Concentration of R&D and Innovation in Commerce: Ranking of Select Companies
R&D benchmarking is an integral part of competitive analysis for sophisticated companies in the technology space. Given constantly changing technology and regulatory landscapes, coupled with the disruptive effects of new industry entrants, sustained R&D is critical for any company in the technology space. It is consequently important for technology companies to develop effective KPIs that can be used to plan, model, track and benchmark R&D investment.
A natural R&D investment Key Performance Indicator (KPI) for a technology company could be the ratio of R&D spending to Gross Revenue, EBITDA or Net Income. This KPI could be computed internally, and then used to benchmark R&D investment relative to competitors and other industry peers. While this KPI can be developed internally with a high degree of accuracy by most companies, it is often challenging to compute it consistently for other public companies because R&D is not treated uniformly in financial reporting. A review of a random set of 10K and 10Q reports would likely show that different companies include different types of financial line items in their R&D computations, which makes direct and consistent R&D spending comparisons across multiple companies virtually impossible. For example, some companies may include in R&D accounting only spending that is truly used to develop new technologies (e.g., salaries, facilities costs and other expenses associated directly with technology development), while other companies may also add the costs of internal infrastructure, personnel deployed in a wider range of R&D-related functions, higher or lower rates of overheard, and so on. Additionally, R&D investment figures are generally unknown for private companies until their first S-1 is filed with the Securities and Exchange Commission (SEC), so it is virtually impossible to compute a KPI based on R&D spending for private companies.
Since patents are typically a natural outcome of R&D activities and innovation, and since much of the patenting process is public, patents can be used to develop an alternative KPI for estimating R&D investment and innovation activities for technology companies. A patent-based KPI cannot be a perfect metric for R&D investment and innovation, but it is one of the best KPIs that can be developed with public information. Such a KPI could be computed by comparing the total number of patents and patent applications of a company to its revenue, and this KPI could be tracked over time to assess internal performance. In parallel, the same KPI could also be determined for competitors and other companies in the industry to assess relative performance against peers. We will discuss below in more detail some advantages and disadvantages of this patent-based KPI approach.
Overview of Analysis
This analysis sought to develop a KPI and scorecard that could quantify the focus on R&D and innovation for various companies in the Commerce space. This analysis was not intended to look at innovation overall, to track or compare the absolute number of patents that companies file, or to quantify other corporate financial or operational metrics. Instead, this analysis focused on directly comparing (a) the Commerce-related patents granted and patent applications published for various companies in 2016, which could be considered an indicator for their R&D investment and innovation activities in FinTech, Payments, Omnichannel and other areas of Commerce, to (b) their respective total gross revenue and EBITDA.
This analytical approach has various advantages and disadvantages. Advantages include that information can be retrieved from public sources, the analysis could be made more consistent by using the same patent search parameters for all companies considered, and it provides a unique insight into the portion of the R&D efforts devoted by various companies to Commerce relative to their broader R&D and innovation activities that go beyond Commerce. Disadvantages include the inherent uncertainty associated with patent searching and the varying patenting rates of different organizations, which may understate or overstate a company’s real R&D activities in Commerce. Please see a more detailed discussion of the scope of this analysis at the end of this article.
Relative Innovation and R&D Concentrations in Commerce
Figure 1 ranks a number of public companies active in the Commerce space in terms of their Commerce-related R&D investment and innovation activities using the patent-based Gross Revenue KPI described above.
Fig. 1
KPI Estimating Relative Concentration of Innovation Activities and R&D in Commerce
(Patents Granted and Patent Applications Published in the US in 2016 / 2016 Gross Revenue)
Since this KPI is inversely proportional with Gross Revenue, which will tend to disfavor companies that are generating a lot of revenue, let’s also look in parallel at a derivative KPI that relates Commerce patenting activities to EBITDA. Fig. 2 shows the companies from Fig. 1, re-ranked using a derivative KPI computed based on EBITDA figures for the most recent fiscal year:
Fig. 2
KPI Estimating Relative Concentration of Innovation Activities and R&D in Commerce
(Patents Granted and Patent Applications Published in the US in 2016 / 2016 EBITDA)
Looking at Figs. 1 and 2 in parallel, it is immediately apparent that Square’s top rank in Fig. 1 flips to become highly negative given that Square registered negative EBIDTA. Remarkably, however, Yahoo maintains its high KPI ranking, and Amazon and Sony make disproportionately strong showings in this EBIDTA KPI. But the reasons for Amazon’s and Sony’s strong performance in this EBITDA KPI become easier to explain in reference to Fig. 3, which ranks the companies in terms of EBIDTA margin relative to Gross Revenue:
Fig. 3
EBITDA Margin (as % of Gross Revenue)
As seen in Fig. 3, Sony and Amazon are operating with a lower EBITDA margin, which will tend to decrease their effective EBITDA and therefore increase their scores in the EBITDA KPI of Fig. 2. This should not be used to underestimate their R&D focus in Commerce, however, since both Amazon and Sony have strong patent portfolios with significant prongs in Commerce.
To help complete the context for this analysis, Fig. 4 ranks the companies from Fig. 1 in terms of patents granted and applications published in 2016 in the US:
Fig. 4
Total Patents Granted and Patent Applications Published in the US in 2016
There is much that could be discussed in reference to Figs. 1-4 above, but here are a few brief observations:
IBM’s ranking was held back in Fig. 1 by its high Gross Revenue, but its strong patent program in Commerce coupled with its lower EBITDA figure helps it land the #2 spot in the EBITDA metric of Fig. 2. Fig. 4 confirms that while IBM remains the top patent filer globally across a wide range of technologies and business models, it definitely perceives FinTech, Payments, Omnichannel and other areas of Commerce as important strategic areas of focus for the future, and is correspondingly innovating and patenting in that space. Look for IBM to remain a leader in Commerce technologies in 2017 and beyond.
Square’s top rank in the Gross Revenue KPI of Fig. 1 flips to become the lowest rank in the EBITDA KPI of Fig. 2 because Square’s EBITDA is negative. A negative figure for these KPIs is meaningless, so it should be discarded. Square’s top rank in Fig. 1 is explained by Square having a meaningful patent program concentrated in Commerce (80+ patents granted and applications published in the US in 2016) coupled with less Gross Revenue. Overall, Square’s good showing in the Gross Revenue KPI confirms its efforts to continue to innovate in Commerce while working off a smaller base of Gross Revenue than its peers.
Yahoo scored well in both the Gross Revenue and EBITDA KPI rankings.Although Yahoo’s patenting activities in Commerce have leveled off in the past few years and its revenue has not grown much, it continues to have a relatively high patenting rate relative to its revenue and EBIDTA. Given Yahoo’s current patent application pipeline, we expect that Yahoo will continue to do well in these rankings, and its R&D and innovation efforts clearly include a strong concentration in Commerce.
eBay and PayPal are tracked separately in these rankings, and they both scored well in the KPI rankings of Figs. 1 and 2. A combination of higher patent filing and lower revenue relative to the other companies in these charts leads to high KPI scores for both EBay and PayPal.
MasterCard’s strong performance relative to companies like IBM, Google and Microsoft is pleasantly surprising. This suggests that MasterCard is seriously investing in R&D and is also running a strong patent program. Watch the press releases in 2017, MasterCard is likely working on some interesting programs in Payments, Omnichannel and Data Analytics.
VISA and American Express are earning more revenue than MasterCard and are patenting at a lower rate, so they predictably ranked lower on both the Gross Revenue and EBITDA KPIs. But both companies have significant R&D efforts in Commerce and will no doubt continue to rank well in the future.
First Data, which includes a Point of Sale division (Clover), makes a good showing in these rankings, although it is ranked predictably a bit lower given its larger revenue base.
Facebook is also a pleasant surprise at the top of these KPI rankings. Facebook has a strong patent program focused on Commerce, as shown by its 4th place rank in Fig. 4, and is working off a lower revenue base relative to these peers. Consequently, Facebook ranks high on both the Gross Revenue KPI of Fig. 1 and the EBITDA KPI of Fig. 2. Facebook’s shift to Mobile has received strong praise and elicited lots of press in the industry, but there is an underlying R&D and innovation push into Commerce that may have been missed by the analysts. Watch out for new and expanded Facebook products and services in Commerce in 2017, including Shopping, Commerce Data Analytics, Omnichannel features, and further monetization of advertising through both B2B and B2C channels with a Commerce tilt.
Walmart and Target deserve a special note here. The fact Walmart and Target don’t rank highly on either of the Gross Revenue or EBITDA KPIs is not significant because they are in the company of technology and Commerce industry leaders. But the fact that they show up on these charts at all is highly significant and confirms their successful evolution from pure Physical Commerce to Omnichannel and e-Commerce leaders. Note in Fig. 4 that Walmart has more Commerce-related patents than some classic technology leaders, while Target is staying close to Walmart in the KPIs of Figs. 1 and 2. Clearly both Walmart and Target have technology divisions that are innovating in Commerce and Omnichannel infrastructure and applications. The minimum standards for vendors of Commerce-related technologies are increasing every day, and such vendors should realize that they are not just competing against each other, but they will have to compete against the organic technologies of their Enterprise customers and will have to demonstrate solid ROIs with their RFPs in 2017 and beyond.
Google, Apple and Microsoft rank highly among the companies patenting in Commerce, as shown in Fig. 4, but their relatively large Gross Revenue and EBITDA knock them down a bit in the metrics of Figs. 1 and 2. This should not lead to a mistaken assumption that Google, Microsoft or Apple are not focusing on Commerce. On the contrary, all of them are considering Commerce to be a strategic growth area, and they are all innovating in Commerce and investing heavily in R&D in absolute terms.
Bank of America Merrill Lynch (BOAML) shows a surprising level of patent activity within Commerce, ranking above a number of more traditional technology companies in Fig. 4. Wells Fargo is also a pleasant surprise in these charts. The high revenue base and phenomenal EBITDA margins tend to decrease BOAML’s and Wells Fargo’s scores in the Gross Revenue and EBITDA metrics of Figs. 1 and 2, but that is a good problem to have and it should not detract from the fact that clearly both banks have world class technology development programs within their organizations.
Intel, Cisco and HP would not normally be expected to rank highly in KPIs focused on Commerce R&D, but all of them embarked on transformational programs years ago that expanded their reach into Commerce, cloud computing, and technology application areas. HP has also had strong activities in Technology Services and Integration, which naturally led themselves to a transition into Commerce. The entrance and expansion into Commerce can be further validated for Intel, Cisco and HP from their activities in investments and acquisitions, with progressively broader footprints that have extended beyond their traditional microprocessor, networking, and server businesses.
Oracle and SAP deserve careful analysis given their Enterprise Resource Planning (ERP) and database heritage. While payments and financial companies like Square, BOAML and First Data may expand into Omnichannel offerings from the front end of payments and B2C transactions, Oracle and SAP have a unique entry point into the Omnichannel chain from the back-end ERP cloud. Oracle acquired Micros in 2014, a leading legacy Point of Sale vendor in Enterprise, and then acquired NetSuite in 2016, a leading financial and operational cloud platform. Between its organic growth in Commerce and the Micros and NetSuite acquisitions, Oracle has been expanding its footprint into payments transaction processing, Commerce data analytics, and cash-to-quote accounting for Enterprises. Watch for Oracle and SAP to put their own fingerprints on what Enterprise Commerce should look like from a technology vendor perspective.
And last but not least, Alibaba is a more recent arrival in relative terms to the world of Commerce and patenting, but make no mistake, it is moving fast and decisively. Alibaba scored well in the Gross Revenue and EBITDA KPIs of Figs. 1 and 2, has a surprisingly high EBITDA margin in Fig. 3, and is clearly ramping up its patent program in Commerce as seen in Fig. 4. Expect big things from Alibaba in Omnichannel, Payments and Data Analytics.
What Does this Mean?
The KPIs in Figs. 1 and 2 could be used as an indication of the extent to which certain companies are focusing their internal resources towards R&D and innovation in Commerce, but should not be misused or misinterpreted. For example, ranking lower on those KPIs does not mean that a company is not doing well. Looking at Apple as an example, we see that it is ranking low on the Gross Revenue and EBITDA KPIS of Figs. 1 and 2. However, that is the result of Apple’s enormous Gross Revenue, which inherently decreases its score for those KPIs. Apple has a high EBITDA margin as shown in Fig. 3, and is one of the top patenting companies of Fig. 4, so there is nothing about Apple that is second class. Apple will certainly continue to invest and innovate in Commerce, but its score on these KPIs will likely continue to lag other peers as long as its Gross Revenue and EBITDA remain high and it continues to focus on non-Commerce areas as well.
It is also important to understand that a patent-based KPI is inherently limited in how well it can estimate the actual R&D efforts of an organization involved in technology development. For example, some companies may spend more on R&D while patenting less, in which case a patent-based KPI would understate their R&D efforts. Conversely, some companies may be prolific patent filers while not spending too much on actual R&D, in which case a patent-based KPI would overstate R&D investment and return. In either case, however, the exclusionary value of patents and the potential to monetarize patent portfolios will likely tend to lead to self-correction for both under-patenting and over-patenting in the long term. For example, a company that patents at a higher rate than its natural R&D rate should support will likely find out in the long term that its patents are narrower and harder to enforce (e.g., statistically, those patents would likely experience ongoing complications with enablement, double patenting disclaimers and overlapping claims), so it may eventually decrease its patent filing rate. Analogously, a company that patents below its natural R&D investment rate will likely find in the long term that its competitors are making more inroads in its R&D space while facing less patent challenges then they should, and sooner or later this company will be forced to reexamine its patenting strategy once it becomes the target of patent infringement litigation, in which case it will likely ramp up its patent filing.
So it is important to realize that the KPIs of Figs. 1 and 2 are the type of metrics that should be developed and used by technology companies in Commerce during their internal assessment and as part of their industry benchmarking, but they must not be misused or misinterpreted.
About this Analysis
For this analysis, we identified a set of over 1 million patents and applications for the period 1995 – 2016 that cover a wide span of Commerce technologies and business models, and we extracted the patents and applications for 27 prominent public companies listed on the New York Stock Exchange or NASDAQ. We limited the analysis to 2016, and we used 12-month Gross Revenue and EBITDA figures reported by Google Finance for each company.
This analysis was limited to patents in the Commerce space, including the following:
Payment space and Financial Technology (FinTech):payments, payment processing, credit processing, traditional currencies and crypto currencies, credit card and ATM card processing, ATM and credit banking systems, SWIFT transactions and security technology, block chain technology (including distributed ledger and consensus-based algorithms), payment gateways, Point of Sale technology, credit card readers and other credit card processing equipment, and related data processing and communications technologies.
Omnichannel Technologies:digital coupons, digital offers, commerce data collection and data analysis, SKU-level data collection and processing, Consumer Relationship Management (CRM) systems, Enterprise Resource Planning (ERP) systems, cloud-based platforms, desktop computers and other devices, electronic tablets (iPad, Android, Windows and other operating systems and form factors), Application Programming Interfaces (APIs), data analytics, data monetization, table reservations, order deliveries, order management, mobile ordering using phones and tablet devices, and other forms of business digital transformation.
We identified an additional set of over 1 million patents that are not directly part of the commerce chain, but support commerce directly or indirectly at either the implementation or application layer. While a search focused directly on commerce technologies may miss these patents, they should not be minimized: it would be virtually impossible to operate in payments, retail or hospitality, omnichannel, or data monetization without employing the technologies that underpin and run commerce. Alternatively stated, operating in commerce would inherently infringe patents covering a broader range of related technologies. Here are some of the technologies covered by these additional patents:
Technology areas that support commerce through customized implementations or dedicated applications, such as data storage and cloud systems deployed for commerce data analytics, payment encryption and tokenization, PCI and EMV compliance, advertising through web, TV and other channels, secure communication networks, servers and cloud platforms adapted for commerce and sales, web-based shopping and electronic commerce (e-commerce) platforms, GPS application for mobile commerce applications, near-field, BlueTooth and other wireless communication protocols for payment transactions, customized hardware systems for payment processing (e.g., Point of Sale systems),
The data sets were too large to be processed via normal patent searches and Excel spreadsheets, so most of the analytical work was conducted using Python and the final results were synthesized in Excel.
If you would like to discuss any aspect of this article please do not hesitate to contact us at info@svskyline.com. We very much welcome any corrections, comments or suggestions for improvements or future analysis that you may have.
Note: This analysis was performed programmatically, without a review of actual claims. The opinions in this article are limited to the scope of this article, and do not necessarily reflect our opinions in general, or the opinions of any of our clients or partners.
#patents #IP #commerce #omnichannel #payments #economicactivity
