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Management Report

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Evolving Patent Business

Evolving Patent Business

LIM Young-Mo

Dec. 24, 2010


Welcome to our video program. I’m Young-Mo Lim from the technology and industry department.

I’m sure all your companies have one or more patents. How do you handle them? I hope you don’t treat them simply as an outcome of research and development, or keep them on hand like a weapons cache for business conflicts. While patents have long been considered as a protective tool for a company’s business, they can also be a way to create profits now. Rather than having products based on patents, patents themselves can generate money. Today, we will look at changes in the patent ecosystem and emerging patent business models.

The idea of a patent was first introduced in 1474 in Venice, Italy. The city government came up with a patent system to attract talented masters from outside and to stimulate the economy. Except for the fact that the duration of their patents was only 10 years, patents in those days were not much different from now. Patent holders were entitled to an exclusive right to manufacture and sell new and useful products they invented.

People started to open their eyes to other potential uses of patents in the 1990s, when TI and Polaroid won disputes involving semiconductors and instant cameras and reaped hundreds of millions of dollars. In the 2000s, this gave rise to a market where specialized companies with various business models trade patents.

The size of the patent trade market in the US was just US$200 million in 2000, but expanded to over US$1.4 billion in 2008. Changes also began to occur in the patent ecosystem, encouraging individuals and universities that had been undercompensated for their inventions to regain their patent rights. After the financial crisis, companies that experienced deteriorating earnings moved to maximize profits from their patents.

With that background, let’s find out what patent business models are out there.

Patent business can be divided into licensing services and support services that aid corporations.

Licensing is a business model where profits are generated via licensing or litigation with purchased or consigned patents. The recent rise of so-called “patent trolls” belongs to this type. Patent trolls are licensing-specialized firm which abuse inventors’ rights as stipulated in the patent law by filing aggressive lawsuits. Such firms filed only about 100 lawsuits in 2000, but the number shot up to 500 by 2008.

There are number of licensing-specialized firms around the world. Intellectual Ventures is the world’s largest in the industry, and recruited funds worth over US$ 5 billon to buy more than 30,000 patents. Italian company Sisvel has created a patent pool with multiple companies licensing their patents to it. With the large pool of patent, Sisvel has run its licensing business, leveraging aggressive strategies, including lawsuits. To protect companies from damage incurred from lawsuits by licensing companies, a defensive business model has emerged. RPX has launched a business to protect manufacturing companies by creating a defense fund.

Supporting services are another newly emerging business model which is to provide brokerage, assessment and consulting regarding patents. Since most patent sellers and buyers refrain from identity disclosure, patent trading takes place via brokerage firms. Recently they are expanding their business scope into M&A and patent strategy to offer total consulting services.

Ocean Tomo is an American firm which opened the first patent auction market in the world in 2006. It created an affiliate company called IPIX which allows patents to be traded the way stocks are. Ocean Tomo also provides a tool to estimate a patent’s value from an objective point of view by collecting information on a patent’s reference, and involved conflicts, etc.

There are also companies that specialize in investigating whether a semiconductor or electronic product infringes any patents. For example, Chipworks has 70 engineers in several fields like circuits and systems, and the company aims to find products that could potentially violate any patents and to collect evidence through reverse engineering.

It’s not just technology firms that are jumping into the patent business. As market size grows, financial institutions and private equity funds are also becoming a part of the equation. Altitude Capital and Collor Capital manage patent funds worth hundreds of millions of dollars.

As the number of patent fund products rises, brand-new financial instruments are being developed. A case in point is “sale and lease back.” The idea here is that a company that needs money sells off its patents and leases them back. In 2009, an Israeli company VocalTec sold 15 out of its 22 patents to financial institutions and licensed them back to secure US$15 million.

So far we have looked at the evolving patent business. Until now, Korean companies have been passive in terms of the newly emerging business, focusing only on obtaining more patents to avoid patent conflicts. Such strategy, however, has its limitations now that multiple business models are emerging and more patents are required to keep up with increasing technology integration. In this sense, Korean companies need to devise new patent strategies to link their business, R&D and patents. To strengthen their patent capacity within a short period of time, they especially need to connect to the patent eco system.

Thank you for watching. I’m Young-Mo Lim.

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