The Wealth of Innovations: An Inquiry into the Nature and Causes of the Wealth of Innovations - Marc Ehrlich, IBM

Content Adapted From “The Invisible Hand –Models for Monetizing Patents in the 21st CenturyRichard M. Ludwin & Marc A. [email protected] [email protected] i ht 2012 13 14 All Ri ht R dCopyright 2012, 13 ,14 All Rights Reserved

The Wealth of InnovationsThe Wealth of InnovationsAn Inquiry into the Nature and Causes of the Wealth of Innovations*

© 2009 IBM Corporation*With Apologies to Adam Smith

The Patent System Is Broken!The Patent System Is Broken!

© 2009 IBM Corporation2

At last something is being done about the dysfunctional

Frivolous lawsuits by trolls cost American companies $29 Billion

Trolls do not make anything but send outthousands of “demand letters” to companiesWitness the lengthy legal disputes…many innovators claim electronics and

software industries would flourish without

A perfectly adequate means for protecting andawarding software developers for their ingenuitydone about the dysfunctional

way America’s patent systemoperates.

American companies $29 Billionin 2011 alone.

thousands of demand letters to companiesthat allegedly infringe vague and overbroadbusiness process and software patents

Between Apple and Samsung. software industries would flourish withoutpatents.

has existed for over 300 years. It is calledCopyright.


The Patent System Is Broken?The Patent System Is Broken?

ADOPTIONADOPTION



COSTCOST© 2009 IBM Corporation5


F tFeatures


Rational Ignorance - (�ra-shə-nəl �ig-n(ə-)rən(t)s ) - (adj.) (concept: economics, politics, patents)

Ignorance about an issue is "rational" when the cost of educating oneself about the issue to make an informed decision outweighs any potential benefit one could reasonably expect to gain from that decision, and so it would be irrational to waste time doing so.

Incremental BenefitF R h

Saturation Point – Where extra R delivers less Inc. B

From Research

Benefit/Cost

Cost of Research$$ Lost oppty


$$, Lost oppty

Traditional IT FOA Patent Cross Licensing Model: gRational Ignorance

POTENTIAL LICENSEE A

Patent Owner

LICENSEE A

POTENTIAL Patent Owner LICENSEE B$ + Patent Licenses

POTENTIAL LICENSEE C




Patent Owner

LICENSEE A

POTENTIAL 5K PatentsPatent Owner LICENSEE B$ + Patent Licenses5K Patents


© 2009 IBM Corporation925K Patents



5 proofs

3 proofs

Patent Owner

LICENSEE A

POTENTIAL 5K Patents

3 proofs

Patent Owner LICENSEE B$ + Patent Licenses5K Patents





5 proofs

3 proofs

Patent Owner

LICENSEE A

POTENTIAL 5K Patents

3 proofs

Patent Owner LICENSEE B$ + Patent Licenses5K Patents


30,000 Total Patents Licensed- 8 Actually Reviewed___________________


29,992 Total Patents Ignored

Secondary Patent Market Making Ignorance Less Rationaly g g

Catalysts include Asymmetric Risks from NPE’s and Open Source

Li bilit As mm t NPE’sLiability Asymmetry – NPE’s– Speculative Purchasers of Dot.Com BMP’s– Created Asymmetric Risk to IT firms– Firms join secondary market as buyers via defensive aggregators ex. AST, RPXj y y gg g ,– Firms evolve both offense and defense oriented secondary market models

• “Privateer” Monetization of All/Part of Portfolio ex. Round Rock, Unwired Planet• Protect open source from threats ex. OIN

Operatin Company/Consortia created PAE ex Rockstar• Operating Company/Consortia created PAE ex. Rockstar


If you can’t beat ‘em…Join ‘em!yDefensive Aggregation

Offensive Assimilation


Secondary Patent Market Making Ignorance Less Rationaly g g




Operatin Company/consortia created PAE ex Rockstar• Operating Company/consortia created PAE ex. Rockstar

Portfolio Asymmetry – Open SourceGoogle purchases Android open source mobile OS company– Google purchases Android open source mobile OS company

– Becomes top mobile OS within 4 years – But Google doesn’t have patents in the mobile space whereas their competitors MS and

Apple have many creating an Asymmetric Risk to Google via their use of open sourcepp y g y g p– Google goes on patent buying binge including acquisition of Motorola Mobility


Portfolio Asymmetry – A Rude AwakeningPortfolio Asymmetry A Rude Awakening

We actually didn't invest in the patent ecosystem,"We actually didn t invest in the patent ecosystem,"We weren't patenting things as aggressively as we should have been... We just didn't buy into that notion of protecting your IP, and it was a wake-up p g y , pcall." Google VP Corp. Dev. David Lawee 09/11/12 Bloomberg TV interview commenting on Apple Samsung verdict – Aug 2012


Portfolio Asymmetry - Addressing the ImbalancePortfolio Asymmetry Addressing the Imbalance

The tech world has … seen an explosion in patent litigation.,.(Some of) these lawsuits have been filed by people…motivated by a desire to block competing products or profit from the success of a rival’s new technology. …….as things stand today, one of a company’s besttechnology. …….as things stand today, one of a company s best defenses against this kind of litigation is (ironically) to have a formidable patent portfolio, as this helps maintain your freedom to develop new products and services. Google is a relatively young company, and … many of our competitors have larger portfolios givencompany, and … many of our competitors have larger portfolios given their longer histories.So after a lot of thought, we’ve decided to bid for Nortel’s patent portfolio in the company’s bankruptcy auction.. If successful, we hope this portfolio will not only create a disincentive for others to sue Google,this portfolio will not only create a disincentive for others to sue Google, but also help us, our partners and the open source community—Google SVP and GC Kent Walker- Official Google BlogPatents and Innovation, April 4, 2011

http://googleblog.blogspot.com/2011/04/patents-and-innovation.html


Portfolio Asymmetry - Reaping the RewardPortfolio Asymmetry Reaping the Reward

“It is good for the whole ecosystem that Google owns IP that they didn’t own before. That’s very good for the Android ecosystem because maybe everyone was going into this starry-eyed and happy (saying): ‘Ok, there’s a free operating system that we can all work with.’ And we all believed it. We all launched lots of phones, and all of a sudden it turns out that there are forces in the market who just don’t want something free for the consumerthe market who just don t want something free for the consumer.So, OK, let’s go back and try to support that. From that perspective, it is a good thing that Google has access to these patents…..HTC N.A. President Martin Fitcher on HTC’s use of Google’s Patents against Apple 9/15/20119/15/2011

HTC Sues Apple Using Google Patents Bought Last Week as Battle EscalatesBy Phil Milford and Susan Decker Sep 8, 2011 12:00 AM ET - Bloomberg Business Newshttp://www.bloomberg.com/news/2011-09-07/htc-sues-apple-alleging-infringement-of-four-u-s-patents.html


“Secondary Patent Market” Making Ignorance Less Rationaly g g




Operatin Company created PAE ex Rockstar• Operating Company created PAE ex. Rockstar

Portfolio Asymmetry – Open SourceGoogle purchases Android open source mobile OS company– Google purchases Android open source mobile OS company

– Becomes top mobile OS within 4 years – But Google doesn’t have patents in the mobile space whereas their competitors MS and

Apple have many creating an Asymmetric Risk to Google via their use of open sourcepp y g y g p– Google goes on patent buying binge including acquisition of Motorola Mobility

Asymmetric Risks create patent monetization opportunities!! (Like a Patent diffusion gradient)


y p pp ( g )

Balancing Licensing and Sales Opportunitiesg g ppThe Key to Success in Modern Patent Monetization

Interplay between patent licensing and sales transforms simple 2 dimensional licensing marketInto a more complex & lucrative 3 dimensional market of potential licensees and buyersp y p g p g

POTENTIAL E EE

p p y

POTENTIAL LICENSEES LICENSEE A

POTENTIAL

LICENSEES

PATENT Patent Owner POTENTIAL LICENSEE B$ + Patent Licenses

PATENT OWNER


POTENTIAL POTENTIAL SELLERSPOTENTIAL

BUYERSSELLERS

OTHER LICENSORS


LICENSORS

Patent Monetization Rules for the New Patent MarketPatent Monetization Rules for the New Patent MarketRule 1 - Ignorance isn’t always Rational. “A patent without a story is a piece of paper”

– Most of the value in a cross license comes from proofsBulk patent licensing/sales can often equate to lost value– Bulk patent licensing/sales can often equate to lost value

– Trick is to balance high $$ volume sales with high price/patent valuations


Bulk Patent Sales With High Patent Value ($/P) are the Exception:

ll /Date� SellerBuyer� U.S.�Patents

(Active,�Issued)�

Price�

($US,�M)�

Price/�Patent�

($US,�K)�

1Oct12� Alvarion‐Wi‐LAN 69 $19 $275

9Aug12� Nokia‐Vringo 109 $22 $202

26Jan12� Real Networks ‐ Intel 127 $120 $945

1Jul11� Nortel ‐ Rockstar 3,600 $4,500 $1,250

27Apr11� Novell ‐ CPTN Holdings 520 $450 $865

4Apr11� Kodak ‐ Omnivision 210 $65 $310

7Feb13� MIPS – Bridge Crossing 293 $350 $1,1947 Feb 13� MIPS Bridge Crossing 293 $350 $1,194

� Total� 4,635� $5,176� $720�(mean)��

$865�(median)�

The Norm is Closer to 150K Per Patent (med.) and The Trend is Downward


The Rational Ignoramus’s Dilemma The Rational Ignoramus s Dilemma As deal size increases deal value increases but…As deal size increases patent value typically decreases

Patent Value ($/patent)

Deal Value ($/deal)

Deal Size (# patents/deal)Single Patent Sale

Small Enumerated Patent LicenseBulk Patent SalePortfolio Patent License


The Rational Ignoramus’s Dilemma The Rational Ignoramus s Dilemma Need to balance larger high $$ deals against patent value lossHow do you find hidden HVP’s in bulk deals?

Patent Value ($/patent)

Deal Value ($/deal)

Deal Size (# patents/deal)Single Patent Sale

Small Enumerated Patent LicenseBulk Patent SalePortfolio Patent License




– Trick is to balance high $$ volume deals with high price/patent

Rule 2 – Asymmetry as OpportunityYou can buy licensing leverage to address (or create) asymmetric risks– You can buy licensing leverage to address (or create) asymmetric risks

• Confronted with a superior portfolio a licensee can buy proofs against a licensor• Value to buyer is immediate change in license value plus other value from patent

(other licensees etc..) should buy if price < valuey p


Buddy Can You Spare a Patent?Buddy Can You Spare a Patent?

POTENTIAL LICENSEEPOTENTIAL LICENSEES

PATENT OWNER

LICENSEES

PATENT PATENT OWNERPATENT OWNER

POTENTIAL POTENTIAL SELLERSPOTENTIAL POTENTIAL SELLERSPOTENTIAL

BUYERSSELLERS

OTHER LICENSORS

POTENTIAL BUYERS

SELLERS

OTHER LICENSORS


LICENSORSLICENSORS




Rule 2 – Asymmetry as OpportunityYou can buy licensing leverage to address or create asymmetric risks– You can buy licensing leverage to address or create asymmetric risks

• Confronted with a superior portfolio a licensee can buy proofs against a licensor• Value to buyer is immediate change in license value plus other value from patent

(other licensees etc..) should buy if price < valuey p– You can sell excess licensing leverage if you pose an asymmetric risk

• Corollary to above; a licensor with a superior portfolio can sell proofs beyond a threshold number to others with potential of no effect on license value (no conservation of royalties “’More’s Law”)conservation of royalties - More s Law )


More’s Law – Selling Excess Patents Doesn’t Affect Asymmetry More s Law Selling Excess Patents Doesn t Affect Asymmetry

POTENTIAL LICENSEE

/ASSERTERPOTENTIAL LICENSEES /ASSERTER

PATENT OWNER

LICENSEES

PATENT PATENT OWNERPATENT OWNER

POTENTIAL BUYERPOTENTIAL SELLERSPOTENTIAL POTENTIAL SELLERS

POTENTIAL BUYER

/ DEFENDER

SELLERS

OTHER LICENSORS

BUYERS

OTHER LICENSORS


LICENSORSLICENSORS




Rule 2 – Asymmetries Move PatentsYou can buy licensing leverage to address or create asymmetric risks– You can buy licensing leverage to address or create asymmetric risks

• Confronted with a superior portofolio a licensee can buy proofs against a licensor

• Value to buyer is immediate change in license value plus other value from patent y g p p(other licensees etc..) should buy if price < value

– You can sell excess licensing leverage if you pose an asymmetric risk• Corollary to rule 2; a licensor with a superior portfolio can sell proofs beyond a

threshold number to others with potential of no effect on license value (no threshold number to others with potential of no effect on license value (no conservation of royalties - “’More’s Law”)

Rule 3 – It takes a Village to Monetize a PatentEvolving a market based approach to monetization requires new strategies for (a) – Evolving a market based approach to monetization requires new strategies for (a) portfolio management, (b) go to market and (c) deal construction.


Market Based (“Outside - In”) Patent Portfolio Development* Market Based ( Outside In ) Patent Portfolio Development Helps Reduce Rational Ignoramus’s Dilemma

Mapping by Patent Class to Patent Holder Products (Traditional – Inside -Out)

Mapping By Patent Class to Competitor’s Products (Outside – In)

Patents owned/ Patent class Patent Holder’s implicated revenue

pp g y p ( )

Competitor’s implicated revenuePatents owned/ Patent class

54231712B’ ($26M)

57423114A’ ($132M)

TBDLowMed.HighProduct

54231712B’ ($26M)

57423114A’ ($132M)

TBDLowMed.HighProduct

Mapping By Patent Relevance to Competitor’s Products


34321321C’ ($12M)

54231712B ($26M)

34321321C’ ($12M)

54231712B ($26M)

High Value Patents* Roth - Market Focused Patent Portfolio, 2012

Searching for Buyers? Look for AsymmetriesThe Squeaky Wheel

E f l

The Squeaky Wheel

E f l

Searching for Buyers? Look for AsymmetriesThe Emperor Has No ClothesThe Emperor Has No Clothes

Aggressive Patent Enforcement Creates Sales OpportunitiesAmong Targets of Enforcement

The more targets a patentee asserts against the more potential buyersfor proofs on patentee

Aggressive Patent Enforcement Creates Sales OpportunitiesAmong Targets of Enforcement

The more targets a patentee asserts against the more potential buyersfor proofs on patentee

Rapid Market Entrance by Fast Follower Who Lacks Patents vs. Incumbent Market LeadersRapid Market Entrance by Fast Follower Who Lacks Patents vs. Incumbent Market Leaders

One of These Things is Not Like the OtherOne of These Things is Not Like the Other The Non-Practicing Operating CompanyThe Non-Practicing Operating Companyg

Companies that compete in some business areas of a patent holder and not in other areas

g

Companies that compete in some business areas of a patent holder and not in other areas

Companies assert patents against firms in industries in which they do not operateCompanies assert patents against firms in industries in which they do not operate


Innovation isn’t limited to Inventions Innovation isn t limited to Inventions Innovating Monetization Business Models to Balance Licensing & Sales

Springing License

Exploding License

Lock Box JDA

Library Card Assignment

Assignable Options

Draft Picks

Mutual Exclusivity

Income Stream Assignment

Assignment with Upside

Drop List Monetization


Springing License

Protect 3rd parties from your patent buyers without forcing them to license

Springing License

Patent license springs into existence upon assignment (or other conditions)– Can specify types of assignee that causes trigger (e.g. NPE, party in suit with

grantee)– Can be appended to term license to add value– Pricing should consider loss of assignment value of patents

Consider when:Consider when:– Parties are at practical patent stand-off or otherwise unlikely to commence suit

during trigger term (e.g. customer/supplier)– The parties do not wish to set a clear licensing value precedent– The grantee(s) see value in ensuring patents do not fall into hostile hands


Springing LicenseSpringing License

OO PL

O has title in hereBOING!!!

PBPB

License is granted “springs” from O to PL prior to assignment to PB


g p g p g

Exploding LicenseExploding License

Protects licensee but allows unencumbered patent sales for most patents

Patent license (or CNS) terminates upon assignment for most patentsCan specify types of assignee that causes trigger (e g practicing entities only – Can specify types of assignee that causes trigger (e.g. practicing entities only or to party with whom grantee has another license)

– Can be used with draft picks or enumerated patents – Maintains assignment value in portfolio licenses for undervalued parts of g p p

patent portfolio

Consider when:– The value of the license was based on a limited number of patents but parties

want patent peace for at least those patentswant patent peace for at least those patents– grantor(s) want to preserve assignment value but are not interested in

having patent disputes with grantee(s)– A term license alone is insufficient to preserve value or does not work for


pthe parties

Exploding LicenseExploding License

License (Term or LOP)Reads Draft Picks

O PL

License (Term or LOP)

CNS

O has title in here

PB

O has title in here

PB

CNS to PL terminates “explodes” upon assignment to PB


CNS to PL terminates explodes upon assignment to PB


– Most of the value in a cross license comes from proofs– Bulk patent licensing/sales can often equate to lost valueBulk patent licensing/sales can often equate to lost value– Trick is to balance high $$ volume deals with high price/patent

Rule 2 – Asymmetry as Opportunity– You can buy licensing leverage to address or create asymmetric risks

C f d h f l l b f l• Confronted with a superior portfolio a licensee can buy proofs against a licensor• Value to buyer is immediate change in license value plus other value from patent

(other licensees etc..) should buy if price < value– You can sell excess licensing leverage if you pose an asymmetric riskg g y p y

• Corollary to rule 2; a licensor with a superior portfolio can sell proofs beyond a threshold number to others with potential of no effect on license value (no conservation of royalties - “’More’s Law”)

Rule 3 It Takes a Village to Monetize a PatentRule 3 – It Takes a Village to Monetize a Patent– Evolving a market based approach to monetization requires new strategies for (a)

portfolio management, (b) go to market and (c) deal construction. Rule 4 – Innovators (still) WinRule 4 Innovators (still) Win

– Innovation (Invention) raises threshold of patents needed to achieve parity with an innovator

• A buyer can only offset the new threshold by purchasing patents at market prices - will always chase the innovator at more expensive price points


prices will always chase the innovator at more expensive price points– Innovators best positioned to exploit asymmetric risk

Innovators WinInnovators WinNew Market Economics Favor Those Who Innovate

Innovation Area 1

# of patents Rational Ignorance

Organic inventionInnovator Creates

New Innovation Area 2# of patents Rational Ignorance

Threshold 1 Inorganic acquisition

Rational IgnorancegThreshold 2


Innovator Follower Innovator Follower

Conclusions Observations and ConcernsConclusions, Observations and ConcernsSuccessful IP Monetization requires:

– Cooperation – success when all parts of an IP organization work together– Breadth – requires knowledge of your company, industry and adjacent industries– Agility – The market is in a state of flux and the rules of the game are being

developed in real time

What we know so far:– Rational Ignorance is not as rational as it used to be– Asymmetric Risks move patents and create opportunities

New and innovative approaches to all aspects of patent strate y are needed– New and innovative approaches to all aspects of patent strategy are needed

What Can Possibly Go Wrong?P li k l f hi– Policy makers must learn from history

• Technological progress can be uncomfortable• Patenting new areas sometimes “feels wrong” (sewing machines etc..)• Bias should be toward letting markets work out the issuesBias should be toward letting markets work out the issues• Don’t pick on technologies where we lead & which were key to our economy


Thank You!Thank You!
