Shopify headquarters in Ottawa on Sept. 1, 2020.Adrian Wyld/The Canadian Press
Jim Hinton is the founder of Own Innovation and co-founder of the Innovation Asset Collective.
Bill Gates, a co-founder of Microsoft, once said that “patents have a shelf life of a banana.” Elon Musk, the colourful CEO of Tesla and founder of Space-X, has made his patent portfolio available to anyone to use. Closer to home, The Globe and Mail’s Sean Silcoff recently reported Shopify founder Tobi Lutke saying “an idea is worth exactly one good bottle of Scotch.”
As a new entrepreneur or technology observer, these statements might fool you into thinking that intellectual property (IP) has little value, that it is irrelevant to the success of the biggest tech companies or that IP assets are not something CEOs pay attention to. The reality is profoundly different.
Microsoft has been one of the world’s top owners of IP for three decades. Mr. Gates has taken the aggressive IP strategy he applied in corporate boardrooms into his philanthropic ventures, leading both his climate change and health initiatives into a strategic accumulation of valuable IP. As a New Republic columnist recently pointed out, “in the world of climate discourse, Gates is what’s known as a techno-optimist. But his theory of change is one of benevolent intellectual property domination.”
For his part, Mr. Musk is also a prolific filer of patents in both the auto and space sectors and the owner of countless other forms of IP, such as copyright, trade secrets and industrial designs. He embeds these IP assets into both user and research partner contracts. His willingness to make low-value patents in his arsenal available to anyone to use without a licence – provided they don’t assert their IP against Tesla – is part of a clever strategy to increase global demand for electric vehicles.
For Shopify, it is the data and proprietary algorithms the company holds as confidential. Shopify’s know-how in its global work force, particularly its developers, is protected through an often undervalued form of IP called non-compete agreements. The company also manages its ecosystem by carefully crafting developer and user agreements that provide an additional contractual layer of protection against IP theft. Trademark protection is one more layer of the Shopify brand, and, as their IP expert recently said, it protects the company in multiple jurisdictions across the world. This IP portfolio and the global management of its proprietary ideas have helped Shopify secure its position while growing to its market cap in 2020 as businesses moved online to persevere through pandemic lockdowns.
And yet, compared with other global e-commerce companies such as Amazon, Alibaba, Walmart and eBay, and relative to its market capitalization, Shopify has a major weakness in its IP strategy: a severely undeveloped patent portfolio. To survive, it will need to leverage its legal expertise and build on its small patent toolkit to complement its growing IP portfolio. This is especially important now that The Wall Street Journal has reported that Amazon has set up an internal team to replicate Shopify’s services.
Companies such as Amazon can extract significant leverage from their massive patent positions over a company such as Shopify. Shopify is vulnerable because it is likely to infringe some of the patents of these players and yet does not hold a significant number of patents being infringed by these players, so it cannot sufficiently neutralize the threat. This means that, at any moment, Amazon can assert its dominant IP position as leverage to get whatever it wants – more market share, more money for its services, even a piece of Shopify’s business.
E-commerce platform companies, as mentioned in the table above, have prioritized and gained tremendously from creating a robust patent portfolio. Vast troves of patents have strengthened their competitiveness, protected them from competitors’ assertions and enabled sustained revenue yields, especially for first movers. Amazon’s patent strategy from its early years offers a perfect case study. In 1999, the company was granted a patent for the software behind its 1-Click buy button, which helped create a key advantage by simplifying online shopping. Valuation studies estimate Amazon earned additional annual revenue of US$2.4-billion from its 1-Click patent.
In the knowledge-based economy, patents are a tool for market capture and control. While they are only one form of IP, their public registry makes them easy to see. And because they require proof of novelty, they have been used as a solid proxy by economists to measure innovation outcomes for both companies and firms. Without a solid patent portfolio, Shopify has missed an opportunity to capture and control a hotly contested market.
E-commerce and supply chain companies have a large operational ecosystem that could overlap with other companies’ operations, leaving room for a business such as Shopify to be more vulnerable to assertion risk by both corporate and non-performing entities. Even though replete with IP and utilizing its IP as part of its value, with its ballooning market cap and geographic expansion, Shopify will increasingly be a target of patent assertions in global markets.
It turns out Shopify’s IP is not worth a bottle of Scotch. It’s actually worth roughly US$150-billion today. They may be intangible and invisible, but intellectual property assets are where the value is, and business leaders work behind the scenes to generate and protect them.
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