Sc[i]3 is currently undergoing a redefinition regarding governance, funding and product mix assumptions. The redefinition stems from a fall in revenues due to free Web services introduced in 1998 that eclipsed Sc[i]3’s primary revenue streams, e.g., patent and trademark searching and document delivery. Not only was the original goal of financial self-sufficiency by the year 2001 placed into question, but the value to the City of Sunnyvale of continuing to support Sc[i]3 became an issue.

It became evident that the City of Sunnyvale needs to determine whether the value to the Sunnyvale community and Sunnyvale’s reputation as a leading edge community warrants the financial support required to maintain and optimize Sc[i]3.

Sc[i]3 hired a neutral outsider, Dr. Sheila Kessler of Competitive Edge to do some research on the perceived value of Sc[i]3 with some of its leading customers and former customers in the fall of 1999. The content of this Report to Council provides background information on Sc[i]3, details the results of the Customer Research Report, provides other data on the financial benefits to Sunnyvale of supporting Sc[i]3 and outlines alternatives.

A capsule of the findings include the following:

1. Dr. Kessler found 17 out of the 20 leading patent law firms and high tech companies highly support Sc[i]3’s continuing existence. They were unaware of any financial troubles and volunteered to help. Many interviewed had converted from fee-based searches to free web patent searches so they understood the reduced revenues. The role Sc[i]3 plays as a link and liaison between the respondents and the bureaucracy of the United States Patent and Trademark Office and the fast-pace of Silicon Valley business was deemed most important by them. Helping to close this gap is part of the mission of the many Sc[i]3 sponsored "Washington and the West" events that bring USPTO officials to Sunnyvale. The Commissioner and examiners of the USPTO play an important role in these events. Otherwise, the interviewees said, "West Coast industry has little representation. East Coast companies do not have the center of gravity for biotech, semiconductor, Internet/software/hardware and medical devices that Silicon Valley does." The group felt it would be a grievous loss to have Sc[i]3 disappear. In addition, the interviewees expressed a desire to have the seminar packages enhanced (which would bring more revenues). They also felt strongly that Sc[i]3 had not been very good at marketing itself.
2. Nearly 10,000 patents have been issued to Sunnyvale residents since 1972. In 1998/99 Sunnyvale inventors were named more than 3,203 times on 2,857 patents. Sunnyvale companies received 2,228 patents in that same period. Sc[i]3 has logged from 35,000 to 65,000 visitors each year for several years. Many of these "garage inventors" come to Sc[i]3 for help because of high prices and lack of availability of patent attorney assistance.
3. Forty-three of the top 100 patent companies in Sunnyvale have used Sc[i]3 services in the last two years. The collective net worth of just the top 20 of these 43 companies has increased 3,324% in the last three years. Only three of the top 20 have decreased the number of employees in the past three years. The rest have increased the number of their employees anywhere from 1% to 74%. That translates to more employment options for Sunnyvale residents; more sales taxes from services and products purchased in Sunnyvale; more corporate donations, more promotions and higher salaries for those Sunnyvale residents who do work for the 43 companies.
4. Sc[i]3 has continued to serve the leading Silicon Valley companies. These industry leaders include Sun, Apple, Lockheed Martin, Applied Materials, Amdahl, Hewlett-Packard, Fujitsu, Genentech as well as Stanford University, the Department of Energy, Lawrence Livermore and others. Over 90% of Sc[i]3 revenues are derived from these outside-Sunnyvale companies and law firms.

Thus, the findings clearly support the continuation of Sc[i]3. The interviews revealed a need for change of direction (the creation of a professional users group, more seminars & USPTO partnering). The question is how to best fund the development and marketing of revenue generating services which constantly must be revised, upgraded and priced competitively to survive, and, in addition, fund the component that provides free help, instruction and other library services to the new inventor and entrepreneur.

Sc[i]3 now takes in revenues that, even in this last difficult fiscal year, finance two-thirds of its costs. While a change in direction will probably enhance that ratio, it is obvious that it can’t guarantee the ability to provide free services to inventors without support from the City.

The City Council will be asked to make a determination, as part of the budget process, regarding the future of Sc[i]3. Options range from closing the library to providing $250,000 annually to support the reference services and providing several years of special project funding to implement necessary changes in services, marketing, user group development, and the exploration of alternate and/or supplemental funding mechanisms.

To offer a full complement of fee-based and free information services to the public, Sc[i]3 will require its planned budget as set forth in the FY1998/99 annual city budget. Using all its allocated funds to improve and market services, Sc[i]3 should increase annual revenues based on 15-20% for the first three years, followed by smaller gains in the succeeding years. Free library and advisory services will cost approximately $250,000 annually. To improve and redesign existing services, develop and market new services at optimal levels, and develop a professional users group with a significant sponsorship component, will require additional funding. $125,000 in special project funds may be sought to support such initiatives, major fund raising and/or political action.

A consultant engaged by the library interviewed 17 patent attorneys in corporate settings or private practice. Sc[i]3 staff surveyed library users to gain additional information. A preview of this report was presented at the January 11, 2000 meeting of the Board of Library Trustees. Publication of the City Council Agenda. A special meeting was held 2/17/2000 to review the Information Only Report to Council at which the Board received comments from the public, considered five alternatives and took action to recommend that the City Council provide additional operational and special project funding for Sc[i]3.

1. Detroit Public Library
2. Rice University, Houston, Texas
3. Boston Public Library

5. Short History of Sc[i]3

6. Board of Library Trustees Minutes of Special Meeting 2/17/00

Sc[i]3, as the only United States Patent and Trademark Office patent partner in the Bay area, has a large and well-defined market to serve. (For a brief history of Sc[i]3, see Attachment E.) Over 35% of all venture capital in the U.S. is invested in Silicon Valley. Sunnyvale residents or companies were named on more than 5,000 patents in 1998/1999. In 1999 alone Sunnyvale companies received 2,581 patents. See Attachment B for a list of Sunnyvale’s top 100 patenting companies.

The chart below shows that, during the past five years, patent activity in Silicon Valley and the Bay area, already the highest in the U.S., has increased by 104% and 99% respectively.

Because Sc[i]3 is positioned in the center of this thriving intellectual property community, the original business plan forecast that Sc[i]3 could recover its operations costs by 2001. In FY1997/98, the Council recognized that it was unrealistic for Sc[i]3 to recover all its operations costs, including the cost of free public library reference service (a mandated component of offering patent and trademark services), and cost recovery was capped at 93% of operations. When Sc[i]3 first started, it was one of the few places to find comprehensive patent and trademark information and search services. The revenues from document delivery and searches continued to grow until highly capitalized IBM offered a free patent website in 1998/99. Public pressure prompted the USPTO to quickly follow suit with both patent and trademark databases. In a single year, the three-year upward growth trend was reversed. Apart from loss of revenue, the question had to be asked, "Are the services and information provided by Sc[i]3 still needed?" See Attachment A.

The library earned a total of $2,234,000 during its first four years, requiring general fund allocations of $157,208 in 95/96, $152,979 in 96/97, $94,118 in 97/98 and $242,680 in 98/99. In other words, the City of Sunnyvale’s support enabled a full complement of patent and trademark information services including free reference service to the public, videoconferencing and professional Intellectual Property (IP) seminars for a total cost of $646,985 or an average of $161, 746 per year. In the first three years, the revenues exceeded the operations costs in all areas except the free reference services, which include answering questions and offering information and instruction in person and on the telephone, maintaining a comprehensive website and housing a physically small but information-rich library collection.

After five years of partnership between the City of Sunnyvale and the USPTO, radical changes in Sc[i]3’s business environment necessitate a review of Sc[i]3 status within the library and city budget structure. The dominance of web-based information products was unforeseen in the original business plan which projected continued growth in the sales of specified products and services. Funds were not budgeted for major marketing or the redefinition of products and services. Now the menu of products and services need to be revised and updated to meet community needs and enhance revenues.

The costs to operate Sc[i]3 consist primarily of personnel (6 FTE) expenses, facilities lease, internal service charges, and fees to the PTO for database and network access. Some of these costs, primarily lease expenses, could be reduced significantly if Sc[i]3 could be accommodated in the main library, but the necessary space for the collections, high-tech equipment, staff, training and meeting rooms, and library users, is inadequate there.

To uphold part of its end of the partnership, the PTO provides Sc[i]3 high-end video equipment, extra cameras, wireless controls, a document camera, electronic whiteboard, two fax machines, a teleconference phone, four search workstations directly connected to comprehensive patent and trademark databases, two customer search workstations, accessories and printers, a jukebox system that holds an entire set of patents from 1790, and other equipment and materials. It has also provided a LCD projector and a laptop computer for training workshops. The partnership provides that staff from Washington periodically come to install and upgrade equipment, and maintain it through PTO-purchased service contracts. PTO trainers have upgraded staff skills on various automated systems.

The PTO also cooperates with Sc[i]3 by offering videoconference seminars taught by subject and policy experts from its Washington headquarters. Subject and policy speakers are also made available upon request to participate in local onsite seminars.

Using Sc[i]3 as a model, the Patent and Trademark Office has created three additional partnerships in other regions of the country: Great Lakes Patent and Trademark Center in Detroit; Rice University in Houston, Texas; and designated only in November 1999, the Boston Public Library. (See Attachment B.) Currently Sc[i]3 provides more than four times the service volume of any of the other equivalent USPTO partners, earns five times the revenue and receives the lowest level of institutional subsidy.

RTC 94-515, October 4, 1994, "Proposal to form partnership between the City of Sunnyvale and the United States Patent and Trademark Office." Attachment F.

Library Sub-Element Policy 6.2C.1. "Maintain the quality of reference service by assisting users to find desired materials and information."

Economic Prosperity Program – Strategies for Business Retention/Expansion/Strategic Attraction.

To answer this question objectively, library administration engaged a consultant to independently survey the Silicon Area IP community. Dr. Sheila Kessler, president of Competitive Edge, conducted the investigation with leading law firms and corporations in the Bay Area that had significant intellectual property portfolios. The complete report is Attachment A. The following italicized comments are excerpts.

1. When the City of Sunnyvale recruits new companies or discourages others from leaving, it points to the "leading edge" nature of the City. In promoting a positive climate for innovation and entrepreneurialism, both the Economic Prosperity program and NOVA point to the value added to the business community by the presence of Sc[i]3 in Sunnyvale. In turn, this public relations has lead to Sunnyvale having more than its fair share of inventors and entrepreneurs – feeding the billions of dollars of venture capital poured into Sunnyvale and Silicon Valley.
2. Sc[i]3 has received positive notice in the press to Sunnyvale’s benefit. It has received national attention and awards. It has been featured in publications about good government practices. All of this adds to Sunnyvale’s desirability as a place to do business.
3. Over 90% of Sc[i]3’s earned revenue has come from companies outside Sunnyvale. This revenue, in turn, subsidizes services to some of the thousands of Sunnyvale residents who now have patents or trademarks.
4. Forty-three of the top 100 patent-driven companies in Sunnyvale have used Sc[i]3 services in the last two years. This has been accomplished with minimal marketing.
5. The top 20 (out of 43) Sunnyvale-based patent driven Sc[i]3 customers add up to a net worth over $164 billion. That money is then pumped back into Sunnyvale subcontractors, fees for City Services, taxes and a sense of well being for Sunnyvale residents. The collective revenues of these top 20 Sunnyvale companies supported by Sc[i]3 were $4.9 billion. This revenue helps fuel the economy as it is spent on goods and services in Sunnyvale.
6. All but three of the measured top 20 companies increased their number of employees from 2% to 72% in the past three years. This not only adds jobs to Sunnyvale, but also provides room for larger than normal salary increases and promotions found in such rapidly growing companies. The extra employee earnings spills over to other Sunnyvale businesses, such as restaurants, service firms, merchants and retailers.
7. The added taxes from high hotel occupancies in Sunnyvale and rates that have nearly doubled in the past three years also benefit the City. Intellectual property allows companies to grow in profitability more quickly. This rapid growth leads to each company hosting more meetings where out–of-towners spend hundreds of taxable dollars a day in Sunnyvale

Most significant, Sc[i]3 provides expertise and timely access to patent and trademark information services to residents and companies doing business in Sunnyvale and surrounding communities. As evidenced by chart B (above), Sc[i]3 operates at the heart of the most active intellectual property center of the world. The second highest patent area, the Boston Metropolitan Statistical Area that includes both Massachusetts and New Hampshire counties, produced only 3,687 patents in 1998, fewer than half the Bay Area. Through Sc[i]3, entrepreneurs in Silicon Valley have the resources and expertise to support their research and development of ideas, inventions, trademarks and trade names. (See attachment C.)

Up until now, most funds at Sc[i]3 have been expended to provide daily direct services. Sc[i]3’s primary performance measure is the revenue to operating expense ratio which encouraged staff to keep operating expenses as low as possible. Sc[i]3 had little or no budgeted capital resources to plan change or market services. Operating under the rules and regulations of two government agencies, it has been unable to respond rapidly to the shifting business and technological environment that has dramatically altered its markets. Nonetheless, Sc[i]3 earned $2,234,000 during its first four years and received $646,985 in four years from the general fund for an average annual cost of $161,746. Fifty-five to sixty percent of the General Fund is generated by the business community served by Sc[i]3 in part. Volunteers contribute from 3,000 to 4,000 hours each year to Sc[i]3. Sc[i]3’s three highest cost categories (after personnel) are its facilities lease, internal rental rates and payments to the USPTO. Sc[i]3 is required to offer free reference service to the public including increasing numbers of telephone queries about web-based information.

The state’s economic and democratic vitality depends on …equitable access to information…. Our multicultural and complex society creates needs for materials, information and services that go beyond the ability of any one library to provide. …No single library is able to meet all the diverse needs of its primary clientele…. Highly specialized information needs often surpass the resources of any single library in the state. – Library of California Act

All libraries have significant numbers of users drawn from outside their primary clientele. The intentional diversity and variety of libraries with unique and special materials allows citizens to find needed information in the depth, language and format that serves them best. Residents of Sunnyvale can access specialized and other libraries all over Silicon Valley-and they do. Currently Sunnyvale residents are borrowing materials from neighboring libraries more frequently than the reverse. Every library is dependent on other libraries to provide full access to information and services. The new Library of California legislation will permit some funding of specialized non-circulating collections. As a unique resource library for the State of California, Sc[i]3 is already being evaluated and considered for supplemental funding as a Resource Library.

The consultant’s study confirmed that Sc[i]3’s mix of revenue products and services (primarily document delivery and searches) had been upstaged by free IBM and USPTO website availability. However, a number of alternative revenue-generating services were identified including more comprehensive and extensive training and seminar programs, an aggressive sponsorship drive, and far more marketing. Other funding possibilities include launching an endowment campaign, foundation and grant support.

As suggested in the section of the report above about the need for California’s libraries to cooperate and share special collections, the Library of California may offer some funding support within the next five years. Currently only $5 million is allocated statewide to identify user needs and special collections. Special state legislation to support Sc[i]3 as a statewide resource for business and economic development could also be pursued.

Currently Sc[i]3 is managed and operated by the City of Sunnyvale. It receives most of the library collection, equipment, technical assistance, training and expert staff for seminars through the USPTO partnership. In turn the City pays for access to the PTO’s networks and databases. If the City finds the operations too costly to bear, other arrangements and partnerships may be possible. Potential shareholders could include the Tech Museum of Innovation, Santa Clara or Stanford University, Joint Venture Silicon Valley, Santa Clara County Manufacturing Group, Santa Clara Bar Association, Silicon Valley Intellectual Property Law Association, or a joint powers agreement among Santa Clara County cities. (Other local libraries are not listed here since a 1991 study demonstrated a lack of ability or interest on their part.)

An expanded partnership might permit Sc[i]3 to remain within the geographical bounds of Sunnyvale, but at the cost of less control and identity.

The consultant’s study showed that Sc[i]3’s value to the community has not ended. Partial measures such as the elimination of certain services to reduce staff or transferring services to the main library are not considered reasonable options at this time. The main library does not have space available. Moreover, eliminating services would mean a reduction in revenue required to underwrite patent and trademark reference services.

Community need for patent and trademark information will not go away. There is a high probability that the demand for service and information would transfer to the main library whether funds for staffing and resources were reallocated or not. General reference staff without the specialized training and resources available to the partnership would inevitably offer reduced levels of service to patent and trademark clientele. The quality of general reference service to all other library users could be negatively impacted. It is anticipated that closure and/or reduced services would not be positive.

If Sc[i]3 were to be closed altogether, the length of time and cost to accomplish the task would depend on a number of decisions such as:

1. What level of patent and trademark information and service (if any) is the City willing to support?
2. Does the City want to allow transition time for the USPTO to find and develop a partnership with another Northern California institution?
3. What level of consideration is to be given to the dispersal or disposition of staff, collections, equipment and furniture? (It should be noted that most equipment and collections are the property of the USPTO.)
4. What resources would be used to close Sc[i]3’s 800+ deposit accounts and return more than $100,000 on deposit?
5. What public relations’ effort would be necessary to inform the Intellectual Property community?

In the past four years, Sc[i]3 has cost an average of $161,746 per year to operate after revenues were subtracted from expenses. Sc[i]3 has returned both substantial revenues and positive publicity for the City, in addition to performing its essential services for citizens. Since Sc[i]3’s most important performance measure has been the revenue to operating expense index, it has striven to improve this measure which rewards low spending levels, to the detriment of improving and marketing services that would result in higher future revenues.

To offer a full complement of fee-based and free information services to the public, Sc[i]3 will require its planned budget as set forth and projected in the FY1998/99 annual city budget. (See chart below.) Free library and advisory services to support inventors, engineers and entrepreneurs will cost approximately $250,000 plus inflation annually. At this level of funding, revenues could be expected to increase by 5-10%. Although some grant research and fundraising efforts could be undertaken within this budget allocation, efforts to develop permanent and/or sustainable sources of alternative funding will require special project funds. Such projects include an endowment or planned giving campaign or support for political action to effect special legislation. Using all its allocated funds and special project funds to improve, redesign, change and market services and to develop a strong and supportive users group and sponsorship program, Sc[i]3 should increase annual revenues based on FY1999/2000 projections by 15-20% for the first three years, followed by smaller gains in the succeeding years.

The chart below illustrates one option for the next five years.

Sc[i]3 offers valuable and valued services both to the City of Sunnyvale and larger Silicon Valley community. In spite of a changing information and business environment, the user community supports the library’s continued existence, albeit with a changed direction and focus. To offer optimum library services and reap the highest rewards, the City must commit to an average annual support level of $250,000 plus special project funds. The alternative is to face other options with unknown or possibly negative outcomes.

A consultant engaged by the library interviewed 17 patent attorneys in corporate settings or private practice. Sc[i]3 staff surveyed library users to gain additional information. A preview of this report was presented at the January 11, 2000 meeting of the Board of Library Trustees. Publication of the City Council Agenda. At their special meeting of 2/17/00, the Board voted unanimously to recommend to City Council Alternative #1 which will keep Sc[i]3 in Sunnyvale under the governance of City Council and administration by the library along with subsidizing reference service at the cost of $250,000 inflated annually and Alternative #2 which will require an additional $150,000 in FY 00/01 and $100,000 in FY 01/02. These funds will allow staff to develop a fundraising plan to seek grants, sponsorships and/or special legislation, redesign the mix of products and services offered, establish an advisory panel from the Intellectual Property community.

These alternatives are presented for staff and Council consideration during the upcoming budget planning process:

1. Keep Sc[i]3 in Sunnyvale under the governance of City Council and administration by the library. Fund Sc[i]3 at planned/projected 1998/99 budget levels. Sc[i]3 would be expected to develop and market successful revenue-producing services to increase revenue by 5-10% in each of the next two years. Council recognizes that the market shifts rapidly, so Sc[i]3 cannot guarantee continually increasing revenues or sufficient surplus revenue to offset core, free public library service. Subsidize reference service at the cost of $250,000 inflated annually.
2. In addition to Alternative #1, provide 2 years of special project funding as follows: $150,000 in FY 00/01 and $100,000 in FY 01/02. Special project funding will be used to develop long range plans and tools to provide stable outside funding. Examples of projects include: develop plans to establish a foundation or endowment, seek grants from foundations or other funding agencies, corporate sponsorships, Resource Library designation under the Library of California Act and/or special legislation. Other activities will include developing a marketing plan, improving/redesigning fee-based services and building an advisory group composed of members of the Intellectual Property community. If successful, revenue increases of 15-20% could be expected.
3. Search for new partners or a sole proprietor to assume fiscal and managerial responsibility. This option could relieve the City and library of some or all managerial and financial responsibility. Additional city staff time would be required to investigate shared authority, or to identify a new sponsor, relocate the operation and disassociate aspects of operation from the City. Option 3 requires supplemental funding until a suitable successor organization is found or reduction in service levels (and revenues) to free up staff to pursue this alternative.
4. Significantly reduce hours of operation and staff to operate within the current budget. A likely result is the concomitant reduction in revenues which would in turn cause a further need to reduce service.
5. Close Sc[i]3. Sunnyvale companies, inventors and entrepreneurs would not have access to services that support invention and entrepreneurialism, economic development, employment and business growth. Any cost savings could be offset by negative public relations.

Prepared by:

Mary Clare Sprott
Administrative Librarian

Reviewed by:

Victoria L. Johnson
Director, Department of Libraries

Approved by:

Robert S. LaSala
City Manager

1. Detroit Public Library
2. Rice University, Houston,Texas
3. Boston Public Library