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IP Rights - How to make money on them?

Patents and other IP rights have really entered the spotlight lately – mainly due to high-stakes litigation and acquisitions involving international giants such as Apple, Samsung, Google and Microsoft. But IP rights involve more than patent wars and sky-high patent valuations. Companies that know how to use their IP rights in general, and patents in particular can also earn substantial revenues from licensing agree- ments or from selling IP rights they do not use or need for other reasons. This is shown by the amount of success stories, featuring mostly US companies, in the media.

The fact is that European companies are lagging behind US companies within this area, and the effect is that European companies miss out on these potential incomes. The reasons are many, but there are of course actions that could be taken in order to start monetizing on their IP rights. In this article we will focus on patents. Since it is important to under- stand the background, we will explain why European companies have so far been less successful than their American counterparts in mon- etizing their patents. We will also share our experience and insights to help companies become better at utilizing their IP assets.

Why are US companies ahead of European companies when it comes to monetizing patents?
Every year intellectual property delivers a considerable amount of value for many companies around the world. As an example we can refer to IMF’s statistics of the revenue streams from intellectual property. The statistics show that the United States is an exceptional performer in monetizing IP, but also that Europe is the main contributor to US IP revenues. The figure presented below shows the difference between receipts and payments for licensing fees for the five most patent-active regions. The performance rate of the European Union compared to other regions is unfortunately poor. While the United States dominates the earning from intellectual property, European companies had a negative revenue stream in 2010 of almost US$ 30 Billion in royalties and licensing fees.

But the above is not that surprising when considering the fact that US companies spend more money on R&D and own more patent rights than any other country. According to the World Bank, European companies filed almost 100,000 patent applications in 2010, while US companies filed over 240,000. At the same time the United States spends almost 1.5 times more of its gross domestic product (GDP) on R&D than the European Union, and even though there are more people resident in Europe than in the United States, there are

1.6 times more researchers in America.

The figure presented below shows how much money is spent on R&D in a few different countries, and how many patents that comes out of the R&D spending. China has done a remarkable journey increasing their patents almost ten-fold while the cost for R&D has only grown by 50 per cent. The figure also shows that the European Union has a slight decrease of patent filings, and it is evident that European companies need to increase their R&D investments and the amount of patent filings as well as utilizing their IP assets better in order to be able to compete with the rest of the world in the future.

More mature market for IP
Although the patent market is arguably global, it is still dominated by the United States in many ways. The reason for this is that there is a different view and a broader interest in patents and IP rights in the US. The United States is home to the greatest number of patent brokers, which reflects the demand among US companies to monetize their patents. There are also businesses, such as private equity firms that more or less created the market through different initiatives. These private investors look upon IP rights as any other investment and/or equity and their goal is to make money on the patents. How aggressive they are in their approach towards the market varies, but their incomes and return on investments come via licensing and royalty agreements or by suing companies that infringe the IP assets.

There are also examples of European companies whose business strategy is to invest in patents, but these companies have so far been less successful partly because of the lack of a functioning market and the different legal systems in European countries. But even though the US market is well developed, trading with patents is not an easy task since valuation could be very complicated. In many cases an investor is looking into investing in something where future revenues are uncertain and far ahead in the future. Understanding the mechanisms in valuation of IP is key and includes knowledge about many aspects of the legal side of IP, insights in the industry/technology area that the IP is related to (for example pharma, ITC etc.) as well as the business side of the industry.

You also need to carefully consider several patent related issues that may have an impact on future revenue streams, such as

  • Patent quality
  • File history, priority date, amount of markets it has been protected in etc
  • Former litigation processes
  • National law that potentially could weaken the patent and make it invalid
  • Potential use of the patent within other areas/industries

Legal system
A patent is a legal right, which means that legal factors directly influence how patent market players can do business. From a legal perspective, the United States is the most attractive country in which to enforce patents. The courts in the US have issued damages of hundreds of millions of dollars while litigation, as a business, in Europe is very difficult to assess since there are no good comparables. This fact makes the litigation business in the US more attractive for the more aggressive patent investors, which increases the willingness to invest in patents and other IP assets.

But there are changes ahead in the legal systems that might have implications in the future. For example, the recent US patent reform may have some effects on the litigation process, which could potentially make it less attractive to sue. In Europe the proposal for the unitary patent, has finally been approved by the European Parliament, which will create further opportunities to increase the level of future patent revenues in Europe.

What can I do to make sure that I use the assets I have?
As we have shown there are many ways in which companies can monetize on their IP assets. Up until now many companies, at least in Europe, have not been very successful within this area. But there are a first few steps that companies can take in order to see what opportunities they have. Many companies lack the knowledge, structure and time to work with IP rights strategically but it can be very rewarding to use external help.

Form strategies for IP
Big or small, a company should always decide on a clear IP strategy which should also form a natural part of the overall company strategy, and not live a life on its own, in parallel with the overall strategy. Unfortunately many companies still have not decided on IP strategies, nor is there the necessary understanding about the importance of IP in management teams, and it is therefore often needed to start out by getting the manage- ment’s attention and understanding of the importance of IP for the whole company. IP are strategic assets that cost quite a lot of money and that can be what potentially determine what business you can do, or not, in different markets. Therefore, it is crucial that man- agement have thorough grounds for decision making to understand the value drivers for these strategic assets. IP should be on all managements’ agenda.

Know what you have
First of all, you need to thoroughly look into and prepare a comprehensive list of all IP assets your company has. You also need to find out as much as you can regarding how important they are to you and to others, what costs are associated with the IP asset, status (markets, lifetime and more), etc. It is also important to know what competing technolo- gies that exist, and what your competitors have on the market and in pipeline. Are they moving in a certain direction or do they do what they always have? This kind of information and analysis are vital in order for you to understand the market and the value of your IP asset – for you and for others.

What is the real value of my IP-rights?
When you have a complete list of your IP rights and additional information about the market, you can start thinking about the value of your rights. It is a complicated task to set market values as well as potential future revenues. Many companies therefore need help with this part from external experts.

Continuous work with IP rights
As the IP strategy is set and the management has increased its awareness and knowledge of IP, it is time to work continuously with the IP assets. The work includes to make sure that no one infringes your patents, to evaluate the use of your IP assets on an on-going basis to make sure that you utilize it in the most optimal way as well as to monitor your competitors and how they are acting within the IP field. It also includes starting to work tactically on increasing the revenues from you IP assets by licensing, selling IP assets or using them in any other way that will generate the money they should.

What kind of options do I have to monetize my IP assets?

Strategic licensing of IP rights
Strategic licensing of IP rights is a great tool for exploring potential markets and product areas at a relatively low risk. You can license out a specific technology to someone in a completely different line of business than your own but who is in need of precisely the technology for which you have patent protection.

Sell IP rights
IP rights have costs associated with them, mainly R&D costs and annual fees for main- taining the protection. Selling IP rights that you own, but are not critical to your business or you are not using is sometimes the best way to put them to good use.

Lower your costs and attract capital
Strong IP rights are assets that reduce risk and increase the opportunities. By being able to show the value and potential income of your IP assets you can attract investors as well as reduce interest rates.

Form strategic alliances and partnerships
Today you often need to co-operate with others, e.g. customers, partners or various experts. When forming strategic alliances and partnerships you can also use your IP rights as a facilitator in negotiations to ensure that you do not lose control of valuable, business critical assets.

Other options
In 2011 Microsoft and Nokia gave away over 2,000 patents to Mosaid, a patent investment company, in exchange for a 30 % cut of the future licensing income. From Microsoft’s and Nokia’s perspective they realized that an external company was probably in a better position to monetize on the IP assets than themselves.

What can Zacco do to support you in commercializing your IP rights?
IP rights are often connected with considerable costs and potentially large income. In other words, they are important assets for the management team to manage in a way that secures that the company makes the best possible return from these assets. IP is considered relatively complicated for those not working on a daily basis with such matters, and our recommendation is also to involve experts when discussing how to monetize such IP rights.

Different companies have different needs and there are different reasons for evaluating IP rights. We can support you with the following services:

  • To form a clear IP strategy based on the company’s overall goals and strategies
  • To find buyers of IP rights, some that you might not even have thought of as potential buyers
  • To provide different types of agreements, such as licensing and confidentiality agree- ments
  • To make IP Due Diligences
  • Etc.

Summary

  • IP rights are connected with considerable costs and stand for potentially large values and incomes to many companies. Unfortunately, some companies do not utilize their IP assets to its full potential.
  • European companies have been less successful than their US counterparts in utilizing IP assets, mainly due to the lack of a functioning market in Europe, but also due to the fact that European companies have fewer patents.
  • There are several ways in which companies can exploit their IP assets in order to increase revenues and to release money that could be used in a better way. For example companies can sell them, license them for use in other industries or on other markets and utilize them to attract capital.
  • By increasing the knowledge internally and make sure that IP is a prioritized question on the right management level, companies can start making sure that they do not miss out on future revenues by allocating the right resources to optimize their return.

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