Lego builds new Intellectual Capital

It is probably fair to say that most people know Lego, the little building block toys. Most of us played with them as children.

I remember  that I didn’t actually like to construct the things Lego wanted me to make. Rather, I used to come up with the most bizarre and absurd constructions. My father, who is a rational man, then would ask with incredulity (or sometimes exasperation) what it was exactly that I had made. My explanation, while perfectly reasonable to me, never seemed to make any sense to him. Obviously, he did not understand my world of dragons that were being fought by aliens in their spaceships.

Now, Lego was in serious trouble about ten years ago. The business started to lose money in 1998, and by 2003 and 2004 turnover was dropping by 10% per year, and losses were about 20% of turnover. Lego was producing ever more designs, with ever less success.

However, Lego managed a spectacular turnaround in the second half of the noughties, and between 2005 and 2009 turnover grew by more than 50%, and profit increased eleven-fold.

A good bit of the story of Lego’s recovery was due to old-fashioned business remedies such as focusing on costs & core business, managing the supply chain, outsourcing production, etc…

But an important part of Lego’s turnaround involved re-inventing how the company looked at its Intellectual Property Rights (IPRs).

Lego’s last patent on its famous building blocks expired in 1978. Ever since, copycats such as Mega Blocks and Best Lock have been providing blocks that fit with the Lego blocks.

Lego first tried the classic approach, and focused on classical IPRs.

Unfortunately, in spite of massive amounts of money spent on trying to prevent its competitors from entering the market, by focusing on its traditional patents, trademarks, copyrights, the end result was that in 2009, the European Court of Justice rejected Lego’s last claim on protecting its technology through copyright or trademarks.

So Lego found itself, apart from its very successful brand, effectively without much of the classical IPR protection on the technical side of its products.

During the same period, Lego started the Lego Factory (now called “Design by Me”). This is a piece of software that, together with online access, allows children to design their own Lego invention, using their own specific combination of the famous building blocks, and then to order that invention on-line.

When the system was first introduced, back in 2005, it was hacked (by adult users, presumably) within fifteen days.

But rather than fighting the hackers, Lego embraced them. Lego wanted to have more user modifications, not less. In 2010, the Design by Me system is an open community, where everyone can share and upload their designs, and where users create and share new content and development continuously, in ways that the Lego designers themselves would never have been able to imagine.

At the same time, Lego started to use its licensing policy much more intelligently, by taking in licenses (e.g. to the Star Wars brand, its most successful product launch for years) and by licensing out some of its core IPRs, e.g. to the theme parks.

Recently, the company is expanding into software, web-based gaming, films, etc.

So what is the relevance of IPRs in Lego’s amazing turnaround story?

It is the fact that Lego has done three things.

First, it identified its core Intellectual Capital. That was not in the patents, or even the technical excellence of its products. It was the combination of the creativity and inventions of all those millions of children.

Technology, combined with a non-classical view on IPRs, allowed Lego to harvest that enormous pool of creativity, and build a booming business around it.

In doing so, Lego effectively created a new form of Intellectual Capital.

Second, Lego took a good look at all of its IPRs, and decided to focus on those that were “fit for business purpose”. And we see that the range of their IPRs was much wider than the traditional list of patents, copyrights, trademarks, designs.

By focusing on those IPRs that served its business model better, Lego managed to get a much better return on investment from its Intellectual Capital.

Third, Lego embraced innovation, not just in its technical approach, but also in its business approach, and in its approach to IPRs.

It is not an obvious thing to do for people who were convinced their core competence was to design the best possible toys, to let the whole world come in and have a defining influence on the design of future toys.

Because, as my father would testify, it is not easy to understand the mind of a child that is busy building its own unique creation.

The genius of Lego is to embrace and share that creativity, rather than trying to own it.