Patent Valuation Methods
This article takes an in-depth look at a recent surge in patent deals and litigation that have added an emphasis on the need for better and more sound valuation principles in regards to patents. Patent valuation is, and has been for the last decade or so, a hot topic among scholars and industry professionals. This article looks at recent public deals and applies some general financial models and metrics to understand which patent valuation method appears to have the greatest relevance.
The market model, although intuitive, seems to only provide a basic rule of thumb, rather than an accurate valuation and requires further in-depth analysis of the relevant portfolios.
The income model generates, what seems to be, reasonable numbers, making it a better tool for comparisons. This is particularly the case when identifying the royalties needed to break even. However, as the reasonable income model metrics also vary, there has to be another deciding factor. For example, looking at the blockbuster deals (Google/Motorola and Rockstar), a different set of metrics was likely applied, as the deals are unique in terms of size and heritage.
With so many large, IP-savvy companies choosing to pay varying amounts for patents, regardless of the conclusions that may be drawn from the valuation models, there seems to be an "X Factor" surrounding patent valuation. Potential contestants include: product launch strategy, immediate opportunities/threats, encumbrances and geography; not to mention patent quality. However, could the "X Factor" simply be that a patent’s value is wholly determined by the amount an acquirer is willing to bid?
Although the use of financial models to value patents are increasing in popularity, one cannot simply match patent value to its potential revenue generation without first understanding the market context and the multi-variable strategic factors that override the proposed valuation.
The value that a group of patents can generate depends on a variety of factors that are specific to that group (eg. geographic coverage, encumbrances, prior art, file history etc.), as well as on the context of use. 100 patents in the hands of a large corporation can be worth much more than the same patents if they were in the hands of a lone inventor.
Perhaps this is the greatest distinction to be drawn when considering patents as an asset and assessing them on the same basis as financial instruments. Every owner of a given financial instrument can expect to receive the same return, and so their main problem is to know which instruments to buy and at what price. For patents however, not only does one need to consider price but also the strategy and capabilities that can be linked to the patents to achieve a return. The two latter factors are very difficult to assess in a financial model, which will assume a transparent market with all investors being equal. This is perhaps why we conclude that the various patent valuation models mainly function as indicators, rather than giving a definitive answer which would allow them to be used as the decision making tools for both sides of any transaction.
Read the full Patent Valuation Methods article here