On October 16^th, 2012, IBM announced a third-quarter 2012 diluted earnings of 3.33 U.S. dollars per share, a year-to-year increase of 4%, or 3.44 U.S. dollars per share, up 8% excluding the impact of the UK pension-related charges. Operating (non-GAAP) diluted earnings were 3.62 U.S. dollars per share, compared with operating diluted earnings of 3.28 U.S. dollars per share in the third quarter of 2011, an increase of 10%.

“In the second quarter, we delivered strong profits, earnings per share and free cash flow growth. This performance reflects continued strength in our growth initiatives and investments in higher value opportunities. These are fundamental elements to our long-term business model,” said Virginia Rometty, IBM president and chief executive officer. The numbers were definitely related to ambitious serial acquisitions.

 

As early as 2005, IBM acquired the data integration provider Ascential Software Corp., which strengthened its ability in providing better data integration, structuring and management service. The data integration department is one of the data management departments with great significance, and the acquisition expands IBM’s open information integration platform.

In 2007, IBM acquired Cognos Inc. for about 5 billion U.S. dollars, which revealed its strategic transformation. Cognos was an Ottawa Ontario-based company producing business intelligence (BI) and performance management (PM) software. BI and PM software are used to collect data, which help companies and organizations making better marketing strategies, thereby improving working and management efficiency.

September 2010 witnessed IBM’s busiest acquisition period. In one short month, IBM acquired the data warehouse appliance company Netezza, the internet technology company Blade, as well as the software provider OpenPages.

Last year, in order to upgrade its risk analysis ability and provide better financial services, IBM spent 387 million U.S. dollars to buy Algorithmics — a leading provider of risk solutions. The company strengthens enterprises’ analytic ability, helps financial organizations making riskaware business decisions and in turn benefits IBM in the long term. IBM’s 2012 financial report proved that its former serial acquisitions had already begun harvesting. The 2012 System z User Conference was held in Boao on October 26th and a new product was introduced. It is well known that all of the top 25 world banks run their businesses on System z mainframes. 71% of the global Fortune 500 companies are System z clients and 9 out of the top 10 global life and health insurance providers process their high-volume transactions on IBM mainframe. Over 80% of the world’s corporate and government data resides on IBM mainframes. The results of the second quarter earnings indicate that IBM’s mainframe server products earnings increased an average of 11%, though figures in Greater China exceeded 50%. These statistics indicate that an increasing number of enterprises are relying on servers which can provide high capacity and hybrid computing as well as high security and large-scale cloud computing. These are the sorts of challenges that these enterprises are facing and consequently IBM invested generously on computing research and development to meet those needs.

 

The generous investment enabled IBM to break the record for annual issuance of U.S. patents, with a total amount of 6,180 in 2011. IBM has maintained its position as the leading recipient of issued U.S. patents for 19 consecutive years. Therefore, IBM can drive revenue as well as prevent IP infringement through patent licensing. It does not waste any time in court compared with its competitors.

IBM released large amount of patents to the public in 2005, which represented a major shift in the way IBM manages and deploys its intellectual property portfolio. While many multinational corporations strengthened their patent protection, IBM gave free access of 500 patents to individuals and groups working on open source software. After that, it kept its principle of establishing a healthy patent and IP cooperation environment with other enterprises.

In addition, IBM can also influence science and technology trends through its patents. For example, IBM states that if it wants to promote particular standards, it can leverage the relevant patents in its portfolio by openly licensing or pledging them. IBM has also successfully attracted many clients who are keen on consulting IP management with IBM.

News related to IBM has consistently been in the headlines. Recent topics include the 6 billion U.S. dollars investment on R&D, series acquisitions, numerous patent licensing, etc. What will “Big Blue’s” next move be and what changes will be made to its current intellectual property strategies? To learn more about IBM’s intellectual property strategy, a China IP journalist interviewed Ms. Leonora Hoicka, Associate General Counsel of IBM Corporation for more information.

 

China IP: IBM has invested over 6 billion U.S. dollars annually on R&D. 20, 000 new innovations have been announced in the most fruitful year. In this new era of technology, how can IBM keep up its creativity and also maintain its leadership role?

Ms. Hoicka: I think there are two things here: first, obviously we are a technology company. We are constantly evaluating the direction of our businesses and looking for the next advancement in our core business. In that sense we stay ahead by looking forward, which keeps us creative and innovative. Secondly, IBM’s community of inventors all recognize the value of IP, and they are very willing to bring forward their innovations and file them to seek patent protection. The inventor population is responsive to that; they understand the direction of the company. The company communicates well with the inventor population. This keeps us very creative and helps us sustain our leadership role. We invested in the IP area and we are about to invest more. What we do is we look carefully at what we make our expenditures on and ensure that those expenditures are consistent with the core values of the company.

China IP: IBM had a series of acquisitions, such as Ascential Software, Cognos SPSS, Netezza and OpenPages. These acquisitions indicate IBM has a specific development direction. How does IBM manage its current vast array of products, technologies and consulting teams as well as those newly acquired companies?

Ms. Hoicka: IBM has been a multinational company for more than 90 years. IBM first became a global company before 1920, so IBM is used to working with companies and subsidiaries around the world. In the case of these recent acquisitions, they are all very focused on specific areas and core businesses of IBM which we have chosen to develop more. For example, Cognos and SPSS, those two companies are experts in areas of data analytics. They have specific expertise in the areas of data analytics. Data analytics in general is one of the core competences of IBM and we are one of the leaders in that area.

Through those acquisitions, what we do is to augment our value proposition for customs in order to deliver better products and to continue our leadership. This is a specific example of where we see the future of our company and core businesses, as one of the areas is data analytics. That is an important technology.

On the other hand, we have divested parts of our company because we no longer consider them to be core business areas for IBM. But other companies want to continue in these areas. That would include things like the divesture of our PC business to Lenovo in 2005, our printing business to Ricoh, and very recently the announced divesture of the retail store system business. For example, when you used to go into a bank or a retail store, the cash register and all the equipments in the retail system would have been IBM’s products. These have now been transferred to a subsidiary of Toshiba because this product area is no longer a core business for us. But for other companies they may still be. We have been able to balance the size of our company by investing only in core areas for our company.

China IP: Is IBM Netezza the developing focus of IBM? What can Netezza bring to IBM? Does it mean that IBM, as a giant in both hardware and software, will play a more dominant role in the database market than its rival Oracle?

Ms. Hoicka: I can’t specifically speak to Netezza about its place in the strategy, because it is a more business question. There are two things I would like to say: one is that IBM has been a dominant player in the database industry for many years, in fact IBM invented the relational database. We have had our DB2 product for a long time. In 2001 we acquired another major database company, Informix. In the database market overall, we are major players with Oracle. The acquisition of Netezza, similar to the comments I made in respect to Cognos and SPSS for the data analytics base, brings additional competences to our existing products base. This is a core business for us.

China IP: Is patent licensing a key development area? Do you think patent licensing is the key to the development of an enterprise?

Ms. Hoicka: Patent licensing is important to many aspects to our patent strategy. We have been licensing patents for many reasons, e.g. to help standard development, in respect of open source, for IP income, and in order to enhance arrangements with our technology businesses partners. So patent licensing has been very helpful to us as a company and allowed us to be involved in businesses in many different areas. Whether that is required for other enterprises, they will make their own decisions as to what IP strategy they want to pursue, and whether licensing is what they want to be involved in.

China IP: The protection of trade secrets is crucial to enterprises. In recent years, many companies have been involved in trade secrets cases. Could you comment on IBM’s practice regarding trade secret protection? Is there any secret weapon?

Ms. Hoicka: Our general practice is that we have internal processes for protecting trade secrets. During product development and other areas, our employees are expected to honor obligations to IBM to maintain trade secrets. If we work with any other entities in the trade secrets area, we enter into agreements to protect IBM’s secrets, so that they also have obligations to us, and we expect them to stick to their obligations.

IBM’s secret weapon in protecting trade secrets is the diligence to make sure we have processes and to make sure we follow those processes. That seems to be obvious until you actually try to do it. Trying to remain diligent is the secret. You can have processes but they are useless if everybody ignores them. You try to be diligent and require people to live up to those expectations, including your employees and businesses partners.

China IP: From various events we could see that IBM has made the Chinese market a focus for development. As the associate general counsel of IBM, what do you think of China’s IP environment? What is the most frequent IP issue that has occurred in China for IBM?

Ms. Hoicka: We have invested in China: we have IBM China, we have research development labs, software development labs, hardware development labs, we have services contracts with many entities in China, including government entities as our customers. So very clearly, we are significantly invested in the Chinese market. We appreciate that we are participating in China’s market.

In terms of the issues we encounter, we have a large intellectual property law team in IBM China; they mainly focus on working with our developers and researchers to capture inventions and protect them as domestically originated inventions as well as protect our inventions from overseas in China. They are working with product teams on copyright issues and making sure our products have all the rights we need for distributing our software products. I think those are the big issues we work on in China. Including trademark protection, we use all aspects in intellectual property regime in order to protect the rights of IBM in China to do good business here.

We all have copyright and trademark issues from time to time. Issues about copyright infringements are the most difficult to solve, and that’s not only in China. They are difficult to track down, for example determining exactly what’s happening, whether it is a software issue or whether there is other content on the Internet which is supposed to be confidential information.