Landscape 2013: Who are the Players in the IP Marketplace?
|Written by: Raymond Millien
Senior IP Counsel, GE Healtcare
Posted: January 23, 2013 @ 10:30 am
In October of 2007, Ron Laurie and I first presented our paper, entitled “A Survey of Established and Emerging IP Business Models,” at the 8th Annual Sedona Conference on Patent Litigation. In that often-cited paper, we presented a new taxonomy comprised of seventeen IP business models in the marketplace. Although, admittedly, the taxonomy we presented was not perfect, we did feel that it adequately described what we observed as the rise of intermediary business models in the IP marketplace. So where are we now as we enter 2013?
The latest statistics show that the cumulative value of U.S. intellectual property is approximately $5.8 trillion (or 48.4% of GDP), and each year over half a million patent applications are filed, over a quarter million patents are issued, over 4000 patent infringement suits are filed and IP verdicts total over $4.6 billion with a median patent damage award of approximately $4 million. Against this backdrop, I now present an updated taxonomy containing 19 IP-related business models. The business models are in addition to the “traditional” operating companies and their “traditional” IP law firms. Further, while not pretending to be all-inclusive, a directory of players implementing one or more of these 19 IP business models is available for download at the end of this post.
What are these models and who are the respective players implementing them? These models and their players are generally referred to as “IP intermediaries” because they are neither the IP creators nor the IP “consumers” (e.g., licensees and purchasers). These intermediaries, however, attempt to perform one or more services or offer one or more products that connect the IP creators and the IP consumers.
More specifically, these IP business models include:
- Patent Licensing and Enforcement Companies (PLECs)
- Institutional IP Aggregators/Acquisition Funds
- IP/Technology Development Companies
- Licensing Agents
- Litigation Finance/Investment Firms
- IP Brokers
- IP-Based M&A Advisory Firms
- IP Auction Houses
- On-Line IP/Technology Exchanges, Clearinghouses, Bulletin Boards, and Innovation Portals
- IP-Backed Lending Firms
- Royalty Stream Securitization Firms
- Analytics Software and Services Firms
- University Technology Transfer Intermediaries
- IP Transaction Exchanges & Trading Platforms/IP Transaction Best Practices Development Communities
- Defensive Patent Pools, Funds and Alliances
- Technology/IP Spinout Financing Firms
- Patent-Based Public Stock Index Publishers
- IP Insurance Carriers
A brief description of each of these 19 IP business models follow, along with some example players. (Admittedly, many firms offer multiple services and thus may be categorized within several of the models within the taxonomy. Thus, the taxonomy does not claim to be perfect, but simply a starting point for understanding the current state of the IP marketplace.)
1. Patent Licensing and Enforcement Companies (PLECs)
These are entities that own one or more patent portfolios, attempt to license them through targeted letter-writing campaigns and then file patent infringement suits against those letter recipients who refuse to enter into non-exclusive licenses. Those that practice this business model are often called non-practicing entities (NPEs) or (rightly or wrongly) “patent trolls.” In some cases, the PLECs have purchased the patents they are asserting and, in other cases, the PLEC entity is actually founded by the inventor(s) of the asserted patent portfolio. (Although in the latter case, such entities are not technically “intermediaries”.) PLECs therefore generate revenue both from license fees and from the annual $4.6 billion IP awards market. (N.B.: Copyright trolls have also been evolving, but we leave that to a future post.)
Example Players: Acacia Research, Fergason Patent Prop., Lemelson Foundation, LPL, NTP, Patriot Scientific, RAKL, Rockstar Consortium, Round Rock Research, TLC and TPL Group.
Operating companies have begun spinning groups of patents to PLECs to generate additional revenue. This is essentially outsourcing an operating company’s patent monetization function to an entity that already has perfected the model. Apart from the tremendous cost savings, the operating companies shield themselves from cross license and counter-claim exposure, as well as avoiding anti-competitive regulations, bad publicity, etc. This is essentially an “if you can’t beat them, join them” approach. This new licensing strategy is named after the sixteenth to nineteenth century practice where one government would authorize private parties to conduct acts of war against another government, especially on the high seas. This saved the authorizing government from the expense of building navies for the same purpose.
Example: Acacia w/Renesas and Acacia w/Access Co. Ltd.
3. Institutional IP Aggregators/Acquisition Funds
These are entities that operate in a sort of private equity fashion. That is, they typically operate as general partners of a limited partnership and raise money either from large technology companies or from the capital markers (institutional investors and even high-net-worth individuals). The investors are promised above average ROI from selective, targeted or large-scale patent purchases with the goal of instituting licensing programs and/or employing various arbitrage strategies.
Example Players: Coller IP Capital and Intellectual Ventures.
4. IP/Technology Development Companies
These are entities that engage in R&D activities and produce IP (including both patents and know-how) much like traditional operating companies; however, the developed technology is not used to manufacture products in the form of physical goods. Rather, the IP associated with the technology is licensed by these entities to one or more operating companies so that the operating company may bring products and services employing the technology and IP to the marketplace. Often the IP creator provides consulting services to the licensee to integrate the technology into the licensee’s products or processes. Thus, these firms are not true intermediaries between patent owner and patent licensee. They are intermediaries, however, in the sense that they form a link between the creator of the patented technology and those who commercially deploy it in the form of products and services. In some instances, however, these companies choose to produce and sell products embodying the IP they develop themselves, as well as licensing others.
Example Players: AmberWave, InterDigital, MOSAID, Qualcomm, Rambus, Tessera, Walker Digital and Wi-LAN.
5. Licensing Agents
These are entities that function as intermediaries by attempting to assist IP owners in finding licensees. Entities that function under this business model often call themselves “IP advisory,” “IP consulting,” “IP management” or “technology transfer” firms. While the amount, quality and depth of services vary, to some degree in shape or form, they all earn retainer and/or success fees by assisting patent owners with finding licensees. Accordingly, these entities may function more like traditional consultants where the patent owner stays very involved in the licensing process, or they may function more like IT companies where the patent owner essentially “outsources” patent monetization and is not involved in day-to-day licensing operations, but still collects a majority of any licensing revenue. The various licensing agents also differ as to whether they engage in “carrot” licensing or “stick” licensing activities. In the latter case, these entities tend to engage in activities that start to closely resemble the PLEC business model.
Example Players: Fairfield Resources, Fluid Innovation, General Patent Corp., ipCapital Group, IPValue, ThinkFire and TPL.
6. Litigation Finance/Investment Firms
These are entities that are a cross between PLECs (Model 1) and IP Acquisition Funds (Model 3). That is, like IP Acquisition Funds, they operate as general partners of a limited partnership and raise money from large institutional investors and high-net-worth individuals. Like PLECs, however, their stated goal is to acquire a financial interest in patent portfolios for assertion. The assertions typically take the form of targeted letter-writing campaigns, followed by patent infringement suits against those letter recipients who refuse to enter into non-exclusive licenses. Variances in the model (and from a PLEC) include the level and nature of ownership or participation (e.g., equity vs. debt) that the firm takes in the patent portfolios being asserted or in the patent-owning entity itself (typically an LLC formed for the purpose of assertion).
Example Players: Altitude Capital, IP Finance, Rembrandt IP Mgmt., NW Patent Funding and Oasis Legal Finance.
7. IP Brokers
These are entities that function essentially the same as Licensing Agents (Model 5) discussed above. The key distinction, however, is that they seek to assist owners of IP (primarily patents) in finding buyers rather than licensees. Also, unlike licensing agents, they operate both on the sell-side and the buy-side. In the latter case they often assist technology companies in acquiring patents having “strategic” (i.e., defensive) value vis-à-vis their competitors. Thus, a typical engagement term between an IP Brokerage firm and an IP owner is shorter than that of a Licensing Agent firm. This is because once the IP is sold, the IP Broker takes a percentage of the sale as a success fee and the engagement is done. (It is a “one hit and done” engagement.) Thus, there is no opportunity for recurring revenue (unless the client later decides to sell additional IP). In contrast, buy-side brokerage engagements can continue indefinitely as the broker’s client strengthens and extends its IP position over time. Entities that function under this business model also often call themselves “IP advisory,” “IP management,” “IP merchant banking” or “technology transfer” firms. While the amount, quality and depth of services vary, in some shape or form, when representing a seller, they all prepare a “pitch package,” identify potential buyers and earn retainer and/or success fees by actually assisting IP owners in negotiating the terms and conditions of the sale agreement with buyers. These entities may function more like traditional consultants where the IP owner stays very involved in the process, or they may function more like IT companies when the IP owner essentially “outsources” the monetization of the IP and is not involved in the day-to-day sale efforts, but still collects a majority of the sale revenue (minus the Broker’s commission and, in some cases, the Broker’s expenses). In contrast, buy-side, brokerage engagements almost always involve a close working relationship between buyer and broker.
Example Players: Bramson & Pressman, Iceberg, Inflexion Point, Epicenter IP Group, Pluritas, Semiconductor Insights and ThinkFire.
8. IP-Based M&A Advisory Firms
These are entities that operate in a traditional investment banking model – advising technology companies in their merger and acquisition (M&A) activities and earning fees based on the value of the entire deal (or apportioned according to the value of the IP within the deal). Whether doing “sell side” or “buy side” engagements, these entities obviously focus on the IP assets within contemplated corporate transactions where IP is driving, or a major component of, the transaction. Services provided by such entities include IP due diligence, consultation on the integration of IP assets and operations as a result of M&A activity, IP deal structuring advisory and general consultations related to contemplated investments, mergers, acquisitions, divestitures, joint ventures and other corporate transactions. This so-called “second generation IP investment banking” involves not just maximizing IP value in the context of a “traditional” corporate acquisition or divestiture, but actually sourcing the transaction based, at least in part, on IP considerations. Here the IP investment banker assist operating companies in identifying potential acquisition targets or acquirors with complimentary IP assets.
Example Players:Blueprint Ventures, Inflexion Point, Pluritas, and Real Capital Analytics.
9. IP Auction Houses
These are entities that are attempting to do for the IP marketplace what famed London auction houses Christie’s and Sotheby’s did for the antique and art marketplace. That is, these entities are auction houses that hold multi-lot, live auctions for patents with the intent of providing a marketplace for facilitating the exchange of such historically-illiquid assets. While there are various auction formats and structures (English, Dutch, etc.), such auctions enable sellers to offer one or more patents according to a pre-determined set of terms and conditions and allows the auction house to charge listing fees, attendance fees, buyers’ premiums and/or sellers’ commissions. Also, other entities aim to be the “eBay of patents” by offering online patent auctioning services.
Example Players: PatentAuction.com, IPAuctions.com, IP Auctions GmbH, and ICAP.
10. On-Line IP/Technology Exchanges, Clearinghouses, Bulletin Boards, and Innovation Portals
These are entities that function like the business-to-business (B2B) web sites that became the rage during the late 1990’s dot com boom. These entities, however, offer web platforms and interfaces specialized for patent and other IP assets. Essentially, this model can be thought of as online classifieds like Craig’s List, but for IP. (Using the analogy of an online version of the Licensing Agent or Patent Broker IP business model would also be appropriate.) Within the model, there are variances such as whether listing fees are charged to patent owners/sellers in addition to, or versus, back-end fees for successful patent sale or licensing transactions. Additional variances include whether these sites are public and browseable for free, or whether they are private, “member’s only” sites that require registration (and presumably a registration and/or annual membership fees). Some of these sites also offer forums, bounties, challenges and idea exchange platforms that aim to spur innovation and thus create new IP.
Example Players: InnoCentive, NineSigma, Novience, Open-IP.org, Tynax, and Yet2.com.
11. IP-Backed Lending Firms
These are entities that provide financing for IP owners, either directly or as intermediaries, usually in the form of loans (i.e., debt financing), where the security for the loan is either wholly or partially IP assets (i.e., IP collateralization). Thus, these parties often function as intermediaries between borrowers and commercial lending institutions, such as banks. Unlike traditional bankers who focus on accounts receivable and tangible assets, however, these IP-backed financiers take into account a borrower’s or target company’s (potential or actual) IP assets in structuring a financing transaction. Variances in this model include entities who deploy their own capital (and thus resemble IP investment firms) or who maintain a network of technology- or industry-specific investors to whom they refer IP owners (and thus resemble patent brokers).
Example Players: IPEG Consultancy BV and Paradox Capital.
12. Royalty Stream Securitization Firms
These are entities that counsel, assist and/or provide capital to patent owners performing IP securitization financing transactions (which resemble the more common mortgage-backed securities). In such transactions, an entity sells their IP underlying the transaction to a bankruptcy remote entity (a “BRE”), and the BRE grants a license back to the IP to the original owner. The BRE, in turn, issues notes (i.e., IP-backed securities) to investors to raise cash to pay the original IP owner the agreed-upon purchase price. The notes are then backed by the expected future royalties to be earned from licensing the underlying IP (to the original patent owner and/or third parties). At the end of the transaction, the original IP owner has essentially raised funds much more cheaply than a loan backed by its traditional assets. Thus, the IP-backed notes will generally be higher-rated commercial paper reflecting the quality of the IP and not necessarily the overall creditworthiness of the original IP owner.
Example Players: alseT IP and Global Franchise Group.
13. Analytics Software and Services Firms
These are entities that provide advanced patent search and analytics software tools that allow patent owners, prospective buyers, attorneys, investors and other players in the IP marketplace to obtain various due diligence intelligence and data points about a single patent or patent portfolio. These software tools and platforms provide varied outputs related to patent “quality” such as validity probabilities, maintenance fee-related life expectancies, various infringement-related metrics, prior art analysis, “related patent” analysis, citation-related metrics, etc. These entities earn revenue from pure software sales/licenses, as well as consulting fees.
Example Players: 1790 Analytics, IP Checkups, Next Steps Research, Pantros IP, PatentRatings.com, Scottish Enterprise, TAEUS and The Patent Board.
14. University Technology Transfer Intermediaries
These are entities that function as IP Development Companies, IP Acquisition Funds, Licensing Agents and/or Patent Brokers, but focus on the niche university technology transfer (i.e., licensing) market. The choice to focus on the university market by such entities is not surprising given that in the 2011 fiscal year, U.S. universities and research institutes spent over $61 billion in R&D, filed over 13,000 U.S. patent applications and had over $2.5 billion in licensing revenue.
Example Players: Texelerate and Innovaro
15. IP Transaction Exchanges & Trading Platforms/IP Transaction Best Practices Development Communities
In further attempts to make IP a more liquid asset class, plans have been announced to create traded exchanges (whether physical or online locations) similar to the NYSE and NASDAQ where yet-to-be-created IP-based financial instruments would be listed and traded much like stocks are today. Another variant involves an on-line trading platform where IP buyers and sellers can come together to execute transactions based on a set of agreed rules developed by a “best practices” steering committee composed of major corporate buyers and buyer-sellers.
Example Players: American Express IP Zone, Gathering2.0 and IPXI.
16. Defensive Patent Pools, Funds and Alliances
This category includes several different types of defensive entities. One was born in reaction to the established PLEC (Model 1) and Institutional Patent Aggregator/IP Acquisition Fund (Model 3) business models described above. These entities seek to selectively acquire portfolios of patents for defensive reasons. They often focus on one technology area or in one industry segment, and are inspired by a “let’s take these patents off the street before the asserters get them” attitude. Thus, this model results in multiple operating companies – who may have not previously cooperated, done business or even respected each other – joining financial and other resources to create an independent entity to acquire potentially “problematic” patents, and license them to anyone willing to share the financial cost of acquiring the patents and the management overhead of administering the pool. One variant of this basic model, referred to as “catch and release,” involves a consortium of operating companies that buys patents which have been put on the market (e.g., via auctions, brokers or direct sale), licenses them to the members, and then sells the patents, preferably though not necessarily, at a profit. In another variant, referred to as a “library fund,” a group of corporate investors pool capital to buy patents that may be “of interest” to certain large operating companies who are known to be aggressive in asserting patent claims against competitors. If one or more of the alliance members is threatened or sued by one of these companies, the affected member(s) can “check out” the patents to use in a counterattack. (This model obviously is not useful against asserters who have no infringement exposure.)
Example Players: Allied Security Trust, Constellation Capital, RPX and Open Invention Network.
17. Technology/IP Spinout Financing
This emerging business model is best described as being organized as a traditional venture capital (VC) or private equity firm, but specializing in spinning out promising (non-core) IP which has become “stranded” within larger technology companies, or creating joint ventures between large technology companies to commercialize the technology and monetize the associated IP. Thus, the revenue for this emerging business model is the same as a traditional VC or private equity firm – achieving a high ROI once a portfolio company is sold, goes through an IPO or even evolves into an IP licensing company.
Example Players: Altitude Capital, Blueprint Ventures, Inflexion Point, IgniteIP, New Venture Partners and Real Capital Analytics.
18. Patent-Based Public Stock Index Publishers
This business model is the evolution of the established Analytics Software and Services business model (Model 13) described above. That is, once the entities offering these software tools and platforms realized that nearly 80% of the value of a U.S. publicly-traded company now comes from intangible assets, and that they possessed tools to measure the “quality” of arguably the largest part of those intangible assets, it became clear that another potential source of revenue would be the creation of formalized stock indexes based on their existing software tools and platforms. Put in different terms, the analytics software and services industry theorized that investing in stocks with valuable patents may allow investors to commit a meaningful and sustainable portion of their assets to IP and allow them to outperform other investment strategies. Thus, they sought out different algorithms to create baskets of stocks using the “quality” of a publicly-traded company’s patents as the primary selection factor. Revenue from such an emerging business model includes the sale of equity research and the licensing of such indexes to ETF, mutual fund and other investable financial instrument issuers.
Example Players: Ocean Tomo and Patent Board.
19. IP Insurance Carriers
Typical commercial insurance (i.e., Commercial General Liability (CGL)) policies carried by businesses do not cover IP claims. Thus, some insurance carriers currently market three basic types of IP policies: (i) First-Party IP Coverage, which protects the value of an insured’s direct loss sustained when its revenue streams are diminished from a direct and resultant impact upon its IP rights; (ii) IP Defense Cost (defense coverage), which protects a company against allegations that it improperly used the IP of another; and (iii) IP Abatement Coverage (enforcement coverage), which funds an attack on a party that improperly uses the insured’s IP. Given that the U.S. market is particularly difficult for IP insurers due to the high frequency of suits and the high cost of litigation, policy limits typically range from US$1-50 million and premiums range from 10-15% of the policy limit.
Example Players: AIG, Hiscox, IPISC, Kiln and The Hartford.
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A Directory of the IP Players can be found here.
About the Author
Raymond Millien, a member of the IAM Strategy 300, is Senior IP Counsel at GE Healthcare where he leads global IP strategy for its $6.1B software, consulting and services businesses. Mr. Millien received a B.S. from Columbia University, and a J.D. from The George Washington University Law School. Mr. Millien may be reached by at email@example.com.
PLEASE NOTE: This article reflects Mr. Millien's personal views as of the date the article was published and should not be necessarily attributed to his former, current or future employers, or their clients.