Savvy investors recognise that value may be locked away in an ailing company’s patent portfolios. Activist investor Starboard Value LP pushed AOL to sell and license a bundle of 800 patents to Microsoft for $1.1 billion – and news of the sale made AOL’s shares jump 43 per cent.
Companies may find value in their patent portfolios even when their products are struggling to compete in the marketplace. For example, Microsoft is believed to make more from licensing its technologies to Android handset manufactures than from selling its own Windows Phone operating system1.
According to the Harvard Business Review article cited above, “IP-savvy business leaders believe that, in a world where battles are increasingly being waged not for control of markets or raw materials but for the rights to new ideas and innovations, the management of intellectual property must become a core competence of the successful enterprise…. Therein lies one of the next great corporate challenges: figuring out how to unlock the hidden power of patents…”
Patents are a short-lived asset – and massively undervalued on almost all balance sheets. GAAP valuations reflect historical cost and have no relationship to a patent’s value. By understanding patents and their true potential value, investors can take advantage of arbitrage opportunities.
A patent is an intellectual property (IP) right granted to inventors to exclude others from using the invention for a limited time in exchange for public disclosure of the invention when the patent is granted 2.
Patents do not convey a right to do anything – they only convey a right to exclude others from making, using or selling the patented invention.
Patents have been used for centuries as competitive differentiators – the first patents, in ancient Greece, were for winners of cooking recipe contests. Patent owners have traditionally used patents defensively, to keep competitors from entering lucrative markets. These attempts have not always been successful: Thomas Edison owned most of the major US patents relating to motion picture cameras, so the nascent American movie industry moved to Hollywood to escape his New Jersey lawyers.
The last 40 years have seen the growth of patents used offensively – to generate revenue from licensing fees.
As noted in the table below, annual aggregate revenue from licensing has grown from $3 billion in 1970 to over $200 billion in 2010. We expect this trend to continue at an accelerating rate.
Success at patent monetisation is becoming a key differentiator between companies. Investors increasingly demand that companies have an effective monetisation strategy and challenge expenses involved in acquiring and maintaining unproductive patent portfolios.
Stories about patents, patent licensing, and patent litigation are in the news daily:
- Apple and Samsung are fighting patent battles on four continents to retain their dominant positions in the $219 billion smartphone and tablet markets.Yahoo sued Facebook for patent infringement (on the eve of Facebook’s IPO), and Facebook sued Yahoo right back.
- Google paid $12.5 billion to acquire Motorola Mobility and its patent portfolio.
Reading these headlines, more C-suite executives are asking themselves, “what are we doing to extract value from our patents?”
Patent monetisation is the process by which patents can be transformed into money or any other type of valuable benefit. Typically, monetization is accomplished through licensing.
A patent license grants permission to use a specific patent or set of patents under a set of defined conditions. These conditions may include the scope and field of use, exclusivity, royalties, territory, and term.
In return for this license, the patent owner is compensated in the form of royalties, lump sum payments or damages for past patent infringements.
Over the last decade, global licensing receipts have increased from $50 billion in early 2000s to over $180 billion in 20093. We believe that the 2015 numbers will be at least double those of 2009. See Figure 1.
As noted above, patent monetisation is an underutilised source of revenue. According to a survey by Carnegie Mellon University and the National Bureau of Economic Research, only 28 per cent of patent owners use their patents to generate licensing income4. See Figure2.
Another study from the School of Intellectual Capital Management showed that just 22 per cent of companies were driven to seek IP protection for purposes of revenue creation5. These studies show just how much of the potential for patent monetisation is still untapped. This untapped potential provides an enormous opportunity for investors. See Figure 3.
Patent monetisation isn’t alchemy. It’s not about taking lead and turning it into gold. As shown by the examples above, too many companies have gold they’re treating like lead.
The decision to monetise patents may be easy, but the process of patent monetisation can be difficult.
Patents are hard to value, their applicability is subject to interpretation, there is no efficient market for patent transactions, risks are involved in the monetisation process, and monetisation campaigns can be costly. Patent owners often don’t know which of their patents are valuable and which method is most suitable for monetisation.
Outsourcing patent monetisation can thus be a sensible solution for many organisations.
Most patent owners lack the multidisciplinary skills required to effectively evaluate their patents and mount a successful monetisation campaign. The necessary combination of skills and expertise rarely resides outside of the largest and most sophisticated corporations – and even these entities outsource due to capacity and resource constraints.
And monetising patents can be expensive: the former Vice President of IP Licensing for Hewlett Packard estimated that to generate $200 million in IP licensing income requires $40 million in annual expenses – half for IP licensing and half for business unit and litigation costs.
1 Digital Trends, “Opinion: Microsoft should be backing Android. Here’s why,” June 9, 2012, http://www.digitaltrends.com/opinion/opinion-microsoft-should-be-backing-android-heres-why/#ixzz1xfhlyquZ
3 The Changing Face of Innovation – World Intellectual Property Report
4 Patents: Their Effectiveness and Role – Carnegie Mellon University & National Bureau of Economic Research, Wesley M. Cohen
5 Business war-gaming in context of IP management, Martins Lasmanis