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A Path to Monetizing Patents.
This article was published in a technology magazine, June 2007 issue.
Intellectual property is one of the most important assets of a technology company. For many companies, it accounts for approximately 60% of the company’s assets. This article summarizes how patents are valued, and how companies can monetize patents, i.e., obtain funds against their patent or patent portfolio.
To gain a competitive edge in the marketplace, a company needs to have a well-crafted patent portfolio strategy in place. An effective strategy encourages development of ideas into technologies, patenting of such technologies, and deployment of the patented technology to meet the company’s business objectives.
A crucial factor in tapping the potential of a patent is timing. A patent may encompass a useful, breakthrough, or disruptive technology, but if the sale is ill-timed, the utility of the patent will decrease over time. Hedy Lamarr, a Hollywood actress, and George Anthiel, a music composer, jointly patented their idea on spread spectrum wireless communication in 1941. During the 20 year life of the patent, they did not earn a penny from their patent. But, today spread spectrum technology is widely used in wireless communications including GPS!
David Kappos, assistant general counsel at IBM who manages patents, said, “Right now, what you’ve got is a marketplace where nobody knows what the asset is worth.” Nevertheless, patents need to be valued to get a substantiated idea-to-profit conversion. Patent valuation refers to the estimated market value of a patent. A patent’s worth is in its utility. A patent’s valuation depends upon several factors. First, the utility of the patented technology in addressing a market need is evaluated to determine the profitability that will accrue from use of the patented technology and the advantage of deploying the new patented technology. Second, a patent is evaluated for its ability to replace existing technology, or, to start a new technological trend. Third, a patent is valued based on the scope of a patent’s claims. Many patents sharing a given technological space with narrow claims are less valuable than a patent with broad claims. Fourth, valuation of a patent depends on the $ amount of the market as a whole for the patented technology, the projected market share that the patent can capture from the overall market, and the projection of the market share in $ over the life of the patent and on any continuation patent applications filed on the original patent to extend the patent monopoly.
The quickest path to monetizing a patent or patent portfolio is to sell it to companies that are in the business of purchasing patents. Outright sale of a patent eliminates the financial outlays of starting a business or a company around a patented product. However, the monetary returns on patents may be low and the inventor forfeits ownership of the patent.
A second for monetizing patents is to license the patent(s) to companies. The patent holder retains ownership of the patent and earns a royalty of about 5-20% on future sales of the product over the life of the patent. Licensing often translates to larger monetary returns compared to sale of a patent, if the utility of the patented technology is high, widespread, and significant over time. IBM’s revenues from the licensing of its patents are in excess of $1 billion, annually. Most of the software giants like Microsoft, Sun Microsystems, etc., obtain a significant part of their revenue from licensing of their software patents.
A third for monetizing patents allows a company to raise funds from financial institutions against the patent assets of the company.
A fourth for monetizing patents is a hybrid where the patent holder sells the patent(s) to a purchaser, with a royalty-free non-exclusive license back to the patent holder plus a percent of the royalty that the purchaser earns on the licensing of the patent(s); this allows companies to monetize their non-core patent assets while still continuing to build a viable business.
A crown-jewel patent protecting a significant, first of its kind technology may be used to block competitors and create a market-niche for the company. A portfolio or even a solitary crown-jewel patent may form the basis for a start-up or spin-off companies.
Fence patents are used to surround or picket-fence core technologies especially those of a competitor, with all conceivable improvements over the core technology. This sometimes compels the competitor to cross-license its patents. Cross-licensing is prevalent amongst companies with overlapping core technologies. Sony and Samsung Electronics have entered into a 5 years cross-licensing agreement covering over 24,000 patents in an effort to reduce cost and potential friction.
Another method for monetizing patents is proactively finding products that infringe the patent and thereafter offering to license the patented technology to the infringer, or seeking treble damages for willful infringement. Infringement damages in the billion dollar range are not uncommon. Recently Microsoft settled an infringement action by Alcatel for $1.5 billion for infringement of Alcatel’s patented MP3 technology.
Although a patent is often classified as an intangible asset, with prudent choices of monetizing, patents are as tangible as any other property of a company. Like any property, a patent can be sold, split, licensed, cross-licensed, etc.
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