Open source intellectual property Gavin Moodie, Griffith University Paper presented to the Australian Institute for Commercialisation seminar on growing the knowledge economy – what are the best models for the commercialisation of research? 5 September 2006, Brisbane. Thank you for this opportunity to elaborate on a part of Griffith University’s submission to the Productivity Commission’s study of public support for science and innovation. The submission argued that concentrating on commercialising intellectual property may be an obstacle to its diffusion. It suggested that the better approach may be for universities to simply give away most intellectual property as a contribution to the general good. Universities may include in their intellectual property licensing agreements a general ‘jackpot’ or ‘blockbuster’ clause that provides that should the intellectual property contribute to a ‘jackpot’ of revenues of, say, $50 million over 10 years, there would be a sharing of revenue determined by a nominated commercial arbitrator. Why should Australian universities commercialise their intellectual property? Australian universities were encouraged to commercialise their intellectual property by the Australian Government which saw it as another source of university revenue. In Knowledge and innovation, the 1999 policy statement that established the current arrangements for Australian university research and research training, the Australian Government said – By being alert to emerging opportunities, more entrepreneurial in their focus, flexible in their organisation and more responsive to business needs, institutions should attract more private investment. Their ability to develop new ideas and move quickly to apply them would then create a reinforcing cycle of opportunities, investment and rewards which can be shared by individual researchers and research teams. Through more strategic use of intellectual property rights, institutions would have scope to access revenue streams, royalty benefits, or equity shares for themselves and their researchers. (Commonwealth of Australia, 1999:5) The policy established research and research training management plans in which universities were required to report on their ‘management of commercialisation, intellectual property and contractual arrangements’ (Commonwealth of Australia, 1999:26). In The chance to change published in 2000 the chief scientist observed – The public sector in Australia has traditionally been reluctant to explore the benefits of adopting a more commercial approach to its IP. Furthermore, a uniform policy with regard to IP does not exist at Commonwealth or State/Territory level. This is partly because of perceived conflicts of interest, lack of commercial expertise and acumen and broad issues of legal liability. (Commonwealth of Australia, 2000:96) The chief scientist proposed the development of innovation centres as the first point of contact for university researchers seeking to commercialise their research by providing advice and help on intellectual property, commercialisation options, business plans, and access to venture capital (Commonwealth of Australia, 2000:92-94). The innovation summit in 2000 supported the chief scientist’s proposal for innovation centres (Innovation Summit Implementation Group, 2000:25) and argued that commercialising public sector research would have economic benefits for the country – Maximising the outcomes of our investment in public sector research will create new business opportunities, jobs and exports. However, there is a perception that public sector research in Australia is somewhat less than commercially oriented and that this needs to be addressed. Where there is commercial orientation, there is often a lack of expertise in valuing and managing intellectual property, business planning and business management. If we do not have the skills to manage commercialisation well, we cannot expect healthy returns. (Innovation Summit Implementation Group, 2000:25) However, commercialising intellectual property has not been an important source of university revenue in the US or Australia and it seems to be an obstacle to universities’ collaboration with business and to the dissemination of new ideas from research. IP as a source of university revenue Australian universities earn only 0.3% of their income from royalties, trademarks and licenses. The biggest Australian university earners of licensing income in 2004 earned less than 2% of their income from licenses: Edith Cowan (1.6%), Curtin (1.4%), Deakin (1.3%) and Flinders (1.2%). While this may reflect the underdeveloped commercialisation of research in Australia, licensing income is only 1.2% of the income of the top 25 US university earners of licensing income. These figures are affected by what counts as a university in the US. The 18th largest earner of licensing income in the US is the State University of New York which has 64 campuses: 13 university centre and doctoral degree granting institutions, 13 university colleges whose highest awards are coursework masters, 8 technology colleges whose highest award is the bachelor degree and 29 community colleges. Other universities include hospitals and even health systems whose budgets are a large part of the total university budget. Comparisons are also confounded by some US universities’ extensive income from ancillary activities such as sports and student residences. The US Association of University Technology Managers therefore express licensing income as a proportion of research expenditure, and found that in 2002 licensing income was only 4.2% of all US universities’ research expenditure (cited in Howard, 2003:5). So even in the US where it is well developed, income from licensing intellectual property is only a modest source of universities’ total income. Furthermore, licensing income is not all surplus for universities. Universities incur very considerable expenditure in earning licensing income, on intellectual property lawyers, commercialisation officers and offices, and the time that university researchers must spend explaining their ideas to these intermediaries. Howard (2005:8) observes that – Researchers and research organisations will, except in very rare situations, earn more from being paid for their work input (contracts and consultancy) than from licenses and royalties flowing from intellectual property or from income earned in spin-out companies. Studies and data consistently show that, except in a limited number of cases, universities and research organisations earn very little from licensing intellectual property. Moreover, many of the major revenue streams have been generated from non-exclusive licensing arrangements. (Howard, 2005:8) Universities over-value IP Concentrating on the commercialisation of intellectual property encourages universities to over-value their intellectual property, which they are likely to do anyway, partly because they overlook the other costs of the commercialisation process. While research is very expensive, development, production and marketing are even more expensive. Research’s share of the total cost of introducing a commercial innovation vary by industry, being higher in product innovations and science-based industries such as electronics and chemicals and lower in process-dominated industries such as iron and steal and non ferrous metals (Pavitt, 2001:16). It also varies by firm, technology and size of innovation (Brown, 1990:149). Estimates of research’s share of total innovation costs range from a low of 5% to a high of 60% (Stead, 1976; Kamin, Bijaoui & Horesh, 1982; Brown, 1990). Universities also over-value their intellectual property because they concentrate on its novelty rather than its commercial potential. Clearly, only a low proportion of raw product ideas have commercial potential. Stevens & Burley (1997:26) estimate that it takes 3,000 ‘substantially new’ product ideas to produce 1 commercial success. Table 1: survivability of ‘substantially new’ product ideas at each stage of the new product development process Stage of innovation Best estimate % surviving prior stage 1 Raw product idea 3,000 100% 2 Ideas screened, patent disclosures 300 10% 3 Patents granted 125 42% 4 Significant development investment 9 7% 5 Pilot plant, test marketing 4 44% 6 Commercial launch 1.7 43% 7 Commercial success 1 60% Source: adapted from Stevens & Burley (1997) table 7, page 26. If anything like this is true, there is less than 1% chance of a successful patent resulting in a commercial success. Therefore the price that business pays for intellectual property at the pre-commercial stage has to be discounted substantially for the risk that it will not develop into a commercial success. IP as an obstacle to collaboration Howard (2005:57) notes that while patent protection and licensing is strong and economically significant in biomedical research, it is much less important in many manufacturing, mining and services industries. He cites Mowery and colleagues (2004) in arguing that university administrators’ insistence on extensive and detailed agreements covering intellectual property is a source of friction rather than as a lubricant for research collaborations. Howard (2005:57) reports that ‘industry representatives have commented that one of the greatest barriers to effective collaboration is the approach taken to intellectual property management within research centres’. He argues that the processes of working out licensing and sharing arrangements can actually impede the free flow of ideas necessary for research and innovation to flourish (Howard, 2005:8). Concentrating on protecting intellectual property also diverts universities from more valuable roles, both for themselves and business, of contract research and consultancies. Howard (2003:4) therefore asks whether technology licensing should be approached as a revenue raising strategy or whether more attention and recognition should be given to the broader contribution of the dissemination and application of knowledge. I therefore suggest that with the exception of biotechnology, universities simply give away most intellectual property as a contribution to the general good. This would encourage universities to concentrate on research transfer and adoption rather than commercialisation of their intellectual property. Universities may include in their intellectual property licensing agreements a standard ‘blockbuster’ or ‘jackpot’ clause that provides that should the intellectual property contribute to a ‘jackpot’ of revenues of, say, $50 million over 10 years, there would be a sharing of revenue determined by a nominated commercial arbitrator. Correspondence Gavin Moodie, 5 Park Road, YERONGA, 4104, Australia, G.Moodie@griffith.edu.au References Brown, Marliyn A (1990) The cost of commercialising energy inventions, Research Policy, 19, 147-155. Commonwealth of Australia (1999) Knowledge and innovation: a policy statement on research and research training, http://www.dest.gov.au/archive/highered/whitepaper/default.asp Commonwealth of Australia (2000) The chance to change. Final report by the Chief Scientist, Canberra, http://pandora.nla.gov.au/pan/25109/20020527/www.isr.gov.au/science/review/ChanceFinal.pdf Howard, John Hamilton (2003) Commercialisation discussion paper, Commercialisation forum and fair of ideas, Knowledge Commercialisation Australasia, http://kca.asn.au/noticeboard/events/cffi/discussionpaper3.pdf#search=%22%20%22Forum%20and%20Fair%20of%20Ideas%3A%20Commercialisation%22%22 Howard, John (2005) The emerging business of knowledge transfer: creating value from intellectual products and services, report of a study commissioned by the Department of Education, Science and Training, Commonwealth of Australia, Canberra, http://www.dest.gov.au/NR/rdonlyres/75374026-6458-4D0E-9CF7-6D589645D093/4079/7253HERC05A1.pdf Innovation Summit Implementation Group (2000) Innovation: unlocking the future. Final report of the Innovation Summit Implementation Group, http://backingaus.innovation.gov.au/docs/statement/isig%20report.pdf#search=%22%20%22innovation%3A%20unlocking%20the%20future%22%22 Kamin, J Y, Bijaoui, I & Horesh, R (1982) Some determinants of cost distributions in the process of technological innovation, Research Policy, 11, 83-91. Pavitt, Keith (2001) Costing innovation: vain search for benchmarks, Research Technology Management, Jan/Feb, 44, 1. Stead, H (1976) The costs of technological innovation, Research Policy, 5, 2-9. Stevens, Greg A & Burley, James (1997) ‘3,000 raw ideas = 1 commercial success’, Research Technology Management, May/June, 40, 3, pp 16-27.  Table 2: licensing income of the top 25 US university earners of licensing income as a proportion of total income, fiscal 2004. Institution Licensing income ($)* Total income ($) Licensing as % of total (%) New York University 109,023,125 ? University of California system 74,275,000 10,815,167,000 0.7 University of Wisconsin at Madison 47,689,165 1,807,600,000 2.6 Stanford University 47,272,397 2,900,000,000 1.6 University of Minnesota 45,550,764 2,746,717,677 1.7 University of Florida 37,402,284 1,500,700,000 2.5 Michigan State University 36,402,250 1,600,000,000 2.3 Wake Forest University 34,296,000 924,000,000 3.7 University of Colorado System 34,128,958 1,374,411,874 2.5 University of Rochester 33,736,882 2,000,000,000 1.7 University of Massachusetts 26,258,577 1,289,941,000 2.0 Massachusetts Institute of Technology 25,781,923 2,035,100,000 1.3 University of Washington 22,808,483 2,155,000,000 1.1 Emory University 22,517,830 2,450,000,000 0.9 Harvard University 16,654,975 2,800,000,000 0.6 University of Utah 14,510,087 1,960,000,000 0.7 Florida State University 14,316,563 918,184,000 1.6 State University of New York 13,363,714 9,062,000,000 0.1 University of Texas 11,541,081 1,200,000,000 1.0 Case Western Reserve University 11,028,447 791,500,000 1.4 University of Iowa 10,712,706 2,100,000,000 0.5 University of Michgan at Ann Arbor 10,633,528 2,024,598,233 0.5 California Institute of Technology 9,886,087 2,134,466,000 0.5 Washington University in St. Louis 9,581,586 1,551,501,000 0.6 University of Chicago UC Tech 8,814,356 1,283,789,000 0.7 Top 25 619,163,643 59,424,675,784 1.0 Top 25 without SUNY 605,799,929 50,362,675,784 1.2 Source: licensing income from the US Association of University Technology Managers reported in the Chronicle of Higher Education 2006-7 Almanac, volume 53, issue 1, page 30; total income from institutions’ web sites. * Licensing income includes royalties, settlements from patent-infringement lawsuits, and cashed-out equity in spinoff companies. Gavin Moodie 6 Open source IP