Creating an effective monetization strategy requires a multi-dimensional game plan, a game plan involving (1) acquisition considerations; (2) campaign costs; (3) revenue potential, taking into account the (i) market landscape and (ii) importance of the read; (4) assessments regarding the (i) strength of the read; (ii) claim construction positions; (iii) validity, including (a) forum considerations and (b) validity assessments; (5) filing strategies; and (6) compelling story telling.
In this post, I’ll be discussing (3)(i) estimating revenue potential, taking into account the market landscape.
Revenue Potential–Market Landscape
To access your portfolio’s revenue potential, first survey the market landscape relevant to your patent asset.
To do so, answer the following:
1. What companies are you targeting?
As a general matter, your target list of potential licensees should include companies with annual revenue greater than US $100M.
If you’re negotiating for a company to pay you six figures for a license, you won’t get anywhere if it’ll break their bank. Focus on targets that have sufficient revenue to fund a six-to-seven figure settlement.
2. For a given target, what is the minimum U.S. annual revenue attributable to the infringing product or service?
If a company doesn’t earn at least US $50M / year from the infringing product or service, your damages base is too small. Consider passing on the target.
To illustrate a damages calculation (I’ll explain more about this in another post), assuming U.S. $50M annual revenue attributable to the infringing product or service, damages over a statutory six-year period, a 25% apportionment attributable to the patented invention driving sales (I’ll be discussing this in the next post), and a 1% royalty rate:
$50M x 6 (years) x .25 (apportionment) x .01 (royalty rate) = US $750K
US $750K represents your best day at trial against all infringing parties, which would be a 3-5 year game plan.
If you were to attempt to capture early settlements, within a 0.5-to-2 year return cycle, divide that number by 4 (this is a safe multiplier, taking into account risk)—this converts to $187.5K in revenue for that given target.
At a minimum, keep the gross return per target in the six-figure range.
3. How many defendants do you have in your target market?
The more defendants you have per campaign, the greater the revenue potential. To count a target as a potential revenue-generating defendant, make sure they met the criteria in (2) above (> US $50M revenue/year attributable to infringing product or service).
As a general rule of thumb, for every 10 defendants you file against, you’ll have 1 defendant seriously interested in settlement discussions.
Thus, if you file complaints against a wave of 20 to 30 defendants at a time, you’ll be negotiating with approximately 2 to 3 defendants at any given time (assuming you price a license at an attractive discount). This will enable you to generate a steady stream of revenue from the campaign.
4. Of the targeted defendants, what is the market-share breakdown?
Is it top heavy, with two or three defendants having more than 90% of the market share? If so, your real targets are the market-share leaders.
Is it more evenly distributed, with a large number of tier II targets? If so, you’ll have a larger defendant pool from which to extract settlements.