Shopify shows new interest in patenting
Ottawa firm ‘ late to the party,’ one lawyer says
Shopify is looking to patent cloud, package processing and retail sensor technology as the e- commerce firm continues to expand its real-world services, including a billion-dollar push into logistics.
The Ottawa- based firm, which reports fourth-quarter earnings Wednesday, has historically shown little interest in patenting its innovations. But following its largest-ever acquisition and a deal with an American telecommunications giant, Shopify and its subsidiaries now hold at least four U. S. patents with another half a dozen applications outstanding. The company is also adding to its small in-house IP team as it expands into new lines of business where the ownership of intellectual property could prove more valuable.
Shopify’s IP efforts are a recent development. Building a patent portfolio ensures rivals can’t simply replicate a company’s successful ideas, and allows it to generate licensing revenues in addition to its core business. Patents can also become bargaining chips if a company is sued for IP violations, allowing it to threaten countersuits using its own patents.
The risk disclosures in Shopify’s 2019 annual report state that it held “no issued patents and thus would not be entitled to exclude or prevent our competitors from using our proprietary technology, methods and processes to the extent independently developed by our competitors.” It warned that the software industry is filled with patents, as well as IP claims and litigation. ( The company did not respond to repeated requests for comment for this story.)
But in September 2019, the firm announced it was buying warehouse robotics startup 6 River Systems for US$ 450 million, its largest acquisition to date. The new subsidiary is intended to help with Shopify’s initial US$ 1 billion, five- year plan to take over shipping and delivery for its merchants by setting up a network of logistics centres and developing AI inventory- forecasting tools.
6 River has at least four U. S. Patent and Trademark Office ( USPTO) patent grants and one outstanding application, the World Intellectual Property Organization’s database shows. They cover components of its warehouse automation systems, which the filings say reduce the time a worker “spends restocking, picking, counting, sorting, moving, and packing product into customer orders and shipments.”
For Shopify, “I would be most concerned about Amazon’s 10,000- plus ( patent) portfolio coming after you, and how much you’re going to have to pay for that,” said Jim Hinton, a patent lawyer and founder of Own Innovation. He noted that the U. S. e- commerce giant is consistently among the top 50 patent-filers in the world.
Shopify CEO Tobi Lütke has repeatedly insisted that he doesn’t see Amazon as a competitor, and the two firms’ tech is integrated to allow Shopify merchants to sell through Amazon’s marketplace. But the Shopify fulfilment network’s two-day delivery goal makes it an alternative to market leader Amazon Prime, and the U. S. firm has filed several robotics patents since acquiring startup Kiva Systems for US$775 million in 2012.
Ross Macmillan, a stock analyst at asset- management firm T. Rowe Price, said Shopify’s increased IP activity makes sense as it expands its fulfilment efforts. “In pure software, where patents exist, they tend not to be particularly powerful because they tend to be narrowly defined, and you can usually find a way around,” he said. “However, in the world of physical goods and processes, that may be more difficult.” Shopify’s applications could be an extension of acquiring a business with an existing patent portfolio.
The fulfilment network will be a “massively influential component of incremental revenue growth over the next few years,” Macmillan said, noting that the service will have a very high “take rate” — the share of the value of a merchant’s transaction that Shopify collects — compared to many of the firm’s other lines of revenue. Shipping and delivery fees could make up as much as $ 8 or $9 on an average $70-to-$80 order, a significantly higher percentage than the US$1.07 billion in overall revenue Shopify made on US$41.1 billion worth of merchant sales in 2019.
The firm filed three patent applications over a two-week period in June and July 2019. The innovations outlined include a new system for authorizing package deliveries and cancelling a drop- off if information provided by the sender and recipient doesn’t match, as well as new cloud technology to better handle “services that are delivered in real- time or near real-time.”
Dallas- headquartered AT&T’S intellectual property subsidiary assigned those applications — as well as six others — to Shopify in June 2019, USPTO filings show.
Shopify’s two delivery- focused patent applications state that there’s no current system for figuring out whether or not a package is expected and legitimate. The documents point to events like “mailing of anthrax to government officials and news agencies” as a source of public concern over postal safety, but note that online shopping will increase demand for delivery.
Chris Silvestre, an analyst at Toronto- based Veritas Investment Research, believes the cloud service is likely an attempt by Shopify to make its own data- hosting and - storage requirements more efficient and less costly rather than something that would be offered to its clients. “They don’t have the capital to build something like this to scale,” he said, noting that cloud technology can be an expensive endeavour for a large e- commerce company. While Silvestre said the firm is financially well positioned with over US$ 2 billion in cash on hand, he noted that the firm has budgeted US$ 1 billion for the shipping and fulfilment plan.
A fourth Shopify patent application, for a system for “capturing transactional context” from a point-of-sale device and sensors placed around a retail location, appears to have been generated through in- house innovation. Filed in December 2018, it lists current Shopify employees as inventors.
The company is “late to the party but at least ready to party,” said Hinton, citing the AT&T deal as a positive sign. “My impression is that they’re going to be generating more as well, given they’ve brought on a couple of patent people.”