2013 Economic Climate: How Patent Holders Create Value

by Morgan Smith
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Submitted by Morgan Smith as part of our contributors program.

In today’s economic climate, innovation is a key element in determining a company’s sustained profitability. An organization that innovates and brings new products to market while, at the same time, maintaining exclusivity over the product, will likely be much more successful than its competitors who either do not innovate or do not effectively protect their innovations. The weapon of choice, therefore, is patents. Strong patents remain a valuable tool for protecting innovation and keeping a competitive edge.

According to the U.S. Patent and Trademark Office (USPTO), the number of patents granted in the past several years was led by IBM (IBM) and densely populated with Japanese and Korean tech giants, including Samsung (SSNLF) and Sony (SNE).

An important aspect to note is that this is only patents ‘granted’ not necessarily ‘acquired’ (bought). It is quite often the case that companies must choose between the two. Every dollar spent fighting patent trolls and or waging patent wars is a dollar not spent researching, developing, and creating new products for market. The situation is so bad that last year, Apple (AAPL) and Google (GOOG) spent more on patent litigation and buying patents than they did on research. So it’s no surprise that some companies are looking for new ways to navigate the patent system while promoting openness and innovation.

Recent changes to legislation have taken effect since March of this year. The America Invents Act was signed into law in 2011 now deems that whoever files the patent first gets to claim the invention, while the previous system was based on who was first to invent. While certainly a benefit of this is that more technology should come to light more quickly by being published in the patent system, it could have a downside for businesses. The push to file a patent so early could mean wasting substantial money on rights that are meaningless.

How ‘substantial’ are we talking? To answer that effectively, one must know how much each patent cost in terms of a company’s R&D spending. Taking the number of patents granted in the last year and comparing that to the company’s annual R&D spending, IBM seemed to be the most efficient company, with each patent costing around $901,000. Microsoft (MSFT) was the least efficient company using these metrics, spending $3.45 billion on each invention and subsequent patent.

Although Google received 15 more patents than Apple in 2012, the latter was twice as efficient, spending just $1.1 million per patent granted. Google, on the other hand, succeeded in rapidly driving up the total number of patents.

Keep in mind that this is only the money spent in one’s own patents. Much more is spent in buying other companies and their patents. Some argue that this was the only reason for the Google acquisition of Motorola for a staggering $12.4 billion.

One should not treat the number of patents in the portfolio and the application count as the only valid representations of a company’s technological might, however, especially since this amount of money is something that companies are looking to avoid. To that end, most are seeking a third party that could help them in preventing spending such amounts on something that won’t have a great return.

Investors can cash in on this search as well, focusing on companies that join with others to both establish patents and protect them. Marathon Patent Group (MARA) supports companies in the patent process at all levels. For instance, at the outset, Marathon can assist with the commercialization of a patent. Throughout, it targets any possible violation or infringement by others. It also helps curb the risk that a patent could be found invalid from a legal decision, as well as preventing the emergence of non-infringing alternatives.

It is established that patents can be granted or purchased. However, it is in the use of such patents (or in some cases, the non-use) that businesses can capitalize on them. A ‘patent troll’ is a term referring to a company that produces no products and/or conducts little research to create new ideas. Instead, they buy patents from others and use them to make money from companies that have built a successful market for a product. Patent trolls use the threat of lawsuits or actual litigation to enforce their demands. A more polite and neutral name for them is nonpracticing entities (NPEs).

A NPE doesn’t need to amass a large portfolio of patents. It can merely hold one key patent in an area and prevent others from expanding into it even though it has no intention of pursuing the use of the patent. For instance, Google having a patent on something does not necessitate that they currently are or ever will actually use the patented idea or mechanism.

One of the examples used is from those who insist that “Author Rank” is a present reality in the Google Search algorithm is that because Google has the various Agent Rank patents, it must be using them. It doesn’t, and it doesn’t have to. On the other hand Apple doesn’t hold an exclusive patent on the tablet, nevertheless holds patents on the technology that makes the iPad such a dominant force that no one can create a competitive product.

Investments in patents and intellectual property are not as straightforward as other investment options. Patent investment is inherently riskier than other forms of investment largely due to the risk of patent infringement. The value of the investment rests almost entirely on the investor’s (or the company’s) exclusive rights to the idea and its marketplace applications. If the patent is weak, outside interests can easily steal the idea and clutter the market with competing products.

Ultimately, investors want to be reasonably assured that the patented concept is capable of yielding an acceptable return on investment. Companies that use their patents creatively in market application (such as Apple), and companies that use patents strategically to prevent competitors growth (such as Google) are where investors should focus.

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