InnPerspective

A Series of Industry Focused Articles

Read about the latest trends and updates in the intellectual property industry from the Innography perspective.

How Much Is My Intellectual Property Worth? Setting a Value on Your IP

Sunday 28, February 2010 by Tyron Stading

The second article in a series of two.

Having acknowledged in the previous article that no standardized way exists to fully and accurately assess the monetary worth of your IP, it is also true that you should have a sense of its real value. Several valuation models exist (some of which are more scientific than others) that are widely accepted. Here are just a few:

Fair value measurements – Here you are basically asking, “What would a third party be willing to pay?” This analysis uses objective measurements such as price per engineer who created the technology, price per patent, licensing fee per brand recognition rate and price per unit generated from IP assets. This method is relatively simple and easy to use, but it might not produce enough data points to accurately reflect how much your IP is actually worth.
Present value of expected future cash flows – This approach is based on discounted cash flows. Essentially, you examine past revenue that can be tied to your IP such as licensing fees, royalties and product sales revenue. You then use that data as a basis for forecasting future revenues. The resulting forecast is discounted by the costs associated with the IP, which can include things like maintenance fees, defense costs and any potential future investments in the existing IP. This method is more accurate than the fair value measurement, but it can produce considerable uncertainty regarding the revenue forecast.
Option pricing models – Option pricing models are so called because they were originally developed to assess the value of stock options. In this case a patent is treated as an option on future technology. The most popular model is the Black-Scholes model, which—when adapted for patents—considers things such as remaining development costs, the market value of the underlying products and variance of product value return. This method is much more scientific than either of the previous methods, which is desirable. There are a number of examples, however, in which the initial analysis has been contradicted by reality because some of the assumptions were simplified so as to make the method easier to wield.
Conjoint and relative utility analysis – This approach also brings science to bear in the assessment of your IP. Using a standard questionnaire and a mathematical equation, products and technologies can be evaluated to determine a monetary value. The biggest drawback of this type of assessment is that it can be complicated and assessing an entire patent pool can take considerably longer than other methods.
Cost of development – If a company has recently completed a new technology investment, analyzing its cost can suggest its value. This is a valuable tool in the disciplines of competitive intelligence and M&A because you can use the economic principle of substitution to understand the value of your competitor’s IP. The use of this model alone, however, does not necessarily reveal what someone would be willing to pay for the IP because it doesn’t account for the potential return on the investment.
Cost of replacement – This approach is useful primarily when a company is considering the sale of a brand or trademark. During the assessment the analyst considers infrastructure costs (the cost to change any physical assets that contain the brand name), marketing costs (such as collateral) and revenue decline.
Price minus book value – This is a very common approach. It is very simple to use but is the least accurate method of any listed here. Using this method, you simply subtract the book value of a company from its market value, and the presumption is that the difference is the value of all intangible assets. The problem with this approach is that it is predicated on several assumptions that don’t stand up to the realities of the market and how companies actually conduct business. The resulting analysis should be thought of as a rough estimate.

So how does Innography fit into this notion of IP valuation? Quite simply, no matter what method you use, the resulting assessment is no better than the data you feed it — and that’s what drives a lot of what we do at Innography.

We share the vision of a standardized valuation model for IP because we believe that IP is an integral part of your business. Until recently, that hasn’t been widely recognized. It’s an extension of the concept of business intelligence, a concept that’s been around for a while and which is playing an ever-increasingly critical role in business strategy.

Data as a Service (DaaS as it’s come to be known) has become an entire industry just as Software as a Service (SaaS) has. Merely accessing the data, though, is not sufficient to drive real business intelligence; that’s accomplished by analyzing the data, something else that’s becoming widely recognized as a necessary component of business strategy.

To analyze the data it has to all be correlated to give it context — and all the data has to be considered to gain a full understanding. Without those data driven analytics it’s impossible to implement a true business intelligence system. More than that, though, Innography is going to be the business intelligence platform for delivering those analytics when a standard model emerges.
At Innography we believe a standard valuation model is necessary and we are in the process bringing that idea to the industry.

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Intellectual Property Valuation – Intangible Assets and Your Ledger

Monday 15, February 2010 by Tyron Stading

The first article in a series of two.

A topic of interest to many of our customers is intellectual property valuation. IP professionals intuitively understand that IP has monetary value and use a number of ways to approximate it, but there is no standardized method for assigning a value to IP.

A number of models exist that are useful to internally assess IP that can help professionals make reasonable decisions in disciplines such as licensing and mergers and acquisitions. Externally, though, these methods don’t conform to Generally Accepted Accounting Principles (GAAP). They don’t contain a way of dealing with critical accounting practices such as the principle of prudence or the concept of depreciation. Without a way to address these principles on a ledger, the valuations can’t assure reliability and accuracy to other businesses in an accepted way.

In my view, the industry could benefit from a universally accepted set of methods for accurately assessing IP because it’s a fundamental necessity to fully integrate your IP into your business. While a reliable model does not exist today, I’m confident that a GAAP conformant method will emerge within the next decade.

Looking forward, what would be the tangible benefit of having such a method in place? The answer is the same benefits we currently think of today for having standard accounting practices—those having to do with regulation, risk and P&L.

For example, today you can demonstrate an accepted value for a company you intend to acquire. That value is based on things like existing tangible assets, forecasted revenues and costs. The value is accepted because the ledger that tracks those aspects of the business does so in accordance with accepted practices.

Business managers also intuitively understand that IP drives revenues (and by extension profits) because these intangible assets are ultimately associated with products. Conversely, they understand that there are expenses, such as patent maintenance fees, that should be considered when trying to determine the real value of the company. What doesn’t happen today is the inclusion of the value and liability of IP as part of the larger P&L exercise—and it ultimately should.

With a standardized model your IP could be just one more ledger entry that investment bankers and business managers would use as part of their analysis when evaluating a merger or acquisition. It would be treated in exactly the same manner as any other asset.
This is also painfully obvious in licensing activities. Coca Cola, for example, holds a registered trademark on the classic shape of its soft drink bottle, which is perceived to be very valuable in the soft drink market.

Likewise, a scientist named Wallace Carruthers at Du Pont invented a process for creating polymer fibers we now generically call Nylon. We are then left with the indelible impression that Du Pont invented Nylon, which is perceived as extremely valuable in a number of markets. But that understanding doesn’t answer the question: What is the value of a Coca Cola trademark product placement license or a license from Du Pont to produce polymer fibers?

If you want to maximize the success of activities such as licensing and M&A, a standardized method for understanding the quantifiable value of your IP is absolutely critical. The last thing you want to do if you’re a buyer is to pay too much for a license or a company you want to acquire. As a seller you face the opposite problem of not wanting to leave money on the table.

For that reason, a significant amount of effort has been put into trying to understand how to accurately assess the value of IP, and sooner or later a standard will emerge. Until then, existing patent valuation models that will have to suffice. In my next article I’ll cover some of the most sound models, when they should be used and the pros and cons of each.

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Mapping Patents to Products – Why Should You Care?

Tuesday 01, December 2009 by Tyron Stading

When I talk with customers, they frequently have questions about mapping patents to products. It turns out that creating a patent to product association is extremely valuable when you think about it.

The business world runs on products. Profits and losses, revenue forecasts, and product offerings are all the lifeblood of a company and they’re all driven by products. It should come as no surprise, then, that you would want to protect your products with patented technology — but it turns out there is more to it than just protection.

With a patent to product mapping, you could start assigning a true value to patents. With that improved capability you have a greater capacity to maximize the return on your intellectual property investment.

That’s because you would have a better understanding of which patents are your most valuable and which have very little value. If you could tie your patents to your products the actual assessment could be performed with greater accuracy and precision, which in turn could help you:

Understand whether or how much to prune your portfolio because you could tie it more directly to your balance sheet
Gain insight into new licensing opportunities
Determine how to direct future R&D investments
Enhance your existing capability to manage protect and exploit your patents

That said, mapping a given product to one or more patents can be a daunting task. In fact, the short answer is that there is no real way to demonstrate a true one-to-one mapping of patents to products. It is possible, however, to do the next best thing, which can provide a very close approximation: trademarks.

You might not have given it much thought, but before dismissing trademarks out of hand, consider how they are used. Trademarks are used to protect naming conventions as unique and proprietary to a company or individual. Trademarks are used for 1) company names, 2) services, 3) slogans, 4) designs and logos, and 5) products and brands.

Let's say, for example, you are releasing a new product or brand and will be spending significant capital promoting and marketing it. You want to trademark that product name to ensure brand value and differentiate yourself from the competition.

You believe that it is something you think is inherently valuable, which is why you are offering it to the market and why you want to protect it from being used by others without your permission.

In fact, just as patents are technology monopolies in the market, trademarks are product/branding monopolies. From this vantage point, trademarks are an interesting approximation for products and brand names. With this understanding, the term product/brands can be thought of as a synonym for trademarks for this discussion.

By attempting to map patents to product/brands, you find a very targeted set of possibilities that enable an understanding of the relationships between intellectual property patents and the product/brands they protect.

The question is how would you go about mapping and correlating patents and products/brands? Innography has produced a solution to address that very issue. In our latest release, Innography Winter ’10, Innography has created a process to associate patents with products/brands—a process which is itself patent-pending. We call the process SemaMap™.

Our SemaMap™ process uses semantic mapping between trademark descriptions and the language used on patents. Narrowing it further, trademarks and patents owned by the same company and that share other attributes really refine the scope to produce a targeted list of patents to trademark associations.

Now that we have a patents-to-trademarks linkage there are a number of use cases that are ground breaking and innovative:

Looking for disconnections between brand protection and patent protection. That is, how well are your products/brands protected by patents?
How do I understand what patents I can leverage to protect my products?
If I have key patent technology, what outside products/brands might be infringing on my patents (e.g. not owned by the same company, branded after the date of the patent, same semantic space, etc)?
What patents might I be infringing on in different product arenas (Freedom to Operate)?
How do I compare two companies’ patent and product positions?
How do I know where a new patent might be applied to a product?

There are many more examples, but these associations provide a very unique insight into a process that hasn't been possible before. This capability is an industry first that has the potential to change the way people think about both their patents and their trademarks. It establishes an intrinsic link between the technologies they own and brands/products they have created and brought to market.

An understanding of how products are related to patented technologies can help you protect, defend and exploit a much greater segment of your intellectual property. We’re no longer talking about only patents, which is the current mindset in the industry. I personally believe this represents a change in how people view their IP — that it will foster a more integrated view of IP and its business value.

This sort of holistic approach has not only been lacking in the industry, it hasn’t even been on the radar until now. It’s my hope that other industry leaders will embrace this enhanced perspective of how customers can and should be truly managing their IP.

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IPAM + IP Analytics = A Whole Solution

Wednesday 23, September 2009 by Tyron Stading

More than two-thirds of a company’s asset value is represented by intellectual property. As a result, companies often invest a lot of human and financial resources in an IP Asset Management (IPAM) system or process. These systems range in complexity and sophistication from basic spreadsheets to expensive, enterprise-level patent software applications. But regardless of how sophisticated or basic the system, the effort to manage your IP Portfolio can be significant.

First, let’s consider the fact that an IPAM is essentially a document management system. Such systems are very good at helping people implement workflows and processes. Depending on how sophisticated the system is it can notify you of maintenance requirements, help you understand your existing IP investments broken down by classification and suggest who should do what next. An IPAM can be implemented as a very sophisticated workflow and reporting tool—but what it can’t do is provide analytic data about your portfolio in the context of other companies and markets.

Consider, for example, something as basic as how you make the decision of whether to maintain a patent that is up for renewal. A sophisticated IPAM can send you a renewal notification, but it can’t help you decide whether it’s a good idea to renew the patent.

For that reason many companies have a blanket business policy of maintaining all patents until they permanently expire—yet most companies have patents that are not asserted, are not commercialized and are not licensed. In other words, the probability is very high that not all of your intellectual property patents have significant business value, and yet they are often maintained to the tune of about $100,000 over their lifetime.

IPAMs provide data suggesting that a next step in a workflow process should be taken, but it can’t enable you to understand what the best next step should be. You need to understand the context of your internal data (what patents you have) to make sound decisions about your portfolio.

Your best bet is to have a solid IPAM system and integrate it with some kind of IP business analytics tool that can enable wise decision making. In the case of portfolio maintenance the integration of an IPAM system with a business analytics tool can be a tremendous advantage.

Once you know that a patent is up for renewal, there are a number of factors you need to consider before deciding whether to renew it. One consideration is the strength of the patent, computed from a combination of factors statistically associated with strong or more robust patents.

Innography compares those factors for each patent to all other patents and rates the patent strength accordingly. With an understanding of the patent strength, you can then make an informed decision about whether to maintain the patent. You also then have the option of selling it or licensing it — but the important point is that having the business analytics at your disposal functionally gives you those options.

Without those analytics most companies unnecessarily continue to invest in a weak patent. Conversely, depending on your IPAM, you might overlook valuable patents you should maintain and inadvertently let them expire. The key to effective portfolio management is to know what you can’t know if you rely strictly on an IPAM.

Integrating your IPAM with a tool like Innography enables you to bridge the gap between internal and external data. Armed with this information you can gain insight into typical IP activities like prosecution, maintenance and intellectual property litigation.

In the case of patent prosecution, your IPAM tracks the record of invention, whereas Innography tracks the probability of acceptance in the context of your business and competition. The insight you gain by using an integrated system is whether patent prosecution of a particular patent (or even a collection of them) is a worthwhile investment for your company to make. An understanding of changing markets and a sharp competitive analysis is critical to business success. In other words you must be able to answer the question “Am I investing in the right IP or should I be investing elsewhere?”

An integrated system can also assist you with litigation, because a good IPAM documents licensing agreements — what exactly you own, and when the patent comes up for renewal. Your IP business analytics tool can give you insight into potential threats, and a strategy for preparing for those threats before they materialize. The two systems working together provide a holistic approach to dealing with the legal realities of a world in which patent trolls dominate the unprepared.

Your licensing strategy can also be significantly more effective with an integrated IP management system. To enable this enhancement, your analytics tool should have collaboration features that allow your team to use it as a centralized repository. It’s not unusual for companies to have large research teams comprising scores of people—and without a way to pull all the patent research in a single place the research effort can often grind to a halt.

Once the licensing agreement is consummated by contract, your IPAM can be used to maintain and track the agreement and any renewal schedules the contract covers. If the contract contains termination clauses, your analytics tool can enable you to make determinations about when or if you should terminate the contract based on the terms of the agreement and changing market conditions.

It’s not really the case that an IP analytics business tool like Innography can take the place of your IPAM—it can’t. You will still need a way to track agreements, inventory, and to develop and execute workflows driven by a good asset management system.

What is true, though, is that your IP business analytics tool can complement your management system, so that you can make sound decisions as you tackle the discipline of holistically managing your portfolios.