Patent Marketplace - Copyright Immendo Ltd 2011


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Presentation slides from lecture given to ICM class of 2012 at Chalmers University of Technology - Center for Intellectual Property Studies (CIP).
Gothenburg, Sweden, Feb 24th 2011

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Patent Marketplace - Copyright Immendo Ltd 2011

  1. 1. The Patent Marketplace 2010 02 24 Marcus Malek ©Immendo Ltd. 2011
  2. 2. Agenda• Recap sine we last met – Revisiting key concepts and answering potential questions• Background – What is really a marketplace. Some financial concepts• Patents as an asset – Are they comparable to art, financial instruments, property or none/all of the above?• Patent valuation – Black magic, methods or madness?• Why would anyone buy or sell patents? – Why is there even a need for a marketplace?• The Patent marketplace – Looking at the market makers and participants of the ecosystem• How is a deal really done – An insight into the nitty gritty of patent transactions• Key take outs 2 © Immendo Ltd. 2011
  3. 3. Revisiting key concepts and answering potentialquestions.RECAP SINCE WE LAST MET
  4. 4. Last time we discussed how to make money with patents and touched upon:• The importance of litigation• The vast number of different business models• The difficulty to prove a working model• The US Patent System as a catalyst 4 © Immendo Ltd. 2011
  5. 5. Litigation was important for business models / marketplace because:• In one way it constitutes the opportunity cost of patents• Litigation is one kind of bet that people choose to invest in• If seen through, the punitive damages that are awarded are huge.• Regardless, almost 90%, of cases settle outside of court 5 © Immendo Ltd. 2011
  6. 6. We looked at a wide number of 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
  7. 7. But even if we saw 20+ models, not all are proven or practiced by many entities• Many of the business models are less than 10 years old• Many still have only one entity who is trying to find their “blue ocean”• Many are also in some way connected to litigation (offensive and defensive) 7 © Immendo Ltd. 2011
  8. 8. The US Patent system also plays it part for the marketplace and business models• The punitive damages rewarded incentivize litigation• By filing suit you can force other people to court, i.e. forcing them to costs• Another large discussion is regarding the quality of patents, do we have too many or too bad patents?• The only way to determine patent scope is in court. 8 © Immendo Ltd. 2011
  9. 9. One could say that the USPTO turns patents into a multi-billion dollar betting game that’s oftensettled in the business arena rather than any other arena. 9 © Immendo Ltd. 2011
  10. 10. What is really a marketplace?Some financial concepts.BACKGROUND
  11. 11. I know you are from different backgrounds, so let’s go through some key concepts• The marketplace – We take it for granted, but what is it really• The importance of liquidity – What does it really mean.• Information asymmetry – A key concept in understanding markets• Understanding Risk – The risk/return trade-off in a patent setting• Transaction costs – In many markets this is virtually nil – how about IP? 11 © Immendo Ltd. 2011
  12. 12. The concept of the marketplace is probably clear to you..• There are exchanges that trade stocks and derivatives at massive volumes around the clock at very low transaction costs (t-costs)• A (scary) large amount of the Swedish students have probably bought/sold a flat• The concept and success of Ebay, Tradera, Blocket is perhaps another good example 12 © Immendo Ltd. 2011
  13. 13. …but imagine the following• You find a Rembrandt in your attic: – What do you do to find a seller? – How do you know the price of it?• You want to sell your flat, but not use a real estate agent• You want to buy 10 bags of wheat from Tuscany• You want to sell shares in your small limited company (AB) 13 © Immendo Ltd. 2011
  14. 14. Although some markets aretransparent and operate at low(no) t-costs, there are still manyopaque markets with enormous transaction costs. 14 © Immendo Ltd. 2011
  15. 15. Let’s take the example of buying or selling shares online – we take much for granted• Do we ever question that the broker has rights to sell the shares?• How often do we ask if the seller really is the owner of the shares?• How often do we really know (as in written letters) that ownership has been transferred.• How often do we check what we can/cannot do with the shares (e.g. collateralize) 15 © Immendo Ltd. 2011
  16. 16. The reason we take this for granted is (probably) that – god forbid- everything should go wrong: “We could always re-sell” ... 16 © Immendo Ltd. 2011
  17. 17. … which brings us on to anotherthing most people (and US home owners until 2008 in particular) take for granted: Liquidity 17 © Immendo Ltd. 2011
  18. 18. Liquidity = how active a market is (i.e. how easy it is to buy and sell certain assets)• The low t-costs, (full) transparency and (seemingly) never ending amount of buyers makes the stock market extremely liquid.• In good times, the housing market is very liquid because of easy access to capital (loans) and abundance of brokers lowering t-costs• Fine art has very low liquidity as there are few buyers, low access to capital and ever fewer sellers. 18 © Immendo Ltd. 2011
  19. 19. Patents are very illiquid because:• Little access to capital• Few sellers and few buyers• High transaction-costs• Difficult to establish price• No open market and brokers of variable quality 19 © Immendo Ltd. 2011
  20. 20. Information asymmetry – the real reason for many transactions / profits• In its simplest format it’s about the buyer and seller having access to different information• For stock markets (institutional traders) that’s seen as virtually transparent (symmetric) because information is public (but there’s too much information) 20 © Immendo Ltd. 2011
  21. 21. Information asymmetry for patents is fairly low because:• Patents are public documents• For high value patents all cards are on the table (e.g. claims charts etc)• Sellers are often keen on making a clear case.• One instance where it’s not true is for emerging tech (non infringement) – where the seller has no idea of buyers intentions 21 © Immendo Ltd. 2011
  22. 22. The concept of risk and reward is probablyclear – but what are specific patent risks?• Main concept is (of course) high risk = high reward• For shares that’s usually a risky business segment / geography / venture• For patents it could be things like: – Validity of the patent – Outcome of Jury judgments – Infringement opinions – Technical essentiality (falling into FRAND / RAND)• In essence, patent risk is quite binary 22 © Immendo Ltd. 2011
  23. 23. All this talk about transaction costs – what is it really?• T-costs are costs associated with closing a deal.• For online trading it’s virtually nil as all is standardized (contracts, change of ownership)• For property it’s quite straightforward only needing certain documentation (country specific)• For art it’s more costly – often requiring 3rd party evaluation (of authenticity etc.)• For patents it’s just a nightmare.. 23 © Immendo Ltd. 2011
  24. 24. Examples of transaction costs for patents• Chain of title• Encumbrances – Scope of previous licenses – Technology consolidation and exhaustion• Representations and warranties – What info can we (as seller) guarantee and what do we know about the patent• Technological definitions – Field of use licensing – Essentiality and other standards issues 24 © Immendo Ltd. 2011
  25. 25. Key concepts – intermediate summary• The marketplace, as we tend to know it, does not exist for patents• One reason for non-existent market is the illiquid nature of patents• Although in theory patents are public, there’s still some information asymmetries• There are also many specific risks associated with patents, almost making it binary• All of the above factors leading to very large transaction costs 25 © Immendo Ltd. 2011
  26. 26. So in essence people try to create amarketplace. As always people likeshortcuts – so naturally they try to extrapolate existing markets to “explain” patents as assets… 26 © Immendo Ltd. 2011
  27. 27. Are they comparable to art, financial instruments,property or none/all of the above?PATENTS AS AN ASSET
  28. 28. Patents as an asset class• This is a topic which is loved by academics and most zealous IP evangelists• Because of the vast number of other assets (classes) available, people are very keen on putting patents in one of those “boxes” based on their characteristics.• One of the main drivers of this is to (again..) try and find a known model to work for 80/20 work• Let’s take a look at the most popular comparisons.. 28 © Immendo Ltd. 2011
  29. 29. Patents = art?• Some people like to look at patents as very similar to art: – Very few people know the true value – Limited numbers of interested parties – Limited numbers of parties with financial muscle – No real market, but rather all handled through few auction houses 29 © Immendo Ltd. 2011
  30. 30. Patents = derivatives / financial instruments• Some people like to look at patents as a financial asset similar to shares, derivatives – Can be collateralized / securitized – Are found on the balance sheet – Can be traded – Use a broker structure for markets 30 © Immendo Ltd. 2011
  31. 31. Patents = property• Some like to look at patents as similar to property – No open market – Brokers are key – Auctions needed to establish real price – Can be collateralized – Market pricing is main method 31 © Immendo Ltd. 2011
  32. 32. My personal view on this: trying to fit a square peg through a round hole• We should accept that patents are patents, nothing else.• The aspect many people miss is the “value adding” aspect and it’s effect on pricing• The models get many things right – but no one is spot on.• My alternative comparison: patents = commodities – Market pricing is main method – Only few retail outlets – Need skilled brokers – Adding value (refining product) opens up to new markets 32 © Immendo Ltd. 2011
  33. 33. Again we’re seeing that people are trying hard to get their headaround how to categorize patents.Mainly to be able to do “quick and dirty” pricing / valuation … 33 © Immendo Ltd. 2011
  34. 34. Black magic, methods or madness?PATENT VALUATION
  35. 35. How on earth do you value a patent?• Yet another “hot” topic for academics (myself included)• There are very many elaborate models, but in real life it’s a different game• Let’s look at the main approaches used: – Cost based – Market based – Income based 35 © Immendo Ltd. 2011
  36. 36. Cost based patent valuation• “The value of a patent is the cost of inventing it and patenting it”OR• “The value of a patent is the cost of inventing around it”• In general – the idea is more similar to buying a refined commodity and saving time/effort 36 © Immendo Ltd. 2011
  37. 37. Income based patent valuation• “The value of a patent is the amount of money it can generate”• Seems very straight forward and intuitive, but has some key issues: – How do you know how much money to attribute to a certain patent – And what would the value have been without the patent?• Regardless – it’s a strong method for licensing 37 © Immendo Ltd. 2011
  38. 38. Market based patent valuation• “What have other people paid for similar patents”• Perhaps even more intuitive, but suffers from two main flaws: 1. There is very little (if any) public information 2. Per definition each patent is unique 38 © Immendo Ltd. 2011
  39. 39. So that was theory, how about real life situations? 39 © Immendo Ltd. 2011
  40. 40. In reality a combination is the mosteffective way – in reality calculate a spread• Cost based is always taken into account as the base scenario – Note: cost can be either for in house or purchase• Then pending if it’s licensing or sales the other methods are used to calculate upside: – For sales, market comparables tend to work best – For licensing, a royalty rate is often applied to sales figures of affected products • But in fact, that royalty rate is often market based 40 © Immendo Ltd. 2011
  41. 41. The honest truth, however, is that due to low liquidity it’s often a buyers market.Roughly meaning: whatever the buyer can afford becomes the price. 41 © Immendo Ltd. 2011
  42. 42. Why is there even a need for a marketplace?WHY WOULD ANYONE BUY OR SELLPATENTS? 42
  43. 43. POP Quiz:Why would anyone sell patents? 43 © Immendo Ltd. 2011
  44. 44. OK – so that was the easy one, but why would anyone buy patents? 44 © Immendo Ltd. 2011
  45. 45. (Unsurprisingly perhaps) I’ve developed a framework / model I find helpful Buyer ReasonsClaim Chartimportance (lo -> hi) Litigation M &A New Market New Tech New Product R&D Portfolio PoolCounter Assert Assertion Offensive Defensive Price / Patent Amount of patens in deal License Preference Amount of seller “homework” / product refinement needed 45 © Immendo Ltd. 2011
  46. 46. You could say immediate need for patentsis in two scenarios: litigation and expansion• Although similar they’re vastly different in types and quantities of patents.• Litigation requires few (one) “silver bullets” to (counter) assert. – Very large t-costs (DD and SMEs) – High price – Claim charts are a requirement• Expansion (segment, geography or product) is more strategic looking more for bulk – Lower t-costs – Low per-patent price – Looking more for heritage patents or certain IPC codes 46 © Immendo Ltd. 2011
  47. 47. You could probably also look at it more comparatively in this 2x2 Size of bubblePatent denotes number ofQuality Litigation patents / transaction (Counter.) Litigation Pool (Assert.) Pool (Defensive) (Offensive) New Product M&A New Build Portfolio Technology New Market R&D Price / patent 47 © Immendo Ltd. 2011
  48. 48. So after all – there are a few scenarios where patents are transacted.However, they are all very different.Let’s look at some real life examples: 48 © Immendo Ltd. 2011
  49. 49. Example 1 – Strategic sale of large portfolio to new entrant• Hundreds of patents• Double digit M$• Strategic fit for buyer entering new market and moving out of OEM• Roughly 5-8 infringed patents 49 © Immendo Ltd. 2011
  50. 50. Example 2 – Single patent sale to defensive buyer.• One patent• Hundreds of $k• Buying patent to take it of market and to avoid nuisance suits• Strong indication of infringement 50 © Immendo Ltd. 2011
  51. 51. Example 3 – Sale of small portfolio for assertion entity• 3 patents• Millions $• Patents bought for assertion by anonymous LLC• Patents were reverse engineered 51 © Immendo Ltd. 2011
  52. 52. Looking at the market makers andparticipants of the ecosystemTHE PATENT MARKETPLACE
  53. 53. The size of the patent market is debatable and depends much what you include.• Do you count only secondary IP transactions – Corporate sales• Do you include licensing?• Do you include settlements?• How about cross-licensing ? 53 © Immendo Ltd. 2011
  54. 54. The difference of definitions can change the market size thousand fold.Billions Global royalty revenues Size of IP secondaries market 1,000 1,800 (bill USD) (mill USD) 900 1,600 800 1,400 700 1,200 600 1,000 500 800 400 300 600 200 400 100 200 0 0 2000 2002 2004 2006 2008 2000 2002 2004 2006 2008Source: Internal analysis, Oliver 54Wyman, World Bank © Immendo Ltd. 2011
  55. 55. Maybe a third way could just be to look at liquidity Patent Portfolios Offered for SaleSource: IAM Magazine 2008 55 © Immendo Ltd. 2011
  56. 56. So the market size is really how you define it, but at least there is a (growing) market.Let’s now look at WHO is in the market 56 © Immendo Ltd. 2011
  57. 57. As always (ICM thought me well) it’s handy to have a framework.. 57 © Immendo Ltd. 2011
  58. 58. Although it’s interesting, we’ll not look atlicensing / pools / litigation / venturing… 58 © Immendo Ltd. 2011
  59. 59. .. but instead focus on the transactional (and re-transactional) side of thingsSource: Internal analysis 59 © Immendo Ltd. 2011
  60. 60. The main actors in IP transactions• First observation: – same actor can do many things (e.g. buy and sell)• Second observation: – patents can be re- sold multiple times. 60 © Immendo Ltd. 2011
  61. 61. The main actors in IP transactions (cont’d)• Third observation: – entities with “an agenda” (defense / offense) often are end of the line• Fourth observation: – Intermediaries (brokers) and people providing liquidity play a major role. 61 © Immendo Ltd. 2011
  62. 62. Hopefully it’s now clear WHO istrading and that entities “wear many hats” creating a complex system.Let’s now turn to the WHAT & HOW.. 62 © Immendo Ltd. 2011
  63. 63. Oliver Wyman (2009 study) presented some figures/thoughts worth discussing. “Litigation grade” patents sold as real “silver bullets”. I’d assume market volume is closer to 3-5% and value closer to 50% “Nice to have” patents, presenting a good solution, not necessarily infringement (maybe future use) “Bulk” patents sold only for quantity. This market volume / value has really dropped, almost non-existentSource: Oliver Wyman2009, Internal Analysis 63 © Immendo Ltd. 2011
  64. 64. Here’s another way of looking at it – tied to strategy, alternatives and tech maturity 20High Risk /High Return Litigation 15 Patent Sales Hard Assertion 10 IP Venturing 5 Soft Assertion Technology/marketLower Risk / Technology Licensing maturityLow Return 0 Emerging Market Mature Market (5+ years) (in-use) Source: Internal analysis 64 © Immendo Ltd. 2011
  65. 65. So no more beating around the bush..Where do the patents really end up then?? 65 © Immendo Ltd. 2011
  66. 66. Oliver Wyman (2009 study) has one answer: Financials and NPEs 66 © Immendo Ltd. 2011
  67. 67. Patent Freedom are implying the same based on growing NPE suits…Total No. companies being sued by NPE’s Number of NPE’s filing suit, per year and total 67 © Immendo Ltd. 2011
  68. 68. … but at the same time promoting sister-company AST as a (well solicited) buyer Patents offered for sale to defensive pools 68 © Immendo Ltd. 2011
  69. 69. Naturally large corporate purchases are made, data is rare, but here are examples:• Microsoft (2010) buying 882 patents related to Linux (from Novell) for 450 $M• Biophan (2007) buying pacemaker patents from Medtronic for 11 $M.• CR Bard (2003) bought biopsy patents from Biomedihal Instruments and Products GMBH for 53 $M• Wi-Lan (2009) acquired 200 wireless patents for 21 $M from Infineon and Airspan.• Wi-Lan (2006) acquired 35 ADSL patents from Nokia for 29 $M. 69 © Immendo Ltd. 2011
  70. 70. So now to tie it all together:How are patent deals really done? 70 © Immendo Ltd. 2011
  71. 71. An insight into the nitty gritty of patenttransactionsHOW IS A DEAL REALLY DONE
  72. 72. The different steps of buying patents1. Initial review for feasibility2. Thorough technical due diligence3. Using SMEs for additional technology evaluation4. Reviewing encumbrances5. Pricing discussions6. Terms and conditions (reps & warranties) 72 © Immendo Ltd. 2011
  73. 73. The different steps of selling patents1. Mining the portfolio2. Grouping portfolio based on strategy3. Second deep techno-legal review4. Adding market analysis of highlighted patents5. Developing claims charts and similar collateral material6. Potential reverse engineering7. Developing sales material8. Going to market9. Incorporate customer feedback10. Encumbrance review by customers11. Pricing12. Terms and conditions (reps & warranties)13. Closure 73 © Immendo Ltd. 2011
  74. 74. Some key steps in selling: a) Product Development• Need strong (mixed) group of people working in interaction• Tackling techno-legal issues• Adding market analysis to find feasible markets• Have patience• Elbow grease, elbow grease, elbow grease.. 74 © Immendo Ltd. 2011
  75. 75. Some key steps in selling: b) Sales Strategy• Might seem very rudimentary – but really helps to look at it from the buyers perspective• Find the buyer with most immediate need (e.g. litigation, strategy, new entrant)• In addition to need, the buyer needs cash and (almost exclusively) needs to be used to dealing with and transacting IP 75 © Immendo Ltd. 2011
  76. 76. Some key steps in selling: c) Negotiations / Pricing• It’s a buyer’s market, but there are some ways around it: – Delaying payments – License vs. Sales• Best situation are multiple buyers going head to head• Develop a reasonable pricing spread, for interna and external communications• Be very aware of the buyers internal/corporate situation and how you can help that individual 76 © Immendo Ltd. 2011
  77. 77. Some key steps in selling: d) Encumbrances / Reps & Warranties• Could be the nail in the coffin• Must make buyer feel comfortable with assets• Seller (or seller’s investors) must be comfortable with the reps & warranties given• This is really a costly and legally intensive exercise 77 © Immendo Ltd. 2011
  78. 78. Summarizing todays lectureKEY TAKEOUTS
  79. 79. Key take outs from today• Patents are patents, not art / property / shares – Trying to use other models might do more bad than good.• Patent market is active and growing but very opaque• The specifics of the market are demanding and costly, but necessary• There are few actors doing many parts of the ecosystem• It’s a large sum game, also for sales• Product development (“nitty gritty sales”) is not that hi-tech, but very time consuming 79 © Immendo Ltd. 2011
  80. 80. Transacting Patents is a fine but very complex trade. It’s mastered by a few.If you master it – you’ll get successful (and probably very rich and working wherever you want in the world..) 80 © Immendo Ltd. 2011
  81. 81. THANKS AGAIN FOR HAVING ME!THANKS FOR YOUR ATTENTION ! Please direct any questions to: 81 © Immendo Ltd. 2011