How Do You Value Intellectual Property?

from the not-this-way dept

Last year, the company Ocean Tomo burst on the scene with a big patent auction that very few buyers showed up for. Since then, however, the company keeps getting its name out there for building a marketplace for patents. Its latest publicity stunt is to try to add up the aggregate value of patents held by companies in the US. As you read the article, though, folks at the company make some bizarre claims -- including the idea that patents and other intellectual property now represent 80% of the value of US companies. The reporter doesn't seem to question the valuation method, even though Ocean Tomo is clearly a biased party who benefits from suggesting (incorrectly) that so much of the nation's economic wealth is locked up in patents. What this analysis misses completely is that it's not the intellectual property alone that creates this value. It's what's done with the knowledge found in that intellectual property. That is, by itself, the "intellectual property" has no value. It's only when it's put to work to actually bring products to market that value is created. This is the key difference between innovation and invention. The folks at companies like Ocean Tomo seem to think that the invention part is where all the value is stored. However, in doing so, they're actually devaluing the intellectual property they think they're promoting. By trying to disconnect it completely from the actual innovation, they're disconnecting the non-scarce resource that makes scarce products more valuable, and actually making the "intellectual property" a lot less valuable.


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  1.  
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    TriZz, May 8th, 2007 @ 7:39pm

    I think you misunderstand...

    ...I'm usually right there with you (which is why I read/comment a lot) but I have to say that I disagree with you on this one.

    What this analysis misses completely is that it's not the intellectual property alone that creates this value. It's what's done with the knowledge found in that intellectual property. That is, by itself, the "intellectual property" has no value. It's only when it's put to work to actually bring products to market that value is created.

    Wrong. Try explaining that one to NTP as they swim in their $612.5M settlement. I'm not saying that I necessarily agree that NTP got the settlement. I don't think they're worth the court papers that were filed...but it does prove you otherwise.

    ...and that's why I think that Ocean Tomo is promoting as such. The RIM/NTP settlement was the largest patent settlement ever. Basically, Ocean Tomo is a lottery merchant and not an innovator (which I DO agree with you on).

    I appreciated your idealistic views, but in the real world -- this is the way it is.

     

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    Mike (profile), May 8th, 2007 @ 8:07pm

    Re: I think you misunderstand...


    Wrong. Try explaining that one to NTP as they swim in their $612.5M settlement. I'm not saying that I necessarily agree that NTP got the settlement. I don't think they're worth the court papers that were filed...but it does prove you otherwise.


    Ah, interesting point. However, let me explain what I meant in the original. I'm not saying there's no *money* in it -- just that it's wasted money. The $612.5M that went to NTP is wasted money. It's money that isn't going into developing new and useful services. It's the broken window fallacy. Yes, it's money, but it's money that's going to fix the broken window, rather than going into anything useful or productive. There's no real value there. There's negative value, because it's taking money away from actual innovation.

     

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  3.  
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    eBusiness, May 8th, 2007 @ 8:22pm

    An Exageration But...

    Obviously intellectual property being 80% of valuation of US companies is an exaggeration but, I do believe the overall value found in intellectual property is devalued by most. Now more than ever infrastructure and distribution is becoming cookie cutter in the future the main worth of all companies will simply be in its unique ideas (intellectual property). http://www.ebizmba.com

     

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  4.  
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    rEdEyEz, May 8th, 2007 @ 10:45pm

    real world

    Intellectual property does not create value. It only establishes a claim upon the POTENTIAL value of the property in question. For IP to yield value it must be acted upon.

    Value is created by innovators who apply intellectual property as they CREATE new products and services, or IMPLEMENT new methods. Laws, lawsuits, and settlements are a means of CONTROLLING the value that innovation/innovators create, purely for the purpose of ensuring a share of, or a "piece of the pie," however big the pie may be, and DEPENDENT upon how big the pie IS.

    ...locking away your IP in a vault serves noone, and really has no value; until, of course, someone cries "infringement!"

     

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    FreeVoice, May 9th, 2007 @ 1:06am

    IP is 400% of US valuations

    I think the IP value is more like 400% of US Valuations.

    Think of the MP3 patent lawsuit, Fraunhofer created the format, it's worth about $150 million a year in licenses.

    Alcatel-Lucent comes along and extracts $1.5 billion worth of damages from Microsoft for their disputed claim to own a tiny part of MP3.
    http://news.com.com/Microsoft+hit+with+1.5+billion+patent+verdict/2100-1030_3-6161480.html

    It's a zero sum game, if Alcatel has $1.5 billion more IP, then Microsoft has $1.5 billion less IP. Yet they don't reduce their claimed IP valuations. So they're overcounting the true IP valuation.

    There's so much overlap in these vague patents and wherever they overlap, the valuation is fully counted by all the parties with overlapping patents in that area, as though they owned the overlap. But anyone of those bad patents can completely shut down a company, there must be a net negative value of the IP.

    i.e. the business they have that pays their bills is actually counted as non tangible assets in other companies balance sheet 4 or 5 times over. But they can never use those patents to extract money from Nokia, because you can never extract more tangible assets than really exist, so the game would be up if that happened.

     

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  6.  
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    TriZz, May 9th, 2007 @ 5:34am

    Re: Re: I think you misunderstand...

    I understand. That $612.5M was broken window money for RIM (who won't have it to R&D new and exciting products) but it's a winning lottery ticket for NTP, and I think that's what Ocean Tomo is trying to do; sell the NTP dream.

    Given the value of that one patent though, how much do you think the rest of (the useful) patents are worth? Some patents are in place and working for the patent holder...the way it should, right? Or is our system just entirely broken?

     

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  7.  
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    Matt Bennett, May 9th, 2007 @ 8:06am

    You know what the value of something is? Exactly whatever someone will pay for it.

    So no, IP by itself is not valueless, people will pay money for naked IP. It's probably not 80% of a company's net worth, either.

     

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  8.  
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    Stupiculous, May 9th, 2007 @ 11:48am

    How valuable is patent valuation?

     

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