1. Intellectual Property: Strategy, Structure & Incentives Paul Henderson Managing Director, Clarify LLC Berkeley MBA 2008 paul.henderson@ClarifyLLC.com12/31/2010 Clarify, LLC 1

2. DisclaimerLegal JDadvice12/31/2010 Clarify LLC, 2010 All Rights Reserved 2 3. Without leaning too heavily on the legal stuff, itwould certainly be interesting to understandfrom a business perspective how companiesthink about what IP they can or should notoutsource, and how they can maintain controlover the parts they do outsource.12/31/2010 Clarify LLC, 2010 All Rights Reserved 3 4. Outline for the talkThe opportunityThe problem Barriers toentry HowHow TO Pragmatic+NOT to do it stepsIntellectualdo itproperty12/31/2010 Clarify LLC, 2010 All Rights Reserved4 5. Doing it right: a simple example12/31/2010 Clarify LLC, 2010 All Rights Reserved 5 6. What is patent #5,327,752 worth?ASP: $29.95Whsl: $12.00Royalty: $5.00 Mfg. cost: $3.5012/31/2010 Clarify LLC, 2010 All Rights Reserved 6 7. Q: How much attention does your companypay to managing its intellectual assets?Intellectual Enterprise value:AssetsIntangible $36BassetsBook ValueDiscounted Intellectualvalue of$9B expectedPropertyfuture cashflows Clarify LLC, 2010 All Rights Reserved 7 8. Why does this matter?Anyone with a glue pot can getinto the shoe business. - Phil Knight12/31/2010 Clarify LLC, 2010 All Rights Reserved8 9. The tools ofcreativity havebecomedemocratized. - Ray Kurzweil12/31/2010 Clarify, LLC 9 Clarify LLC, 2010 All Rights Reserved 10. Q: If anybody canmake a product, howcan anybody makemoney at it?12/31/2010 Clarify LLC, 2010 All Rights Reserved 10 11. An economists view: barriers to entry Bruce Greenwald Competition Demystified 200512/31/2010 Clarify LLC, 2010 All Rights Reserved11 12. Some common barriers to entry: Economies of scale Inability to gain access to specialized technology Existence of learning/experience curve effects High switching costs Brand preferences and customer loyalty Capital requirements Access to distribution channels Regulatory policies Tariffs & international trade restrictions12/31/2010 Clarify LLC, 2010 All Rights Reserved 12 13. Where can we getbarriers to entry?12/31/2010 Clarify LLC, 2010 All Rights Reserved 13 14. IP strategists view:=12/31/2010 Clarify LLC, 2010 All Rights Reserved 14 15. Intellectual Assets vs.Intellectual PropertyIntellectual AssetsPeople/TalentExperienceProcessesRelationshipsCultureIntellectual Property:PatentsTrademarksCopyrights Trade Secrets Clarify LLC, 2010 All Rights Reserved 15 16. The myth of patent protection12/31/2010 Clarify LLC, 2010 All Rights Reserved 16 17. IP rights are negative rights12/31/2010 Clarify LLC, 2010 All Rights Reserved 17 18. The best defense is12/31/2010 Clarify LLC, 2010 All Rights Reserved 18 19. Copyrights: What you need to know Fixed in a tangiblemedium Notice: 2010 John Doe- not required, butrecommended Registration - notrequired, butrecommended Beware of ownershipproblems with softwareconsultants Clarify LLC, 2010 All Rights Reserved 19 20. Trade secrets are: Information that is not generally known That has value derived from secrecy That the owner reasonably tries to keep secret Clarify LLC, 2010 All Rights Reserved 20 21. What can IP get for you?Barriers: Patents Copyrights Trademarks Trade SecretsScaleAccess to tech Learning curve Switching costs Brand Capital Distribution Regulatory Trade/tariff Clarify LLC, 2010 All Rights Reserved21 22. Not all barriers to entry confercompetitive advantages (& vice versa) Barriers Competitive to entry Advantages Clarify LLC, 2010 All Rights Reserved 22 23. 12/31/2010 Clarify, LLC 23 24. Something somebody wants12/31/2010 Clarify LLC, 2010 All Rights Reserved 24 25. One of these is not like the others Company 1 Company 2Company 3Revenue$58B$124B$65BGross profit $9B $27B $26BNet profit 2.7%7% 21.5%marginEnterprise $21B$101B$253BValue12/31/2010 Clarify LLC, 2010 All Rights Reserved 25 26. HPs strategy (in a haiku): Good enough productsBuy it all from ODMs Ship lots of volume12/31/2010 Clarify LLC, 2010 All Rights Reserved 26 27. Not CustomersCustomers12/31/2010 Clarify LLC, 2010 All Rights Reserved 27 28. HPs value chain Shift Left strategy Repair Test Validation Design Support Rawmaterials Distribution Assembly What couldComponents possibly gowrong?12/31/2010 Clarify LLC, 2010 All Rights Reserved28 29. 12/31/2010 Clarify LLC, 2010 All Rights Reserved 29 30. Pause to ponder:What were the incentives ofthe managers who madethese decisions?What are the incentives ofODMs?12/31/2010 Clarify LLC, 2010 All Rights Reserved 30 31. Look at how incentives align Leverage the More fully utilize Leverage technologyCM/ODM volume of otherexisting capacitywith other customers customers Adapt the product to Make a profit fit the mfg. processAlignedSupportable Conflicting HP Make a profit Push more Control suppliersresponsibility to theuse of technologysupplier Restrictive contract terms 12/31/2010 Clarify LLC, 2010 All Rights Reserved31 32. What if you areoutsourcing someor most of yourvalue chain?12/31/2010 Clarify LLC, 2010 All Rights Reserved 32 33. Your genius idea12/31/2010 Clarify LLC, 2010 All Rights Reserved 33 34. Monetizing the iPhone ecosystemProfit$4Pools:70% $.50? 30%30% ? 40% iPhone productRetail channelAds Application SWContentComponentsMaterialsServiceConnector AppleiTunes store iAds royaltystores Auth chip Patents App store ATT rev.PatentsTM share CopyrightCopyright Trade secret12/31/2010 Clarify LLC, 2010 All Rights Reserved34 35. How much can we make for ourselves?Retail Price: $99 You get: Apple gets:Channel margins$39$60Program $ - $10 $10Connector royalty-$4$4Auth chip royalty-$0.50$0.50Total: $24.50 $74.50 Your Margin of 24.5% has to cover COGS and SG&AOops.12/31/2010 Clarify LLC, 2010 All Rights Reserved 35 36. Apples strategy (in a haiku):Products people love, Control the ecosystem, Take all the money12/31/2010 Clarify LLC, 2010 All Rights Reserved 36 37. Where are the control points in anecosystem?Interfaces12/31/2010 Clarify LLC, 2010 All Rights Reserved 37 38. Why arent there knockoff printers?12/31/2010 Clarify LLC, 2010 All Rights Reserved 38 39. Think about 3 kinds of structure:1. Ecosystem / value chain2. Product architecture3. Organization & process architecture12/31/2010 Clarify LLC, 2010 All Rights Reserved 39 40. IncentivesEveryone in the entire ecosystemmust have incentives for them to actin the way that you want them to12/31/2010 Clarify LLC, 2010 All Rights Reserved 40 41. If you must expose your IP, consider: Means Motive Opportunity12/31/2010 Clarify LLC, 2010 All Rights Reserved 41 42. Pragmatic steps:Trade secrets: Remember that all relationships are forever, for now Mark confidential documents confidential Review your policies and documents that cover the handling of confidential information (especially work made for hire) Make it clear who owns what in Joint Development AgreementsPatents: You cant assert a patent that you never file Set up structures (patent review board) and incentives ($100/disclosure, $1000/patent) to motivate inventors to discloseCopyrights & Trademarks: Mark your stuff, monitor misuse and act on it12/31/2010 Clarify LLC, 2010 All Rights Reserved 42 43. Do patents matter forstartups?NoYes Many VCs treat it as a checklist Can matter a lot at a liquidityitemevent Takes years for a patent to issue Some VCs recognize that IP may Technology is changing quicklybe the only thing of residual Costs time & moneyvalue Applications become public Psychological barrier tocompetitors Cant have a valid & enforceablepatent if you dont file one Clarify LLC, 2010 All Rights Reserved 43 44. 12/31/2010 Clarify LLC, 2010 All Rights Reserved 1 45. 12/31/2010 Clarify LLC, 2010 All Rights Reserved 45