Patent Valuation: The Untold Story

A couple of postings ago, I noted that I had attended the Theory and Practice of Patent Valuation conference in Berkeley last Friday. As I mentioned in that post, the conference seemed to be scattered, and I used that post to try to rationalize the proceedings.

However, the biggest shortcoming of that conference wasn't its scattered nature. After all, that nature describes the overall patent market today. So the conference merely reflected the market in its current state. No shame there.

Moreover, I suppose I can't slag the conference for missing the biggest story of all in patent valuation. This is because the press release that made this story the biggest one didn't come out until one week before the conference, and did so without any fanfare. So, it's not surprising that the conference missed it.

Nonetheless, there were some subtle hints of this biggest story at the conference. Those subtle hints concerned the "swagger" of the patent brokers during the conference. That is, the conference was filled with very different kinds of players. Academics, expert witnesses, corporate counsel, IP investment banks, etc. Brokers were just one species among many.

But among all the species there, the brokers stood out in terms of their confidence -- a confidence that bordered on arrogance. And I don't mean just one or some of the brokers. I mean all of them. If a non-English speaker had attended the conference, and thus hadn't understood any of the words spoken, that person could still have picked up that, as a class, the brokers carried themselves like "they got game".

Why? Is swagger and overabundant confidence merely a common personality trait of all brokers? Perhaps. After all, "broker" is just a glorified name for "sales guy". But I think that, beyond the familiar sales guy bluster, there is a powerful reason justifying the demeanor of the brokers at the conference.

That reason is found in a single paragraph, in a January 29 press release (PDF) issued by leading broker IPotential, LLC. In this press release, among other information, IPotential announced that, over its 5-year life, it has handled 137 patent transactions, bringing in \$265,000,000. That works out to an average price per transaction of \$1,934,307.

Now, keep in mind that these are not audited numbers. These are numbers being put out by a private company. For all we know, these numbers could just be ones that IPotential is pulling out of its ass. Still, we have no reason to doubt these numbers. So let's proceed.

The other caveat is that, to my knowledge, no other brokers have disclosed even these skimpy numbers. For example, Inflexion Point Strategy, LLC, tells us only that "We have handled the IP aspects of over \$50 billion worth of high tech joint ventures, mergers, acquisitions, divestitures and investments." As opaque as that is, Pluritas, LLC, is even less forthcoming.

But since the swagger of both the Inflexion Point and Pluritas people seemed to match that of the IPotential people at the conference last Friday, I tentatively suspect that the numbers of these "silent" brokers are closer to those of the "speaking" broker (IPotential), then to those of Ocean Tomo, LLC.

Ocean Tomo owns and operates a well-known patent auction. These are live auctions, held generally twice a year (Fall and Spring). Between 2006 and 2008, Ocean Tomo held six such live auctions. And it is kind enough to post the results of these auctions on its web site.

Now while these results are not audited either, they are already public in a way. This is because many people attend the live auctions, so many are already aware of the prices that individual lots of patents are going for at the auction, before Ocean Tomo announces those numbers on its site.

The other reason I suspect that Ocean Tomo's numbers are accurate is that they are so shitty in comparison with those put out by IPotential. I mean, if Ocean Tomo was lying about its numbers, would't it lie a little more beneficially to itself?

Anyway, on with the bloodbath. You can get the results of Ocean Tomo's auctions from 2006-2008 here. Going through the six Fall and Spring auctions for those three years, we find 224 patent transactions going for a total of \$82,429,600. This computes to an average price per transaction of\$367,989.

This means that, in selling patents,  the broker IPotential is (allegedly) getting a price per transaction that is OVER FIVE TIMES what Ocean Tomo's auctions are getting.

That's not a typographical error. In fact, the truth might even be worse than that for Ocean Tomo. Ocean Tomo's average is skewed by a single \$16M+ transaction that is wildly beyond any other price fetched for the 224 transactions. If we drop this highest price and the lowest price from Ocean Tomo's results, its average price drops to \$296,970, which is 6.5 times less than IPotential's number.

What's going on here? This kind of difference in price is astounding. This question should have been the story of the conference.

Well, since it wasn't, I'll try my hand at answering this question. As I mentioned above, I suspect that the numbers for the other brokers are closer to those of IPotential's than to Ocean Tomo's. In other words, I think there is something systemic going on here.

Basically, I think the answer to this question came out of the conference. As I mentioned a couple of posts ago, there seemed to be general agreement among the brokers and corporate counsel that the most important thing that brokers do in selling a patent is to create a marketing package that features claim charts. Ocean Tomo doesn't do this.

Why might claim charts account for the huge difference between the numbers of brokers, and those of Ocean Tomo? I think the answer comes from something IPotential CEO Ron Epstein said at the conference. He said that bidding was the key to getting value for a patent owner, just as bidding is the key to value in all markets.

How do claim charts help create a bidding dynamic? Well, the parties identified in the claim charts are motivated to bid because they allegedly infringe the patent being sold. In contrast, the two- to three-page "lot overviews" generated by Ocean Tomo tell us no such thing.

Could it be that simple? Could this simple difference in marketing approach explain the (justified) swagger of brokers? In a market full of very smart people, this explanation doesn't seem likely.

However, parahrapsing E.O. Wilson, we people are sheep, after all, and there's nothing like the "crowd mentality" to make even the smartest among us miss the most obvious of things.

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