It is been said that beauty is in the eyes of the beholder. The same is true for patent value. Value is in the eyes of the beholder or business user. Thus context is critical for valuing intellectual property assets. For example would you buy a bottle of water for hundred dollars? If you are at home or in a hotel probably not. If you’d been out in a desert alone for five days probably yes. The “Valuation Considerations of Business Use and Hype Cycle” figure shows the contextual elements that are used to establish whether a patent is in the high or low-end of the values that come from marketplace databases.
There are three elements to give insight on the business use environment. There are two elements related to understanding the marketplace and hype cycle environment. This context is then fine-tuned by many detailed measures to ascertain if a higher low patent value should be set. The advantages of using this method are that the information required is readily available from patent and marketplace databases.
The first driver business value is the dominant business need that the company has at any point in time. The hierarchy of these needs is shown in the “Business Needs & IP Roles” figure. Patents that are supporting the business needs on the lower portion of this Maslow hierarchy can be thousands of times more valuable than those needed to support the upper business needs such as “speed R&D and business product development”. As a point of clarification, patents that are supporting the topmost business need relating to industry standards that are decades away may have important strategic value but little current value. However those patents that support today’s industry standards fall into the “freedom to operate” area and are thus very valuable.
The second driver of business value has to do with the intellectual property environment that the company’s business lines are operating in. Patents in some industry segments are worth much more than in other segments. Generally speaking, on this grid the most valuable patents are found in the upper left quadrant, and lowest value to the business in the bottom right quadrant. In the uppermost left quadrant, if the timeline to commercialize the scientific patents is long or longer than the life of the patent, the patents have little commercial value. On the other hand if the industry is fast moving and the technology rapidly deployed, these are the highest value patents that exist in business. Likewise those covering pharmaceutical drugs and medical equipment are typically very high value patents. On the other hand those covering specialty food ingredients, newspaper, and clothing are much lower in value. This trend is borne out by the “average royalty rates by industry” published by several professional society organizations.
In the “Role of Patents by Industry Segment” figure some of the grid elements have been overlaid with which business need and IP role tends to dominate that selected industry. For example patents covering pharmaceutical drugs are typically aimed at sustaining an advantaged market position. This is in contrast to Internet and business method patents where the key is really to maintain freedom to operate by amassing large portfolios. The main use for specialty food ingredients, specialty chemicals, electronic equipment, and industrial controls is the ability to geographically out license in a way to rapidly grow revenue and profits. Without patents these geographic expansion programs are on a weak footing.
When it comes to business value of patents, the market size and market profitability are what patents protect. Patents that protect large portions of this advantaged position are valuable assets. As a business moves from embryonic through decline as shown in the “Business Hype Cycle” figure, the value of the patents also generally goes up and then flattens too.
The traditional S-Curve is many decades old and was upgraded in the 1990s with the understanding that there is a chasm or blip in the curve to be crossed as a business developes. Patent values in this critical stage of commercialization also experience a similar changes in value. By the 2000s Gartner Corporation when looking at the introduction of technologies found that there is an overpricing of businesses just before the chasm and a much slower increase in value afterwards. The latter slope up was very dependent on the industry segment that the technology plays in. This is similarly observed in patent values
Hype cycles, as illustrated in an “Example Gartner Hype Cycle” figure, explain the relative value of patents and small companies in an around the chasm portion of the S-curve. This is an important finding for those individuals and entities buying and selling patents as it guides selection of the right time to do so. These timing points are indicated on the “Hype Cycle Based IP Management” figure.
All of this information is now combined and used to determine which commercial or professional society databases to use for bracketing the actual patent value under consideration. The databases are typically derived from litigation awards, licensing transactions, open innovation technology transfer, or standards sources. Adding to this knowing the industry segment to use, or comparable industries to draw information from, is important in picking the right database information. Finally when using the database information it’s important to note the time when the specific valuation data point transaction/event occurred. These data points are arranged in order on a hype cycle template so that the appropriate over / undervaluation of the database entries is understood. In summary, the five uses, 11 industry segments, and three hype cycle positions create the context needed to determine which database to use and which time slice in that database is appropriate when selecting market comparables.
Once the appropriate database and data elements within that database have been selected for valuation purposes, more detailed measures are used to fine-tune the exact royalty rate or patent value within the range.
For business use and hype cycle positions that point to the highest patent value being related to litigation there are 10 measures available to fine tune patent value. These are shown in the “Examination Based Measures Used to Fine Tune Patent Value” figure. Each of these measures are assessed against an industry benchmark patent portfolio. This allows the statistical significance of the results can be ascertained and the overall pattern can be summed and weighted to establish the fine-tuned patent value or royalty rate.
For business use and hype cycle positions the point the highest patent value being related to excluding competitors from accessing the sustained advantage position protected by the patent, the 15 predominantly citation-based measures are best used to fine-tune the patent’s value. These measures are shown in the “Citation Based Measures Used to Fine Tune Patent Value” figure. As before each measure uses an industry benchmark patent portfolio and the results fine-tuned by the percentile position of the asset being evaluated.
Lastly for business use and hype cycle positions that indicate that the highest patent value will be obtained from geographic expansion with out-licensing programs, the 12 geographic based measures are best to use. These are shown in the “Geographic Based Measures Used to Fine Tune Patent Value” figure. This is a very important consideration for most patent value determinations as for many entities global filing is a haphazard process. The impact of lack of coverage is easily uncovered by such an analysis.
Using business use and marketplace environments provides the context needed to establish patent value from licensing, litigation and technology transfer databases. Within these databases data points selected on the highest value use of the patent can be fine-tuned based on examination, citation, and geographic based measures.