(The following will be the first installment of a series called “Monetizing IP” that IP Prospective plans to run daily over the next week. The topics will cover conventional models such as sale, license-back, and outbound licensing, and then will move to new models, such as patent pools, IP auctions, IP stock markets/investing, and defensive IP aggregators.)
It is no secret that we live in an information society, but consider the following: according to the U.S. Patent and Trademark Office, intellectual property in the U.S. is worth over $5 trillion - more than double the federal budget plan for fiscal year 2009. Statistics like this leave many economists, investors, lawyers, and corporate executives asking why this value is never fully realized or liquidated. The search for an answer has been a drain on many resources. Inherently, intellectual property value is the product of a legal system that grants rights of exclusion to IP owners, and therefore its monetization is frequently effectuated only through lengthy litigation and settlement negotiations. This practice actually created a business model in itself, sparking the rise of “patent trolls”, or companies that buy up free-market intellectual property in hopes of suing users of similar technology for a settlement or license payment.
The savvy and successful phenomenon of “patent trolling”, despite its drag on productive innovation, has led some large corporations to use strict enforcement policies that result in healthy income streams from licenses and settlements. Capitalizing on this model may be easier for a large company like Texas Instruments, whose market share and visibility has allowed it to accrue almost $1 billion per year from such enforcement endeavors. Still, smaller companies have realized other fruitful methods to monetize intellectual property and experience its potential liquidity. These practices range from the conventional models of sales and outbound licensing to new outlets such as joining IP pools, participating in IP auctions and stock markets, or investing in defensive IP aggregation firms.
A Conventional Model: Sale of core and non-core IP
The sale of intellectual property more frequently occurs as a component of an asset sale, merger, or acquisition transaction. In such an event, it is easy to overlook real intellectual property value, especially if it is not core intellectual property or instrumental to operations. When negotiating an M&A transaction or asset sale, an IP audit may be beneficial to spot hidden value in the company, resulting in a higher closing price. On the other hand, if intellectual property owned by the company is not core intellectual property, it may not result in a higher company appraisal value, resulting in the IP changing hands without compensation for it. In this case, an IP audit may be advantageous to find such IP, in which case it may be placed on the market for purchase by a third party buyer. Just because IP is not critical to the current operations of a business does not mean it holds no monetization value. One company’s trash may be another company’s gold, resulting in a sale transaction that benefits both.