Patent Marketplace - Copyright Immendo Ltd 2011

The Patent Marketplace

2010 02 24 Marcus Malek
©Immendo Ltd. 2011

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

Revisiting key concepts and answering potential
questions.
RECAP SINCE WE LAST MET

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

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

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 19
Source: Internal analysis © Immendo Ltd. 2011 Defensive Patent Strategy

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

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

One could say that the USPTO
turns patents into a multi-billion
dollar betting game that’s often
settled in the business arena rather
than any other arena.

9

What is really a marketplace?
Some financial concepts.
BACKGROUND

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

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

…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

Although some markets are
transparent and operate at low
(no) t-costs, there are still many
opaque markets with enormous
transaction costs.

14

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

The reason we take this for granted
is (probably) that – god forbid-
everything should go wrong:
“We could always re-sell” ...

16

… which brings us on to another
thing most people (and US home
owners until 2008 in particular)
take for granted:
Liquidity

17

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

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

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

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

The concept of risk and reward is probably
clear – 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

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

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

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

So in essence people try to create a
marketplace. As always people like
shortcuts – so naturally they try to
extrapolate existing markets to
“explain” patents as assets…

26

Are they comparable to art, financial instruments,
property or none/all of the above?
PATENTS AS AN ASSET

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

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

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

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

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

Again we’re seeing that people are
trying hard to get their head
around how to categorize patents.
Mainly to be able to do “quick and
dirty” pricing / valuation …

33

Black magic, methods or madness?
PATENT VALUATION

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

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

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

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

So that was theory, how about real
life situations?

39

In reality a combination is the most
effective 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

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

Why is there even a need for a marketplace?
WHY WOULD ANYONE BUY OR SELL
PATENTS?

42

POP Quiz:
Why would anyone sell patents?

43

OK – so that was the easy one, but
why would anyone buy patents?

44

(Unsurprisingly perhaps) I’ve developed a
framework / model I find helpful
Buyer Reasons
Claim Chart
importance
(lo -> hi)

Litigation M &A New Market New Tech New Product R&D Portfolio Pool

Counter Assert Assertion Offensive Defensive

Price / Patent
Amount of patens in deal
License Preference

Amount of seller “homework” / product refinement needed

45

You could say immediate need for patents
is 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

You could probably also look at it more
comparatively in this 2x2
Size of bubble
Patent denotes number of
Quality 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

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

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

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

Example 3 – Sale of small portfolio for
assertion entity
• 3 patents
• Millions $
• Patents bought for
assertion by
anonymous LLC
• Patents were reverse
engineered

51

Looking at the market makers and
participants of the ecosystem
THE PATENT MARKETPLACE

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

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 2008

Source: Internal analysis, Oliver 54
Wyman, World Bank © Immendo Ltd. 2011

Maybe a third way could just be to look at
liquidity

Patent Portfolios Offered for Sale

Source: IAM Magazine 2008 55

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

As always (ICM thought me well) it’s handy
to have a framework..

57

Although it’s interesting, we’ll not look at
licensing / pools / litigation / venturing…

58

.. but instead focus on the transactional
(and re-transactional) side of things

Source: Internal analysis 59

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

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

Hopefully it’s now clear WHO is
trading and that entities “wear many
hats” creating a complex system.

Let’s now turn to the WHAT & HOW..

62

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-existent

Source: Oliver Wyman
2009, Internal Analysis 63

Here’s another way of looking at it – tied to
strategy, alternatives and tech maturity
20
High Risk /
High Return
Litigation
15

Patent Sales Hard Assertion

10

IP Venturing
5 Soft Assertion

Technology/market
Lower Risk / Technology Licensing maturity
Low Return 0
Emerging Market Mature Market
(5+ years) (in-use)

Source: Internal analysis 64

So no more beating around the
bush..
Where do the patents really end
up then??

65

Oliver Wyman (2009 study) has one
answer: Financials and NPEs

66

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

… but at the same time promoting sister-
company AST as a (well solicited) buyer

Patents offered for sale to defensive pools

68

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

So now to tie it all together:
How are patent deals really done?

70

An insight into the nitty gritty of patent
transactions
HOW IS A DEAL REALLY DONE

The different steps of buying patents
1. Initial review for feasibility
2. Thorough technical due diligence
3. Using SMEs for additional technology
evaluation
4. Reviewing encumbrances
5. Pricing discussions
6. Terms and conditions (reps & warranties)

72

The different steps of selling patents
1. Mining the portfolio
2. Grouping portfolio based on strategy
3. Second deep techno-legal review
4. Adding market analysis of highlighted patents
5. Developing claims charts and similar collateral material
6. Potential reverse engineering
7. Developing sales material
8. Going to market
9. Incorporate customer feedback
10. Encumbrance review by customers
11. Pricing
12. Terms and conditions (reps & warranties)
13. Closure

73

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

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

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

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

Summarizing todays lecture
KEY TAKEOUTS

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

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

THANKS AGAIN FOR HAVING ME!
THANKS FOR YOUR ATTENTION !

Please direct any questions to:
mmalek@immendo.com

81

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