IS THERE REALLY A "PATENT BUBBLE"?

In 2013 the patent market continues a steady climb after a series of high profile patent deals over the past year. The market avoided a “patent bubble” that some predicted after the technology titan bidding war in the Nortel patent sale of 2011. There is little indication of a “crash” that would have decreased the value of patents across the industry and left investors with subprime patent assets. The market shows signs of maturity despite events like Nortel, which can spike the cost for patents above their real market value. By all accounts, the current patent market enjoys stable growth, hampered neither by irrational exuberance nor investors’ cold feet for patent investments. Further, the increased activities of NPEs (brokering firms, private equity funds, aggregation entities, etc) and their collaboration with traditional patenting firms may be helping the patent market by facilitating deals involving smaller firms and portfolios.

The number of patent transactions continues to grow steadily year over year. According to the Global Technology Transfer Group (GTTG), the patent transaction market enjoyed growth over eight quarters since the beginning of 2010. In the third quarter of 2012 many small (less than 20 patent assets) or medium transactions (20-100 patent assets), and a few large transactions (100+ patent assets) marked a quarterly upturn in patent deals with 4,103 total patent asset transfers or secondary assignments. Aside from a seasonably low second quarter in 2012, economic activity in patent markets appears healthy with consistent growth. As discussed below, when evaluating the patent market its crucial to look at overall market figures, such as those released by GGTG, rather than from anecdotal lessons around transactions like the Nortel deal.

The mid 2011 Nortel patent sale involved inflated patent prices caused by rivals bidding against each other rather than working in partnership to obtain Nortel’s patent assets. The Microsoft-Apple lead consortium paid $750,000 per patent for 6,000 patent assets, outbidding Google’s offer after 18 rounds of fierce bidding. Watching the Nortel situation, players in the patent market learned that synchronizing buying efforts would avert a Nortel-like bidding war, and drive the price for portfolios towards market value. In late 2012, a consortium lead by Intellectual Ventures (IV) and RPX paid an average $477,000 per patent for 11,000 patent assets from Kodak, for a reported total of $525 millions, whereas initial aluations were in the $2-3B range. By working in partnership, members of the consortium minimized their individual costs for rights to the Kodak portfolio. After Kodak, it is unlikely the patent market will see another Nortel.

The consortium lead by IV and RPX included deep pocketed patent firms, many of whom might have bid against each other had Nortel not taught the lesson that rivalrous bidding is more expensive than collaborative bidding. IV, perhaps the largest patent aggregator in the world, is no stranger to competing for patents against many of the very firms whose interest in the Kodak portfolio it coordinated. The IV consortium may signal the end of inflated patent values resulting from Nortel-like bidding wars, unless there is a portfolio that technology giants want at the absolute exclusion of all others in the industry. The IV consortium demonstrated how private industry efforts can curb irrational bidding behavior that drive up prices for patents above market value. In other words, the IV consortium helped the technology industry avoid a patent bubble by showing the unsustainability of Nortel-like patent prices.

Research on the value of patents has not shown a patent value crash across the patent market after Nortel. In October 2012, Dr. Jack Lu from Applied Economics Consulting Group presented at a Licensing Executive Society (LES) workshop empirical research on inconclusive evidence of a patent bubble. Assessing a sample of pre and post Nortel patent transactions, Lu calculated the average value per patent pre-Nortel at $237,000, compared to a post-Nortel average of $319,000. Lu also calculated the pre-Nortel median value of patents at $578,000 and post-Nortel median at $289,000. Lu acknowledged that figures may be skewed by a few large transactions for expensive portfolios, however the numbers do not demonstrate that the Nortel deal signified a systematic drop in patent value.

In February 2013 IPOfferings (IPO) released its annual Patent Value Quotient report, which found a higher average value per patent but a lower median value of patents than Lu’s calculations. Based on 35 reported post-Nortel patent transactions in 2012, the firm estimated the average value per patent at $422,000 and median value at $220,000. Detailed information available from the IPO dataset reveals how three large transactions affected the calculations. Setting aside patent purchases by Microsoft, Samsung and Intel, which accounted for 14% of transacted patents assets, $1.1 billion for 971 assets (averaging $1.1 million per patent, with a median of $1.4 million), the IPO report’s average value per patent drops to $303,000 and the median value falls to $200,000. The recalculation of the IPO dataset sets the average post-Nortel patent value close to Lu’s estimate of $319,000.

Patent Value Quotient: Average Paid per Patent by Technology in 2012

Taking research from Lu and IPOfferings as representative of patent transactions indicates that the average value for patents has increased post-Nortel, while median patent value has decreased; suggesting that in the years after Nortel transacted patents have gained in value, while there is an increase in transactions involving smaller portfolios. This conclusion is only tentative given the limited research data. A critical aspect in patent value assessment is the lack of industry transparency and disclosure. Most transaction details are not available to the public. Information such as total payments, size of portfolios, uniqueness of patent assets and industries that patent assets cover often stay under lock and key. Patent market research is prone to high margins of error. Although the findings by Lu and IPOfferings are not conclusive, they point in the opposite direction of a post-Nortel patent bubble.
Based on our own experience as active patent brokers with close to 2000 assets sold in the past couple of years, we can definitely point to a flight to quality patents and the gradual disappearance of a market for non infringed patents that are still ahead of the industry. This could change once again if and when Intellectual Ventures closes its third fund, as it would enable the aggregator to invest in new uncharted areas. But for now, despite an increasingly larger number of buyers, your patents are only as good as the claim charts you can produce to evidence possible infringement.

Many other variables can influence patent value other than the attention of corporate titans. Patent strength and extent of use in the industry are universal factors in patent value. Patents in large portfolios may be more valuable because of their relationship to complementary assets in the portfolio. How a patent buyer intends to assert a patent may also affect its valuation because royalty rates per patent may reflect a different value assessment than a successful infringement suit. Whether a patent owner is selling a litigated or non-litigated, a non-used or commercialized patent may also affect patent value.

Nortel-like situations may spike patent value without signaling trends in the broader patent market. When large players strategically pursue patent initiatives, the mere size of their pocketbooks can inflate the value of target portfolios. Such activity may not reflect a net increase in patent value across the market as much as they do the phenomenon that competition for particular patent assets among big rivals drive up the price of those assets to the extent of the firms’ pocket books will allow. The smartphone patent war between Apple and Samsung may have raised the value of mobile patents when Apple won over a half billion dollars in damages, however with the litigation subsiding the mobile patent frenzy may calm down. Additionally, after firms like Facebook and Google catch up in the patent game by buying portfolios containing hundreds to thousands of patent assets, they may slow down patent acquisitions once they’ve reached a strategic critical mass of patents in their coffers.

In short, the narrative on a possible patent bubble after Nortel has little supporting evidence and does not address the many factors that suggest a strong, healthy patent market. Ascertaining the true market value of patents helps parties pursue their strategic interests, enabling both seller/licensor and buyer/license side confidence. Such an assessment must look at the overall market, including transactions for small portfolios and those involving NPEs, in addition to front page headline grabbing transactions undertaken by big spending corporations. The patent market is currently doing well, with many untapped patent assets available for new transactions.