Markets for IP are opaque
Remember the fundamental microeconomic principle that the
intersection of the supply and demand curve determines the price? If supply
increases and demand remains constant, the price goes down, if demand increases
and supply remains constant, the price goes up.
Only, with markets for intellectual property (IP), that mechanism
just does not kick in. It is not that IP has features that would make it
impossible for a potential buyer and seller to interact, rather buyers and
sellers simply don’t know of each other; thus the difficulty of
determining the price. Markets for IP currently remain opaque and
underdeveloped worldwide. There are no worries about the impact of the
“invisible hand”, when it comes to IP, everything is happening in
an “invisible space.” For those asserting that IP is just another
tool allowing corporations to benefit to the detriment of the poor,
that’s probably good news. For those believing that IP is the currency
of the knowledge based economy, allowing innovators all over the world to
engage in entrepreneurial activities may raise more concerns. Sometimes
companies “sit” on underleveraged IP portfolios.
Trading exchanges for IP may be a way to overcome this challenge.
Contrary to listing exchanges, trading exchanges have as their sole goal to
bring willing buyers and sellers together. Various exchanges have already been
created. Hollywood got its own movie exchange, insurance companies traded
catastrophe options, and even vegetarians looking to date other vegetarians
have their own “veggiedating.com” exchanges. But exchanges for IP
have not seen a major breakthrough, perhaps because it is very much perceived
through the legal lens, perhaps also because right holders prefer to keep their
IP hidden away to avoid attracting patent trolls or other unnecessary
competition.
A new paradigm for IP
Clearly, the prevailing paradigm of intellectual property protection
has not been one of help and has prevented the perception of IP as a tradable
business asset. Under the IP – Rights perspective IP is still largely
viewed as a defensive right, a right to exclude. The right holder secures its
market share by preventing other market participants from embracing a similar
concept, idea or approach. The primary strategic IP emphasis of most businesses
remains based on a defensive understanding of IP, where IP is viewed as an
effective barrier method. While these strategies may well help secure a
firm’s freedom to operate, they have hardly contributed to leveraging IP
as a potential source of revenue and funding.
Companies like IBM have demonstrated that the contrary is true. At
IBM, structured IP portfolios were evaluated according to their relationship to
the firm’s overall business strategy and subsequently leveraged through
in/out and cross licensing deals. While this example shows how a firm
successfully turned legally defined rights into corporate business assets, it
may be assumed that even higher rates of return may have been achieved through
the leverage of an online IP exchange.
Fail it, fail it better (Samuel Beckett)
raised Venture Capital money to build an online marketplace for IP.
Significant amounts of money were invested to acquire the necessary technology
for online trading. The basic business model of first generation exchanges was
relatively clear cut. Online IP trading platforms kept a certain percentage,
usually around 10-15% of the transaction. Slight variations existed though.
While some exchanges were by invitation only, others allowed anyone in, be it a
university, an SME or a big corporation. By the same token, the valuation and
rating methods employed varied. The idea was good, yet not good enough. Most
exchanges did not meet investors’ expectations: Primarily because of
insufficient leverage and because some of the exchanges charged entrance fees
that were too high. “It was like throwing a party, where no one
came.”
Another reason may be that certain IP exchanges had databases that
were neither particularly user friendly, nor particularly deep and wide in
scope. Also, these exchanges were listing exchanges and not trading exchanges
and badly neglected their marketing. That, on top of a general market
perception of IP as a legal instrument serving to protect rather than promote,
caused the early death of many IP-based online businesses. When the bubble
burst, many first generation exchanges shut down. Surprisingly, for quite some
time, nobody touched the idea again, perhaps because of the collective trauma
experienced by new technology entrepreneurs during the dot.com crash.
What is the profile for a new IP trading
exchange?
Can the new millennium mark the era for IP trading exchange?
Probably, if the focus is on strategy rather than the technology itself and in
this sense looks more at the social rather than the technical dimension of
online business. Strategy has to be everything and the technologies just serve
as a basis for smart business approaches. In the next edition of the IPR
Helpdesk’s Newsletter, we will explain how!
(To be continued in the next number of
IPR-Helpdesk Bulletin)
Sources: Information interview with the following corporations:
Patentcafe, WIPEX, TechEx, Ocean Tomo, IPB Bewertungs A.G., as well as patent
search on current U.S. patents for exchanges.
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Disclaimer: The views expressed in this article may not
necessarily reflect those of the Haas School of Business, U.C. Berkeley(«)
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