If you’re interested IP issues from an asset perspective, there are not many sources better than IAM Magazine’s Joff Wild, and IP Finance author Jeremy Phillips. From Jeremy’s recent post, it seems like the pair got together for lunch without me (no hard feelings boys–next time y’all are in Texas, beers are on me) to talk about the recent IPO of patent aggregator RPX and the prospect of broad investment in IP generally.
The mutual conclusion, it seems, is the emergence of a bubble in IP investment. The problem, as Joff summed up recently is that “there is potential for a lot of finance people to make calls on patent-based business models that they do not quite understand. There is no problem with any of that as long as investment targets deliver the goods, but what happens if they do not?” Pointing out, also, that most patents are worth very little, Joff expresses pessimism about the future of IP investments. In the rest of this post, I’ll try to point out how IP, even “worthless” patents may actually be undervalued relative to what the IP market would look like if licensing were truly efficient. After all, there’s nothing to counter-act British pessimism like good, old-fashioned American can-do optimism.
The truth is, any market is susceptible of a bubble and, most likely, all markets experience them at one time or another. One investor I spoke to recently used a different word for this: correction. I have no doubt that the IP market, in particular, will experience more volatility as it matures. There are a number of reasons for this, including the fact that valuing any specific IP asset is an inexact science. For a large collection of patents, the chances that imperfections will cancel each other out seems just as likely as the imperfections compounding to grossly over or under value the portfolio. We may have seen IP bubbles before, as one explanation for the quick rise, and dramatic fall in buying interest at Ocean Tomo patent auctions.
But do the RPX results indicate that IP is overvalued at the moment? Perhaps, but not necessarily. Acacia is likely the most prolific publicly traded company that derives its income solely from IP licensing. The company has been in business almost 20 years to reach its present $1.3 Billion (USD) market cap, yet it controls a very tiny fraction of the millions of patent assets in existence. RPX raised almost $160 Million at its IPO, placing its valuation on par with Acacia’s (market cap currently about $1.2 Billion (USD)), using a three-year old business model dependent on subscription fees and a commitment never to enforce its patents through litigation.
So how, in this context, would RPX (or IP generally) be undervalued? Consider RPX’s marketing pitch. They made the case that their business model was a sound investment because they stand to eliminate billions of dollars wasted annually on legal fees associated with patent litigation. Ignore, for a moment, whether RPX can drive supposedly, “extortionate” license fees down to a rational level, and just focus on the elimination of legal fees alone.
The dream scenario for investors likely involves a world where all IP licenses are exchanged through RPX. In other words, any patent that needs to be licensed, will be licensed to paying subscribers. If one prolific patent owner (Acacia) can build up a company controlling several hundred patents, generating a billion dollar market cap, imagine what RPX could be worth by eliminating (year after year), billions in transactional costs alone for owners of millions of patents.
Granted, I have serious doubts about whether the dream scenario is even approachable, much less achievable. The purpose of the mental exercise is to consider the value of not just the IP itself, but the benefits that a truly efficient market for IP licensing would present. A popular refrain lamenting patent licensors attempts to paint them as opportunists that leverage legal expenses to extract valuable sums using worthless patents. However, from the patent owner’s perspectives, the stakes are high, and the outcome is uncertain, motivating aggressive attempts to extract as much as possible. Why? Because the patent owner could end up with nothing, instead. Also, since the threat of litigation is the primary motivator, the litigator is a necessary tool for the patent owner. The bounty demanded by the litigator only drives the patent owner’s ask up even more.
However, if efficient licensing models can eliminate the expense and risk associated with licensing, patent owners can accept far less than they would have otherwise and still maintain a profitable licensing program. Thus, despite the fact that, as Joff points out, many patents are worth very little, an efficient market will create value in the long run by not only eliminating transaction costs, but enabling low value patents to trade at rational levels, even further eliminating waste. This savings can be re-invested any number of ways, and just about all of them will be better than the current system. (Sure, litigators’ kids need braces, but wouldn’t you rather see the money go to alternative energy or something?)
This is also partly why I think RPX will struggle in the long run, since their business model tends to rely on the existence of chaos that will begin to fade in the future. But their short-term success does demonstrate that the key to unlocking the true value of IP is out there. It’s only a matter of time before we find it.
- RPX IPO Wednesday; Own A Piece Of Patent Monetization For $16 (gametimeip.com)
- Ocean Tomo ‘Freedom To Operate’ Auction Helps Patent Owners Build Value (gametimeip.com)
- Patent Licensing Firm Acacia Offers Public Equity (gametimeip.com)
- RPX, Defensive Patent Firm, Goes from Zero to $160M IPO in Less than Three Years – Thoughts from Boston Investor CRV (xconomy.com)