Do We Really Need to Compare the Value of Patent Portfolios?

It is the maiden voyage on these blog pages for this new Kat. My view of maiden voyages was shaped by the scene in the movie Titanic, when the skipper of the doomed ship is about to embark on the route to doom, smiling smugly while sipping (presumably English) tea. Here's hoping that our maiden voyage and the blogging journey that it portends will do a whole lot better than that of the fabled ship from a century ago. So let's get on with it.....

A recurring discussion in the patent literature has been the consideration of patent quality. In a notable example, Allison, Lemley, Moore, Trunkey and Derek ("Valuable Patents", Georgetown Law Journal, March 2004) posited that "some patents are intrinsically more valuable than others" and proposed that the "easiest way to discover the characteristics of valuable patents is to study litigated patents." On that basis, and 2,925,537 patents and 6,861 patent litigation cases later, the authors came up with a textured analysis of the characteristics of valuable patents. Disagreement about these results, and their value for patent policy and practice, continue to this day. Readers are invited to wade through this literature.

Be that as it may, the question of "valuable patents" looks much different when it gets into the hands of the popular business press. Perhaps the most recent example in this genre is summarized in an article by Steve LeVine, entitled "IBM Piles Up Patents, But Quantity Isn't King", which appeared in the January 25, 2010 issue of Bloomberg BusinessWeek. Based on a study carried out by Ocean Tomo on behalf of the magazine, the patents awarded to the 1,000 largest public companies in the world on a revenue basis were analyzed. The results, as set out in the one-page article, emphasized the following:
1. IBM leads (and has done so for the past 17 years) in the number of U.S. patents granted annually (4,914 in 2009). By comparison, Microsoft, which ranked number three on the list, had only 2,906 registered patents in 2009.

2. However, based on a multi-factor analysis (reported to be in the several dozens), and including the number of prior patents cited, related litigation, and the payment of patent renewals, "Microsoft's portfolio was assessed at 3.3 times that of IBM's." By this measure, Microsoft's ranking is no. 1, while that of IBM is only no. 8.

3. The reason for the differential, according to Ocean Tomo, is that IBM's has a sizable number of service-related patents, which "command" a lower price than Microsoft,which has a large number of game and software patents. The ranking "is something that IBM people won't accept, but it is accurate nevertheless,' says Steve Lee, president of Ocean Tomo's patent rating division. "
So what do we make of these results? In my humble opinion, not very much. I simply don't understand what it meant by the fact there is a multiple of 3.3 between the relative value of the two patent portfolios. I am sure that the number-- as a calculation-- "is accurate", but what does that tell me. The article does not elaborate. Given Ocean Tomo's apparent lack of success in trying to create a patent-trading market, one can genuinely question whether it, or any other entity, can ascribe a meaningful value for collections of patents with the precision that is suggested by the study.

The comments brought in the article from both IBM and Microsoft regarding their respective patent portfolios do not really clarify the matter. The IBM patent portfolio is described as both a club against potential infringers as well as a platform generating substantial income from third parties. In the words of IBM's chief patent counsel, "It's the leverage we are able to get from the patent [licensing] negotiations." On the other hand, the chief IP Officer of Microsoft is reported to have said that his company does not view patents "as a profit center, but 'as a currency that you use to trade to another company' for its patents." Both are compelling strategies for using one's patent portfolio and each certainly merits further investigation about the extent to which the strategy has been successfully implemented.

However, if the fundamental difference in the way that each of these two companies views the function of patents, then the question then becomes: how does one devise a metric that allows for meaningful valuation and comparison in such circumstances? Even more fundamentally, even if we can create such a metric, what do we gain by engaging in such a comparison? After all, the ultimate test would seem to be the value of the patent portfolio to the overall value and performance of the company, rather than some inter-company ranking based on unclear criteria.

Without wishing to sound trite, both IBM and Microsoft are companies with world-class technology, and I don't think that either really needs the information provided by inter-company rankings of the relative value of their patent portfolios. Au contraire, it would seem, for business journalism and the attention-grabbing headlines that follow from such rankings.
Do We Really Need to Compare the Value of Patent Portfolios? Do We Really Need to Compare the Value of Patent Portfolios? Reviewed by Neil Wilkof on Friday, March 12, 2010 Rating: 5

1 comment:

  1. Hi Neil,

    Welcome to the high-profile blogosphere.

    There are a large number of ways to value patents, and even in strict monetary terms, licensing revenue is by no means the only or necessarily the best way to value worth. Firms may use their patents to prevent competitors. The patent portfolio may or may not help the share price of the company, making or breaking takeover deals, etc.

    If Microsoft is making money from games patents, and a competitor is developing life saving medical technology, arguably the medical technology is more valuable.

    Some medical technologies such as therapeutical treatments are not patentable outside the US, and in the US are virtually unenforceable and so cannot be licensed.

    With anti-trust legislation, the legitimate monopoly that a patent provides can become a billion dollar liability in Europe.

    Then again Microsoft has valuable copyright IP which enables them to sell their software for exorbitant prices.

    Like most rankings and headlines, should be taken with a pinch of salt. (That said, I congratulate you on leap-frogging my IP blog ranking as the leading Israeli blogger by becoming a Kat. With an order of magnitude more hits, the IPKAT is certainly higher ranking, however we look at it.


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