(This week, David Wanetick, Managing Director of IncreMental Advantage provides readers if the IP Asset Maximizer Blog with an excellent overview of the various factors that he believes affect patent valuation. Please let me know if you would like to be a Guest Blogger.)
How Patent Vulnerability Impacts Valuation by David Wanetick of IncreMental Advantage
Many things can affect the value of patent rights
As I often tell business leaders who attend my course on Valuing Early-Stage Technologies, valuing patents isn’t rocket science. It is much more difficult. Or to paraphrase Winston Churchill, valuing patents is a riddle, wrapped in a mystery, inside an enigma.
Measuring even a well-delineated permanent entity is much more difficult than may be imagined. As Neil deGrasse Tyson (a renowned astrophysicist) and Benoit Mandelbrot (the father of fractal geometry) have discussed, no one really knows what the circumference of the coastline of the United Kingdom is. The tides will cause varying degrees of erosion on the coastline depending on the hour of measurement while the cumulative affect of choosing which rock formations to measure around will have a dramatic impact on the final assessment of circumference. Patent valuation is infinitely more difficult to determine than the measurements of a given land mass due to the interminable variation of underlying technologies, legal issues, business issues, and context in which patent valuations are conducted.
Companies that have patents often attempt to achieve a more attractive valuation by boasting about their patent portfolio. This is often a successful gambit as many investors, customers and media figures are impressed when a company reports a relatively large number of patents or pending patents in its portfolio. Thus, it is no surprise that many entrepreneurs and venture capitalists have admitted to me that they view patent preparation and filing costs akin to marketing expenditures.
However, valuation analysts should not reflexively assign a higher valuation to companies that own patents or are applying for patent protection. Companies can have a patent on a technology for which there is no possibility of commercializing or selling. Patents pending are particularly specious. Pendency (the length of time it takes the US Patent and Trademark Office to make a decision on a patent application) is now an average of 32 months. In some industries—such as semiconductors and electronics—pendency is more on the order of four to five years. Thus, the market targeted by a patent could become obsolete before the USPTO makes a decision. In fact, only between 2% and 5% of patents generate any royalties and another 45% to 50% don’t even have any strategic value. Further, two out of every three patents lapse because of failure to pay fees, most often because their owners believe that the thousands of dollars in maintenance fees exceeds the value of the patents. Continue reading →
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The News is Out: We Now Have an Intangible Asset-Based Corporate Economy
(Ed. Note: A family emergency has been keeping me away from the office. The good news is that I have been catching up on my RSS feeds and reading some really interesting stuff, albeit a bit late. One of these interesting reads is a David Brooks piece dealing with corporate intangible assets. Since this was published Christmas week, others may have missed it, too. And, when pundits pick up on what you have been talking about for years, I means that the public is finally “getting” it!)
David Brooks’ Op-Ed in the December 22, 2009 New York Times raises some interesting points about our new intangible economy. In this piece, entitled “The Protocol Economy,” Brooks recognizes that we have moved from an economy that makes “stuff” –that is, a physical goods economy—to one that deals in “protocols.” (I think it would be more appropriate to call our evolving intangible economy a “process-oriented economy,” but I will go with Brooks’ characterization for this post.) The point of Brooks’ piece is to highlight the need of economics to transform its models in order to deal with this new reality.
Brooks’ states:
Protocols are intangible . . . .[A] nation has to have a good operating system: laws, regulations and property rights.” He goes on to say, in relation to the high cost of entry and often miniscule cost of copying a product that is the embodiment of an intangible idea, “[y]ou’re only going to invest the money to make that first [product] if you have a temporary monopoly to sell the copies. So a nation has to find a way to protect property rights while still encouraging the flow of ideas.
As an IP Strategist, I concur wholly with Brooks that laws have to be in place to allow those who invest in the intangible economy to recoup their investment. However, I believe that Brooks’ argument begs the question of what is needed for this new “protocol economy” because, in my experience, relatively few business professionals even recognize that the rules of economic engagement have changed so markedly in recent years. Breaking down Brooks’ assertion, he is advocating for detailed rules of the road when most people are still walking on dirt pathways.
Experts today agree that most, if not virtually all for some companies, of corporate value is in the form of intangible assets, which can exist in the form of intellectual property—patents, trade secrets, copyrights, trademarks– or as other, less recognized forms, such as contractual relationships, specialized employee knowledge and others. These assets do not exist just because experts say they do; rather, they must be identified, captured, protected and leveraged in order for any value embedded in them to be realized. Or, put another way, intangible assets cannot be measured unless they are managed.
So, while I agree with Brooks that the US and other countries need to focus more on intellectual property protection, I will choose to spend my time trying to demonstrate to people why and how they need to understand where their organization’s value lies and how to successfully capture it. In other words, experts and pundits can say it is so—I intend to make it so. Here’s looking forward to the Year of the Intangible Asset!
Posted in: Commentary, IAM, IP Strategists, Intellectual Asset Management, Patent Business Strategy, intangible asset management.
Tagged: business strategy · intangible ass · Intellectual Asset Management · Intellectual Property Strategy · IP Strategists · ip strategy · Patent Strategy