Should secondaries be the primary comparison?

In the last couple of months there have been some marvelous IPOs and acquisitions happening in the technology space. Facebook’s likely IPO is the elephant in the room but in the meantime there have been some shockwaves with, for example; LinkedIn and Skype.

Secondaries surging !

This has lead to a surge in the secondary trade (i.e. non-public trade between shareholders) of Groupon, Zynga and Facebook equity. Directly this has lead to discussions of regulations and complaints about “opaque markets”, overvaluation etc. I was also lucky enough to attend a number of talks in London over the last weeks, with VCs discussing these and similar issues. One thing I really embraced was the notion of how scarce this type of equity is and thus might merit a higher price.

So what has this got to do with IP? Well to me the same reasoning rings very true for IP and especially investing in IP. Valuation of IP receives a lot of complaints from many people (accountants and academia to mention some) and is seen as something opaque and in need of regulation. There have been many ( more or less unsuccessful) attempts at making the market transparent (e.g. Ocean Tomo, , IP-X, IPXI, Yet2) but nothing has become a de facto standard.

IP Secondaries surging !?

Regardless of this, a large number of IP transactions take place every year (for example Apple/Freescale, Microsoft/Novell, HTC/ADC or of course the never ending Nortel)showing that even without a primary market, the secondary market will give plenty of exit opportunities. The key, however, is that the assets must be of good quality and/or strategic – just as with the equity mentioned above (or have a missed a surge in secondary trading of Lunarstorm or Friendster?)

Then there’s also a constantly growing number of venture/PE backed IP vechicles being set up (how many of you have heard of Juridica, Digitude, IPGest, ?). And of course also some very large vechicles attracting large sums of venture money like Round Rock and RPX. And if that’s not enough, you should really take a look at IV’s investors , if that’s not the cream of the crop, then I don’t know what is and somehow they were able to be convinced to invest without public prospectuses.

So I guess my point is that comparing IP with something transparent and established like the stock market with extremely liquid trading and instant pricing models might not do IP justice. But instead comparing it to the “mysterious” market of secondary investment, where exits are fewer and larger as well as investments being not for everyone but instead for the seasoned players understanding the market.

Based on this I’m actually very interested in two upcoming workshops at CIP Forum next week, where large portfolio transactions and the possibility of a European IP market will be debated. Maybe they will prove me wrong..

Marcus Malek

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R.I.P. Ocean Tomo - Intangitopia Special Report

Last week Ocean Tomo sold their patent auction part to ICAP. This created some stir in the news and blogosphere, examples and very few (bloggers) actually seemed surprised. IP Law&Business , and Managing IP among others, have good pieces on the deal. That articles also feature commentary, also found elsewhere, by Ron Laurie from Inflexion Point who says that the major reasons were:
* The Ocean Tomo business model of targeting the low end of asset quality
* The difficulty to conduct diligence.
He also mentioned Intellectual Ventures' likely withdrawal from bidding at Oceant Tomo auctions as. That rumor, which fueled the debate of IV "puppetmastering" the auctions, led to another good IP Law&Business piece (pdf), an interview with IV chief of acquisitions Kevin Barhydt.

The 5$ million in cash and possible 5$ million in stock is a fire-sale price for OT, which for long time where hyped as the saviours of IP liquidity (also by myself, as found in previous posts here and here). Personally I must admit that I believed in the OT model for a while, but in hinsight it was more likely due to lack of experience. Regardless if it was IV in disguise who bought the OT patents or not, it seems as if buying patents "blindly" is not something people are less interested in doing - also likely related to the recent drop in financial strength of many firms. Regardless of that, I still would like to cast some light, in form of Ocean Tomo statistcs, on what I believe to be the death of the public IP marketplace.

Please find a Intangitopia Special Report - where 8 full Ocean Tomo auctions are analyzed inside and out in order to provide you with a better and objective view on what once was the great Ocean Tomo.

Complete Ocean Tomo Auction Analysis

View more Microsoft Word documents from Marcus Malek.

// Marcus Malek

(Follow me on twitter)

IP as a financial asset will be discussed further by prominent IP thought-leaders during CIP FORUM 2009, 6-9 Sep, Gothenburg, Sweden

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)

A tax we want? - the success of trolls, trolls 2.0 and why we perhaps want to keep it this way.

Recently Fred Wilson twittered and blogged, at his always interesting VC blog, about his opinion on patent trolls. He said: "Just in case you didn't know how I feel: patent trolls are a tax on innovation and are evil of the highest order"

After that there was a wonderful set of comments on the same blogpost (I encourage to read them) and two linked post found here, and here. The latter by the CEO of the Fred's portfolio companies that were infringed. Fred's expression, comments on his blog/twitterfeed among other things inspired me to write this post (which in hinsight is quite lenghty). I think that looking at NPE litigation as a tax could be a proper and viable way and actually one we should embrace. However there are many open ended issues to such a statement, so I'll try to elaborate on some of them and encourage people to contribute their view on this subject which has so many approaches and, as far as I know, no one correct answer.

A game in three arenas
In order to clearly describe what I think about this I want to look at the innovation processes as part of three arenas. The first being technology, which is all about research and free from patents and money (other than funding the research) and focuses on delivering new inventions, with a die hard race to be claimed as the first inventor. Then there is the second arena, which is the legal arena. In this arena inventors or corporations choose if and how to protect the invention, which is much more complex then binary patent/no patent. Think in terms of patent type, claim type, portfolio strategy, geography, aim of patent (e.g. standard, x-license, ensure free use) and this arena becomes just as complex as thinking of 100 researchers sequencing genes. Thirdly there is the commercialization arena, where corporations exploit these innovations and/or patents for profit through means of products, licensing schemes, services, litigation etc.

It's only business !?
NPE litigation is, in my mind, mainly in the commercial arena, which is also why it attracts so much attention and critique from people. I believe companies/managers get more upset that they might lose money (i.e. make less) rather than actually not being the rightful inventors of a technology. Along those lines I could see NPE litigation as a tax on commercialization, but not on innovation.

My maths would say that if there was a player that would purchase all garage inventors and "few-man" companies' patents - they would churn out much more patents. As this is, in small scale, what some NPE's are doing - one could argue they are creating more innovation (which is also often IV's main claim when interviewed). Naturally this logic has its' flaws as it equals more patents with more innovation and takes no consideration of innovative leap etc. One could also see companies responding and saying that the money spent on litigation would in fact be reinvested in R&D, which is really hard to judge.

My personal opinion is that for large corporations this is much more determined by other factors, in smaller companies (e.g. like Fred's example which spent 10% of VC round on litigation) it could actually be the case. However, statistics show that almost 40% of all NPE litigation 2004-2008 was with only 20 companies (accounting for 534 cases). Without double-checking I would bet a lot on all of them being Fortune 100 companies. The point I want to make is that the first and foremost targets are non-surprisingly large corporations.

Then how about innovation and all the effort put in there?
I am pro innovation in all forms and want nothing more than for new and exciting start-ups to grow and change the way we see the world. But I think we must draw the line between innovation, products and patents ( a brilliant and frequently re-tweeted example is given by Jackie Hutter, here). In the world we live in today, it is very hard to really be sure that you are the first to invent something and unfortunately a patent is no proof of that. Statistics show us that since 2000, 15 patents have made up for 1375 lawsuits with over 16000 possible parties involved. Interestingly the top 8 litigated patents only have 3 different titles and are all within telecom. Now these lawsuits are not NPE lawsuits, but all patent lawsuits since 2000.a
The point I want to make is that statistics show us the difficulty and very contextual and interpretation based nature of patents, especially in a litigation setting.

Tying things together - with an "arbitrage opporunity"
What I want to show is that it is very hard to judge the outcome of a lawsuit but also to know whether a product actually reads on a patent- bearing in mind those 97 lawsuits for a single patent. Out of this there has rissen a large amount of companies that see this as an arbitrage opportunity by acquiring patents and then finding products that read on patents and settling for an amount equaling costs of a lawsuit with the defendant. The most litiguous actor, Acacia, has filed approximately 250 lawsuits since 2003, this equals 42 lawsuits per year. In contrast, they signed 60 new licensing agreements in the first 9 months of 2008, in 2007 that same amount was 69 (source: EDGAR). Without further research it gives an estimate of their success rate, which accounted for $30 million $40 milion respectively those years.

Just taking a guess, I would say a majority are settlements. I think this could take place based on certain criteria. Firstly, Acacias patent portfolio (493 as of 1/1 2009) consists of patents that are either key inventions (success in techniological arena) or written in a way that suits litigation, e.g. broad (success in legal arena - for this purpose). Secondly and in relation to Acacias patents, the defendants have products which might read on said patents. The key here is the word might. Because, this would never be sure until proven in court (which also can be appealed) and it could also be the case that regardless of commercial success, user friendliness or anything like that, the companies product and surrounding patents perhaps just are not the same thing (similar to Jackie Hutter's example mentioned above). All in all, the companies are not willing to pay to prove that they have adequate patents, neither do the want to go to court and lose and perhaps be senteced to damages or even willful infringement. This usually results in settlements where companies agree to an Acacia license and perhaps also a down payment. Which then would lower the defendants margins on the affected product.

Trolls 2.0 - firing the legal guns
With NPE settlements being mainly in the commercial arena, I would like to attract some attention to another way of litigating - invalidating patents. Now this would be something that I, as a manager or c-level executive, would be really afraid of. Just as there are very many patents out there, there are also almost always two or three companies delivering the same type of product service, i.e. there is competition. While an action from a troll is all about getting paid a share of product revenues by the defendant, we could well se a surge in action by competitiors being all about taking all of the defendants customers. Just as it is possible for NPEs to track down profitable companies, target products and map portfolios based on public data, it's also possible to use the power of crowdsourcing to find relevant prior art. Three recent example of that are Article One Partners , the USPTO' peer-to-patent and the recent "save red hat movement".
Imagine receving notice that your competitor claims your patent(s) to be invalid and has 20 scientific articles to prove it. Now you could potentially risk much more than paying up to a troll. Imagine popular companies with a dedicated fan-base starting to use this, especially in the overcrowded telecom, hardware and software space, and just to save the company they like or a product they use often 10 000 savvy people would spend 2 hours each trying to find prior art and all of a sudden you have the workload equivalent of 10 full time employees working one year done in almost an instant.

2.0 Lawsuits - adding another 0 to the costs
Just as a reference one could think of all those extremely costly lawsuits we have seen. RIM with their $600 million, Medtronic with their $1.35 billion. Well I don't the how reasonable such figures are, but they occur. And as soon as the other party uses the legal and perhaps even technical arena to fight you - you will pay big if you lose. There is a big new initiative started by MAPP where they try to get president Obama engaged in capping damages in patent lawsuits.

Ending thoughts - maybe people should embrace the tax?
What I wanted to show with this blogpost was that the patent system is overloaded and there are so many patents out there in certain fields that they are litigated over and over. Tying that together with the cost of litigation, the NPE licensing deal has become a proven model, with acacias succes as one example.
With all the uncertainty in the patent system I honestly believe that some NPEs actually are rightful owners of some technologies that their licensees incorporate in products.
What I also wanted to say that based on this uncertainty and the new movements of crowdsourcing to reach invalidation, corporations should perhaps look at trolls as tax on commercialization, purely in business terms. And instead be afraid of their new and improved competitors - using the legal and technical arena to put them entirely out of business or if challanged ending up in multi million dollar lawsuits with a very fierce and savvy (based on all crowsourcing) competitor that perhaps could make you wish it would only have been the "good old troll 1.o"

Marcus Malek

The IP Store?

During the recent weeks there has been heavy posting in the blogosphere regarding new breeds of IP companies, where RPX (covered here and here) perhaps have gotten most attention, with their interesting business model of being an anti-NPE. Also seeing much attention is two even more interesting breeds; Article One Partners ( covered here) and its open source cousin Open Invention Network (again covered by Securing Innovaton, here).
There is however more commotion in related fields like patent valuation, where the search for the golden standards still goes on (e.g. here ) and another conceptual thought on the subject here.
Yet another interesting new breed of service is launched by Stanford (discussed here) where IP related data will be public. Last but not least, the FTC hearings some time ago, both parties (Intellectual Ventures vs. "rest of the world") agreed that more data is something they all would like to see.
These recent postings have lead me into thinking what an IP marketplace could look like.

What is an efficient IP market?
I would believe that many people want to look at the IP market the way we have looked at every other marketplace the last half century or so. Now pursuing a thesis within Patent Valuation I can also conclude that academics sometime try and fit a square peg in a round hole with applying classical financial theories to an IP setting. The most striking being that not even all authors are clear on what a patent actually is and many also dive head into the logic of patents=products. Whether you are pro or con NPEs they at least crush that myth with their business model. Looking at a (IP) market with the view that it is a means of generating revenue elsewhere (i.e. products or services), then it is not difficult to see how people are working hard to closing the NPEs "loophole".

This has me thinking, how would this be handled, would you have to be a producing company to be able to litigate or perhaps wider use of cross licenses as damages or perhaps just less damages could be solutions. Anyhow - these are all complex and strive towards "fixing" an existing loophole. Arguments are often that litigation intensity and cost have people running away from patents and keeping things secret instead. I sometimes wonder if perhaps more effort should be put into building a new marketplace suited for IP rather than trying to jam IP into the existing product market.

What if all would change and instead of buying and selling patents, companies get more savvy and leverage licensing schemes instead and remaining the owner of the patent, thus not giving NPEs enforcement options. Now I know there are inherent flaws with this, where the biggest perhaps is the difficulties to match two parties. This is why I am so glad that the "big fish" seem united in thinking that more data is needed and I am also really exited about the new Stanford service. A part from those progresses I still believe that much can be done by just trying to build such a (or any other) marketplace from scratch and having legislators set the norms proactively rather than obtaining a large backlog and reacting to whatever loopholes people find. Just look at the way Apple constantly set the norms by setting up marketplaces like Itunesstore and Appstore.
So question is - is there a Steve Jobs in any PTO?

Virtual Property and Capital

For some this might come as old news, for others this might be as intriguing as it is for me. As Venturebeat reported twice there are some serious working attempts att selling entirely virtual products. This idea of selling virtual swords, and one mans convincing presentation, always has a special meaning to me as it was what actually opened up my eyes to the knowledge economy. Below, I'll try to highlight, on a conceptual level, why I think this is so extraordinary

Ownership - what is owned and who owns it?
The first thing that comes to mind is whether something generated in a proprietary game becomes property of the player or the game (i.e. game developer). I have not dwelwed into this subject so I am not to decide, however instinctively I could argue for both. There is some legislation in the field however that is related to SecondLife which is much more elaborate than e.g. WOW. Linden Lab who dictate SecondLife (and have every right to) could potentially create any kind of property law they want which users must adhere do once accepting the license (to my knowledge this has not been developed to such extent by Blizzard and others). But what happens when marketplaces are set up IRL, that are under conventional law (e.g. not giving players rights to their created characters) , we could end up with a lot of "dead capital" to cite DeSoto.
I must finish my thoughts on ownership by directing you all to a very interesting and award winning thesis, discussing in depth what I just touched upon.

The transaction - money in the bank or the beginning of a fall
As with ownership the object that is transacted upon might be hard for some people to comprehend, i.e. how people can pay for a digital sword. In my mind it is not anything different than a branded shirt or mobile ringtones. People spend money on things that delivers much connotations and a feeling of belonging / showing off / standing out. Being an ecnomist I love the fact of a new and evolving marketplace and an increase in liquidy caused by purely virtual products. I think the concept of being an intermediary and taking on some (in my oppinion modest) risk and taking a cut from each transaction - simple and effective way of generating win-win and revenue.
But there is also a part of me who can be sceptical and take the view of hardcore gamers who live for the game and would likely be slightly pissed of if lazy fair-weather players could buy level 11 characters - and in an instance we would have money killing all those long nights of creating an "invincible" palladin.
And should the hard-core gamers "die" (i.e. their characters) they would have "no" switching costs and would perhaps wonder off to other games more in their infancy and without established exchanges.

Marcus Malek

Thoughts on building an IP marketplace

In light of recent Ocean Tomo success and the ever growing interest in IP and intangibles (especially as it makes out 80 percent of market cap.. or what did Pat say ;) ) there are many ideas floating around and lot of effort put into thinking about an IP-marketplace. This will be a first post of hopefully many as I will try to focus on the financial / transactional side of IA / IP.

One could go on in eternity regarding the contextual nature of IP valuation and whether accounting principles are up to date - but that is not my intent. In this post I'm thinking about the actual markets. In light of CDOs I won't debate the future existance of securitzed IP to generate leverage - that is bound to happen. What I am interested in is governance, transparancy and liquidity.

First of all I would like to tip my hat to Ocean Tomo - true pioneers and deserve all appraisal. But what if (or when?) success (i.e. hight returns) leads to competition (as market theory has shown) and we all of a sudden have multiple OT's where some only take 8% of the cut and others 7% etc. Where would the buyers and sellers want to be?

How would markets attract both buyers and sellers if they require physical presence?
Would it be entirely online-based with a search function for all markets?
Would biotech complexity always be handled at high end 10% marketplaces with nice prospectuses?
Will we see an overall "garage sale effect"? (i.e. steep fall in percentage of lots sold as companies would try to sell all kinds of "crap" IP - perhaps to boost liquidity in light of the turmoil).

I personally trust market forces on this one out. But wait a minute - there might be a regulatory issue overruling it all as Ocean Tomo have some interesting pending applications.
As interesting they are on their own I see the following two key issues:
1) How will the infamous Bilski ruling affect these applications
2) If granted - will OT go open (á lá DNA), closed or somewhere in between?

Interestingly, they are not alone in this field. Wonder how Bilski influences this one?

Finally, some food for thought. It could be an interesting system if:
1) All corporations understand the potential in leveraging IP (i.e. not only as a legal necessity)
2) IP markets start growing
But the markets and securitization are privately owned (and governed ?) and you have to pay a royalty for calculating a value on IP you want to acquire.

Please share your thoughts on where the "IP market" ship is heading.
All aboard !?

Marcus Malek