Monday, December 28, 2009

Did I get it wrong?

Did I get it wrong?

As the year draws to a close, I look back at my big prediction for the year.

A perfect storm for IP?

I thought this year would be the year for IP to come into its own. It was based on 6 streams of reasoning.

Changing asset composition

According to Ned Davis Research, the proportion of intangible assets as a percentage of market capitalization in the S&P 500 companies has risen from 16.8% in 1975 to 79.7% in 2005. Research by Deloitte and others has also put the proportion of intangible assets in the region of 80%. A logical consequence is that 80% of corporate consciousness should be directed towards getting the full value from the intangible assets.

Big awards

The NTP settlement of 612.5m with Blackberry-maker Research In Motion in 2006 put intellectual property on the global corporate map. However it was not a once-off event.
This year, big court awards and settlements continued to hit the news. Some examples are Uniloc Vs Microsoft ($388m verdict, later vacated), Visto Vs RIM ($267.5m settlement), Versata Vs SAP ($138.6m verdict), i4i Vs Microsoft ($200m verdict). These continued to hammer home the fact that intellectual property has a value in itself.

Credit crunch

Even the biggest organisations had problems getting financing this year. Entrepreneurs used to present their business models relying on bank or VC financing based on potential future profitability. That model no longer holds. Companies have to show that they can be self-sufficient to cover short term financing with internal cash flows. One way of doing this is by licensing IP.

Profitability problems

As profits continued to be hit, companies are changing their attitude to keeping their markets closed. CEOs are trying to make the best use of existing assets and are looking for alternative sources of profit. The news about big awards (above) called their attention to the possibility that their own IP may have marketable value.

President Obama

Early in his term, President Obama announced that he was targeting offshore assets in “tax havens”. If you ask any company about their assets in offshore jurisdictions, there are 2 types of asset – cash and IP. With the threat of closer scrutiny by US revenue authorities, it was believed that companies would avail of the opportunity to come onshore to more acceptable jurisdictions.

Favourable tax regimes

For countries struggling to set a future economic strategy, the received wisdom is that the future will be in intellectual property. Many of those countries have changed their laws to encourage IP management activities. The theory is that it will encourage both indigenous innovation and foreign direct inward investment. Whenever I spoke to people in the Big 4 accountancy firms, they were very confident that there was huge interest and that the new laws would be a spur to action.

The logic for the Perfect Storm

So there you have it – intangible assets becoming predominant, CEOs realizing they have a value, need to raise cash, need to find new profits, President Obama forcing IP onshore and countries creating a welcoming nest for the onshored assets. It sounds like the perfect recipe for a sea-change.

But it never happened

When I talk to the Big 4 guys, they are still talking coyly about the “huge interest”, but in fact very few projects have been announced.

In defence of my predictions, I can say a few things happened:

  • Patents have been under attack. Alleged infringers are using the re-examination process as a defensive tool. Sometimes they are even using it as a pre-emptive defensive or offensive weapon. The result is that there is less certainty about the presumption of future validity of a patent.
  • There was further uncertainty in advance of the re-run of Bilski regarding software patents.
  • With the drastic reduction in venture capital activity in IP and the cash needs of inventors, the achievable sales prices of patents has fallen. I have seen patents that were valued at over $300,000 selling for less than $40,000. Ocean Tomo was criticised as a failure when their auction this year fell dreadfully short of expectations. The reality was that Intellectual Ventures, previously the predominant supporter of the Ocean Tomo auctions just stopped buying new IP at auctions this year.
  • CEOs are more cautious. Even though they know that they should be looking out for new sources of profit, they are not adventurous. Even if a project will yield clear profit streams within a very short time, they do not want to make any investment in a new activity right now.
  • Another source of hesitancy is that most companies have never actively commercialized their IP, so they just don’t have the will to start right now.

Big thank you

I have enjoyed the feedback from various readers during the year. You challenged my thinking and helped me grow.
I thank you all and send you warm wishes for success in 2010.

1 comment:

  1. Great post. Indeed, the outlook was promising, but the IP market didn't quite get over the hump. Growth continues, though, and as the C-Lever suite becomes more educated on the real value of IP, it will become the asset class we think it can be. Happy new year.