Monday, May 19, 2008

Shape of Things to Come
How Apple's trademark for its iPod protects its brand -- and offers lessons for other companies on how to leverage their intellectual property
WSJ, May 12, 2008; Page R6

As promised, this is a fabulous article that is a MUST read!

As a minor advertisement, James is a key contributor to our Driving Organic Growth class and he goes into how to secure your market position in great detail.

On Jan. 8, the U.S. Patent and Trademark Office granted Apple Inc. a trademark for the three-dimensional shape of its iPod media player.
This was more than a recognition of an innovative product design. It also was Apple's capping piece in a multiyear marketing and legal campaign that pushed intellectual-property rights to new competitive advantage for the company.


In many ways, Apple is benefiting from an expansion of U.S. trademark rights, beyond the traditional names, images, logos and two-dimensional symbols trademarks usually secure. In recent years, trademarks have been granted for such things as product shapes, colors and scents that companies can claim are linked exclusively to the source company in consumers' minds.
These nontraditional marks are difficult to obtain. But unlike more commonly used utility and design patents, which exist to cover functions and the ornamental look and feel of products and expire after a set number of years, trademarks can remain in force potentially forever.

The iPod shape trademark gives Apple a new weapon in the fiercely competitive market for media players. While competitors may eventually appropriate the iPod's inner workings, as utility patents expire, they will risk litigation if their products come too close to the trademarked shape of the iPod, including its popular circular-touchpad interface.

Moreover, trademark law allows the holder to sue not only manufacturers but also distributors of competing products whose attributes so resemble those of the protected mark that they create the likelihood of confusion in the marketplace.
The Apple strategy is particularly important because companies typically don't give enough attention to the management and potential value of trademarks -- especially when it comes to the nontraditional variety. This is partly because trademarks, like other intellectual properties, are complex assets. But they can make a significant difference.
Yamaha Motor Corp., for instance, has a nontraditional trademark for the arcing water spray produced by its personal watercraft. Market research has shown that such trademarkeable design cues can promote brand recall and spur sales.

The key to obtaining nontraditional trademarks is to convince an examiner in the U.S. Patent and Trademark Office that the average consumer associates the design attribute in question exclusively with the company seeking the trademark; in Apple's case, this meant proving that the average shopper for a media player identifies the shape of an iPod with Apple. Building such associations -- and securing the nontraditional trademark -- is a process that usually takes years and requires support across a company's various departments. Apple's campaign, for example, involved its marketing, product-development and legal departments. Such an effort also assumes that the product design attributes in question are unique. But the iPod's continued domination of the media-player market -- and the fact that Apple now has applied to register the iPhone's shape -- suggest the potential rewards of trademark management.

We based our research on public documents in the database of the Patent and Trademark Office, including Apple's trademark applications and correspondence between an attorney representing Apple and the examiner assigned to the case by the Patent and Trademark Office. We did not interview anyone from Apple, and Apple declined to comment on this article.

We believe that companies can learn from Apple's example and implement similar strategies of their own. What follows is a summary of that strategy in five steps. Note that depending on context, the first two steps may be reordered.

1. For branding purposes, give the product a unique name and obtain a traditional trademark.
This is an important first step in securing the brands and trademarks of any product or service.
In October 2001, Apple filed at the Patent and Trademark Office its application for the traditional trademark for the unique product name iPod.
When Apple launched the iPod the same year, the product was immediately hailed as a pioneering innovation and an example of harmonious design.

2. Secure utility and design patents to start building a fence against competitors -- and a bridge to nontraditional trademarks.
Utility and design patents prevent close copying of successful products. Under current law, design patents also can be used as a bridge to securing nontraditional trademarks.
Nontraditional-trademark laws favor applicants that can show a history of unique product designs. Providing evidence that a design was chosen for its departure from existing designs can help make the case that consumers identify the unique design exclusively with the company.
Apple has a tradition of unique design. Of the original iPod's standout features, the round touchpad interface was perhaps the most noticeable. Meanwhile, as subsequent iPod models were released, Apple piled up some 19 design patents.
When Apple eventually filed for the nontraditional trademark, it had the opportunity to present as evidence a list detailing the existing iPod design patents to help argue that the shape was uniquely Apple's.

3. Create ads that spotlight the attribute -- shape, scent, motion, etc. -- that forms the basis of the association with the company.
Advertising can help build the desired association in consumers' minds by highlighting the product attribute, the company name, and little or nothing else.
This is important not only to nurture the association, but to present as evidence to the Patent and Trademark Office. Creating such ads can show that the company itself considered the design feature in question to be unique and strongly identified with the company.
Apple included in its evidence presented to the Patent and Trademark Office references to commercials, including iPod Nano television ads in which the device is displayed prominently throughout and identified by name only at the end, with the words "IPOD NANO" and the Apple logo.

4. Apply for additional traditional trademarks that help leverage the product and strengthen the association.
Typically, advertising does the heavy lifting when it comes to building the association, as it did for Apple. But the company gave its effort an extra boost by seeking two additional trademarks: one for a two-dimensional symbol representing the device, and another for a trademark to be used on co-branded products.
In June 2005, Apple filed a traditional trademark application at the Patent and Trademark Office for a simple symbol representing an iPod (see illustration). This symbol is a simple line drawing of an iPod seen straight on. It depicts the iPod's outline, rectangular viewing screen and circular control panel.

This registration secured the iPod's two-dimensional geometry and created a symbol that could be further used to reinforce consumer associations between the iPod and Apple.
Next, in August 2005, Apple sought a traditional trademark for another symbol (see illustration) to help develop its "Made for iPod" branding and licensing program. This mark, which includes the phrase Made for iPod, is licensed to manufacturers of iPod accessories, a growing multibillion-dollar market. Companies that display the mark on their products pay Apple a percentage of sales as a trademark royalty. So, in effect, these companies are paying Apple to help it build the association between the iPod shape and Apple.


What's Happening: Companies are obtaining new kinds of trademarks, securing exclusive rights to product features such as shape, scent and color. A vivid example came earlier this year, when Apple registered the three-dimensional shape of iPods as a trademark.
Why It's Important: Trademarks, unlike patents, can last forever, and so provide a potent new marketing weapon against rival products. Apple now has an open-ended ability to sue media-player makers and distributors when their products resemble too closely the shape of an iPod.
How It's Done: The Patent Office doesn't make it easy to register a nontraditional trademark. But other companies can learn from Apple's campaign, which involved multiple patents, trademarks and advertising.
Both trademarks also helped pave the way for the three-dimensional shape registration by further solidifying Apple's ability to claim exclusivity of the rectangle-and-circle image.

5: Apply for the nontraditional trademark -- and be ready to negotiate.
The Patent and Trademark Office assigns each application to a trademark case examiner, each of whom may look at a case through a slightly different lens.
Applicants expect they'll have to negotiate, so they may begin by applying for a much broader trademark than they actually think they will get. The case examiner, in turn, tends to reject initial applications as too broad, then suggest what trademark specifics would be accepted, and what evidence to submit in support of the application.

Experienced players -- like Apple -- tease out what the examiner is looking for without making the trademark claim any narrower than is required.

When Apple first applied to register the iPod's three-dimensional shape in July 2006, it included a drawing of an iPod seen from an angle. The drawing emphasizes not only the overall rectangular shape of the player, but the viewing screen and circular interface control (see illustration).

STEP BY STEP Apple first sought a trademark for a two-dimensional iPod symbol (top left), then for a mark for co-branded products (bottom left), and finally for the three-dimensional shape of its players

It also requested a legal description of the trademark that was so broad it could be taken to refer to any media player: "The mark consists of the design of a portable and handheld digital electronic media device."

The application included no information about Apple advertising or other efforts to make the iPod's appearance distinctive, or exclusively associated with Apple in consumers' minds.
Predictably, the case examiner rejected Apple's application, giving as one reason that its trademark description was too broad.

The rejection letter then proceeded to give Apple some guidance: "The applicant must list the specific features being claimed, e.g., the concentric circle design, etc." The examiner added that Apple should not try to get an exclusive right to the rectangular viewing screen apart from its incorporation into the look of the iPod shape, since it was a common shape for viewing screens.
The letter also noted the lack of evidence of the required association in consumers' minds between the product design and Apple. Possible evidence, the examiner wrote, could include examples of marketing materials in which Apple promoted the shape in the U.S., a tally of total spending on such promotion, and statements from dealers and consumers supporting the shape's distinctiveness.

Apple was not slow or stingy with its response. It submitted, among other evidence: data reporting a market share for the iPod of more than 70% in 2005, showing widespread consumer familiarity with the product; statements from consumers who attested to the iPod's "distinctive" design and unique "uncluttered" feel when compared with other media players; and an accounting of the advertising budget -- in the "hundreds of millions of dollars" -- specifically crafted to build an association between the iPod's shape and Apple.

In January, the Patent and Trademark Office granted Apple the nontraditional trademark it desired, along with the following more specific description of the approved mark: "[T]he design of a portable and handheld digital electronic media device comprised of a rectangular casing displaying circular and rectangular shapes therein arranged in an aesthetically pleasing manner."
The iPod's nontraditional trademark victory was complete.
But Apple hasn't stopped there. In 2007, it secured a trademark on a two-dimensional symbol representing the iPhone. It also has obtained design patents on the iPhone. And in October 2007, the company applied for a nontraditional shape trademark for the iPhone.

The reasons for doing so are now clear.

--Mr. Orozco is an assistant professor of business law at Michigan Technological University's School of Business and Economics, Houghton, Mich. Dr. Conley is a clinical professor of technology industry management at the Kellogg Center for Research in Technology and Innovation at Northwestern University, Evanston

Sunday, May 18, 2008

The Computer Industry Comes With Built-In Term Limits
New York Times Published: May 18, 2008

This incredibly insightful article summarizes the challenge of every large, successful company across all industries and markets. The underpinning of Clayton M. Christensen’s thesis discussed below is that companies who grew from very successful business models tend to over protect them and get blindsided even when business leaders have a sense it is coming. My experience is that the most difficult challenge of business leaders is to really convince themselves (to the point where they will dedicate significant resources early enough) and their organizations that they are in trouble when their current business is still a huge money machine. It IS doable but tough. Clayton M. Christensen’s work is brilliant but his predicted outcome does not have to be your result.

MATHEMATICIANS have long tried, and failed, to solve the Riemann Hypothesis, a stubbornly unyielding math problem. Good luck to whoever tries to figure it out. For the first correct proof, a $1 million prize will be awarded by the Clay Mathematics Institute.

Similarly, two successive Microsoft chief executives have long tried, and failed, to refute what we might call the Single-Era Conjecture, the invisible law that makes it impossible for a company in the computer business to enjoy pre-eminence that spans two technological eras. Good luck to Steven A. Ballmer, the company’s chief executive since 2000, as he tries to sustain in the Internet era what his company had attained in the personal computing era.
Empirical evidence, however, suggests that he won’t succeed. Not because of personal failings, but because Mother Nature simply won’t permit it.
It’s unfortunate, as a $300 billion prize could be collected by Microsoft shareholders: that would be the increase in market capitalization, should the share price return to its high of $59.56, attained in 1999, from its current price of $29.99. (Maybe this was why Mr. Ballmer flirted with Yahoo.)

That prize, however, seems a mirage. You can’t merge-and-acquire your way around the Single-Era Conjecture. Just ask I.B.M., which gobbled up Lotus Development Corporation to no avail.
The Yahoo affair obscures the larger story: Microsoft’s long, long struggle — since 1993 — to maintain its leadership position while the Internet grew ubiquitous. Mr. Ballmer, who joined Microsoft in 1980 as its 15th employee, and Bill Gates, his mentor who will retire next month as a full-time Microsoft employee, have certainly tried their best to avert the inevitable decline of the company’s influence.

In 2000, Mr. Ballmer credited Mr. Gates for noting that no company in the computer business had ever stayed on top through what Mr. Gates called “a major paradigm shift.” The two men wanted Microsoft to be the first company to achieve that goal. An interesting challenge, but some problems are of a size that dwarf the abilities of multibillionaire mortals.
In a 1995 internal memo, “The Internet Tidal Wave,” Mr. Gates alerted company employees to the Internet’s potential to be a disruptive force. This was two years before Clayton M. Christensen, the Harvard Business School professor, published “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (1997). The professor presented what would become a widely noted framework to explain how seemingly well-managed companies could do most everything to prepare for the arrival of disruptive new technology but still lose market leadership.

It’s Google, of course, that has developed the musculature to step forward and lay claim to being Microsoft’s successor as industry leader in the Internet era. If there had been any way Microsoft could have prepared for this day, it had ample time to do so. In 1993, fully five years before Google’s founding and two years before Mr. Gates’s memo, Nathan P. Myhrvold, then Microsoft’s chief technology officer, wrote his own memo, “Road Kill on the Information Highway.” It spelled out in prescient detail how each of many industries would be flattened by the build-out of digital networks, and it said that the PC software business would be no exception.

It’s no secret that Microsoft’s online businesses have failed to gain leading market positions. But what is not widely appreciated, perhaps, is that the company’s online initiatives have lately been doing worse than ever.

The last year when Microsoft made a profit in its online services business was the fiscal year that ended on June 30, 2005. Its MSN unit used to do a nicely profitable business providing dial-up Internet access to subscribers. When its users began to switch to broadband services provided by others, however, the earnings disappeared. Microsoft’s Web sites brought in a trickle of advertising revenue, which did not grow fast enough to offset the disappearance of the narrowband access business. AOL suffered in similar fashion.
In the 2006 fiscal year, Microsoft’s online services produced a $74 million loss after the previous year’s profit of $402 million. Since then, the numbers have become uglier, as Microsoft’s online segment has added employees and absorbed growing sales and marketing expenses. In the 2007 fiscal year, the online businesses lost $732 million. In the next nine months, through March 31 this year, they recorded a loss of $745 million, almost double the amount in the period a year earlier. With $2.39 billion in revenue for the nine months, the online segment represents only 5 percent of the company’s total revenue.

The numbers at Google, which is nothing but an online services business, have moved in the opposite direction. For rough comparison, profits in its 2005 fiscal year, ended on Dec. 31, were $1.5 billion. The earnings grew to $3 billion in 2006 and $4.2 billion in 2007.

According to Hitwise, an Internet research firm, Google’s share of searches in the United States has increased to almost 67.9 percent in March 2008 from 58.3 percent in March 2006. During the same period, Microsoft’s share has dropped to 6.3 percent from 13.1 percent.

Mr. Ballmer has always been a ham on stage. His comically demonic chants and dances in recent years have been preserved on YouTube. But even way back in the day, he had the gift. At the company’s annual meeting in 1994, when he was overseeing sales and Microsoft was enjoying its moment of triumph over competitors, he shouted at top volume: “It’s market share — market share! market share! market share! — that counts!” He continued: “Because if you have share, you basically leave the competitors” — here he grabbed his own throat for emphasis — “just gasping for oxygen to live in.”

His mock asphyxiation of competitors was later stripped out of its jokey context by government antitrust lawyers. But the imagery is no less apt now than it was then, except that the roles have reversed. As Google continues to gather market share and the Single-Era Conjecture dictates Microsoft’s eclipse, it is Mr. Ballmer’s own online services that now are gasping for oxygen.

Monday, May 05, 2008

Why Good Companies Go Bad
When business conditions change, the most successful companies are often the slowest to adapt. To avoid being left behind, executives must understand the true sources of corporate inertia.
Reprint: 99410
HBR July-August 1999
by Donald N. Sull

Welcome to the new alumni of our Driving Organic Growth executive education class at the Kellogg School.

I think this is a very interesting perspective on the usual reaction when a successful company is challenged in the market by a host of reasons. I love the concept of “active inertia”

One of the most common business phenomena is also one of the most perplexing: when successful companies face big changes in their environment, they often fail to respond effectively. Unable to defend themselves against competitors (this could also occur if market/industry conditions change independent of the competitors) armed with new products, technologies, or strategies, they watch their sales and profits erode, their best people leave, and their stock valuations tumble. Some ultimately manage to recover—usually after painful rounds of downsizing and restructuring—but many don’t.

Why do good companies go bad? It’s often assumed that the problem is paralysis. Confronted with a disruption in business conditions, companies freeze; they’re caught like the proverbial deer in the headlights. But that explanation doesn’t fit the facts. In studying once-thriving companies that have struggled in the face of change, I’ve found little evidence of paralysis. Quite the contrary. The managers of besieged companies usually recognize the threat early, carefully analyze its implications for their business, and unleash a flurry of initiatives in response. For all the activity, though, the companies still falter.

The problem is not an inability to take action but an inability to take appropriate action. There can be many reasons for the problem—ranging from managerial stubbornness to sheer incompetence—but one of the most common is a condition that I call active inertia. Inertia is usually associated with inaction—picture a billiard ball at rest on a table—but physicists also use the term to describe a moving object’s tendency to persist in its current trajectory. Active inertia is an organization’s tendency to follow established patterns of behavior—even in response to dramatic environmental shifts. Stuck in the modes of thinking and working that brought success in the past, market leaders simply accelerate all their tried-and-true activities. In trying to dig themselves out of a hole, they just deepen it.

Because active inertia is so common, it’s important to understand its sources and symptoms. After all, if executives assume that the enemy is paralysis, they will automatically conclude that the best defense is action. But if they see that action itself can be the enemy, they will look more deeply into all their assumptions before acting. They will, as a result, gain a clearer view of what really needs to be done and, equally important, what may prevent them from doing it. And they will significantly reduce the odds of joining the ranks of fallen leaders.