2.Business Activities and Regional IP Holdings

General comparative benchmarking can be helpful, as we have just seen. They help a company set targets for IP portfolio growth and compare those targets against well-respected competitors. This is one way to achieve a balanced IP portfolio, in comparison to other companies.

It is also important for a company to maintain balance with respect to regional revenue streams. That is, a well-designed IP strategy tries to build up IP protection in all geographic regions involved in generating company revenue. At the simplest level, this requires a company to build an IP portfolio across regions that takes account of how much revenue is generated in each region. Generally speaking, a company should hold patents in each region in numbers roughly proportional to the percentage of overall company revenue generated in that region. An IP portfolio should maintain revenue-adjusted regional balance, in other words.

To take a simple example, consider the desktop and small computer market. We will compare two prominent competitors in this market, Hewlett-Packard (HP) and Lenovo. We will focus on the European segment of this market, asking whether revenue in Europe is matched, proportionally, by HP’s and Lenovo’s European IP holdings.

Begin with HP. HP made sales revenue of $38 billion in this market in a recent year. Here is a geographic breakdown of HP’s revenue, by percentage by region, in the desktop computer market, in a recent fiscal year:

As you can see, HP generates 22% of its sales (or $8.35 billion) in the Europe, Mid-East and Africa (EMEA) region. The bulk of these regional sales are in Europe, as the following chart shows ($5.7 billion sales in Europe, 68% of EMEA sales, or 15% of HP’s global sales):

HP Sales: Europe, Mideast, Africa Breakdown (In Billions of Dollars)

How well do HP’s European patent holdings reflect this sales revenue? One way to answer that question is to look at published patent applications in recent years. Usually eighteen months after a patent is filed, it is published as a published application. Counting recent published applications can give you some measure of recent patent activity. The goal here is to examine regional patent activity - in the form of published applications - and compare it to regional sales revenue.

The following chart shows the percentage of recent HP published patent applications by geographic region.

HP Patent Applications 2017-2019 (Percent by Region)

If we take into account that computer sales are 65% of HP’s revenue, and assume that 65% of the European applications are related to HP’s computer business, we see that

Since 2017, HP Patent Application Breakdown

Since 2017, 4155 US published apps for HP; 1480 in Europe; 1155 in China. (by business unit: 65% revenue from computer sales; 35% from printers and other business units)[1]

Lenovo Income by Region (Unit: Billion)[2]

China is the People’s Republic of China; AP is Asia Pacific (other than China); EMEA is Europe, the middle east, and Africa; and AG is the Americas, primarily the US.

Lenovo is primarily a computer company; 70% of its annual revenue of $45 billion comes from its PC and Smart Devices Group (a corporate division).

Assuming that Lenovo’s Europe, Middle East and Africa (“EMEA”) sales break down in roughly the same pattern as HP’s, this means that 68% of EMEA sales come from Europe. Total EMEA sales were $12.7 billion, so Lenovo’s estimated sales in Europe were roughly $ 8.6 billion.

Now consider Lenovo patent applications in Europe. Since 2017, Lenovo has 2,632 published applications in China and 1,120 published applications in the US. But since 2014, Lenovo has only 57 published applications in Europe (the EPO). Lenovo (like some companies) also relies at times on national (non-EPO) patents from individual national patent offices. Since 2014 Lenovo has another 177 published applications in the German national patent office, and 46 in the national patent office of Great Britain. Putting all of these together, we have a total of 280 Lenovo applications published in Europe since 2014.

The following table compares Lenovo patent applications in Europe, per application, with the same figures for HP (described earlier):

Without knowing more details about Lenovo’s operations in China, it is impossible to say whether the regional difference with HP should be a concern. In particular, you would need to answers to the following questions to decide whether Lenovo should be filing more applications in Europe:

●Does Lenovo sell mostly older models of computers in Europe? Does it compete in Europe primarily on the basis of low prices, wide distribution, good service facilities, etc.? If so, then many or most of the components in Lenovo computers sold in Europe may be covered by lapsed patents that were filed many years ago. This might indicate that more European filings would not be helpful, because there are few new components or component designs, which would make it difficult to obtain valid European patents.

●Are the computers sold by most of Lenovo’s competitors manufactured in China or other countries where Lenovo has a large and valuable patent portfolio? If so, patents in these countries of manufacture may be adequate to protect Lenovo revenue streams. Note that even if this is so, European patents would permit Lenovo to bring patent lawsuits against distributors, retail sellers, and other companies involved in the “distribution chain” of competitor computers. Obtaining and holding patents in countries where distribution and sales take place gives Lenovo more strategic options regarding which type of company to sue (manufacturer versus distributor/seller) and in which countries Lenovo will litigate its patents. In general, the more strategic flexibility it gives you, the more valuable a patent portfolio will be.

In general, then, there may be reasons not to hold patents in proportion to regional revenues. But a strategic decision to pursue this approach should be accompanied by an acknowledgement of the risks and costs.