Trouble on the High Seas

In yesterday's post, I noted that Ocean Tomo's auctions seem to be fetching prices that are, on average, over 5 times less than what IPotential has been getting. At the end of that post, I ruminated on how this amazing discrepancy could exist. I concluded that the basic problem with Ocean Tomo's approach lies with the less-than-helpful 2-3 page "lot summaries" it provides for the patents put up for sale at its auctions. This post digs deeper into these thoughts.

Ocean Tomo kindly provides us with the results of its past 6 Fall and Spring patent auctions. Its press releases tell us which patent "lots" sold at the auction, and for what price. What those press releases don't tell us is what happened to all of the patents that had been listed in the catalog, but that do not appear as sold on the ensuing press release.

It doesn't take Sherlock Holmes to figure out that the "unmentioned" lots did not sell at the auction. That would explain why Ocean Tomo doesn't say anything about them in the press releases.

So, for each of these six auctions, I looked at the percentage of patent lots (out of all lots offered for sale) that didn't sell. Here is what the data told me (subject to possible immaterial typos):

  • Spring 2006: 66%
  • Fall 2006: 65%
  • Spring 2007: 49%
  • Fall 2007: 51%
  • Spring 2008: 38%
  • Fall 2008: 58%

From startup of the auctions in Spring 2006, through to Spring 2008, this looks like the story of a business gradually getting its shit together. That is, figuring out the best practices for selling patents via auction.

But just look at that Fall 2008 number. Almost 3 out of every 5 patents went unsold at Ocean Tomo's most recent auction. Ouch!

That sure looks like an ominous number last Fall. So I studied the press release for that auction looking for some indication from the company explaining just what the heck happened. But as I read the release, it sounds like the sort of "skies are blue, the sun is up, and oh what a lovely day" drivel that PR people pump out in their sleep.

Well, with no help coming from there, let's go deeper into the numbers. Let's say you were among the lucky 2 out of every 5 owners who actually managed to sell your patent at last Fall's auction. How did you do?

In its auction catalog, for each patent lot, Ocean Tomo provides  a figure it calls "Expected Value". For example, Lot 6 in the Fall auction sold for \$192,500. But its "Expected Value" was "\$300,000+". I assume this means that the owner of Lot 6 expected the patent to fetch over \$300,000. But as it turned out, the patent sold for much less.

Actually, the owner of Lot 6 was among the lucky Ocean Tomo customers last Fall because \$192,500 is at least within earshot of \$300,000. Most of the others owners fared even worse.

A little digression here. I believe that "happiness" is simply the difference between what we expect, and what we get. Moreover, the degree of happiness/sadness correlates with the size of the gap between expectations and reality. With me so far?

Assuming that those "Expected Value" figures in Ocean Tomo's catalog are expectations held by the patent owners, then it stands to reason from the data that Ocean Tomo auctions are a machine for generating very sad customers.

For example, the Fall 2008 auction had 15 web-related patent lots for sale. (Web patents are the specialty of my business,Jack Polymath LLC). Of those 15, 9 sold, and 6 went unsold (i.e. the web patents did much better than the non-web patents in that auction in term of being sold). Of the 9 that sold, 8 provided publicly disclosed "Expected Values". The lot summary for the other said only: "Please Inquire Regarding Expected Value".

Now, for the 8 web-related patent lots that sold in Ocean Tomo's Fall auction that disclosed an Expected Value, the average selling price was \$160,875 (median \$170,500); the average Expected Value was \$350,000 (median was the same).

So, on average, the "lucky" sellers of web-related patents who actually managed to complete a sale at the Fall auction got a selling price that was 50% less than what had been expected. i.e. It was a sad day.

Of course, maybe I'm being too literal here.  I mean, maybe that "Expected Value" figure isn't really expected by anyone. Maybe that figure is more like the prices thrown out by the New Delhi street sellers that I encountered on my trips to India in the late 1990s.

Maybe Ocean Tomo's high-falutin' "21st century" patent auctions are, in reality, more like a 17th century "Third World" bazaar in which hawkers shout out the sorts of prices that only fools would pay.

I don't know. I don't work there. I don't know anyone who does.

I live and work in Silicon Valley, California. And I must say, having pored through the numbers that Ocean Tomo kindly puts out every half-year on its auctions, I'm baffled why that company evidently seems to think its doing a good job.

I don't mean to crap all over Ocean Tomo here. Like I said, I appreciate that they are a leader in publicizing this kind of data. The brokers in this space, who seem to be kicking ass and taking names, are as secretive as Swiss bankers. Very little but a wall of silence is coming from those folks on the data. This is why I appreciate Ocean Tomo.

In fact, I appreciate that company so much that I'm going to explain exactly what is wrong with its approach. As I said at the start of this post, the problem comes down to its 2-3 page "lot summaries". I went to the trouble of skimming through the web-related ones for the Fall 2008 auction -- looking for some clue as to why this auction business seems to suck, big-time.

I noticed, reading these summaries, that they have it backwards. That is, the summaries try to sell the patent as a future vision. The standard argument boils down to: "In the future, lots of companies will be reading on this patent." Summary after summary, that is the core message.

Memo to Ocean Tomo: That's the wrong message, dude! The correct message isn't who might read on the patent in the future. The correct message is who is currently reading on the patent right now.

For example, for the web-related patent lots for last Fall's auction, those patents were filed in the late 1990s through early 2000s. By the time they were being sold, it had been 5-10 years after the original invention.

Memo 2 to Ocean Tomo: The web moves really, really fast, man! Inventions conceived a decade ago related to the web are either currently being practiced, or they never will be practiced. In other words, either these patents are the shit, or they ain't worth shit. And which is which comes down to this divide.

You're welcome. :)