In coordination with the upcoming FORTUNE Innovation Forum, Gerry Komlofske, the President and CEO of ipIQ, discusses ipIQ’s unique view on the characteristics of winning technologies and highlights one specific “rule-of-the-road” of intellectual property and business strategy. That rule, which is true more often than we would like, is: When a good technology meets a bad business, the business usually wins.
ipIQ has three decades of experience helping clients leverage technology against emerging business opportunities. This experience includes helping Honda recognize the value of the CVCC combustion technology, identifying Acuson as an acquisition target for Siemens, identifying technological hot spots in polymer coatings, and helping private equity firms recognize undervalued technology assets in the medical products industry.
In order to illustrate the point that “when good technology meets bad business, the business usually wins,” Komlofske takes a closer look at the example of Sun Microsystems:
“The table below depicts the patent-based intellectual property of Sun Microsystems. Across the board, Sun has very strong technology. It is clear that Sun’s technology is fundamental in the industry with an ipIQ current impact indicator that is at least 2x the average in each platform area. ipIQ’s current impact measure is an indexed indicator which measures how much influence Sun’s technology is having on the platform area across all competitive technologies. However when we look at our valuation model, Sun doesn’t do quite as well.
Why is Sun not more highly valued?
To answer that question, we introduce the ipIQ valuation model. In its general form, the model relates a company’s equity value (in the form of PE ratio, EBITDA multiple or market/book ratios) to our indicators of technology value. At the highest level, these include the above mentioned current impact indicator, the technology’s proximity to fundamental science, the age of the technologies on which a company is building (either their own or others), and an indexed research and development budget comparison. This model generates a predictive stock target based on the technologies’ potential. For companies in focused, well defined industry sectors ipIQ models work very well. Figure 1 compares ipIQ’s predictive stock price with the actual price of ATMI since 2001.
Figure 1: ATMI vs. ipIQ predictive model.
ATMI is a Semiconductor material manufacturer. Product cycles are quick and the technology is the primary source of competitive position. The actual stock price is closely related to our modeled value, with the evident “momentum” nature of investors.
Figure 2 below compares ipIQ’s predictive stock price with the actual price of Sun since 2001. Sun’s value since the dot com bubble evaporated, and market performance has fallen well short of its technology value, even as Sun has strengthened its portfolio recently.
Figure 2: SUNW vs. ipIQ predictive model.
ipIQ believes that the drop in relative market performance is due to the fact that Sun continues to focus commercially on its hardware/server related business, with over three quarters of its revenue in this area. This is a crowded commodity business with stiff competition from IBM and HP, with commodity components manufactured offshore – a bad business which cannot be rescued by strong IP. And SUN does have some strong IP, but has not capitalized on its strength.
Did Sun miss the boat?
Arguably, Sun’s Java technology could have been a Microsoft killing platform. However, antitrust issues became a leading business issue rather than leveraging Java. This failure to exploit Java actually gave Microsoft time to develop .Net and minimize a very real threat from Sun. This is a classic example of a failure to exploit IP for business gain and reinforces the gap between the actual stock price and ipIQ’s predictive measure.
Can Sun Turn Itself Around?
The strength of Sun’s technology portfolio is significant, but is leveraged in a difficult area. Interestingly, Sun’s strong technologies including Java, have been recognized outside the core IT industry, as illustrated by Google’s licensing of Java. Google is clearly focused on becoming a standard, which requires two things – a large market share and the means to maintain that share. Google’s search engine share is undisputed. Their desire to make the Google interface the only interface for users is apparent. Licensing of Sun’s Java technology gives Google the tools to create applications that battle the installed base of Microsoft. ipIQ would bet that the Google/Sun relationship will evolve into the licensing of security patents to exploit another perceived weakness Microsoft applications. That make’s better business sense and is the beginning of aligning Sun’s strong technology with better business practice.
Apparently, for the past two months, there has been a grassroots movement underway in Vancouver to establish an “innovation commons.” According to Boris Mann, the leader of the movement, the idea just might work: “Of course, my interest is seeing this actually happen here in Vancouver, but I think the model would work well in any city in the world: Throw a bunch of smart, independent, motivated people together in one space and let collaboration and innovation blossom.” According to the Vancouver Innovation Commons wiki set up by Boris, the innovation commons would be a “physical, 24/7 space where Vancouver’s entreprenuer community can gather to motivate each other’s innovation.” 
