Apple & Google Big Movers in "Most Powerful Patents"

By BA McKenna - July 25, 2012 | Tickers: AAPL, GOOG, IBM, MSFT, YHOO | 0 Comments

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I think prolific tinkerer Thomas Jefferson, who told us "all men are created equal," would agree that that maxim does not apply to patents. My money would be on Tom joining me in taking Apple's (NASDAQ: AAPL) 676 patents filed in 2011 over, say, Panasonic's 2559.

Owning the right patents can reap billions in new products, while infringing on others' patents can cost the big bucks. Patent wars have always gone on, but they've particularly heated up in recent years. Notably, barring an 11th hour settlement, Apple and Samsung are headed to a jury trial -- being dubbed the "Patent Trial of the Century" --  over Apple's claims that Samsung infringed on Apple's patents by copying designs and tech in its popular Android-powered devices.

So let's take a look at both quantity and quality -- the companies that are racking up the most patents and those that have the patent portfolios that pack the most punch.

Quantity

IFI Claims Patent Services publishes an annual "Global Top 50," ranking companies by total patents filed. For 2011,  Big Blue took the top spot for the 19th year in a row. Here are the top 10: 

If patent collecting were an Olympic relay-type event, Team USA would be silver medalists. Here's how things stack up in the entire 50. 

Quality -- Patents That Pack the Most Punch 

While quantity info is interesting -- and there is a better chance of having powerful patents if a company has a larger portfolio -- quality is what matters.

Of course, judging quality is subjective. That said, it seems IEEE Spectrum's "Patent Power" Scorecard uses solid methodology. (IEEE Spectrum is the world's leading engineering and scientific magazine.) The annual Scorecard, a survey of the world’s most valuable patent portfolios, is released at the end of each year for the previous year. So the most current scorecard (released at the end of 2011) is for 2010 portfolios.

U.S. Companies (or Entities) Ranking #1 in their Respective Categories:

Wondering about Google (NASDAQ: GOOG)? Google ranked #2 behind Yahoo in the Communication/Internet Services category.

Big Movers

• Apple

Apple was the biggest mover, jumping to #1 in its category for its 2010 portfolio from #14 for its 2009 portfolio.

The scorecard is based on internally-developed patents, with the rationale being that organic innovation is the crucial factor to success. Apple’s internally developed patents increased to 566 U.S. utility patents in 2010 from 110 U.S. utility patents in 2006. Additionally, it acquired patents from elsewhere — notably, as part of the consortium that purchased Nortel Networks' patent portfolio.

Apple’s relatively small internally-developed portfolio ranks #1 because its patents score very high in two components of "Pipeline Power":  Pipeline Impact (they are cited as "prior art" 70% more frequently than average) and Pipeline Generality (they are 37% more generally applicable than average). (Pipeline Power and its components are discussed at end of article.)

• Google

Like Apple, Google has dramatically ramped up its internal patent efforts in recent years. In 2010, Google was granted 283 U.S. utility patents, compared to 28 in 2006.

Google's also been on a patent-buying binge -- notably, it bought patents from IBM, and bought Motorola Mobility to obtain its extensive patent portfolio.

Team USA Leapfrogs Over Team Japan 

There were 211 US companies on the 2010 scorecard, accounting for 64% of the 331 total. Team Japan placed 47 companies (14%) on the scorecard.  

How "Patent Power" Scores are Calculated 

I'm going to simplify things. You can read the complete scoring methodology here. 

Patent Power scores are calculated using these factors:

• Pipeline Growth -- Shows the trend in a company's patent activity by dividing the number of patents granted in 2010 by the average for the years 2005 through 2009.
• Pipeline Impact -- Shows how frequently patents issued in 2010 cite a company's patents issued from 2005 through 2009. It shows the extent to which a company is developing its own technology, as well as the impact of its technology on others.
• Pipeline Generality -- Measures the variety of technologies that build upon a company's patents. The rationale is that patents cited by later patents from a wide variety of fields tend to have more general application than those cited only by the same field.
• Pipeline Originality -- Measures the variety of technologies upon which a company's patents build. The rationale is that inventions created by combining different technologies tend to be more original than those that make improvements upon the same technology.

Wrap Up

Disruptive innovation is often the driver behind superior stock market returns. Thus, perusing surveys ranking patent power can be a good place to hunt for potential stock investments, as well as to keep track of how companies you currently invest in stack up.

As for specifics here, Apple and Google's ramped up internal R&D and patenting bodes well for future innovation. IBM's continued dominance in both patent quantity and -- in its category -- patent power also bodes well for it. No doubt, we'll soon be seeing even more uses for HAL, its smart-robot, and an explosion in the entire artificial intelligence field.

And Yahoo obviously has patent power -- I was surprised it ranked higher than Google -- so it should be interesting to see it new CEO Marissa Mayer can translate that patent power into innovative products and services that have revenue- and earnings-generating power.

Stay tuned for Part II where we peruse the Scorecard to look for potentially promising investments and then qualitatively and quantitatively analyze them.



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