Patent Holders Learn to Adapt to More Investor Scrutiny

With a greater role in more businesses’ performance, patent assets and strategy are going under the microscope.

The required disclosure and hyper-scrutiny that small public patent licensing companies are subject to may be starting to affect larger, more defensive IP holders, including Apple, Intel and Sony. The increased interest is more likely to benefit those that perform.

In “Reveal Thyself,” the latest Intangible Investor in IAM Magazine, out next week, I look at how the heightened awareness of some tiny IP-centric companies, many of them NPEs with an out-licensing model, is likely to affect larger patent holders with diverse business models. Here is an excerpt:

IP success is no longer a “trust me” proposition for the terminally confused. Value and performance must be explained, and respect earned. For smaller patent holders looking to make a mark with licensing revenue, as well as for larger ones protecting profit margins, the first rule IP reporting is the same: under-promise and over-deliver. 

Not all public IP companies (PIPCOs) are driven by a simple out-licensing or assertion model.  Some are operating companies that sell products and conduct 0tightrope walker1R&D. (Colleen Chien may choose to believe otherwise, but not all small patent-rich businesses have assertion covenant written into their charter. “Patent assertion entity” (PAE), as a term, presumes a business’ raison d’être is litigation. It is disturbing that some anti-patent forces are trying to make it the defacto term for “licensing businesses.” Private and public licensing companies are not “suing machines” by nature. Enforcement is rarely their first choice. Some learn how to do it really well because they have to to succeed. All operating companies are to some extent non-practicing ones, too. It would be impossible to practice all of the patents they hold.)

The Genie is Out of the Bottle

Like biotech and entertainment industry stocks before them, PIPCOs are complex, typically speculative business models that fascinate many, even though their returns may eventually only satisfy a few. Their survival is inevitably market-based, and subject to a harsh eco-system. (It’s difficult avoiding that term.)  Ultimately, competition will determine who survives — and, as evolution has proved, the strongest typically do. PIPCOs success, failure and cross-breeding will create more valuable assets and  durable business models for ideas and innovation. They also will help provide a greater understanding of innovation rights and how they can be deployed.

In today’s legal and legislative environment the key to business model success for patents may not be the “elephant hunter” hoping to bag the biggest prey. Lofty damages awards paid by Research in Motion, Microsoft, J&J and others, are a currently a relic of the past. Many large awards are reduced, retried and thrown out, and the economics and risk of patent litigation are less amenable to big game hunting.

If history is any indication, IP business model competition will be bloody but ultimately positive. Quality assets, good management and clear performance usually win out in the end not only in spite off the carcasses along the way, but also because of them.

Institutional investors, banks, pension funds and others are slowly becoming more familiar with the language and movements of IP performance. Their positions in smaller entities are among the driving forces, but so are is M&A, like Motorola’s sale to Google. Because PIPCOs are more directly affected by licensing and enforcement, and closely monitored for strengths and weaknesses, they may provide a better worthwhile, if more painful, learning experience.

Some investors may choose to look at larger patent holders through a similar lens. If it is inappropriate to do so then more relevant performance measures will have to be identified, such as market share maintained, profit margins protected and the number and cost of suits settled (or avoided). 

While not all patent-rich businesses or business models, small or large, are likely to succeed, focusing systematically on their performance is likely to lead to more robust survivors, and fewer disillusioned investors.

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