Editor’s Note: Leonid (“Lenny”) Kravets is a patent attorney at Panitch, Schwarze, Belisario and Nadel, LLP in Philadelphia, PA. Lenny focuses his practice on patent prosecution and intellectual property transactions in computer-related technology areas. He specializes in developing IP strategy for young technology companies and blogs on this topic at StartupsIP. Follow Lenny on Twitter: @lkravets and @startupsIP.
As large companies increasingly look to protect their revenue streams through IP risk mitigation, startups with strong patent holdings will become increasingly valuable because they provide an opportunity to remove dual potential threats to the potential acquirer’s revenue stream — as a competitor and as a patent threat. Startups that are able to position themselves as part of an acquirer’s IP risk mitigation strategy make themselves more attractive targets for acquisition.
For example, Twitter acquired Tweetie days after Tweetie filed for a patent application on the pull down to refresh feature and Google recently acquired Apture and Katango, two small startups with multiple pending patent applications relevant to Google’s businesses. Although some have described these deals as talent acquisitions, the value presented by the associated IP to the acquirer should not be ignored.
Potential acquirers viewing target companies as part of their risk mitigation strategy should result in increased patent prices being reflected in smaller patent deals, as well as in increased valuations for startup companies with IP holdings. Unfortunately, despite the evidence of how valuable patents are to large companies, parts of the technology community see filing patent applications as a scarlet letter for startups.
While some members of the technology community argue that patents are more trouble than they’re worth, the average price of sold patent assets keeps skyrocketing. Monday’s acquisition of 800 AOL patent assets by Microsoft set a new high water mark for the value of an average patent asset (a patent or patent application) of 1.25 million dollars. Other recent deals include the purchase of Novell’s patent portfolio for $450 million, the purchase of Nortel’s patent portfolio by a group including Microsoft and Apple for $4.5 billion, and the acquisition of Motorola Mobility by Google for $12.5 billion.
While each of these deals have been reported as being a “patent” sale, in each case, only a portion of the total patent assets are issued patents, with the rest being patent applications. In practice, patents and patent applications are not valued equally because the value of a patent application can change drastically during the course of prosecution and the owner of the application must expend significant resources relating to its prosecution.
It is difficult to identify a specific breakdown between patents and patent applications in each of these deals. However, the true price per issued patent is likely to be substantially higher than what was reported.
Thus far, these higher per-patent valuations for large portfolios do not appear to have filtered down to smaller portfolios such as those held by startups and other small companies. This may be due to the fact that companies will pay a premium to purchase large portfolios, since it is easier to structure a single transaction instead of many smaller transactions, and because a large portfolio can provide coverage for a broad range of technologies related to the acquiring company’s core businesses.
However, the conclusion to be drawn from the above-mentioned sales is that the true value of a patent is what someone is willing to pay to keep that patent (or patent portfolio) out of a competitor’s or Non-Practicing Entity’s (NPE) hands.
While it has been argued that the increased patent valuations amount to a patent bubble, these valuations signal a new view of patents as an IP risk mitigation strategy that minimizes exposure to IP threats. Similar risk hedging strategies are employed in many other industries. For example, in the airline industry, hedging of fuel prices is a commonplace, accepted practice. Thus, while current patent prices may be overly inflated, it is likely that increased prices are here to stay.
The view of IP in terms of risk mitigation will likely make small technology companies the next beneficiaries of the increased patent values. As the remaining available large portfolios find new homes, large companies will be forced to look to smaller technology companies to continue mitigating their IP risk by preventing patents from falling into the hands of NPEs or litigious competitors. After all, many of the NPEs were at one point operating companies or acquired patents from them.
The result is that the increased valuations and competition for patents provide an opportunity for smaller technology companies to monetize their own assets regardless of the success of their business, as shown by Google’s acquisition of the Cuil patent portfolio. Facebook’s acquisition of Instagram (which does not appear to have any patents or published patent applications, but may have unpublished patent applications) showed that patents are not strictly necessary to make a startup an attractive acquisition target. Still, it would have been interesting to see how much Facebook would have been willing to pay for Instagram if it had a patent portfolio.
Patent applications can be expensive to write and prosecute (typically costing between $15,000 and $75,000), and are not for every company. However, the increased emphasis on, competition for, and value of patents shows that dismissing patenting out of hand can be a competitive disadvantage by foregoing part of the value proposition a company with IP can offer to a potential acquirer.