D Murali

Evolution of IP valuation

D. Murali | Updated on September 18, 2011 Published on September 18, 2011

Anu Vaidyanathan, CEO, PatNMarks

Intellectual capital can incorporate both intellectual properties, such as patents, trademarks and licensing, as well as human capital such as employees

One of the questions I posed to Anu Vaidyanathan, CEO, PatNMarks, Bangalore (http://bit.ly/F4TAnuV), during a recent interaction in Business Line, was about the Google-Motorola deal, widely seen as a patents story. As an IP (intellectual property) expert, was she happy with the deal valuation? “I believe the patents-race, much like the arms race, is very real, very live and very commercially significant,” begins Anu. “Some people argue that a very contentious atmosphere takes away the joy of innovation or invention but, I believe what we are witnessing in the telecommunications industry is an expected epoch, with the evolution of the industry and the undeniable market recall that these mobile gadgets have.”

It bears mentioning that these wars are not the first of their kind, perhaps the media hype is more these days but that's an entirely different and political topic of debate, she notes. Within the semi-conductor industry, a lot of patent wars and acquisitions have been fought and survived, reminds Anu. An example she mentions is of Intel paying around $1.25 billion to AMD to settle some IP disputes (after many years of contention, at undisclosed legal fees), in a $30-40 billion market in the last decade.

Reasoning that, within telecom, the fact that Google paid $12.5 billion is not a huge surprise given that the order of magnitude of sales of a cellular phone is a lot more than the high-end processors for personal computing, Anu points out that nearly four dozen lawsuits were filed against Android, simply because of its market share in the last two years. “The Android platform has more than 50 per cent market share of both Microsoft and Apple (combined) at a little over $300 billion in the mobile telephony/applications space. Google having to pay $12.5 billion to protect its Android IP problems for that portion of market share seems reasonable. What bears examination is the impact of the anti-trust cloud that Google is presently under on all acquisitions they make.” Our conversation continues over the email.

Excerpts from the interview.

Would you like to give a historical perspective on the way IP valuation has been evolving over the years, and where do you see it headed?

On an average, 70 per cent of the market value of several companies on the S&P 500 is attributable to IP and other “intellectual assets”. Value is not a specific figure but rather an alignment of assumptions.

Typically, we use three components for valuation – cost-based, market-based and revenue-based – also thought of as value past, present and future. Timing and context are critical components of the assessment. For example, the complexity and customisation needed to create an asset may cause a high level of cost variability and outcome uncertainty.

Similarly, given sufficient time, multiple alternatives can be explored, but if deadlines are tight, the need to have a working solution requires a value premium. Valuations look at each of these elements to provide a reasonable approximation of the value boundaries.

Intellectual capital can incorporate both intellectual properties, such as patents, trademarks and licensing, as well as human capital such as employees. For acquisition purposes, the degree to which intellectual assets are formalised or codified increases the likelihood of retaining the value.

If the employee experiences or methods are documented, those assets are more readily leveraged and potentially non-linear (highly scalable). If those experiences or methods are known only to the employees, leverage or reuse will be more restrictive and will require additional employment agreements to capture those assets. Note that this estimate range cannot include the potential options value for market timing, for example, if the underlying asset (let's say software) is necessary to win a contract or deliver to a deadline within a 3-6 month timeframe. In such a situation, the time premiums can easily double the estimated value, depending on the opportunity.

IP valuation has been evolving in terms of methods used and the basic understanding around the area. I see it being a very active part of many M&A deals and public listings and this trend will continue. The benefits can be accented by placing more incentive on this line item in a company's portfolio.

What are the three or four things that the audit committees and risk managers of enterprises should have in their list of IP priorities?

A few things to keep in mind are that IP strategy has to align well with a company's core competency. IP is no longer viewed as a mere legal tool but also provides very real economic benefits (debt securitisation, for example) to companies of all sizes and ages.

One of the key issues in globalisation is understanding where the human capital is based (and protecting IPs in that backyard), and where the final products are used or sold (and extending protection there as well). A survey on R&D spending by SMEs showed that these companies acknowledged a lot of wastage through mismanaged patent costs. A badly managed IP portfolio is a sure shot recipe for disaster as the costs explode in no time.

Audit committees and risk managers should also work towards building IP protection as a part of their work culture and build the impression of it being money well spent. This is the ultimate roadmap for sustainable innovation and enabling employee retention (of highly creative individuals).

The last thing managers should be savvy about is in picking an IP team that has an established track record in terms of domain expertise. For a long time, the Indian Patent Office did not require that patent practitioners have science degrees. That has changed but it's still something to keep in mind. Process efficiency within the IP organisation also translates to decreased costs in the long-term even when paying a premium for domain knowledge.

As our products and services get smarter and more intelligent, with an increasing integration of IP (e.g. phones, cars, secure online payment), won't it be a healthy trend to inform the customers about the IP component of the price tag?

Analogous to food labels, IP labels could help enhance conscious consumerism. In 2007, I thought it was ridiculous to have to spend Rs 17 for a coffee at Coffee Day vs. Rs 4 at the local Sukh Sagar… today one might ask should I be paying for the experience, a huge premium? In terms of IP, it's very hard to differentiate where the plethora of components are sourced from, who developed the IP on the chipset vs. the applications vs. the device itself.

So, a label could help a consumer understand the value of what they are buying. That being said, most people eat highly processed food on a daily basis without checking the nutrition content. Therefore, it would be a much larger exercise to determine the true value of such an exercise. Counter culture so to speak is here to stay. We are now in the jet age of instant gratification, we see, we want, we get sold on media messages and we buy.

One step above creating these labels would also be to regulate the norms around these labels to accurately indicate the social benefits companies are creating for the local economies that are powering their IP. Being an academic, I am allowed to be reasonably idealistic in my expectations of the ways the world could be.

Your suggestions on how enterprises can promote innovation and IP creation despite tight budgets?

I believe that people create all kinds of things on shoestring budgets. I believe the real disconnect is in the value attributed to IP. In the last decade, as a small IP services and solutions provider, we have seen inventors of companies of all shapes and sizes walk through our doors. The ones that bring the most professional gratification are the ones that believe in the value the exercise brings to their thought leadership. I have seen professors acknowledging their hardworking students by making them co-inventors. I have seen up and coming companies encouraging their teams to really own a piece of the puzzle by placing a premium on inventions filed. I believe there is always a way, if you want there to be a way. In order to sustain creativity, an organisation must place an incentive worth working for.

Any other points of interest.

Any field of technology – software having a lower time to create competitive advantages through creative engineering than say manufacturing or pharmaceuticals (which typically have top-heavy requirements of equipment and market presence) – is greatly accented by IP. All innovation (including processes and services) cannot be converted to IP but the ones that define a company's core competence must be converted for sustainability and strategic advantages.

Published on September 18, 2011

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