Patent Based Business Models     2010 02 07 Marcus Malek       ©Immendo Ltd. 2011
Agenda• Background   – What you can do with patents and why it’s a business     model.• The importance of Litigation   – W...
What you can do with patents and why it’s abusiness model.BACKGROUND
So, let’s start on the easy side of things, 6 months into           ICM, what can you do with patents?•   License•   Sell•...
And because it’s IP/IPR, the options are not           mutually exclusive• Either do the “simple” way  – Litigate and lice...
So now we’ve seen the options – but what  makes them into different business models?• Revenue models/streams  – How will w...
Even if incentives and strategy seem  difficult – the key challenge is revenues• Usually when setting revenue models you u...
So what are the benchmarks for patents?• Royalty payments    – Confidential• Patents sales    – Confidential• Technology l...
So how can you do any revenue modeling         for patent based BMs?• Looking at the market, there only seems to be  one c...
Why it’s the double edged sword that drives themarket and business models.THE IMPORTANCE OF LITIGATION
Litigation / damages is popular since it setsthe “Big number” you can then derive from• Although not a perfect example, da...
Litigation      The opportunity costs of patents?• As an economist I find it helpful to think about  litigation as the opp...
Before moving into business models, it’s      probably helpful to explain litigation•   Litigation mechanics•   Punitive D...
POP Quiz“How do you determine validity and claim scope of a patent?                  14           © Immendo Ltd. 2011
The US Patent System                     (Chicken or the Egg)• Do we have too many or too bad patents?• Do we need special...
Regardless:   There is an uncertainty.An uncertainty you can bet on.                 16           © Immendo Ltd. 2011
And it seems as if more and more parties              are willing to take the bet                   Trends in patent filin...
Litigation Mechanics; a crash course         - Leading up to the litigation• Investigate the patents• Use outside law firm...
Litigation Mechanics; a crash course                  - Steps in a litigation1.   File a complaint     – Other party will ...
But people do settle, outside of court (In           the 3 arenas – business wins)                           Patent Infrin...
And if you don’t, you take a huge risk – but             also go for the big bucks             Top 10 largest initial adju...
Punitive Damages – The root of all evil or                 road to Eldorado?   • Contrary to Swedish (and most European) s...
Tying on to our previous discussion Damages = “Big Number” used in        revenue modeling                     23         ...
Looking at the upside, it’s a no brainer, but         of course there’s a downside - cost    • Patent litigation is extrem...
Patent Trolls – Elephant in the room?• Patent troll is the common (derogatory) term for  companies not manufacturing produ...
Nuisance Suits – Driving the value by          exploiting the system?• What people really seem to be upset about are  liti...
Regardless – NPE suits are increasing                           The Number of Active Distinct NPEs as PlaintiffsSource: Al...
But suits are mainly tied to Hi-Tech and to    the large CE/Telecom companies.   Lawsuits, per tech sector.               ...
Litigation – Intermediate Summary• Litigation is taking a bet, or actually many bets• Litigation is very costly• Most case...
And as litigation has become acalculated bet with costs / income;   we have our first rudimentarypatent (opportunity cost)...
A – Z of making money from patentsPATENT BASED BUSINESS MODELS
The A-Z of patent based business models.• Overview of most (all?) known business models.• Quick and dirty for comparison, ...
Comparison of Patent Based Business Models                                                                                ...
1) Semiconductor design and license the              designs and IP• Description: Companies research, develop and  patent ...
2) Research and license technology and                  patents• Description: Dedicated research centers that do  R&D then...
3) Research and license patents• Description: Doing R&D within specific field  and then licensing patents, potentially  li...
4) Research and litigate• Description: Entities doing research within a  field, patenting and then primarily litigating.  ...
5) Acquire portfolios and license• Description: Acquiring mature portfolios and  using licensing knowledge to generate ret...
6) Acquire patents or rights and litigate•   Description: Company solely relying upon third party    patents. Acquiring th...
7) Pool the patents for standards                     a) Aggressive•   Description: Aiming to gather patents relevant to a...
7) Pool the patents for standards                    b) Non Aggressive•   Description: Aiming to gather patents relevant t...
8) IP Trust work• Description: Taking over IP matters for  “sleeping” / holding companies.• Typical buyer of service: Big ...
9) Litigation Trust• Description: Assigning patents from BigCo to a  trust to generate income in “other name” on  patents....
10) Patent Aggregation•   Description: Amass patents within technologies for    FTO or strategically strong position. Emer...
11) IP Secondaries• Description: Use financial muscle to buy mature  IP assets, add value, and resell• Typical sellers / b...
12) Investment Bank Funds• Description: Investment bank funds investing in  patents instead of financial assets. Using typ...
13) Defensive patent pools                    a) Non-profit• Description: Offering subscriptions to companies  to fight NP...
13) Defensive patent pools                       b) VC Backed•   Description: Offering “lawsuit protection” to    members,...
13) Defensive patent pools                   c) Open source• Description: Pool to gather all patents for  specific technol...
14) Patent Securitization• Description: Securitization of patents or patent  royalty streams. Then turned into financial  ...
15) Patent Collateralization• Description: Collateralizing patents or patent  revenue streams to get. The problem is to br...
16) Brokerage• Description: Acting as a proxy for a market  place and joining buyers and sellers of  patents.             ...
17) Consultancy• Description: Specific IP/Patent consultants• Typical clients: Technology heavy BigCo or  SMEs            ...
18) Auctions• Description: Conducting patent auctions and in  such a way matching buyers and sellers.• Typical sellers / b...
19) IP Based ETFs• Description: Create an ETF based on IP  performance or IP heavy/savvy companies.• Typical investors: As...
20) Patent Invalidation• Description: Offering service of invalidating  patents on behalf of clients.• Typical buyers: Com...
Comparison of Patent Based Business Models                                                                                ...
Interim Summary      - Patent Based Business Models -• There are many models, across the spectrum  of funding and strategy...
Believe it or not; not everything is patentsOTHER IP BASED BUSINESS MODELS
Copyright Sales• Description: Selling portfolio of copyright, often rights to  music catalogues.• Typical buyers / sellers...
Copyright Securitization• Description: Securitizing income from artistic works to, with help of  investment SPV, to get mo...
Trademark Sales• Description: Selling trademarks• Typical buyers / sellers: New entrants, Big Co /  struggling companies, ...
KEY TAKE OUTS AND NEXT TIME
Key Takeouts• Litigation is important as it is often the way to  maximize financial income of a patent.• Litigation is inc...
Next time we meet..• We’ll discuss the patent marketplace• Besides more discussions on strategy, we’ll also  focus on:  – ...
Thank you for your attention!     Any questions?  mmalek@immendo.com
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Patent Based Business Models - Copyright Immendo Ltd 2011

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Presentation given at to ICM (class of '12) at Chalmers University of Technology,Center for Intellectual Property Studies, February 7th 2011.

Presenting different patent based business models, highlighting the diversity and also how litigation is an important part of business modeling and strategy. In one way, litigation becomes the opportunity cost of patents.

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Patent Based Business Models - Copyright Immendo Ltd 2011

  1. 1. Patent Based Business Models 2010 02 07 Marcus Malek ©Immendo Ltd. 2011
  2. 2. Agenda• Background – What you can do with patents and why it’s a business model.• The importance of Litigation – Why it’s the double edged sword that drives the market• Patent Based Business Models – From A – Z of making money from patents• Other IP Based Business Models – Believe it or not; not everything is patents• Key take outs and next steps 2 © Immendo Ltd. 2011
  3. 3. What you can do with patents and why it’s abusiness model.BACKGROUND
  4. 4. So, let’s start on the easy side of things, 6 months into ICM, what can you do with patents?• License• Sell• Litigate• Give away• Collateralize• Securitize• Raise funds• Sell rights to license• Sell rights to litigate• Insure• Insure against lawsuit 4 © Immendo Ltd. 2011
  5. 5. And because it’s IP/IPR, the options are not mutually exclusive• Either do the “simple” way – Litigate and license – Sell and keep license• Or you could be a bit more exotic: – Litigate it, sell rights to license within certain fields, offer free to NGOs/Uni/NFP• Or you could go for leverage: – Securitize income streams within your field, keep license and right to sub license, sell right to litigate within a certain field, try to sell patent for defense within other field 5 © Immendo Ltd. 2011
  6. 6. So now we’ve seen the options – but what makes them into different business models?• Revenue models/streams – How will we make money – What’s the frequency of payments• Strategy – Can we make it fit with our existing business OR – Can we exploit a gap in the existing ecosystem• Incentives / USPs – Why will it work – Do we have a larger agenda / greater good? 6 © Immendo Ltd. 2011
  7. 7. Even if incentives and strategy seem difficult – the key challenge is revenues• Usually when setting revenue models you use known metrics: – Cost / supply chain costs – ROI / IRR for invested capital – Financial metrics from exits / PLCs – Sales prices for products/services• But more importantly, there’s also an existing market used for benchmarks ... 7 © Immendo Ltd. 2011
  8. 8. So what are the benchmarks for patents?• Royalty payments – Confidential• Patents sales – Confidential• Technology licensing – Confidential• Collateralization rates/terms – Very confidential• Securitization rates/terms – Some data, but very very small market• Return criteria for investors – Very confidential• R&D Costs – Large sums are public, but costing per patent is very confidential 8 © Immendo Ltd. 2011
  9. 9. So how can you do any revenue modeling for patent based BMs?• Looking at the market, there only seems to be one commonly agreed standard / benchmark – Litigation and damages• Although not perfect it does satisfy key criteria: – Cost structures – Returns (and timing of returns) – Exit strategy 9 © Immendo Ltd. 2011
  10. 10. Why it’s the double edged sword that drives themarket and business models.THE IMPORTANCE OF LITIGATION
  11. 11. Litigation / damages is popular since it setsthe “Big number” you can then derive from• Although not a perfect example, damages and income from litigation settlements has become the de-facto standard of modeling many patents revenues• Looking at litigation would give you the “Big Number” to which you could then apply a number of discounts to suit your scenario.• The main idea is (probably) that it does represent the opportunity cost of patents. 11 © Immendo Ltd. 2011
  12. 12. Litigation The opportunity costs of patents?• As an economist I find it helpful to think about litigation as the opportunity cost.• As always in economics, it’s just a model: – Not every patent can be litigated – Not true for new markets / tech• But on a portfolio level for mature technology it’s a decent model.• The most important limitation though – mainly (only?) works for US legal system. 12 © Immendo Ltd. 2011
  13. 13. Before moving into business models, it’s probably helpful to explain litigation• Litigation mechanics• Punitive Damages• The Cost Of Litigation• Patent Trolls• Nuisance Suits 13 © Immendo Ltd. 2011
  14. 14. POP Quiz“How do you determine validity and claim scope of a patent? 14 © Immendo Ltd. 2011
  15. 15. The US Patent System (Chicken or the Egg)• Do we have too many or too bad patents?• Do we need specialist courts / judges?• Can we really patent “anything under the sun?• Is this really efficient – do we stifle innovation?• Would it be better without patents?• Is it really feasible to have to wait 3-5 years for a patent infringement trial?• “Should we really file our suit in Delaware, I’ve heard Texas is better”? 15 © Immendo Ltd. 2011
  16. 16. Regardless: There is an uncertainty.An uncertainty you can bet on. 16 © Immendo Ltd. 2011
  17. 17. And it seems as if more and more parties are willing to take the bet Trends in patent filings and litigation 1991 - 2009Source: PWC 2010 17 © Immendo Ltd. 2011
  18. 18. Litigation Mechanics; a crash course - Leading up to the litigation• Investigate the patents• Use outside law firm• Establish likelihood of infringement – Produce claim charts• Contact potentially infringing party with your demands – Cease and desist – Pay royalties• If the other party does not respond – go to court 18 © Immendo Ltd. 2011
  19. 19. Litigation Mechanics; a crash course - Steps in a litigation1. File a complaint – Other party will answer and say: • They don’t infringe • Your patent is invalid • You don’t own the patent – And so the ball gets rolling..2. File more detailed complaint and ask for a jury – Potentially change courts – Add extra lawyers3. Other party potentially countersues – Not true for NPEs4. You settle outside of court – If not, they you push the case through and bet on the outcome 19 © Immendo Ltd. 2011
  20. 20. But people do settle, outside of court (In the 3 arenas – business wins) Patent Infringement Cases2000 – April 2008 Five Districts (CAND, DED, ILND, NJD, TXED)Source: Ropes & Gray, IPLC, Cornerstone 2009 20 © Immendo Ltd. 2011
  21. 21. And if you don’t, you take a huge risk – but also go for the big bucks Top 10 largest initial adjudicated damages awards: 1995–2009Source: PWC 2010 21 © Immendo Ltd. 2011
  22. 22. Punitive Damages – The root of all evil or road to Eldorado? • Contrary to Swedish (and most European) systems, the US system awards punitive damages. • For patent litigation it’s either lost profits, price erosion or a royalty based on sold goods. • Up until recently these percentages have been large, leading to an escalation in damages. Median patent damages awarded, 1995–2009 Type of DamagesSource: PWC 2010 22 © Immendo Ltd. 2011
  23. 23. Tying on to our previous discussion Damages = “Big Number” used in revenue modeling 23 © Immendo Ltd. 2011
  24. 24. Looking at the upside, it’s a no brainer, but of course there’s a downside - cost • Patent litigation is extremely costly, lawyer costs are by far the largest. • As costs are often in the millions of dollars, a periodic payment scheme could be advantageous. • This is the reason for so called contingency lawyers. – Take some money up front – Take a large piece (often 25%) from settlementsSource: RPX, Allied Security Trust, AIPLA 24 © Immendo Ltd. 2011
  25. 25. Patent Trolls – Elephant in the room?• Patent troll is the common (derogatory) term for companies not manufacturing products / doing R&D (NPE) and who make money mainly by litigating patents.• With such a description companies like Rambus would end up in the same category.• Although a popular target for “stifling innovation” by lawyers, NPEs also require lawyers for all their litigations.• In reality – it’s a clever financial construction (all “moral / greater good”, thoughts aside) 25 © Immendo Ltd. 2011
  26. 26. Nuisance Suits – Driving the value by exploiting the system?• What people really seem to be upset about are litigations without a really profound infringement case.• The US system has a built in mechanism where you can force people to court = force costs upon them.• This incentivizes (according to some) parties to file a suit and hope for a settlement that would be smaller than answering the complaint. – In practice, trying to find an arbitrage situation. 26 © Immendo Ltd. 2011
  27. 27. Regardless – NPE suits are increasing The Number of Active Distinct NPEs as PlaintiffsSource: Allied Security Trust, Patent Freedom 27 © Immendo Ltd. 2011
  28. 28. But suits are mainly tied to Hi-Tech and to the large CE/Telecom companies. Lawsuits, per tech sector. Damages, per tech sector.Companies with most NPE suits. Source: Allied Security Trust, Patent Freedom, : Ropes & Gray, IPLC, Cornerstone 2009 28 © Immendo Ltd. 2011
  29. 29. Litigation – Intermediate Summary• Litigation is taking a bet, or actually many bets• Litigation is very costly• Most cases settle• Litigation is mainly tied to high-tech• If going for a verdict and winning, the sums are often multi million dollar• Because of the large sums and people working on contingency – litigation has become a calculated bet. 29 © Immendo Ltd. 2011
  30. 30. And as litigation has become acalculated bet with costs / income; we have our first rudimentarypatent (opportunity cost) revenue model. 30 © Immendo Ltd. 2011
  31. 31. A – Z of making money from patentsPATENT BASED BUSINESS MODELS
  32. 32. The A-Z of patent based business models.• Overview of most (all?) known business models.• Quick and dirty for comparison, rather than in depth knowledge.• Looking at: – Incentives – Typical Revenues – Buyers, sellers, licensees• Every business model will be exemplified with a company 32 © Immendo Ltd. 2011
  33. 33. Comparison of Patent Based Business Models Offensive Patent Strategy 1. Design and license 2. Research, license tech + IP 9 6 3. Research & license patents 4. Research and litigate 4 5. Acquire and license 7a 5 6. Acquire and litigate 7. Pool 10 a) Aggressive b) Non-Aggressive Corporate / Private Funding 3 Institutional Funding 8. IP Trust 9. Litigation Trust 10.Aggregation 11.IP Secondaries 16 12.IB Funds 13.Defensive Pools a)Non-Profit 17 12 b)VC Backed c)Open Source 2 14.Securitization 11 7b 13b 15.Collateralization 16.Brokerage 17.Consultancy 15 14 18.Auctions 13a 1 19.Patent based ETFs 20.Invalidation 13c 20 18 8 19Source: Internal analysis © Immendo Ltd. 2011 Defensive Patent Strategy
  34. 34. 1) Semiconductor design and license the designs and IP• Description: Companies research, develop and patent semiconductor / IC / SoC designs and license the designs and the related IP and IPRs• Typical licensors: Semiconductor manufacturers Offensive Patent Strategy Corporate / Private Funding• Incentive: Stick to core business, no need to Institutional Funding produce the actual chips – enough to license.• Typical Structure: Listed / Private Company• Typical Income: Royalty percentages + up front for IP.• Example: ARM.• UK based ARM are developing cores for Defensive Patent Strategy application processors (e.g. Cortex A8 or dual core Cortex A9) which then, as an example, becomes part of the processors in your iPhone 4, Samsung Galaxy Tab etc. 34 © Immendo Ltd. 2011
  35. 35. 2) Research and license technology and patents• Description: Dedicated research centers that do R&D then generate IP which is then monetized together with technology through licenses or given for free within field of use or geography. Offensive Patent Strategy Corporate / Private Funding• Typical licensors: BigCo in same country Institutional Funding• Incentive: Help country with innovation• Typical Structure: Part government, part BigCo• Typical Income: R&D funding and royalites• Example: ETRI (Electronic and Telecom Research Institute)• Korean, collaborating with Samsung, Hynix, LG Defensive Patent Strategy and are co-inventors plus give blanket license to Korean companies. 35 © Immendo Ltd. 2011
  36. 36. 3) Research and license patents• Description: Doing R&D within specific field and then licensing patents, potentially litigating to companies within industry and also coming up with new solutions. Offensive Patent Strategy Corporate / Private Funding• Typical licensors: Companies within specific Institutional Funding tech sector• Incentive: Lower costs and stick to key skills• Typical Structure: Public / Private Co• Typical Income: Royalties and settlements• Example: Rambus, Defensive Patent Strategy• Developing new busses for RAM memories and then aggressively licenses / litigates memory manufacturers. 36 © Immendo Ltd. 2011
  37. 37. 4) Research and litigate• Description: Entities doing research within a field, patenting and then primarily litigating. Not focused on technological advances. Offensive Patent Strategy• Typical licensors: BigCo within certain tech Corporate / Private Funding field Institutional Funding• Incentive: Low Costs, aggressive returns• Typical Structure: Listed / VC backed• Typical Income: Settlements , Royalties• Example: Interdigital• Performs R&D and litigates and licenses all Defensive Patent Strategy major handset manufacturers. 37 © Immendo Ltd. 2011
  38. 38. 5) Acquire portfolios and license• Description: Acquiring mature portfolios and using licensing knowledge to generate returns. Also quite prone to litigation. Often acquiring known/”heritage” portfolios. Often operating on Offensive Patent Strategy Corporate / Private Funding a portfolio basis. Institutional Funding• Typical licensors: Big Co, across technologies• Incentive: Knows the licensing/litigation business, aggressive returns• Typical Structure: Small VC backed / public• Typical Income: Settlements , royalties• Example: Wi-Lan Defensive Patent Strategy• Canadian company, started with licensing parental control technology, then quit R&D and started acquiring portfolios to license / litigate. 38 © Immendo Ltd. 2011
  39. 39. 6) Acquire patents or rights and litigate• Description: Company solely relying upon third party patents. Acquiring them or just rights to them and then litigating aggressively. Often acquiring patents from lone inventors , small Co. Aiming to maximize Offensive Patent Strategy value per patent rather than per portfolio. Corporate / Private Funding• Typical licensors: Big Co across technologies Institutional Funding• Incentive: Get “cheap” patents from small inventors, share proceeds with them and lawyers.• Typical Structure: VC / Public• Typical Income: Settlements and licenses• Example: Acacia• Has acquired more than 150 portfolios across many Defensive Patent Strategy technologies, setting up entities which then aim to maximize value for each patent. 39 © Immendo Ltd. 2011
  40. 40. 7) Pool the patents for standards a) Aggressive• Description: Aiming to gather patents relevant to a certain standard and then licensing everyone using it. Often aggressively or prone to litigate.• Typical licensors: Big and small Co within specific tech Offensive Patent Strategy field Corporate / Private Funding• Incentive: Securing a dominant position within a Institutional Funding widespread specific technology, then making everyone pay their part.• Typical Structure: Small / medium private company• Typical Income: Public royalty schemes, based on fixed amount per product.• Example: SISVEL Defensive Patent Strategy• Seen by many as the epitome of this, trying to license everyone to MP3 patents, which may or may not be invalid. But technology is widely used. 40 © Immendo Ltd. 2011
  41. 41. 7) Pool the patents for standards b) Non Aggressive• Description: Aiming to gather patents relevant to a certain standard and then licensing everyone using it to promote interoperability and sales of products using it. Patents must be declared by the entity as a part of the program but are often still owned by original assignee. Offensive Patent Strategy• Corporate / Private Funding Typical licensors: Big and small Co within specific tech field• Incentive: Ensuring proliferation of technology through lowering Institutional Funding of licensing transaction costs.• Typical Structure: Consortium of BigCo• Typical Income: Public low-price, per unit, royalties from everyone using the technology.• Example: MPEG-LA• Great story within video. Promoting the MPEG-2 standard by licensing every device at a fixed price, 2.50$, and creating massive incomes for the patent holders and something close to 1000 Defensive Patent Strategy licensees. 41 © Immendo Ltd. 2011
  42. 42. 8) IP Trust work• Description: Taking over IP matters for “sleeping” / holding companies.• Typical buyer of service: Big Co Offensive Patent Strategy• Incentive: Lower costs, give single USP for Corporate / Private Funding people already needing other trust work Institutional Funding• Typical Structure: Small Co in “tax haven”• Typical Income: Subscription based• Example: IP Trust• New Luxemburg entity offering IP trust work Defensive Patent Strategy for any client listed in Luxemburg with less IP knowledge. 42 © Immendo Ltd. 2011
  43. 43. 9) Litigation Trust• Description: Assigning patents from BigCo to a trust to generate income in “other name” on patents.• Typical licensors: Big Co Offensive Patent Strategy Corporate / Private Funding• Incentive: Maximize value of patents not core to Institutional Funding business. “Attack” entities which could be• Typical Structure: Trust or remote entity to create “smoke and mirrors’• Typical Income: Settlements• Examples: Multimedia Patent Trust, Mobile Media Ideas Defensive Patent Strategy• MMP is an Alcatel-Lucent outfit litigating their patents against BigCo• MMI is a trust litigating Sony and Nokia patents 43 © Immendo Ltd. 2011
  44. 44. 10) Patent Aggregation• Description: Amass patents within technologies for FTO or strategically strong position. Emerging model with mainly one player. Income generated through licenses within fields or re-selling patents. Offensive Patent Strategy• Typical licensors / buyers: Big Co / New entrants Corporate / Private Funding• Incentive: Gather all patents from different assignees Institutional Funding to have blanket FTO and very strong licensing position• Typical Structure: Corporate backed• Typical Income: Licenses• Example: Intellectual Ventures• IV is the main actor in this field having more than 30000 patents and supposedly generating more than Defensive Patent Strategy 1$B through licensing and recently also starting with litigation. 44 © Immendo Ltd. 2011
  45. 45. 11) IP Secondaries• Description: Use financial muscle to buy mature IP assets, add value, and resell• Typical sellers / buyers: BigCo / Strategic, new entrant, entities in litigation Offensive Patent Strategy Corporate / Private Funding• Incentive: Providing liquidity in market, allowing Institutional Funding for “cheap” purchase price, then adding value to acquired assets to generate high ROI• Typical Structure: PE / VC backed.• Typical Income: Sales• Example: Coller IP Capital• PE Fund, to date 4 large portfolios acquired now Defensive Patent Strategy reselling smaller parts at attractive ROI/IRR 45 © Immendo Ltd. 2011
  46. 46. 12) Investment Bank Funds• Description: Investment bank funds investing in patents instead of financial assets. Using typical GP/LP structure and bank being passive but raising funds from institutions / private wealth. Offensive Patent Strategy Corporate / Private Funding• Typical investors / GPs: Private wealth / known Institutional Funding IP management firms• Incentive: Give investors alternative/exotic options for diversification• Typical Structure: Fund is LP, once raised it hands capital to GP to manage investment• Typical Income: Sales, licensing, venturing Defensive Patent Strategy• Example: Austrian Alpha Patent Funds• Have raised 150+ M EUR over 4 funds. But have been troubled with their GPs, changing many times. To date not generating any returns. 46 © Immendo Ltd. 2011
  47. 47. 13) Defensive patent pools a) Non-profit• Description: Offering subscriptions to companies to fight NPEs. Members put money in escrow and the pool gathers patents which the members can take a license to at their discretion. Offensive Patent Strategy Corporate / Private Funding• Typical members: 1+ $B Companies Institutional Funding• Incentive: Fight NPEs, “insurance”. Pool finds “toxic patents” and members take a license.• Typical Structure: Trust or similar• Typical Income: Member fees• Example: Allied Security Trust• So far the only one. To date around 20 members Defensive Patent Strategy and acquired approximately 350 patents (in 24 portfolios). 47 © Immendo Ltd. 2011
  48. 48. 13) Defensive patent pools b) VC Backed• Description: Offering “lawsuit protection” to members, who pay membership based on size. The pool chooses which patents to buy and members get a license. Patents then re-sold. Assets acquired mainly Offensive Patent Strategy from NPEs or litigiuos entities. Corporate / Private Funding• Typical member: Big and small Co in litigation prone Institutional Funding industries• Incentive: Pay up front fee to lower litigation strain• Typical Structure: VC / PE backed.• Typical Income: Member fees, re-sold portfolios• Example: RPX• The main (only?) actor in this field and ar right trying Defensive Patent Strategy to IPO. They have around 70 members paying 50k – 5$M per year. To date they claim to have invested 250 $M. RPX is backed by very well known VC’s. 48 © Immendo Ltd. 2011
  49. 49. 13) Defensive patent pools c) Open source• Description: Pool to gather all patents for specific technology area and make them freely available.• Typical licensors: Smaller or software based Offensive Patent Strategy Corporate / Private Funding companies Institutional Funding• Incentive: Promote certain software, open innovation “everything should be free”• Typical Structure: Company backed / consortium• Typical Income: Fees from consortium, often non-profit• Example: Open Invention Network Defensive Patent Strategy• Promoting Linux. Wants to buy all Linux patents and make them freely available. Promoted by Novell, Red Hat, Sony, NEC, Philips, IBM 49 © Immendo Ltd. 2011
  50. 50. 14) Patent Securitization• Description: Securitization of patents or patent royalty streams. Then turned into financial instrument you can invest in.• Typical parties: SPV and underwriters Offensive Patent Strategy Corporate / Private Funding• Incentive: Generate leverage for party Institutional Funding securitizing, gain money from interest for borrowers• Typical Structure: Bank backed SPV• Typical Income: Interest plus transaction costs• Example: Royalty Pharma• Most well know example, where royalty streams Defensive Patent Strategy from pharma patent licensing were securitized in an SPV which the attracted many investors. 50 © Immendo Ltd. 2011
  51. 51. 15) Patent Collateralization• Description: Collateralizing patents or patent revenue streams to get. The problem is to bridge the understanding gap and the proper interests• Typical debtors / creditors: Small Co, startups Offensive Patent Strategy Corporate / Private Funding• Incentive: Get loan using patents, but not pay Institutional Funding too high interests• Typical Structure: Boutique Banks• Typical Income: Interest and potential patents in case of default.• Example: Paul Capital, Alset IP, Paradox Capital• All doing collateralization. But more details don’t Defensive Patent Strategy exist. 51 © Immendo Ltd. 2011
  52. 52. 16) Brokerage• Description: Acting as a proxy for a market place and joining buyers and sellers of patents. Offensive Patent Strategy• Typical buyers / sellers: Big Co, new market Corporate / Private Funding entrants, parties in litigation Institutional Funding• Incentive: Helping people find the patents they need.• Typical Structure: Small, or even one-man- bands, well connected in the market.• Typical Income: Transaction percentage Defensive Patent Strategy• Example: Thinkfire, iPotential• Perhaps the most well known. Both claim to generate 1+ $B in transactions 52 © Immendo Ltd. 2011
  53. 53. 17) Consultancy• Description: Specific IP/Patent consultants• Typical clients: Technology heavy BigCo or SMEs Offensive Patent Strategy• Incentive: Provide expertise and specific Corporate / Private Funding knowledge Institutional Funding• Typical Structure: Private Co• Typical Income: Running fees and potential success fees.• Example: IP Value• IPV are good example of this. VC backed and Defensive Patent Strategy helping stalwarts like BT, Xerox and PARC. 53 © Immendo Ltd. 2011
  54. 54. 18) Auctions• Description: Conducting patent auctions and in such a way matching buyers and sellers.• Typical sellers / buyers: Small Co, lone inventor / Intellectual Ventures, NPEs Offensive Patent Strategy Corporate / Private Funding• Incentive: Trigger buying environment for high Institutional Funding price through competitive bidding. Trying to lower information asymmetry through DD material.• Typical Structure: Small Co• Typical Income: Percentage of transactions• Example: ICAP Ocean Tomo Defensive Patent Strategy• Ran a number of auctions, but were never successful long term. Mainly IV as a buyer and very large gaps between expected and actual prices. 54 © Immendo Ltd. 2011
  55. 55. 19) IP Based ETFs• Description: Create an ETF based on IP performance or IP heavy/savvy companies.• Typical investors: Assuming people looking for exotic diversification alternatives Offensive Patent Strategy Corporate / Private Funding• Incentive: Use IP strength as proxy for companies Institutional Funding and bundle them as diversification ETF• Typical Structure: Traded SPV• Typical Income: ROI and costs for management• Example: Ocean Tomo• Are running 3 indexes on NYSE: Euronext, where the basket of companies with the strongest Defensive Patent Strategy patents. 55 © Immendo Ltd. 2011
  56. 56. 20) Patent Invalidation• Description: Offering service of invalidating patents on behalf of clients.• Typical buyers: Companies in litigation Offensive Patent Strategy• Incentive: Using crowdsourcing to invalidate Corporate / Private Funding patents as a defense/tactic in litigation Institutional Funding• Typical Structure: Small Co, large network• Typical Income: Paid per assignment• Example: Article One Partners• AOP is running such a program and has CIP Defensive Patent Strategy advocate Marshal Phelps on their board. 56 © Immendo Ltd. 2011
  57. 57. Comparison of Patent Based Business Models Offensive Patent Strategy 1. Design and license 2. Research, license tech + IP 9 6 3. Research & license patents 4. Research and litigate 4 5. Acquire and license 7a 5 6. Acquire and litigate 7. Pool 10 a) Aggressive b) Non-Aggressive Corporate / Private Funding 3 Institutional Funding 8. IP Trust 9. Litigation Trust 10.Aggregation 11.IP Secondaries 16 12.IB Funds 13.Defensive Pools a)Non-Profit 17 12 b)VC Backed c)Open Source 2 14.Securitization 11 7b 13b 15.Collateralization 16.Brokerage 17.Consultancy 15 14 18.Auctions 13a 1 19.Patent based ETFs 20.Invalidation 13c 20 18 8 19Source: Internal analysis © Immendo Ltd. 2011 Defensive Patent Strategy
  58. 58. Interim Summary - Patent Based Business Models -• There are many models, across the spectrum of funding and strategy.• Many business models practiced by mainly a single entity.• Roughly evenly split between offensive / defensive models and corporate / institutional funding. 58 © Immendo Ltd. 2011
  59. 59. Believe it or not; not everything is patentsOTHER IP BASED BUSINESS MODELS
  60. 60. Copyright Sales• Description: Selling portfolio of copyright, often rights to music catalogues.• Typical buyers / sellers: Financial Institutions / Struggling artists, estates, record labels• Incentive: Liquidity and exit for record labels• Typical Structure: Varies• Typical Income: Transaction percentage for brokers and then running royalties on all music• Example: The rights to Michael Jacksons music has been sold a couple of times, for example Dutch pension fund ABP owns two catalogues. 60 © Immendo Ltd. 2011
  61. 61. Copyright Securitization• Description: Securitizing income from artistic works to, with help of investment SPV, to get more funds.• Typical investors / debtors: Exotic investors / struggling artists• Incentive: Alternative way of financing for artists / record labels.• Typical Structure: SPV which owns royalty streams, investors invest in that SPV according to share.• Typical Income: Transaction costs + interest• Example: David Bowie famously securitized his back-catalogue into a bond (so called “Bowie Bonds”) to free up cash for his next album. 61 © Immendo Ltd. 2011
  62. 62. Trademark Sales• Description: Selling trademarks• Typical buyers / sellers: New entrants, Big Co / struggling companies, estates• Incentive: Liquidity• Typical Structure: Brokered deals• Typical Income: Transaction percentage• Example: A quite famous trademark, iPad, was sold from Fujitsu to Apple in 2010. Another example is the trademark “GI” which is now being auctioned. 62 © Immendo Ltd. 2011
  63. 63. KEY TAKE OUTS AND NEXT TIME
  64. 64. Key Takeouts• Litigation is important as it is often the way to maximize financial income of a patent.• Litigation is increasing and driving a number of business models.• There are roughly 2 dozen business models, with widely different strategies, funding , revenue models etc.• Most patent business models are very new, people are still exploring new options. 64 © Immendo Ltd. 2011
  65. 65. Next time we meet..• We’ll discuss the patent marketplace• Besides more discussions on strategy, we’ll also focus on: – Pricing and valuation – The ecosystem• And try to answer some questions: – Is there really a patent marketplace? – Can we use proxies from other assets to model a market? 65 © Immendo Ltd. 2011
  66. 66. Thank you for your attention! Any questions? mmalek@immendo.com
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