Patents – the new gold?
In an era when discussion of economies has an overwhelming focus on new technologies rather than old heavy industries, the importance of patents has reached an all-time high. Without a legal barrier, any successful new product will rapidly be copied and its market share and profit margin eroded accordingly. Even businesses which see their competitive advantage in terms of customer service rather than innovative electronics may be able to protect some aspects of their operations through patenting, and investors are certainly likely to ask whether they have IP assets before deciding to invest. For women-owned businesses in particular, it is notorious that investors tend to be less easily convinced as to the strength of the business proposition, so any additional source of credibility when fund-raising can be worth their literal weight in gold. Accordingly, despite the complexities of the patent system, women entrepreneurs should at an early stage begin assessing the scope for amassing patents in defence of their business ideas.
But patents are expensive, especially if a business decides to seek protection in multiple jurisdictions. And as a general rule the size of a patent portfolio is not a useful measure of its value: the established research reputation of the companies which had developed those technologies is a better guarantee that at least some (but by no means all) of the patents concerned were likely to be strategic assets. A company which decides on a strategy of simply getting a portfolio as large as possible may well be able to do so: patents can be granted for minor improvements on existing technology, and a creative and persistent patent attorney can often persuade the patent office to let a relatively weak application through. But as the mobile phone patent wars have shown, a determined competitor may well persuade a court to revoke that patent, if it does not genuinely represent a novel and inventive development.
Having patents is one thing; getting value from them is another. Working out how to get the best return on patents is an art rather than a science, and no one approach will apply in all cases. Patent valuation techniques tend to ask for information that simply isn't public, such as what licence fees are being paid for comparable patents, or what the value of the market for the product might be in 5 years' time. Absent real numbers, such calculations are often no better than educated guesswork with some scientific-looking window dressing. I'm always tempted to make the comparison with Drake's Equation for calculating the probability of finding intelligent life in the universe (a commodity which, as Lily Tomlin showed us, is not easy to find even in New York City!) The equation is long and full of mathematical symbols, but cannot tell us whether aliens are imminently about to be found since we have no data on which to make a valid estimate for most of the variables.
But some key points are widely applicable for assessing what factors may indicate a patent portfolio's true worth.
1. "Patents plus"
A portfolio of patents, even in isolation from the know-how and vision of the business which developed the technology, may be enormously valuable to close competitors working on substitutable products – as in the mobile phone patent wars. But unless the potential buyer or licensee is already engaged in the same market, patents on their own may have little apparent value or interest to the outside world. Notably, having bought AOL's patents for over $1 billion, Microsoft promptly sold 70% of them on to Facebook, for the bargain price of only $550 million. They had extracted the 30% they considered relevant for their business. Thus, decisions as to what to patent, or what patents to acquire or license, must go hand in hand with a business objective – a new product, a different cost structure – and without understanding this objective (and its feasibility) patents may not add real value at all. In order to extract value, a buyer or licensee is likely to need access to the right know-how and markets.
On the other hand know-how alone, whilst certainly valuable as a platform for developing future technology and smoothly implementing the present, is impossible to capture absolutely and therefore vulnerable to being dissipated over time as employees depart. Patent rights, lasting 20 years from the date of filing, provide several business cycles' worth of exclusivity. The combination of know how and patent rights gives the best of both worlds.
2. What is the source of value?
Perhaps counter-intuitively, a patent is a multi-function tool. It may add value to a business by maintaining exclusivity over product edge, and thus market share and profit margin. It may allow access into a market – for research collaboration, for instance – that would otherwise not be feasible due to the risk of leakage of too-widely-shared confidential information. It also enables more open internal communications within a company, which might otherwise have to operate under the organisational constraints of trade secrecy in order to protect its work. At the most superficial, but still effective, level, Audi and Dyson have both demonstrated that numbers of patents over a product can be invoked purely as a marketing asset, to persuade customers of the product's innovative and desirable status.
If it is not protecting technology which is core to a company's own products, it may be exploited as a source of licensing revenue. It may provide a basis for changing an infringement-licence negotiation into a cross-licensing arrangement. And in some jurisdictions the connection between patents and products may enable tax benefits to be claimed, and the use of patents by other group companies should be considered in setting the inter-company transfer price.
The value calculation is very different in each case. And more than one analysis may apply to one and the same patent, depending on the circumstances. The most reliable approach will come from applying several valuation methods to give a range of possible values, without trying to ascribe a single pseudo-accurate, definitive result.
3. Look at the history
A granted patent is not necessarily a valid patent. Patent offices do a good job but cannot have perfect knowledge of every technical discipline. The fact of grant is therefore only a partial endorsement of the patent's strength. On the other hand a patent which has survived having been opposed (in the European Patent Office) or subjected to an inter partes review (in the US Patent and Trademark Office), has been subject to a more rigorous analysis by a competitor which is a real expert, and has a higher chance of withstanding any later challenge. Further, by having been singled out for attempted removal, the patent's likely commercial relevance and value have been established.
4. Is the market there?
Some great inventions have failed commercially: the Betamax video technology, generally agreed to be technically superior, was out-marketed by the VHS video solution; the zip fastener patent expired before the market for easy closure clothing (effectively launched by World War II air force uniforms) came into existence. It is also important to identify which market(s) are relevant. A history of successful innovation, demonstrated with a portfolio of patents, may open access to future research collaborations taking a company into different markets, which may not otherwise have been considered accessible.
5. Think ahead – laterally
Kodak's failure to shift its business from film to digital cameras in time to catch the wave of mobile devices incorporating cameras left it holding a thousand patents it was unable to exploit to their full value. Even the strongest patent may be rendered worthless if the marketplace moves into another direction. In terms of patent value, this cuts both ways: patents a company holds today may not look very promising, but there could be other markets in which they would hold a truly strategic position. Conversely, as in all things, success is fragile and a highly prized portfolio must constantly be re-assessed for its current but also future importance, so that research efforts can be focussed towards tomorrow's business needs. Only if there is no realistic prospect of the patent finding its niche either today or tomorrow should abandoning patent rights be seriously considered.
One way to get management to focus on the question would be to have patents, like other capital assets, appear on a company's balance sheet. But although this certainly gives patents as an asset a higher visibility than they generally enjoy, it may also engender an undue focus on the immediate numbers, and a year-on-year expectation of increased returns. Some of the range of sources of patent value – potential future market access, for instance, or defence against as-yet unidentified competition – are dependent on future development and therefore fundamentally uncertain. The associated costs can therefore only fairly be treated as a gamble on markets over the next 5-20 years; and a fair management assessment should accept that despite the undesirable uncertainties that entails, nonetheless, a portfolio of patents represents an insurance policy well worth having. This kind of long-term view is perhaps something that more women than men find natural, and which runs contrary to mainstream business thinking which often focuses exclusively on the business' immediate and near-term needs. Just as today's directors of HR tend to be women, so too may directors of IP be women in the best run companies of the future.