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NOTE: This is the third and final part of a three-part series. (Part 1 | Part 2)

In order to understand what information we need to observe to derive useful market pricing information for patents, we need to have a basic understanding of the ways that patents create value. Only then can we understand what types of transactions we are interested in observing and the correct way to interpret their meaning. In addition to this, before examining the value of patents it is essential to be clear as to what kind of value we are talking about.

Private Economic Value

Most patent valuation techniques are hampered by a failure to be sufficiently precise on what kind of value they are attempting to measure. The problem partly arises from the almost universal failure to distinguish between the scientific significance of a patent and its economic value. Even those that have made this distinction have failed to adequately distinguish between the private economic value they generate for their owners/licensees and the public economic returns they create for society. To produce the kind of patent valuation metrics described above, it is essential to have information that measures the private economic value patents create.

IP Market Signals

It is also essential to understand the way different actors in the IP supply chain transmit market signals about the value of patent rights. It is the final market for goods and services that ultimately determines the commercial value of patent rights. Therefore, it is only when the products which embody patents are commercialized and sold to final consumers that economic value is established. This insight allows us to eliminate consideration of both litigation and deterrant value in searching for an optic on the market for IP. From this perspective, it is the “Practicing” value that is the most direct measurement of patent’s ultimate value.

However, this is not the specific type of value that we are most interested in observing. Remember that the need described here is for visibility on the market prices for IP. This is because all of our management tools and instruments rely on access to this particular kind of value. Thus we are most interested in the market-clearing price for patent rights. Only this particular definition of patent value can provide the necessary input to enable the adaptation of existing business skills and mechanisms to the ‘idea economy’.

Since market transactions occur between willing and knowledgeable parties, the market-clearing price for IP will also be influenced by the supplier. When the creator of IP is internal to the same organization that commercializes the final product, it is virtually impossible to observe “market” pricing. Therefore, it is only when patent rights are transacted between entities, as in the case of licensing, that we can accurately observe the sythesis of the influence of all of the actors in the IP supply chain.

Finally, in addition to the influence of the actors, market transactions also compound critical information about broader market forces and other external factors such as macroeconomic fluctuations, changes in regulation, the impact of key litigation, and many other influences that bear on the pricing of the transactions. This underlines the point that the most relevant and valuable IP valuation data are transaction prices between parties, or in other words, licensing transactions. The pricing of these market transactions alone reflect the true fusion all economic factors, and therefore, are the correct target of observation for measuring the market value of patents.

Conclusions

Four key conclusions come from this discussion of patent value:

1. Our ability to manage IP is limited by our inability to reliably measure its value.

2. Licensing value is the only type of patent value that can be measured consistently and reliably.

3. Only licensing transactions offer a valid measurement of the distinct economic value attributable to patent rights.

4. Only licensing transactions provide the opportunity to observe the “fair market value” of IP.

Based on this, the most viable solution is to gain access to observe a large number of licensing transactions as they occur and accumulate revenue over time. As noted above, the challenge is that these transactions are strictly confidential, and this is the reason that previous attempts to access this data have been unsuccessful. The need, therefore, is for a solution that provides a way to observe the market for IP transactions (or at least a statistically significant portion) which does not compromise the confidentiality of the transactions. Second, this data must be analyzed in such a way that the results can be accurately generalized to the larger space of patents. If you would like to learn more about this, my research on “Patent Citations and Licensing Value” examines the extent to which this kind of approach could produce meaningful metrics.

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