Intellectual property has been a cornerstone of virtually every industry and business. But only over the past two or three decades has the value and wealth generated by the various forms of this intangible asset risen to the same levels as those gained from tangible assets, such as land or natural resources. Generally, IP refers to the collection of patents, copyrights, trademarks, and trade secrets that a company owns. However, this definition has been broadened to encompass all types of intellectual property, such as business models, methods, strategies, customer and market information, reports and documents, drawings, general know-how, e-mails, software, algorithms, and recorded media. The IP portfolios of many businesses constitute their most valuable assets.

IP can also act as a critical differentiator and a great source of revenue. Even a cursory review of the relevant headlines over the past few years covering VC investment in start-ups, economics of licensing/royalty agreements, or litigations clearly indicates intellectual property's huge value and the need for effective management strategies. Such strategies should protect intellectual assets in a practical as well as a cost-effective manner and garner the maximum possible value from them. Because of the heightened importance of these valuable assets, IP's role in the semiconductor industry must be continually examined.

The rise of IP-providing companies, many examples of licensing/royalty payments of up to hundreds of millions of dollars, and the growing need for more innovation to overcome CMOS scaling barriers all point to the ever-more- prominent role that intellectual property plays. Consequently, there has been an increasing focus on creation and generation of IP among semiconductor companies, which consider it a major competitive advantage.

One metric often cited as a measure of success is the number of issued patents. Although this gauge is quite relevant and important, it is ultimately the quality, not the sheer quantity, of the IP and its potential commercial value for revenue and licensing/royalty income generation that ultimately matter the most. One key core patent, or a collection of a few fundamental core patents with a high level of technical merit and multiple broad claims that effectively and fully cover the relevant IP, technology, and application landscape, is much more valuable than a long list of patents on incremental improvements to existing technologies. This value can be greatly enhanced if these key core patents also offer novel practical solutions to current problems or roadblocks, are sought by others, are easily detectable, and allow no economically viable work-arounds. However, many of the "lower-value" patents are still needed for defensive strategies, cross-licensing, and competitive reasons.

Generally, there are two categories of intellectual property. The first is proprietary IP, which, depending on its breadth, provides some degree of differentiation. Examples are patents in emerging and enabling technologies, such as techniques and innovations developed to enhance transistor performance or to overcome issues with device scaling. Proprietary holdings also include methods to extend subwavelength lithography using immersion techniques or tools, processes, and materials developed for high-k gate dielectrics and metal-gate stacks.

The second category is commodotized IP, which can be used free of charge by anyone. An effective strategy may include defensive publications designed to put select intellectual holdings in the public domain with the aim of preventing others from obtaining patents by establishing prior art. Here, because there is no major technical differentiation, a significant portion of the leverage and advantage is lost, which often translates into a lower profit margin. One segment of the semiconductor equipment industry in particular has suffered the consequences of this weakened IP position: The lack of any appreciable technical differentiation in automated batch-immersion wet stations has contributed significantly to price sensitivity, low margins, and relatively poor financial performance, which has made running a profitable auto-wet tool business quite difficult.

Another important category is the ownership of IP generated or used during the development of industry standards (such as 300-mm intellectual assets) by SEMI, IEEE, or other industry groups. In many cases, member companies provide all or portions of the IP, and it is supposed to be open to access. However, at times this area has been quite challenging and must be addressed early in the process by clear and solid procedures as well as proper legal and licensing measures. Standards with IP strings attached create an unfair business environment. Recent court battles and lawsuits highlight the need for more transparency on the part of standards member companies.

There are also some gray areas of intellectual property. For instance, equipment companies work with many customers and learn a great deal from these interactions. Naturally, they will leverage this know-how in their own tool and process development, which they later transfer to their customers without indemnification.

Along with the potentially great rewards of the intellectual property business come risks and challenges that must be managed as part of a comprehensive strategy. The most troublesome aspect is the expensive and at times endless litigation for potential infringement or improper use. An ongoing in-house IP audit, careful examination of its ownership, and review of the need for outside or third-party IP, followed by a well-planned and financially sound cross-licensing and licensing strategy, significantly minimize the risk of ending up on the wrong side of a litigation.

In the case of low-margin commodity products, royalty stacking can be a potential challenge. Multiple patents may need to be licensed from different parties for development and sale of a product with several royalty payments. Cross-licensing can potentially help to minimize the financial effect of this problem. Other challenges include identifying and capturing the developed internal IP and the relatively high costs of obtaining patents and maintaining and enhancing the intellectual property position of the company. Ideally, this should be financed by the value extracted from the existing assets.

As the globalization of the business and the industry has accelerated and the outsourcing of chip manufacturing has burgeoned, there are many concerns about IP rights and protection, counterfeiting, protectionism, and bureaucracy in countries such as China with weak regulations or ineffective enforcement of their existing intellectual property laws. The Chinese central government has shown that it is aware of the importance of providing a level playing field for foreign companies. Major changes are under way to establish internationally recognized IP rights, courts, and enforcement.

Despite these efforts, many uncertainties about the effectiveness, speed, and success of these initiatives and the potentially negative role of local governments remain. A prudent long-term strategy still calls for establishing IP rights and filing for patents in China now, in the hopes of leveraging them in the future in a more equitable environment for the effective assertion of intellectual rights.

The valuation of IP, which should examine various possibilities and options for maximizing commercial gains, remains a challenging and critical component of a sound strategy. The potential market value is generally estimated as the present value of the net projected future revenues and profits that can be attributed to the intellectual property and anticipated to be earned over its useful market or economic lifetime. It is critical to specify scenarios; target markets; market size; projected market shares; portions of the market values of products, services, and applications that use the IP; and the potential risks of achieving these estimated benefits. The ability to translate IP into profits can increase the market value of the company well beyond its book value. In addition to the traditional approach of using tangible assets, intellectual assets can also be employed as collateral for securing loans and financing transactions.

Companies need to manage their IP assets through a set of comprehensive and well-documented strategies. These strategies should be designed to help businesses recognize the importance of their intellectual portfolio, audit and identify their existing holdings, assess their value, leverage the competitive advantage they might provide, and fully extract their maximum commercial value. They should also develop mechanisms to identify, capture, establish, promote, and reward creation of new IP; establish rules for primary and secondary (international) filings; and protect and enforce the intellectual rights.

In addition, companies should perform competitive analysis of owned IP versus assets owned by others, verify ownership, identify important third-party holdings, establish processes for inclusion of IP issues in business decisions, educate the workforce on the value of IP, and develop metrics to measure the effectiveness of the intellectual portfolio strategy and monitor its performance. Market valuations of IP and its net contributions to revenue ultimately measure the success of a company's intellectual property strategy.