Understand the Value of Patents
I received a congratulatory letter last week, from a marketing company which sells patent plaques, for a newly issued US patent (US Patent 9931595). It was a shock to say the least. I have not filed any patent applications since I left my previous employee 13 years ago. It turns out that this patent was based on work I contributed some 15 years ago. This patent application, filed in July 9, 2010, is a divisional of U.S. patent application No. 10/909,706, filed Aug. 2, 2004, which is a continuation in part application of U.S. patent application No. 10/702,240, filed Nov. 6, 2003 now abandoned. With the long drawn out process, the issued patent has only a limited useful life left. This triggered my thoughts on writing this post on the value of patents.
Broadly speaking, there are three categories of patent strategy based on how patent values are created.
Business Growth: This includes patents intended for internal commercialization to generate new business opportunities. Due to the monopolistic nature granted with patents, companies often place a very high value on such patents. It is well recognized that IP strategy is fundamental for long term success of most businesses, especially those in the high tech industry. However, because patents are intangible assets, it is often difficult to assign a monetary value to them. An indirect way to measure the value of patent assets is the prices high tech companies are willing to pay for strategic patent portfolio. Google bought Motorola Mobility, with its 17,000 patents, for $12.5 billion, to protect its Android mobile operating systems from rivals. In another similar transaction, Microsoft acquired 800 patents from AOL for more than $1 billion, only to turn around and sell 70% of them to Facebook for $550 million in cash. These transactions are obviously one-off purchases that don’t necessarily provide meaningful references for other patent assets. Patents remain relatively illiquid assets. Furthermore, due to the thinness of actual markets for patent assets, the traded or implied market values may be far from actual intrinsic values from future expected cash flows under the base economic assumptions.
Freedom to Operate: This includes patents which are again meant for internal exploitation but the primary motive behind maintaining them is to shield other technologies/patents of the corporate and impede competitor’s patent applications. Value of this category of patents often resides in its ability to protect and extend existing or adjacent business line or market. For pure FTO purpose, many of this class of patents are abandoned somewhere along the way. Such patents obviously serve a business purpose but generously cannot be translated into direct revenue streams.
License: This includes patents developed for external exploitation by licensing out patents and generating a direct revenue stream in the form of royalties. Patents filed by universities often falls in this category since universities generally do not have the means to commercialize their inventions. For license strategy to work, the patent has to be of fundamental value. Typically, a strategic portfolio is much more valuable than a hodgepodge of good ideas. In addition, there has to be a way to extract value from the patent. A handful of schools, MIT, UC Berkeley and Wisconsin among them, have turned their licesning activities into significant revenue generating sources. With that said, very few businesses have been able to develop a sustainable model for licensing patents.
Ultimately, individual patents are just building blocks. Value is only created and maximized when they are an integral part of business strategy.