For the half-year to 31 December 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Rebecca Gulbul, Lucas Michels and Marie-Andrée Weiss.

Regular round-ups of the previous week's blogposts are kindly compiled by Alberto Bellan.

Friday, 25 October 2013

IP as an Asset: Really?

IP, like most everything else, has been prone to changes in public fashion. This Kat is (sadly) able to remember the status of IP prior before the 1980s, during which it was treated as a backwater legal field and was often viewed with hostility by the courts and academics. But I am bit of an octogenarian exception. For most of us, the dominant popular fashion of IP since the 1980s has been all to the positive—IP can do virtually no wrong. One by-product of this fashion is the extent to which IP has become a proxy for various commercial interests. Thus, in 1994, we witnessed the adoption of the TRIPS agreement, which placed IP squarely within the purview of international trade. Later in that decade, we began to encounter IP in a more MBA sense, namely IP as an “asset”. Indeed, it is reasonable to argue that, only when IP could be couched in terms of an asset, could a corporate commitment to IP begin to take place. Even more than IP as an instrument of trade, the growth of IP as an “asset” marked the acceptance of IP as a handmaiden of the high octane economy of the time, where everything could be traded (and maybe even securitized and bundled into a financial instrument), only to come crashing down in 2008.

Despite the economic woes that have beset us since the onset of the Great Recession, the development of the notion of IP as an “asset” seems to continue unabated. Entire cottage industries have grown up to evaluate the monetary worth of IP (think of the November 2011 estimate of the Kodak patent portfolio at 2.5 billion US dollars, only to be sold later at a fraction of that amount); to auction IP (think Ocean Tomo, here); and to aggregate IP for the sole purpose of commercializing the right per se (think Intellectual Ventures, here). Indeed, lying at heart of the public debate about patent trolls is the notion that patents are viewed as an asset, ripe for commercialization via litigation. Whereas 20 years ago, to the best of this Kat’s recollection, no one spoke of IP as an asset, today it is treated as a given, a natural by-product of the intellectual property rights system.

Truth be told, this Kat has never been comfortable with the simple importation into mainstream IP discourse of the notion of IP as an asset. In my view, the use of the asset lexicon has served to distort a proper understanding of IP rights. Permit me to identify several reasons for my discomfort.

Consider this definition of 'asset' as set out in Investopedia:
 “1. A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

2. A balance sheet item representing what a firm owns.”
Investopedia goes to explain that
“[a]ssets are bought to increase the value of a firm or benefit the firm's operations. You can think of an asset as something that can generate cash flow, regardless of whether it's a company's manufacturing equipment or an individual's rental apartment.”
So how does IP stack up against this definition? Permit me to suggest five problems.

The problem of direct intention—A company acquires an asset because it is believed that the asset will contribute to the company’s revenues. However, IP rights are not really acquired but rather are created by the company, subject to the legal metes and bounds of the right. Moreover, not all such rights are created with the direct intention that they are meant to potentially contribute to the company’s income stream. While it is presumed that (most) patents are obtained for this purpose, other IP rights (such as copyright) are often created during the day-by-day course of business, and their connection with the income stream of the company is far more tenuous.

The problem of recognition on the company’s books—If one indicium of an asset is that it is carried on the books, then goodwill may pose a problem, because it is this Kat’s understanding that the accounting principles in some countries do not provide for goodwill. Thus, to the extent that goodwill is considered an IP asset, it may not meet this requirement in all jurisdictions.

The problem of valuation—The challenge of giving a valid and reliable valuation for IP rights is a particularly thorny one. The wild fluctuations in the purported value of the Kodak patent portfolio is only one such example. This is not to say that competent, earnest professionals do not make good-faith efforts to value IP rights. It is simply the case that the task may be too daunting for even the most skilled. If one recalls how fatally off the mark investment banks, accountants and rating agencies were in valuing financial instruments based on a bundle of sub-prime mortgages, the Sisyphus-like difficulty of assigning a meaningful value for patents, trade marks, or copyright works (unless there is a recognizable royalty stream) is palpable. Without the ability to provide a valid and reliable valuation, the notion of IP as an asset seems hollow indeed.

The problem of markets—Presumably, for an asset “to have value”, there must be some type of market by which the asset can in principle be exchanged (preferably for money), even if that asset is unique (think of a piece of art). Attempts at creating public markets for patents (and, on occasion, even trade marks) have in the main not been successful, at least to the extent that would enable one to say that there is a regularized public market of exchange for patents or trade marks. When one moves further afield to trade secrets and copyright, the notion of a market of exchange for these types of IP rights appears simply far-fetched.

The problem of identification—It would seem axiomatic that, for an asset to have value, it must be able to be discretely identified. This requirement is met on the whole by a registered patent, subject to the provisional nature of even a registered patent, which still can face a challenge to its validity or scope. To a similar degree, registered trade mark rights can be identified, but unregistered trade mark rights are far less certain. Copyright provides a high degree of certainty in identification, but the sheer number of copyright works within any organization makes it well-nigh impossible to provide a complete list. The issue is most acute with respect to trade secrets, for which identification is often impossible (akin to describing galactic dark matter) because of the confidential nature of the right. Simply think about the last time that one tried to prepare a schedule to a corporate acquisition that purports to describe the trade secrets that are involved. The upshot here is that the current reliance on the notion of IP as an asset may well be distorting the way that we understand the nature of IP rights. IP may well have some asset-like qualities, but that does not make IP an asset in the traditional sense. Perhaps it is time to begin to develop the contours of what is meant by these asset-like qualities.

17 comments:

Anonymous said...

Good article, Neil. I also am so ancient that I can remember when patents were things with pretty seals that you got, well, because you could and they were good for something, even if we weren't exactly sure what. The commoditisation of IP has now provided us with three camps (a) those who regard IP as the saviour of all personkind, (b) those who regard IP as the great curse of personkind, and (c) the puzzled onlookers in the middle (i.e., most of us). Unfortunately, as they say oop North, lad, where there's muck, there's brass..

Suleman Ali said...

I think a lot is gained by considering IP as an asset. A business that has IP rights has to make decisions on how much resource will go into creating and maintaining each IP right, and so some type of valuation is needed, even if its complex. I think the system as a whole is adapting to the new prominence of IP rights as new business models are created around evaluating, commercialising and trading IP. I think modern-day data-rich fast-changing business environments will cope with IP rights and the inherent uncertainties they have.

Anonymous said...

I am also ancient, and can remember a brand being destroyed by a health scare - hero to zero within a week. The business folded, but an astute operator purchased the residue for peanuts, and recovered the reputation in 9 months (the effect of baby related retail business - one that I would be in if restarting a career)

Anonymous said...

Interesting article... YES IP is the single most valuable commodity on this planet.

And there are changes coming cat friends - the issue is how much pain the world needs to go through to get right with me over the GeoSpatial (Location Based Controls Fraud) now in the US Federal Courts and also filed for only one of many fraud losses with the IRS (1.5B for 2012 calendar for only one small area of infringement).

How I know this is I am the party who filed the fraud loss with IRS and legally owns control of this IP.

Todd

Anonymous said...

Perhaps there is a danger in talking about "IP" the way one talks about other asset classes, e.g. cash, plant, commodity, bond, equity, debt, property. One can look at each conventional asset class and broadly describe its attributes in comparison to other asset classes, in terms of risk and return, in terms of liquidity, in terms of valuation, in terms of depreciation, and the like. One can do this because, within each class, the members of the class behave broadly alike, and accountants can thus proxy the behaviours of a specific asset (a barrel of a certain oil, a particular car, a share in a certain business, a particular plot of land, a bond obligation to pay a certain value at a certain time) with the behaviours of the class to which that asset belongs. The process of abstaction is both possible and useful. However, as the article demonstrates, IP assets are not at all all alike, and it is therefore very hard to talk, except in the most vague terms, of the asset class properties of IP assets. Accordingly, even if a certain amount of abstraction is possible for the purposes of discussion, it is rarely useful to lump all the various types of right which fall under the heading "IP" in to single asset class, or to discuss them in the same breath.

IP already is becoming a catch-all term for the components of a business which give it value, which are not financial obligations, and which are not tangible. Such an "everything-but" approach only reminds us that while IP is a nice brand for us as practitioners to use to sell our services, the natures of the rights in which we deal are very different. We should not mislead those who depend on our advice by hiding their peculiarities under an "IP asset" umbrella.

Ron said...

I have a copy of the British General Electric Company's balance sheet for 1916 in which the value of its IP is given as one guinea.

Perhaps that fact that it was the middle of the first world war had something to do with it, but even allowing for inflation, it seems rather low for a company that was then valued at about two million pounds and which has acquired the UK rights for the tungsten filament lamp which subsequently generated a substantial sum in licence revenue.

Mark said...

Agreed, good article Neil.

For many companies the intangible asset is more than the IP per se. For instance it may be a pharmaceutical drug in development or a collection of song recordings. These intangible assets should not be confused with units of production; the asset is the blueprint or package of information and rights that enable units to be made.

To attempt an imperfect analogy: the IP protects those assets like a barbed-wire fence protects access to land. The fence is an important feature when enjoying exclusive access to the land. But the most important part of the asset is the land and not the fence.

This notion breaks down if the IP is traded on its own, disconnected from the underlying asset. Much IP has a very precarious value, if it has a value at all, when viewed on its own.

Andy J said...

I don't subscribe to Neil's negative view about the tradeability of copyright. Whole industries (motion pictures, records, book publishing to name but three) could not exist in their current form without an IP portfolio, so clearly in some sectors the book value of IP can be measured just as accurately as other income streams. An even more specific example might be picture agencies such as Getty, whose sole function is to trade in licences for copyright works. Remove copyright works from their inventory and they have no business.
The fact valuing IP can be problematic does not mean it shouldn't be classed as asset. Many more tangible assets such a share certificates or real estate will have their value determined by the vicissitudes of the market. "The value of shares may go down as well as up, and past performance is not guide to future performance" we are warned.
If IP really has little value or purpose as an asset, why does Hollywood keep trying to extend the copyright term?

Anonymous said...

Overall, the negative tone of the article left a negative taste in my mouth - not of IP as an asset, but rather of the author's views regarding IP.

I am left with the distinct impression that the author is not a fan of such personal property rights.

Ron Yu said...

Excellent post.

I am in complete agreement with you on the issue of IP valuation, having listened to much talk and having read several publications on this subject it is clear that many pundits and so called ‘experts’ in this area have a fundamentally flawed understanding of what makes IP valuable.

As with any intangible property, IP valuation if often a guess often disguised in impressive sounding rhetoric. So why should we be surprised when the Kodak portfolio is grossly overvalued when, for example, art experts often get the value of paintings wrong?

Many valuation models presume a steady state environment yet any IP practitioner knows that, for example a patent, can become worthless overnight either because a successful legal challenge has rendered it invalid, or simply because the owner forgot to pay his fees.


Part of the problem with the sudden exuberance over IP as an asset comes from an incomplete understanding of the fundamental interaction between business, the market and technological environment and the IP itself. The business people may understand the business aspects that make a piece of IP valuable including the things one can do to enhance the value of the IP by, inter alia, successfully building a brand, licensing the IP, etc., but perhaps not the legal nuances. Similarly, while the lawyers understand the legal aspects, do they really understand the business or environmental ones?

And if the so-called experts have an incomplete understanding, what of the politicians who will make policy decisions based on the input of these ‘experts’?

The problem with the current state of irrational exuberance over IP is that in their rush to, for instance, embrace IP trading – presumably to encourage creation - governments may fail to give due consideration of the consequences. Then, when governments later get deluged by complaints about patent trolls, copyright trolls, trademark bullies stifling creation and innovation, will they say ‘how did this happen?’

Anonymous said...

I think the issue is in the English language. A financial "asset" is not the same as something being an "asset" to the business.

It is a fallacy and to import characteristics shows a logical failing which causes difficulties.

Perhaps if we were to move backwards from the correct handling of the valuation, treatment and other characteristics we could associate it in an inductive way with some other aspect of the business...

Meeting Place said...

Readers of this blog may be interested in the summary report "Banking on IP" commissioned by the IPO. It appears as though the banking sector are beginning to see IP as a new asset class in some circumstances -
http://www.ipo.gov.uk/ipresearch-bankingip-sum-281013.pdf

Anonymous said...

I agree with the post. I would add that the focus on IP assets reflects a one-eyed vision, since the balance sheet of a business is made up of assets and liabilities, and IP liabilities arising from third party IP rights must be assessed.
Another comment is that all this emphasis on valuation and commercialization of IP rights serves the interests of lawyers and accountants but certainly the interests of businesses.

Anonymous said...

"and IP liabilities arising from third party IP rights must be assessed"

How would you make such an assessment?

John said...

Intellectual Property is a business asset in the same way that a company's R&D group or sales and marketing group are business assets. They all contribute to cash flow. However, it is difficult to identify a market value for any of them separated from the rest of the business.

In the case of IP, it contributes to cash flow (hopefully) by increasing the gross profit of a product, by increasing price and/or market share. Yet I agree it is difficult to put a monetary value on IP.

I suppose one model would ask, if the company had to take a license on its IP, what royalty rate would it pay? Certainly only so much that it can still make a decent profit on sales.

Some determination of value is important, because it informs you how much you should invest in developing the asset.

But I would like to hear other opinions, as I think the question is important and the answer opaque.

Anonymous said...

Are inventions worth anything?

Anonymous said...

Anonymous @ 14:36,

Is that a real question?

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