April 8, 2009

The IP marketplace in 5 years?

I recently answered a question at LinkedIn with the same question as the title above. I found it very close at heart and thought I'd incorporate it here for further thoughts and some more elaboration

When I think of the IP marketplace I envision sales and acquisitions of IP and not the roll of IP within the marketplace (i.e. technology). The closest embodyment so far would be Ocean Tomo, which seem to have hit a slump with its last auction being seen as a failure (see here and here). In recent years we have seen a surge of different players entering the market (Ocean Tomo being one) and I am a firm believer that this is a field in its infancy, which I have written about here and here.
Before elaborating more on how I see the IP marketplace in five years, I'll take you throug my reasoning. I have chosen only to look at patents as they are by far the most liquid asset.

The IP Marketplace today

First 4 observations I hope we can all agree on:
*Corporations continue to file enormous sums of patents each year, thus "non-core" patents will likely only increase and so will supply for a market.
*Not least in this recession, bigCo,smallCo and inventors are having an easier time to motivate divestiture of patents and are also in greater need of liquidity.
*Non-us legislations are slowly catching on the US model of heavy patent litigation (examples are EU harmonization attempts).
*Increase in large scale patent acquisitions by e.g. trolls, RPX, IV etc.

Looking at above factors; increase in supply and demand combined with legislative action - the obvious answer would be that the IP marketplace would be booming. However this is not that straightforward.

The main reasons for that being:
* Selling (or out-licensing) naked patents is very hard and time consuming and is very much a tacit skill compared to selling many other asset classes which have no element of negotiation as well as much historical data.
* IP landscapes are often cluttered due to wide X-licenses, encumbrances / deal clauses, standards and what's commonly seen as the "troll threat".
* The marginal value for naked patent acquisitions / in-licensing is situation based and that value is often logarithmic from buyer point of view.

I think that in 5 years the IP marketplace will continue to be built up by three sub-markets:
* BigCo broad licensing - continuing with wide X-licenses to increase FTO.
* Liquidity Divestitures - from BigCo to inventors, patents for sale will go up.
* Patent aggregators - nothing indicates any slowdown of RPX, IV trolls.

The IP market moving forward - more behavior than a unified exchange

However I believe there will be great changes, but within quality and behavior as companies recognize strategic value of patents and also the importance of dealing with acquisition or divestiture properly. E.g.:
* Companies will actively start looking for certain technologies when planning a new venture / spin out / line-extension slightly outside of core.
* Patent sales will require more and dedicated work by the seller if looking for short term ROI. The model with an unspecified Cease & Dsesist, countered by a declaratory judgement and then a long wait in Texas, Cali or Delaware is not scaleable and slow - not to mention unpopular.
* With laws passed that could open up for lawsuits also outside of the US, savvy companies will start to be proactive when considering defensive or offensive IP acquisitions to strenghten portfolio.

One could draw the easy parallel of IP and general business where certain amounts of analysis, preparatory work, appealing sales material etc. are given and anyone not complying with the norm has no chance (e.g. not having a thorough business plan, strong PPT and proof of concept if driving down Sand Hill Road). My meaning being that such a norm has not been set in the IP sphere yet.


The emerging new actor


In light of an increase in "homework" (i.e. analysis) needed I see the emergance of a new actor. Such an emerging actor would be similar to an m&a department within an investment bank. An actor dealing with sellers and buyers, possibly being a strategic partner to BigCo when divesting/acquiring patents. Cases are built around business, technical and legal strenghts. Key metrics are profitability, portfolio strength, ROI and regional / technological FTO. This actor will also, like the banks, rely heavily on trust and look for long term partners rather than short term assertion raid. Which is also the reason why such an actor in the long term could develop a scaleable model of naked patent sales - which I see as the true key of a functioning patent marketplace.

// Marcus Malek
(follow me on twitter)

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