The volume of patent portfolio acquisition transactions in the past few years has increased greatly. Press reports have naturally focused on the “big deals” from a patent valuation viewpoint such as:
- Nortel Networks $4.5B patent sale (2011)
- Google’s $12+B acquisition of Motorola Mobility (2011)
- AOL’s $1B sale of 800+ patents to Microsoft and subsequent sale of 650 patents to Facebook (2012)
- Kodak Digital Imaging Portfolio $525M (2013)
These are certainly impressive and newsworthy but what has not been widely reported is the increasing activity in smaller patent portfolios. This is the first of a series of articles on this trend and how companies are responding to it. These articles are based on the work we have been doing in the past 12 months for a wide variety of companies. In this article we set the stage by looking at the forces that are driving this portfolio trafficking.
Basic Fact: For a market to exist there must be sellers and buyers.
Who are the Sellers?
Large Companies as Sellers
Until recent years companies with large patent portfolios did not have active programs to sell patents. This was in part a result of:
- Lack of Inventory Control.
In most cases these companies did not really have any clear understanding of what they had. We founded IPVision in 2000 to bring to market the patent analysis technology we had developed in the course of commercializing new startup ventures, primarily from MIT. The large companies we talked to were intrigued about our patent analytics but for many of them their perceived immediate pain point was that they didn’t have any “inventory” of what they had. In many cases this was literally the lack of an up-to-date listing of patents. They were beginning to get serious about acquiring IP Management (as in inventory control) Systems.
- Lack of Business Management.
Business leaders began to understand that we were rapidly moving to a Knowledge Economy and that for many companies the value of their intangible assets was much greater than the tangible assets shown on the balance sheet. However the “management” of patent assets had been the domain of the lawyers, who though talented did not have management training or orientation. MBAs are told “You Can’t Manage What You Can’t Measure” but there was no accepted way to measure IP or determine patent valuation. As IP Management began to become a business function more companies began to try to connect their patents to their products – what protected what? Once Management had a better idea of what they had they asked how it related to their current and planned strategies and how all of this related to competitors. IPVision patent analytics helped Management answer these questions. As IPVision worked with these companies they began to see that they had potentially valuable patent assets that did not align with their current business strategies and they began to grow more confident that they could start to sell or monetize these patent assets without fear that they would “throw the baby out with the bathwater”. More of them began to contemplate becoming sellers of patent assets.
Smaller Companies and Individual Inventors as Sellers
Other sellers include smaller companies with good technology who may have stumbled on the way to market – their patent assets were the residual value of unsuccessful commercial strategies. Individual inventors whose expertise is not in business matters are another class of sellers – patent sales are a way that they can realize value of their inventions.
Who are the Buyers?
Two major trends have created more willing buyers of patent assets.
- Patent Aggregation
First, are the patent aggregators or those with patent centric business models. Intellectual Ventures was the dominate buyer for much of the 2000s decade, amassing over 22,000 U.S. patents. The business models of many of the aggregators revolve around various aspects of litigation and litigation defense. Other models revolve around financial efficiencies such as royalty stream securitization.
- Open Innovation
For decades many companies adhered to the NIH mantra “Not Invented Here”. They invented their own things and were not receptive to bringing in outside ideas. Innovation might be introduced into a company through acquisition, in many cases of successful venture capital backed companies. From this perspective Venture Capital can be considered a form of “outsourced R&D”. The concept of Open Innovation started to change the NIH mindset as business executives realized that the world was moving faster than they could innovate internally alone. This in turn made companies more receptive to patent acquisition as part of new business development and in-bound technology transfer.
What Does This All Mean?
The increasing volume of patent portfolios being marketed has companies asking “How Do We Evaluate This Stuff?” In the following parts of this series we present real examples (disguised to preserve confidentiality) of the processes and analytics that IPVision has helped our client companies implement. Let us know if you have any stories or comments.
Author: Joseph G. Hadzima, Jr. | Senior Lecturer, MIT Sloan School of Management | Co-Founder & President of IPVision, Inc.