Season 3 Episode 3
30th March 2023
The Patent Market
He joined us to share the inside scoop on the patent market, from who is buying and selling and the price, to what the future holds.
He chats to the hosts of the Cipher Vision podcast, who are:
How he came to know so much about the patent market
I was an engineer, then went to law school, and became a patent attorney. One of my clients was going public, they asked me to become the General Counsel, so was in-house there for a while.
And then, through various ways, ended up setting up a law firm focused on patent strategy.
There was a bunch of unicorns coming up. And a lot of them didn’t have a big enough patent portfolio or the right patent portfolio because they grew so fast.
We had to create a lot of data management and scraping tools to track what’s going on in the patent market. We are able to at least scrape the US Patent assignment database and pull down information about the assignments and solve that problem.
But as a result of that, we have a big data set.
On being about to issue his latest report on the patent market
11 years ago, I send a note to Joff Wild, who was the editor at IAM. I said, ‘we have this crazy number of patent deals and I think we can create, some transparency to this really opaque marketplace.’
Joff was happy to have us do this report. So we published his first report about this opaque market of patents. We started to publish things like,
- What’s the typical price?
- How many packages come on the market?
- How long are they on the market?
- What’s the average size of one of these things?
To give you some context of how important this was, it is not that our pricing is the perfect answer. It is that there was no information about pricing.
Recounting an example of using the guide for accurate pricing
So a really good example of that is for one of my clients. The CEO of another company, came in and said, ‘Hey, would you like to buy our patents?’
Now, it was in a technology space that the client would have been interested in buying. He said, $33 million?
I said, ‘Well, you know, we’re not going to pay $33 million? Because that’s just not going to work. Why don’t you take a look at the Market Report. And then get back to me, I don’t want you to necessarily bid against yourself here.’
He comes back and he goes, ‘Well, we used your market report, plugged in the numbers, how about $350,000?’
What’s happened over that 11 years of us reporting on this market is it’s now at a point where you can find pricing for buying and selling but also we have economists using the data at universities to publish papers on inventions.
A high-level summary of this year’s report
Some bad news and interesting news.
The bad news is pricing is dropping for patents. That’s not great news for patent holders, patent creators.
Other news that I think is really interesting: we looked at brokers and brokers as part of this committee. They are really important, but it’s a really small group of people, maybe 40-ish companies in the world are brokers.
We looked at all the closed deals, what percentage of those are represented by brokers?
It’s 90%. And that’s amazing. We knew that brokers were important. We didn’t realise that they were that important.
So this is surprising for us. Even after all this time, we look at this data and we slice it and we ask new questions.
On the variations in prices for assets and the importance of a median price, rather than an average
I think one of the things that’s really important before we get too deep into price, is that these are asking prices. So if you look at the average asking price of an asset in 2022, it was about $100k per asset. And for the previous couple of years, it’s been around $150k.
And what happens is the shape of the curves, they look like a rollercoaster, it sort of goes up and then it’s all this long run out.
And the prices can go quite high per asset. So averages don’t really work very well, because people, when they think of averages, they usually think about a nice bell-shaped curve.
And these are not bell-shaped curves and averages sort of really skew the numbers. Medians have other problems but at least we think it’s a better representation.
We can see that median prices drop. And so that’s bad. I think the other thing that’s important though, is the price of assets and actually sales tend to be a little bit more stable, and a little more consistent.
So we’ll see more variation and asking prices than in sales prices. So I think that’s an interesting part of this is that the people who know how to price their assets to sell actually do better and they do it more consistently.
On why the patent market might not be described as a rational marketplace
I think it’s rational. I think it’s somewhat orthogonal to other markets.
The folks who find themselves selling are usually inventors who have no other monetisation paths. So these are individuals or very small companies that really haven’t been able to productise what they’ve come up with universities, operating companies, there’s a few NPEs.
But if you look at the lion’s share, it’s the operating companies and it’s pretty consistently the operating companies are the ones that are selling, and they’re selling for all kinds of reasons.
One, they’re selling to maybe balance out their portfolio, they have too much something and the maintenance costs get pretty high.
Two, they might be selling frankly, to do something called privateering, which puts pressure typically on a competitor. So they’ll sell to an NPE with the expectation that the NPE will go and harass their competitor.
Conversation highlights continued
On the make-up of patent buyers
It is operating companies and NPEs. And it’s a little bit of every year whether the NPEs are going to buy more than operating companies as a percentage of the market – it just depends on what year it is.
But those are the 80% of the purchases, then you have some corner cases, law firms, some universities buying back, vendors buying things back. Defensive aggregators, also a part of that, and they’re anywhere from 5% to 20% in any one year.
Nigel Swycher: What you’ve just said there is that almost half the buying community is non-practising entities.
We’re having flashbacks to what Ken Seddon, the CEO of LOT network, said in a previous podcast. He was talking about circular firing squads and self-inflicted harm. As a data guy are you just neutral on this?
Kent: No. We show this and we show where these assets come from. You know, because it’s all public information – a lot of operating companies are selling to NPEs, There’s no two ways about it.
Ultimately, and what you’ve sort of touched on here is these are the most dangerous assets in the world, the ones that are just open, available for people to go buy on the open market.
These are really dangerous assets. The probability that somebody will sue on anything that hits the open market is around 12%.
The probability that somebody sues on something that has been bought is around 45%, 35%. If it’s an NPE, it’s a 50% chance that they will sue on something in that package.
Now, let’s just talk about the random patents out of all the patents that are currently available in the world. What’s the chance that somebody actually sues? We’re talking one in 10,000 as a general ballpark.
So we’re talking assets that are thousands of times more likely to be sued on these are really dangerous assets.
On how patents are sometimes used as legal assets by operating companies
Operating companies are using patents to counter sue and/or counter assert. So there’s lots of negotiations that go on behind closed doors.
We actually help our clients prepare for those negotiations by helping them buy patents, and put them in a format that they can go in with to counter. So these assets are being used pretty regularly.
On whether the NPE issue is global or is specific to certain countries/sectors
It’s mostly tech, but it’s definitely broadening out. We’re definitely seeing it in automotive, manufacturing, consumer products. I’d say still, 80% of it is in high-tech.
With the change of the court system in Europe, for patents, it looks really interesting. It has a US majority fingerprint with more and more interest internationally.
On how important it is for organisation to use analytics and data
When I was in [a previous role] there wasn’t a huge, decent sized team of programmers. They were creating their own databases to manage a lot of the work and also to roll up some of the analytics.
What’s happened is, you don’t have to have that team anymore. You don’t have to have a separate programming team to get high level important analytics to drive decision making.
And the insights are one of those parts of the tools. We’re big fans of Cipher. What we can do now is show you things like, here’s all the competitors in your space who bought patents lately.
We use the Cipher classifiers to help people understand where assets are moving around and who might, in their space, be buying stuff.
One of the examples that’s pretty interesting, you can usually see where Apple’s going, based on what they’re buying, they will go buy patents in those spaces where they probably didn’t feel like they filed enough patents.
You can see strategy out of this, you can see other people’s strategy, you can see if you have greater risk.
And one of the things that we do by pulling in data from things like the Cipher platform and financial information and even LinkedIn, you can start to create a better risk profile for your company. So what’s our overall risk?
That’s what you can do with analytics. That’s what you can do with the data. When you pull the data together from different sources. Now you can start to get a better risk pitcher for your company. And buying and selling patents is just part of that analysis, and also part of the solution.
Kent’s predictions for the future
I just did a survey of some of the biggest buyers – everybody was less optimistic than they were two years ago.
Two years ago, everybody thought the market would expand or stay the same. This year, 30% of people thought the market would contract. 70% of people surveyed thought it would stay the same or increase.
There’s definitely a shift in sentiment on how this market looks like it’s going to go over the next couple of years. And I think that’s reasonable, with the layoffs that we’re seeing in Silicon Valley and the pull-back on budgets.
It means that some people won’t have the resources to go by what they would have liked to buy. And we also know that when these budgets get pulled back, people start looking at other folks who are infringing and pointing fingers and trying to get their pound of flesh.
Nigel Swycher’s key takeaway
There’s no doubt that there’s an active market in the buying and selling of patents, but it’s still small.
We’re talking about 2,000 transactions in a world of over 3.5 million active US patents, and a lot more if you look at the global landscape.
What Richardson Oliver has achieved, however, is significant. Kent has aggregated and analysed hard to find data, not as a way to value companies or even portfolios, but to facilitate transactions between those who want to buy and those who want to sell.
What’s more difficult to rationalise is whether this market is increasing risk by putting patents into the hands of employees or decreasing risk by allowing companies such as LinkedIn to bolster their portfolio much more quickly than homegrown inventions alone.
Whichever side of the telescope you take, it’s hard not to be grateful to Kent for shining a light on what’s going on.