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What's in Your Portfolio?
07/10/2008 - By IVAYLO KOSTADINOV In the dot-com era, while a portfolio with several patents was a positive sign of technological prowess, private equity investors and venture capitalists did not rigorously scrutinize the value of a start-up’s portfolio.
Instead, they were primarily interested in finding the right opportunity, funding it and making a quick profit with an exit strategy spanning three to five years.
Back then, investors did not bother with extensive valuation procedures, since the market fury was conducive to realization of profits before a start-up’s intellectual property assets were put to the test in a competition-driven market. In the current economy, however, start-ups are taking much longer to reach the IPO stage. This slowdown has reduced investor interest in traditional valuation factors such as market timing, experience, management and financing strategies. Now, more than ever, the value and strength of a company’s intellectual property portfolio defines the actual worth of a company in the eyes of investors.
There are several methods for attempting to attach a dollar value to an intellectual property portfolio. An upper limit value can be determined by estimating the cost of designing around the patent (i.e., designing a non-infringing product). In certain cases, however, revenues generated from licensing a patent may be worth far more than it would cost to design around it. Ultimately, the true value of any intellectual property can be calculated based on the present value of the future profits that it will provide. # A patent portfolio’s value and strength is largely a function of the breadth of the patented claims in relation to what is already in the public domain and how long it will take before a competitive product can enter the market. In the pharmaceutical industry, for example, obtaining a patent is exceedingly valuable as it is relatively difficult to design around a well-drafted set of claims, further governmental regulations typically stifle competition by drastically limiting a pharmaceutical product’s entry to the market.
In contrast, patents in the semiconductor, communications and software industries can generally be invented around with greater ease, creating the risk that a start-up will find new and unexpected competition as soon as it attempts to commercialize its technology. That said, unexpected competition is much less of a threat if a company has strategically carved out a sacred space for its technology by obtaining a critical number of patents that cover its most commercially viable products.
Qualcomm Inc., the pioneer of code division multiple access (CDMA), has over 4,000 pending patents/patent applications and, as of 2005, had licensed the various technologies covered by these patents to more than 130 wireless equipment manufacturers worldwide. Before Qualcomm managed to obtain these core patents, Qualcomm was nothing but a fledgling telecom company. In the 2005 fiscal year, licensing and ongoing royalty fees received by Qualcomm accounted for 32 percent of its total consolidated revenues of $5.67 billion.
Another well-known success story in the realm of licensing is IBM. Earning about 3000 patents each year, IBM has been consistently on the top of the list, as the number one prosecutor of technology patents. In the 2004 fiscal year alone, IBM made $393 million in licensing and royalty-based fees, up 16 from the year before. Thus, for both young and old technology companies, an early start and continued maintenance of an internal program to mine for valuable intellectual property (e.g., by way of inventor incentive programs and progressive filings) are critical to reaching a commanding IP position in the market.
In high-tech industries, where the patent landscape is very densely populated, a cluster of patents covering a niche market is a sign of strength. Such a cluster increases the difficulty of designing around a product, and also provides for design flexibility in the future as the related technology evolves. Most patent savvy companies, instead of only patenting specific features of a product, launch aggressive campaigns to obtain rights to ideas that broadly cover the design landscape to which their specific products belong. This approach allows a company to build an overall stronger portfolio in the related space, sometimes completely barring their competitors from entering the corresponding market.
A strategically maintained patent portfolio should define the outer boundaries of the intellectual property a company has already developed, so that the company can protect itself from encroachment by competitors. More importantly, however, a patent portfolio should be also implemented to propel a company in a direction that would best position it to take advantage of future advancements in the technology.
For example, companies such as Nokia, Sony-Ericson and Samsung routinely file patents that cover present or future telecommunication standards. These companies know very well that obtaining a patent that covers the essential technology behind a telecom standard will firmly secure their market positions and will further deal heavy blows to competitors, who will eventually have to either license the right to use the respective technology or leave the market.
Consequently, for a young company, the strategic positioning of patents reduces risk and makes its technology more attractive to investors. Besides providing strength through fortification, portfolios with multiple patents can provide value in a variety of other ways. For example, with multiple patents in its portfolio, a company may be able to avoid costly litigation by offering to license or cross-license certain intellectual property rights.
Enforcing or defending a patent infringement suit can become very expensive, very quickly, due to the costs associated with hiring legal counsel and the related court fees. For example, the legal costs for asserting a few patents in the United States Federal Court system can easily exceed $3 million. This predicament is further compounded for younger companies that often operate on very thin budgets. Advantageously, a company with a reasonably well-maintained patent portfolio will have a bargaining advantage and also greater leverage to avoid litigation by way entering into cross-licensing agreements.
Hence, a well-balanced portfolio can open the door for cross-licensing opportunities and stimulate cooperation from other companies. The true value of a cross-license is not apparent from finances alone, because income from cross-licensing is only recorded when cash is exchanged. Depending on the structure of a licensing agreement, a patent may be even used as a form of corporate currency, in the same way that corporate stocks can be used to purchase other assets.
Companies with foreign market presence should develop their portfolio with an international objective to limit the commercial exploitation of their products worldwide. Many companies concentrate on the US market alone. While the US is a large market for any product, it only defines a fraction of the global market. As such, emphasis on both domestic and international patents creates a more valuable portfolio. Not seeking protection in foreign markets may help a company save money in the short term. In the long run, however, this strategy will decrease leverage in future marketing endeavors and may prove to be a costly mistake. A comprehensive intellectual property portfolio at the minimum should broadly cover the patent landscape to which the most important company products belong. It must also target the manufacturing regions and consumer markets that might open up in the next 10 years with an eye towards the foreseeable advancements in related technology. Thus, while extraneous and unnecessary filings should be avoided, building a worldwide patent portfolio in strategic markets is highly recommended to help increase a company’s earnings prospects and potential worth.