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IP, IP Asset, Patent, Risk Mangement

Survival Of The ‘Micro-Entity’ IP Licensing Model

The economic value of an IP licensing business model derives fundamentally from the incremental and relative value a particular piece of proprietary technology contributes to a product or market.  In some cases, the technology represents a product in itself, but more often the technology represents a portion or improvement to an existing product.  I refer to this value as both incremental and relative because both the proportion of value the technology represents, and the overall value of the relevant product or market determine the overall gross value of the related IP rights.

In other words, the most valuable IP represents the biggest slice of the biggest pie.

But with so much energy and investment focused on identifying these high value IP rights, a gap was arguably formed at the “lower end” of the value spectrum, where patents offering rights to relatively minor increments of low-value products often went ignored.  Patent owners strapped for cash often relied on “last resort” buyers offering only token value and empty promises of future returns.  However, over the past year, a monetization model emerged specifically targeted at low-value rights that potentially accrue to significant sums.

In other words, some valuable IP might be represented as hundreds of small slices of small pies.

Two specific entities are currently targeting this particular business model. While it may be too early to draw definitive conclusions about their long-term efficacy and viability, it is important to periodically “check in” and see how these campaigns are faring.  On the patent side, Lodsys kicked off about five months ago with a set of patents targeted at mobile software.  For background, see Guest Post: Targeting App Developers Only Seems “Unfair”.  On the copyright side, Righthaven kicked off back in 2010 with an effort to license copying of content owned by a conglomerate of publishers in several markets. For background see Righthaven Business Model Exposed – End Of An Era, Or Spawning Of A New IP Licensing Industry.

Lodsys initiated its micro-licensing campaign in May of this year by sending letters out to small companies–in many cases, businesses consisting of a single programmer–actively involved in selling software designed for the iOS platform.  A campaign targeting Android and Blackberry developers soon followed.  However, as I pointed out earlier, the economics of this campaign seemed strained.  Lodsys publicly sought only 0.575% of revenue, which amounted to less than $600 per year for the majority of developers. As a result, the success of the campaign would almost certainly rely on the ability to strike licensing deals without resorting to litigation.

Nevertheless, litigation ensued.  While Lodsys may have struck unreported licensing deals, the only confirmed license from its litigation campaign is with a developer/college student, who confirmed the reports last week.  The “free” version of the student’s application boasts over 3 million downloads, and prominently features the ability to upgrade to the “paid” version, which sells for between $0.99 and $1.99.  In addition, the “paid” version of the program features over 7600 reviews, indicating the potential for over one million sales (review-to-purchase ratios can apparently between 1:100 to 1:500).

Assuming Lodsys stuck with its publicly stated 0.575% royalty rate, a million dollars in sales by this college student raised less than $6000 in revenue for Lodsys.  However, looking at some more conservative numbers, consider 3 million to be the total number of “free” downloads, and a  5% “conversion rate” to the “paid” version at $0.99.  This results in just under $150,000 total revenue, of which about $45,000 goes to Apple, and about $860 goes to Lodsys, leaving the developer with slightly over $100,000.   Other reports claim that Lodsys is asking for 2.5% in royalties, which bumps its share up to $3750, leaving the developer still with more than $100,000.

The 2.5% figure is far more realistic, since collecting less than $600 for every $100,000 earned makes for a very slow road to profitability.  Either way, if Lodsys set out to demonstrate a viable licensing market at the “micro” level, it has a long way to go.

However, the current snapshot of Righthaven’s campaign presents a fair uglier picture.  Righthaven initiated its micro-licensing campaign targeting small web publishers, in some cases including individual bloggers, found to be copying content from Righthaven’s partner network of media companies.  In at least one case, Righthaven pursued Matt Drudge for running a copy of a copyrighted photograph owned by the Denver Post.  By and large, however, its campaign focused on news aggregators, watchdog organizations and bloggers.

While a website tracking Righthaven estimates that it has collected over $350,000, it’s campaign has hit a stand-still. Part of the reason is simply prudence.  Finding itself on the wrong end of some court decisions, Righthaven chose to put its campaign temporarily on hold to appeal those decisions.  Presumably, if Righthaven is successful, the licensing activity will resume.

However, recent court activity leads me to question the $350,000 figure in the first place. A recent Businessweek report claims that Righthaven is unable to post a $34,000 bond.  The amount stems from a court order that to pay the legal fees of one of the entities Righthaven previously accused of copying its content.  The central issue surrounding this particular appeal is whether Righthaven’s agreement with the original rights-holders properly actually gave Righthaven sufficient ownership.  Righthaven’s inability to muster $34,000 to appeal an issue so critical to their entire operation speaks volumes about its long-term prospects.

While it may be too early to call these micro-licensing business models a failure, the outlook does not appear to be very lucrative.  Some argue this is as it should be; that small entities get a “free pass” until they become well established in their respective businesses.  Certainly, this argument has some appeal, especially because the amount of revenue available severely limits access to competent legal services on an economically sensible budget.  Many naturally believe that meritless cases go un-detected due to lack of incentive for an adequate investigation. However, involvement by Apple and Google in the Lodsys cases demonstrates that patent rights impacting significant revenue, whether distributed or not, attracts the attention of those with something to lose.

Similarly, the Righthaven cases attracted involvement of media watchdog groups.  Arguably, these organizations hold a stake in ensuring that Righthaven and its financial backing can’t unduly influence the scales of justice to impact free speech concerns.  Given the overall state of events, I’d say they little to worry about.

Discussion

One thought on “Survival Of The ‘Micro-Entity’ IP Licensing Model

  1. Can you share where you have seen reports that Lodsys is seeking royalties of 2.5%? Thanks.

    Posted by Andy | October 24, 2011, 11:02 am

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