What's all this intellectual property (IP) stuff, anyway?

For the last decade or so, we've heard about IP creation, IP
protection, IP licensing, and IP companies. Is this really a new type
of business or a familiar business wrapped up in new jargon?

By Jim Turley, Patriot Scientific -- Electronic Business, 9/19/2007

We're totally buzzword-enabled. Nobody sells products anymore. We
"enable seamless methodology solutions targeted at attractive price
points."
Who writes this stuff, and when did we decide that talking like
lawyers or politicians was a good thing?
A case in point is "intellectual property," or IP. For the last decade
or so, we've heard about IP creation, IP protection, IP licensing, and
IP companies. Is this really a new type of business (oops, a "paradigm
shift"), or is it a more familiar business wrapped up in new jargon?
The good news is, it's the latter, and the concept is easy to
understand. Intellectual property has been around for a long time, and
we're all familiar with it, even if we don't always call it by its
currently fashionable moniker. In short, intellectual property is
knowledge, and IP licensing just means sharing what you know. Books,
music, teaching, art-they're all examples of IP. And the world would
be much poorer without them.
For a somewhat seamier example, IP licensing is a lot like the world's
oldest profession: You get to sell it and then turn around and sell it
again to someone else. There's no inventory, no cost of goods, and no
manufacturing. Unfortunately, the "product" depreciates rapidly and
many of your customers prefer that you don't mention their names. Yes,
indeed, it's a tried-and-true business model.

This same business model also works for software, music downloads,
movies, and most professional services. In all cases, you're selling a
valuable-but intangible-product. Plumbers and dentists certainly
provide useful services, but they don't generally leave behind a
material product, do they? You're paying for their time and expertise,
not the PVC pipe or the little roll of dental floss. Movies don't
leave a "residue," apart from good or bad memories. Same goes for
music, especially now that we download tunes and no longer get the
album covers or liner notes that once displayed our musical tastes to
friends and visitors.
In the electronics world, IP encompasses both software and hardware.
Software IP is easy to grok. We know we're paying for the bits on the
CD-ROM, not the plastic CD itself. The same software is equally
valuable, whether it comes on a CD, DVD, or floppy disk or as a
download (the ultimate intangible IP).
Hardware IP is a bit trickier. After all, hardware is, by definition,
a tangible product. But hardware schematics, Verilog, VHDL, test
vectors, and other bits of engineering effort all fall under the
rubric of intellectual property. You exert effort to create those
things, and you can share them with other engineers. Whether or not
you charge money for your schematics is another matter; you've created
something valuable either way.
Hardware engineers are like a team of architects. Architectural firms
create detailed blueprints for a building, but they don't actually
swing the hammers. Instead, the architects sell their plans to
construction firms that do the physical construction. The architects
get paid for their plans, and the builders get paid for their labors.
Everybody's happy.

Likewise, computer engineering firms can design chips (or boards, or
systems, or networks, and so on) and then sell those designs to the
folks who actually solder the devices together. This division of labor
allows everyone to specialize. The designers design, and the builders
build. The end customers don't know or care who, or how many people,
took part in developing their shiny new iPhone. All they know is that
they really like it.
The same goes for every other electronics product today. Cell phones,
antilock brakes, satellite-TV receivers, or TiVo boxes weren't all
developed by a single brilliant engineer. (And even if they were, that
person didn't actually solder together each TiVo that has gone out the
door.) We all build on the efforts of others; our "value add" is the
expertise we bring and not in reinventing the proverbial wheel.
The value of your efforts-your intellectual property-depends on a lot
of things, including the vagaries of market demand. Skill in designing
RS-232 interfaces might be valuable for a while but worthless later
on. If you've added a particularly brilliant bit of software to
generic hardware, you'll find a ready and willing market. Competition
and complexity are also factors.
Determining what your IP is worth is a tricky and inexact science-and
the topic of next month's article.