Patent Exchange–Supplying the Market (Part 2(i) of X)

For a patent exchange to exist, there would need to be a number of patent holders that supply patent assets to the trading market.  A number of questions naturally arise: (1) Who would be the parties to supply the patent exchange?  (2) What are incentives to supplying the market, taking into account (i) disadvantages of traditional monetization means and (ii) advantages of a patent trading market?  (3) What are the logistics of placing a portfolio on the market, taking into account (i) mechanisms to generate revenue for patent suppliers, (ii) patent portfolio groupings, and (iii) how would patent holder enforce its publically-traded patent against a competitor, if it needed to?

In this post, I’ll be discussing (2)(i) incentives to supplying the market, taking into account disadvantages of traditional monetization means.

Taking the case study of Cisco as an example, there are a number of incentives for an alternative means to monetization.  The costs to obtain and maintain its patent portfolio demand a need to generate revenue, but there is a natural deterrent for Cisco to monetize its patent asset through traditional means.

The following points illustrate disadvantages of traditional monetization means for large-scale operating companies such as Cisco.

1. Need to monetize–without a monetization vehicle, patent assets are huge liabilities.

Unless Cisco is actively monetizing its patent portfolio, the portfolio is a huge liability.  On average, each patent asset costs US $25K-50K to obtain and about $8.7K to maintain over its lifetime (this only takes into account U.S. assets, not foreign ones).  This amounts to a total average cost of US $46K per U.S. patent asset.

Multiply that by 10,000 and it costs Cisco to US $460M to maintain its entire patent portfolio.

As such, Cisco would need to earn US $460M in licensing revenue, just to break even.

2. Only a fraction of patents are monetizable through traditional means.

On average, only 1% of patent assets are monetizable through traditional means, because a very small number of patent assets are actually infringed.  Applying this average to Cisco, only 100 of its 10,000 patent assets are monetizable through traditional means of licensing and litigation.

For Cisco to break even on its patent investment, each of these 100 patent assets would need to generate US $4.6M.

Anyone in the monetization space can attest that generating US $4.6 M on a given patent asset is a very risky proposition.

3. Opportunity cost to monetize—risk of large-scale patent warfare.

But for operating companies, there is an inherent risk for it to monetize it patent assets.

Namely, to monetize its portfolio Cisco would need to sue other operating companies.  For such campaigns to be profitable, those target companies will need to be large enough and earn sufficient revenue such that a monetization campaign would be justified.

But if the target companies have large revenue, they also likely have their own patent portfolio.

If Cisco sues these companies that have relatively large patent portfolios, Cisco would expose itself to counter patent lawsuits from those companies.

This is analogous to mutually-assured destruction regarding nuclear arms—no country wants to start nuclear war with another nuclear power, because it will assure mutual destruction.

This is typically the reason you don’t see many operating companies engage in all-out-war with respect to patent assets.

As such, there is a natural deterrent for Cisco to monetize its patent asset through traditional means.  But the costs to obtain and maintain its patent portfolio demand a need to generate revenue—hence the need for an alternative need to monetize patent assets.

0 Comments

Leave a reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>