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Note: This is the second of a three-part post. (Part 1 | Part 3)

If there is such a great need for pricing information on the global IP market, then why has no one ever bothered to gather it together and analyze it? Unfortunately, this is a difficult question to answer, partly because different people give different reasons. Many understand that the fact that virtually all IP transactions are confidential makes it extremely difficult to gather this information. However, there are also a lot of misconceptions, particularly regarding patents, that are often cited as fundamental reasons why this kind of data wouldn’t be meaningful even if it were available.

One issue that has been widely blamed for the non-emergence of IP markets is the fact that IP assets are all unique by definition, and therefore transaction prices cannot be comparable. However, the attributes that distinguish patents within a definable group do not appear to have a distortive influence on the dimension of market value. Although patents within a specific technical area are all scientifically distinct in some dimensions, it is not evident that these differences are the driving factor in determining the market price. It is important to remember that what makes patents different scientifically is very different than what makes them different economically. The scientific and economic dimensions are less interconnected than most people think, and this is a major source of confusion about valuation.

More important, however, is this argument misunderstands the role of market data in many if not most contexts in which it is successfully used. First, it falsely assumes that other types of assets or products being traded in market are truly identical, or at least that their differences have a smaller impact on their economic value. In fact, there are very few products and markets where the products are truly homogeneous (sometimes thought of as “commodities”). Many things that appear to be commodities actually exhibit considerable variance along dimensions that have meaningful impacts on price.

Most market pricing data are aggregated, reported, and used in ways that obscure the impact of variability in attributes on pricing. An example of this is an automobile blue book. If you look-up the price for a particular car model and year you will see a high value (implying a car that has marginally higher than average value - usually associated with better condition or features) a low value (implying worse condition or features) and a mid point (implying typical condition and features). In reality, these numbers obscure the variability associated with these and a lot of other attributes such as where the transaction takes place, and even what color the car is. Obviously some variation in price is attributable to things like the color which are not visible in the market data (the blue book). Nevertheless this data is used to successfully enable what has become a very fluid market in used cars.

Looking at other types of assets such as real estate, industrial equipment, and labor reveals how much more variability is associated with other markets. Yet, the existence of the variability does not eliminate the usefulness of market data in negotiating transactions and providing the key input for sophisticated financing instruments such as securitization, insurance, and more. In fact, most market data that is used as the basis of a wide range of industries is aggregated, averaged, or summarized in ways that obscure significant variations in the attributes of the assets or products. Market pricing data are almost never generated in a context of perfect comparability. For this argument to be valid, one would need to demonstrate that the dimension of variation in the attributes within other markets has a proportionately smaller impact on aggregate market pricing data than it does in patents. However, there is really no evidence to support this.

Another version of this argument is that because patents are scientifically unique, only one or a few companies will be in a position to commercialize them. Therefore, as the argument goes, patents cannot exhibit a “market value” as the market for any given patent is too small to be generalizable. However, this demonstrates a misunderstanding of the concept of market value. Even if an asset has only one buyer, it will have a market value at which it will trade hands. In this scenario, the market may be small but this will only have the effect of giving the buyer more bargaining power in the negotiation. For all of these reasons, we can reject the argument that the dissimilarity of patents prevents their economic comparability.

Further evidence supporting this view is that there actually have been many efforts to aggregate comparables for IP transactions over the years, some of which are embodied in commercial services. A substantial amount of effort has also been invested in alternative ways of approximating market value. In a way, the legitimacy and comparability of the data have already been defined by the demand for it in specific contexts. This is not surprising as it has actually been the case in other areas where market data are now used actively. Ultimately, the valid interpretation of the data will always be defined by the use case and the need, and as I have already argued, there are a lot of valid potential uses for IP market pricing data.

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