seen from the increased number of patents Indian firms are filing, as compared to earlier years. Though there are no specific statistics available for companies operating in the Indian context, one indicative trend can be seen from the number of patents being filed with the help of legal firms. Vaibhav Parikh of Nishith Desai & Associates, a research-based legal and tax firm, says that his firm has filed close to 30 applications for various Indian IT companies in the last 18 months—up from almost nothing a few years ago. Says Parikh, "The beauty of IP is that unlike products, you do not need a high profile marketing plan to succeed in the market place. And unlike software services, IP can be used not only as a way to earn revenues from licensing but can also act as a competitive barrier to stop other companies from targeting your niche domain. Additionally, the same IP can also be used to provide services in a faster manner."

Adds Sunil Desai, technical director (Engineering), Aftek Infosys, "IP certainly gives an edge over the competition as you can not only prove your technical prowess but also reduce delivery time by a significant percentage."

The IP licensing model needs sustained investments for a long period before significant payback can be expected, says Dr G Venkatesh

From the trenches

Consider what India’s number three software services player Wipro is doing on this front. The Bangalore-based giant is using its intellectual property rights (IPRs) aggressively to generate revenues. The company has numerous IP blocks in various technology areas—residential gateways, IEEE 1394, USB and wireless LANs. Says Ramesh Emani, chief executive, Embedded and Access Technology Solutions, Wipro Technologies, "We have a fairly successful IP licensing strategy and this can be seen from the number of wins we have had in the recent past. We are market leaders in the IEEE 1394 IP space and wireless LAN is one of our newer IP areas that is generating a lot of interest in the market. Our success in the IP licensing market can also be seen from the fact that we have over 30-50 orders for our IP in the last few years."

Wipro is attracting a lot of attention from its customers who are asking not only for design services but also product companies who want Wipro’s IP integrated in their products.

The importance of IP licensing as a strategy can be best seen from the example of Mumbai-based Geometric Software, which derives its revenues from a variety of sources like software services, products, IP-based services and IP licensing. Way back in the 1980s Geometric had a dream of building an integrated product line for the CAD/CAM/CAE segments. But all factors considered, it also knew that being a small company it did not have the capabilities to compete with international brands in terms of marketing. The company then chose the route of service exports for sustaining growth in the early 90s. But simultaneously, Geometric believed in creating IP and started licensing its technology either as software components or OEM products. Geometric incidentally was one of the first Indian companies to license not only its products but also its geometry-based algorithms to other companies for improving both CAD and CAM processes. But the one important element in Geometric’s strategy is that Geometric has never diluted its focus on product lifecycle management (PLM) for both services and products.

Says Anil Risbud, CTO, Geometric Software, "Our IP is the main differentiator as compared to other service-oriented firms. Our ability to build our own IP was one of the key reasons why mainstream PLM vendors entrusted the source codes of their software by establishing offshore development centres in Geometric." Today IP is the key reason why Geometric is counted among the very best in the global PLM space. For instance, in January 2001, Spatial bought out Geometric’s translation technology for over a million dollars. It was a sound marketing strategy for Geometric since the company knew that it did not have the resources to market the technology independently. Geometric continues to work on the IP but for the vendor.

IP is also the key reason why French PLM major Dassault decided to enter into a joint venture with Geometric. The JV company, named 3D PLM Software, is a significant development since it is for the first time that Dassault has selected a product development partner. The significance of the deal lies in the fact that Dassault Systems is a mega force in the 3D-design space. Currently, one out of two cars and seven out of 10 aircraft are designed using Dassault’s Catia solution. Hence, the business opportunity for Geometric is huge.

Geometric has also invested considerable resources in developing its ‘feature recognition’ technology. This technology reduces design and manufacturing cycles by enabling mechanical and manufacturing products to automatically recognise features from any legacy 3D model. What’s significant here is that a company like Dassault is marketing the latest version of its product Catia saying that it has Geometric’s feature recognition technology. Currently, revenues from IP licensing contribute close to 15 percent of the company’s revenues. Geometric is perhaps the best example of the fact that companies can use the IP approach to keep on moving up the value chain without the risks associated with product companies. Geometric does not have a single hot selling IP based product but several of its IPs are promoted by its partners.

IP licensing for start-up companies

The IP licensing model though risky is also proving to be attractive for many small start-up companies. For instance, companies like Ittiam Systems have their entire business model focused around IP licensing. Says Srini Rajam, chairman & CEO, Ittiam Systems, "We believe that we are setting a benchmark in terms of time required for an IP company to ramp up. Within a short span of two years, we have created a portfolio of more than 30 IPs and 26 customer engagements. Our hottest selling IPs are in digital video, wireless LAN, voice band modem and voice over IP."

Mistral Software is another Indian start-up that’s very aggressive on the IP front and expects revenues from IP to grow at a rate of 300 percent over the next two years. Says Anees Ahmed, CEO, Mistral Software, "Today IP licensing accounts for only 5 percent of our revenues, but this is expected to scale up to about 20 percent over the next two to three years. Some of our hottest selling IPs are product reference designs done for players in the consumer electronics space and defence."

Mistral has already bagged two orders for two different designs; a reference design for a smart karaoke card and a handheld. The same design prototype can be used by other companies to develop value-added PDAs catering to different industries. Company officials say that using the design prototype from Mistral, the cost of developing a PDA can be reduced by half, compared to standard designs available in the market. Another Indian company active on the IP front is Bangalore-based Encore Software. The company derives more than 80 percent of its revenues from IP and has already sold its technology to a leading Japanese telecom manufacturer.

Hybrid model

While IP licensing is attractive, a business model based around pure IP licensing is perhaps a tad too risky for Indian companies—it would be prudent for Indian companies to adopt the hybrid path—develop IP for value and take the services route revolving around the IP for volumes. Take for instance a company like Sasken, which gets close to 55 percent of its revenues from IP (licensing, customisation and royalties) and the rest from services.

Says Dr G Venkatesh, chief strategist at Sasken, "We were the first company in India to adopt a hybrid business model, in which we derive roughly half of our revenues through IP licensing and another half through services. Sasken firmly believes that this is the only viable business model that can be competitively sustained in the long run, especially in the embedded systems space. Another significant point to note is that the two business models are not entirely independent of each other and there are considerable synergies to be exploited between them. Sasken has been able to differentiate itself from competition in the services space on account of the competencies it has built in the IP space. Likewise, Sasken has leveraged its services relationships to mature and propagate its IP licensing business."

Sasken has done some impressive work on IP. It is one of only two independent sources for ADSL technology in the world. Since the company has carried out the complete design in a bottom-up approach, it owns all the implementation IP of the modem. Besides ADSL, the company has also a number of IPs in the 3G space and is currently ranked as the leading independent provider of protocol stacks conforming to 3GPP specifications. What’s noteworthy is that the company is one of only proven independent stack suppliers for GSM and GPRS phones. Another significant first for Sasken is its recently granted first patent in the DSL space, which is probably the first US patent in core communication technology granted to an Indian company.

Sasken also offers a host-based solution of the ADSL modem in which all the digital computations are carried out on the host Pentium processor, which in turn can substantially reduce the bill of materials required to manufacture the modem. The company has licensed its ADSL technology to a number of vendors, the most significant one being Ambient, a company later acquired by Intel.

Key challenges

However, if building IP looks like the next big thing, think again. Not many Indian companies have the patience or the maturity to invest in building IP and then wait for revenues to flow. While IP-based licensing is comparatively less riskier than the products game, IP-based licensing is not risk-free. The capabilities required to develop a unique technology that is difficult to copy and at the same time has potential for deployment in a high volumes or possesses high value—to make the licensing of IP lucrative—are not easy to come by.

But perhaps the biggest challenge that players face is taking a call on what IP a company should devote more resources to. Says Emani of Wipro, "Quite often, an IP block may not sell initially, but sales might grow after some time. So the ability to stay in the market with the IP during bad times helps in the long run. But this again can be a gamble as there is always a possibility that the technology will fail. Sustaining power is hence an extremely important issue when you are a company dealing with IP."

Emani also points out that companies face the tough choice of developing either standards-based IP or non-standards based IP. Says he, "If a company is involved in standards-based IPs, the entry barrier to competitors is low and this quickly leads to price erosion. The challenge is to get into the space at the right time and ahead of competition. This might not always be the easiest thing to do as most companies are competing with each other for this same advantage. Jumping in the non-standards-based IP space is fraught with risks as there is no guarantee that you will be able to market the IP well and find takers for the IP."

While services are a definite way of mitigating risk, innovative companies like Geometric have come out with a risk-sharing model for IP licensing. The company has adopted a risk-sharing IP licensing model for the high growth PDM business, wherein the OEM or channel partner is responsible for product management while Geometric itself continues to invest in the development aspect for which the company receives royalties.

In the IP licensing game, it is also important for companies to know the right time for letting go of an IP or even abandoning efforts in developing a particular IP if there is no future for it. For instance, Geometric Software has taken some bold decisions concerning its IP. Explains Risbud of Geometric, "We have faced challenges at every step of the IP building and licensing cycle. We have sold IP to partners when it was not profitable anymore to sustain licensing. We have built OEM products at our cost when the market did not believe in our algorithms. We have even stopped research in futuristic translator technologies when we realised the market was not ready for them and we could not find partners who would bet on them. We plan to balance such risks by actively working with channel partners in future."

Additionally, a company needs to continuously invest in research to keep the technology or IP competitive. Says Dr Venkatesh, "The IP licensing model requires sustained investments for a long period before significant payback can be expected. It also requires supporting activities like marketing at various forums, patenting and participation and influencing standards bodies." Another key issue among Indian companies is the lack of mindset of filing patents for their IP. Very few Indian companies like say, Sasken, have top-notch legal teams to file patents for the company. Vaibhav Parikh of Nishith Desai says that many continue to hold IPs but don’t have the maturity to go for a comprehensive IP audit to evaluate their IPs. The result—lost opportunities.

In summary, as the results of the top Indian software companies have shown and billing rates are increasingly being hammered down, the future of the Indian IT industry may well lie in the hands of companies who have the IP to withstand tough economic scenarios and tougher competition. But as Parikh explains, "Real gold or fool’s gold depends on how well you protect it." This may well be the issue the Indian IT industry has to ponder over if it does not want the Chinese dragon breathing down its neck in the next five years.