An Entrepreneurs Guide to Value: Intellectual Property, Physical Property & Services

07 SEP 2011

If you look around the world it may seem as if there are many different kinds of businesses making money in millions of different ways. But the truth is that the vast majority of businesses can be grouped, meaningfully, into three broad categories.

Enterprises Based on Intellectual Property Licensing & Sales: Publishers, film producers, engineers with patents, programmers, and anyone who creates information that is trademarked, copyrighted, patented then distributed to others in return for payment somewhere along the line.

Enterprises Based on Physical Property Licensing and Sales: Manufacturers derive value from selling objects, landlords from renting locations, car rental agencies from renting cars. If your company sells or licenses the use of objects or places, its value is based on physical property rather than intellectual property or services.

Enterprises Based on the Sale of Services: Lawyers, talent agents, hair dressers, practicing physicians, dentists, dog walkers and baby sitter all sell time and their services. Sometimes service providers get paid very high rates, sometimes very low rates, but the key thing is that in order to make money they have to spend time working for someone else and what they create belongs to that person.

To see how these business types work, consider that a writer creates intellectual property which he sells to a publisher who resells it to others. In effect both the writer and the publisher make their money off of a body of captured information they can protect. This is exactly what a programmer who writes an application then licenses it to Google does. It is exactly what a filmmaker does when licenses a film to a distributor in return for a fee.

The good thing about an intellectual property based business is that the content being sold can be created out of thin air.

If an engineer creates a new solar cell that costs pennies and generates megawatts every day, his patents can be resold for millions. He didn’t have to buy the raw materials for that invention from someone else. He created it. Furthermore, once he sells his patent to someone for a fixed amount and a percentage of each solar cell sold, he can work on other things. That means, in effect, his patent is a “virtual employee” working for him all the time. Produce enough great intellectual property, exploit it in enough media, and you can retire rich as JK Rowlings has demonstrated.

Physical property-based businesses depend upon the ownership, rental or sales or actual stuff. Sometimes this is a very hard way to make money. If you create sculpture over the course of a decade, then sell it, you need to make sure you get paid very well for that object. Van Gogh created many paintings but did not die rich because he sold the paintings only to his brother, usually one at a time.

Large scale manufacturing can, however, pay off very handsomely if it is done correctly. Producing the one of something may be difficult, but creating a second identical unit is almost always easier and cheaper. Duplicating something a million times makes each unit cheaper still. This reduction of cost for each additional unit created and sold is called “returns to scale”. If you own an manufacturing based business, you almost always have to have employees and you almost always have to create, or find, distribution channels that will move your objects around in the real world.

Of course, you don’t always have to sell what you own in order to make money off it. Landlords rent property, car rental company’s sell the use of their vehicles. Renting objects and places can be very lucrative, and like intellectual property licensing can create a lot of “passive income” that you can receive while working on other things.

Service-based business perform tasks for people people and the pricing is usually handled on an hourly, weekly or yearly basis.  For example, you hire lawyers to fight court cases without knowing how long it will take to reach a resolution. A painting service, on the other hand, might charge by the house painted and a landscape gardener may spend more time working in your yard in fall than they do in winter even if they charge you exactly the same amount in both seasons. Service-based businesses may create intellectual property or physical property for others, but the owners of the service don’t own the resulting property.

While service based businesses are often very cheap and easy to start, to earn money someone has to work. Early on, the owner of the business is usually the one providing the service. Over time he may pay others to provide that service to his customers instead.

Combining Values to Create a Better Business

Each of these kinds of enterprises has advantages and disadvantages and you can often quickly increase your company’s value to your customer, and its revenues, by creating a hybrid business which delivers several kinds of value to your customers.

For example, service based businesses are often quick, cheap and easy to start. You get paid for knowing how to do something and then doing it. If you can take that expertise and package it into something you can copyright, trademark or patent, you’ve made your business vastly more valuable because it can now earn money through the sale or licensing the intellectual property derived from the services you have provided to others over time.

A manufacturing business based upon a trademarked piece of intellectual property that people like will make more than one based on an unknown design. For example, there are many teddy bears, but only some of them are Winnie the Pooh. People will pay a premium for products for products based on characters they know. So a manufacturing business can become more profitable by licensing some high value trademarked images or designs.

What to Do Next

Think about the value your company delivers to customers and think about the other values it can create. Service businesses can often create valuable intellectual property based on their expertise. Property-based businesses can often add services to their offerings to earn more. Intellectual property creators can become more profitable by creating services that deliver their content or by licensing the creation of objects based on it.