I recently read the very interesting "The Invisible Edge", by Boston Consulting Group economists Mark Blaxill and Ralph Eckardt. The full book has been reviewed elsewhere, so I won't discuss the whole book. However I will say that Chapter 9 struck a particular chord with me.
Chapter 9 explores the concept of IP as a tradable asset, beginning with pop star David Bowie offering bonds backed by the copyright to his music in 1997. By doing so, David Bowie was able to raise $55 million in cash, and bond investors were able to make an investment in his music. Blaxill and Eckardt then speculated that IP could be the next major financial asset class, in the same way that real property has moved beyond being a place where we sleep or work, but instead has moved to an investment where the ownership and financing could be separate completely from its use. The authors speculated that this would come in a number of stages:
- Stage 1: IP assets are closely held and rarely traded
- Stage 2: Specialists emerge to facilitate transactions
- Stage 3: Speculators enter the market
- Stage 4: Transaction costs decline
- Stage 5: Marketplaces for exchange are established
- Stage 6: Derivatives emerge
So where do patents sit in relation to these stages? The author's argue, and I agree, that patent and patent owners are now found at all of these stages. The emergence of these complex markets is the reason for the newer types of IP owners that we are starting to see, such as Intellectual Ventures for example.
I am a practicing IP manager, and wanted to look at this from the viewpoint of a company wanting to use patents. I wonder if something similar to the figure below shows the complexity of IP access in the years ahead:
In this map, the terms:
- 'Owner-operator' refers to a company that owns IP and sells product or processes under the same name, i.e. no license agreements are in place. This is still the most common form of IP ownership.
- 'Company IP Ltd' refers to a company that the ownership of their patents in a separate but related legal entity, and there are a number of possible reasons for doing this. Ford, for example, own many of their patents under the name of Ford Global Technologies.
- 'IP Ownership Syndicates' refer to syndicates of IP users that might jointly own a group of patents, for example the syndicate that recently bought the Nortel patents. .
- 'Non-Practicing Entities' refer to the likes of intellectual Ventures, while IBM is an example of a patent owner that will freely license their patents to other IP users, including their competitors. Obviously sometimes this type of licensing is in response to actual or threatened litigation.
What ties together the Blaxill/Eckardt model of tradable IP assets, and the above model of IP access, is the need in both models for increasingly accurate views on IP value and quality. If we compare the IP market to the real property market, for example, it is a lot easier to obtain an independent market view of either the purchase or lease price of a house or commercial building. In contrast, it is a lot harder to obtain these values for a patent or other IP right, and for a number of reasons.
Among the biggest of these reasons is that IP can be non-exclusive. In general, only one family can live in a house, while a family only needs to live in one house. In contrast some products can be claimed by thousands of patents, which may also claim many other products. In this light, IP valuation models based on the profitability of the product can find their limitations - how should the profit be divided among many different patents? Should the profitability be attributed equally, or should 'better' patents earn the right to a greater share of any royalties payable by the product owner? If so, how would we judge the better patents, particularly without an individual assessment of what might be thousands of patents?
Other people might ask if the value contribution of a patent protecting a product should be distinguished from the value contribution of other components, such as the company brand, distribution system, etc. Simply assigning all of the 'excess' profit earned by a product to a single patent may give a misleading impression of the value of the patent.
These are the sorts of questions that are likely to come up more and more. IP managers sometimes talk about the IP being the majority of the value of many businesses. Blaxill and Eckardt suggest that as commercial managers wake up to this, they will demand more and more from the IP assets of the firm, just as they do for other types of corporate assets (other examples of IP capitalisations are found here). This will naturally drive more and more measurement of patent and other IP asset values. David Bowie may have catalysed a big trend when he decided to capitalize his copyright rights back in 1997.
I think this is an exciting time to be an IP specialist. With the right tools that can assist with IP valuation (and Network Patent Analysis can provide a unique means of predicting the relative values of patents in a crowded field) there is great scope to play an increasingly important role within our business environment.
