At one time, it was believed that at least 70% of all corporate value was in a corporation’s intangible assets. This percentage, while probably assuming too much for many companies, and also too little for others, has been agreed upon by numerous IP professionals. Apparently, the “average” is stumbled upon by subtracting a corporation’s tangible assets from its market capitalization, the remaining assets presumably being IP. It is true that tangible assets have made up less and less of a corporation’s market capitalization. Technology replaces machinery and human capital. Synthesized vertical integration has cut the need for factories and real property. Many professionals assume the growing gap has been filling with intangible asset value. I am no different.
A recent article in the latest issue of IAM discusses a decrease in corporate intangible asset value from the 70% figure to below 50%. A blog about this piece written by Joff Wild has brought to the forefront an extraordinary debate, via comments to the blog, between some of the world’s top IP management experts (check out the comments for some great reading!).
In this debate, there seems to be some discussion about the reason for the decline, and just how do we standardize IP valuation in the first place. One element of the discussion focuses on transparency in the IP market, which I have harped on for years. I have an article that will be published in the upcoming issue of the Buffalo Journal of Intellectual Property Law titled “Commoditizing Intellectual Property Rights: The Practicability of a Commercialized and Transparent International IPR Market and the Need for International Standards”. In this article, I discuss the utter importance of transparency and the market mechanisms that are beginning to come into play that will introduce such transparency. In my humble opinion, the market for IP is only subtly different that that for tangible assets such as real estate, and the largest constraint on the market is the lack of public price and information discovery. For years, IP transactions have only been done at arms length and behind closed doors. For understandable confidentiality reasons, there has never been a common platform for buy-side and sell-side.
When professionals speak of a need for a standardized valuation method, they speak the truth. Nevertheless, it is also true that an effort made to create a scientific quantification and valuation method is made in vain. The fact that Pat Sullivan came up with 50 different IP valuation methods currently in use should tell us not that we need to condense these to one standardized method, but that none work accurately enough (or else there would only be the one). Instead, the IP valuation method we seek is one which will work for us. A laissez faire approach to the market will work better, but not without market transparency. Transparency is key, and once we have it, we will have a commoditized asset class, readily tradeable based on complete information and price discovery.
Market players such as Ocean Tomo and its burgeoning IPXI are contributing greatly to this endeavor. The success of Ocean Tomo’s IP auctions have already begun to create a common stage for buy-side and sell-side participants. Nobody can say that the valuation of the IP sold at the most recent auction in Chicago wasn’t made a little bit easier because of the past 12 or so auctions in the last 3 years. Indeed, they use their own Patent Ratings system, but its methodology is based on past sales, and every transaction makes the next valuation more exact.
To say that transparency is not the answer for the valuation of IP, while pointing at the real estate market and the bubble that burst in that market, is to confuse confidence and speculation. Once the IP market breeds confidence in its participants, there are attributes of IP which lend against complete speculation that will inflate valuations to a point of a bubble bursting. The inherent qualities of royalty streams and license structures will keep IP valuations at bay. This is the very methodology upon which the business model for Royalty Pharma is built. Effectively, Royalty Pharma has gained interest from institutional investors of late because royalty streams create a transparent (although risky) investment for those that might not understand the patent producing those royalties. Nevertheless, one can easily graph a royalty streams’ performance, and from that performance one can value its present or future value. This is the beauty of IP, and one of its largest attributes over tangible assets. If we can make IP investments product-based, and not rights-based, we have some transparent information which we can discover and use in other IP valuations.