By Doug Friedenberg
We spoke not too long ago with Michael Friedman of Ocean Tomo, a company which is positioned as a valuation and transactional center of Intellectual Property. Our first report to you on the subject spoke of the magnitude of Ocean Tomo’s domain, which is as fertile as the lushest farmland, but as crowded as the Sahara Desert. We also noted that there were rational reasons why the IP marketplace was not so easy to see. Now we hope to make the world of IP a bit more visible and bring the patent trolls up from under the bridge.
Intellectual capital generally refers to Intellectual Property assets like patents, trademarks and copyrights. Ocean Tomo also includes special intangible assets like corporate and government preference rights. The valuation structure of IP is evolving, just as the valuation structure of oilfields once did. After all, under 200 years ago, oil was unknown, and a bit before that, tulips were the trade du jour.
Today, there is gradual movement in the understanding of IP value, both amongst investors and the accounting profession. As long as the investment world undervalues assets it doesn’t know how to count, there will be inefficiencies ripe for exploitation. Some of those opportunities undoubtedly lie among the 300,000 or so new patents granted each year.
Lately, as Michael Friedman reminded us, there have been some surprising patent valuations in the marketplace. Ocean Tomo has assisted in the valuation of a number of prominent patents and portfolios. Michael noted that the Nortel patent portfolio was sold for $4.5 billion, which was a bit more than another group’s estimate of 10% of that number about a year earlier. Ocean Tomo has been involved in the valuation of patent portfolios for the likes of Novell, Interdigital, and Eastman Kodak. Michael noted that when they had first looked at Interdigital, it had $13 in cash, $16 per share in 3G IP, and had a stock price of $29. The company’s 4G patent portfolio was effectively free.
We enquired about the worst management of an IP asset Michael had seen. Michael acknowledged that there are such cases, and cited one where a patent worth $100 million was sold for less than a tenth of its value. No doubt this will warm the hearts of all fans of inefficient markets. Ocean Tomo now assesses the value of each patent through their PatentRatings system (not by hand, though). But it will probably be quite some time before the investor population can easily assess new patents being created at the rate of 25,000 per month.
Investing in Intellectual Property
Ocean Tomo uses PatentRatings to determine estimated valuations, and has also established a marketplace for ease of IP transactions both ownership transfer and licensing rights. This greater liquidity makes the market more accessible, but there are still fewer interested investors thank one might have thought, probably because it takes a lot of work to sort out valuation and use of what are still somewhat illiquid assets.
What investors should do is a matter of style and capability. As Michael noted, some patents may have significant potential growth in the hands of an owner who understands the business requirements around the IP.
In other cases, a patent may have potential unrealized by a current owner. Many small, brilliant inventors are totally at sea when it comes to monetizing their IP, but it’s not like they belong to a club where you can hang out and schmooze them.
And then, there are companies steadily marching forward as patent generators. The point to all this is that significant potential wealth is being created every day in IP, but it takes a little time and work to uncover. But hey, if you want Alpha, what’s wrong with setting up camp in a spot where there’s a natural moat defending your position?
Patent trolls are a controversial sector of the IP marketplace. They are often portrayed as opportunists armed with attorneys taking advantage of patent ownership while having no particular interest in the development of the patent’s usage. We asked Michael for his view on the subject. His first thought was that “patent troll” might be an unfair characterization, noting that universities will protect their patent positions even if they are not currently active in the development of their patents. He also noted that there are many smaller inventors who may have their work picked off by larger companies.
As for those patent holders whose primary interest is to set up a royalty stream without concern for the underlying asset, Michael observed that they do create a bit more liquidity in a market that is still nowhere near as liquid as might be. Apart from that, there’s an element in the underlying conflict that is similar to the conflict inherent in situations where someone else buys a piece of real estate that another developer would like to own.
We asked Michael what public companies impress him on the IP front. He mentioned two. The first was Qualcomm, which he described as the first 21st century corporation. The second was Acacia Research, which, ironically, is described by some as the “mother of all patent trolls.” Their website reveals ownership of over 180 patent portfolios in surprisingly diverse technologies. While we can understand how annoying it can be to have to rent IP real estate you thought was your own, it’s pretty clear that a company like Acacia Research has to do an awful lot of groundwork to “get lucky”, probably more than most. Bottom line? It’s not always so easy to tell where the shrewd investor ends and where the troll begins.
IP Creation and its Importance for the United States
During the course of our interview, Michael Friedman referred to the United States as being the center of development in IP, with most IP being created in America and then being licensed outwards into the rest of the world. He went on to note that IP leadership may also translate into wealth creation leadership…for as long as it lasts. Michael did have a concern about the United States maintaining its world leadership in intellectual property. This was not because of an imminent problem, but rather, because the country will need to remain attractive to the world’s brightest minds and foster environments where IP creation can flourish.
Michael also observed that new IP will likely be responsible for much of the job creation in the United States going forward. One may infer a correlation between a country’s educational capabilities and its ability to create IP, made doubly important by the need for better educated workers as new IP has to be utilized by the workforce. This argues strongly that a well-educated country is good for domestic business, and the Alpha of a country.