State of Innovation

Patents and Innovation Economics

IPXI Exchange Model Issues

Gametime IP and IPWatchdog have recently written excellent articles on IPXI.  However, I still see a problem with IPXI’s model.  Namely – are the number of ULR limited?  If so then they will become all used up.  Now imagine launching a new product that is going to need a license.  Yes, I can buy a number of ULRs, but I don’t know how many I will need.  If the product is highly successful, I might need more ULRs than are ever offered.  I doubt many business is going to take that risk.  Alternatively, if the number of ULRs are not limited how do I know that IPXI will not flood the market?  If they can issue additional ULRs for the same patent, I am going to have a very difficult time determining what price I should pay for them.

There are two broad exchange models out there.  One is the stock market and the other is the commodities market.  Because Mr. Gerard Pannekoek, CEO of IPXI, comes from the commodities side of the world, it appears that IPXI is trying to model there exchange on a commodity exchange.  A commodity exchange has a consumable item it is exchanging and the ULR is an attempt to create a similar consumable item.  With a commodity additional units can be produced.  With a patent the number of ULRs to the patent could also be increased, but they do not have to be produced in any sense of the word.  You can rationally price a future contract for a commodity because the amount of production is limited.  For instance, only so much land is devoted to corn production.  It takes a certain amount of time for the corn to be produced.  The amount of corn in storage can be determined.  In addition, the need for the corn is likely to be fairly well defined.   None of this is true of ULRs.  If you are designing a new product that requires a ULR, then you have no idea what the sales of the product will be in ten years.  You have no idea if the underlying technology will still be important in ten years.  Finally, you have no idea how many ULRs will exist.  So you neither can predict the demand or the supply for a ULR – unless it is only dealing with products and technologies that have been in the marketplace for awhile. You cannot rationally price a ULR (assuming more can be issued for the same patent) because there are no constraints on the issuing of more ULRs.

A stock exchange model would be more complex, but I believe a more viable model.  Each patent or a portfolio of patents could be seen as a company.  IPXI could issue shares in the patent groups and the shareholders would receive a percentage of the earnings.  These securities would look a lot like oil and gas leases, in that they have a finite life.  The value of the patent security would be based not only on the value of the underlying patent(s) but in the ability of the management group to increase revenues.  Most economic models show that the biggest return for a patent is to non-exclusively and widely license the technology.  Since the patent company would not be a producer, their interest would be consistent with a widely licensed technology.  They would also have an incentive to provide technical expertise on how to use the technology and a disincentive for frivolous litigation.  They could offer standardized licensing contracts that would also eliminate the high cost of bilateral negotiations.  The money from the initial offering would be used to create the management team and promote the patented technology.  Investors would have the knowledge of sales and earnings that they have for a company or oil/gas lease.  These companies would probably exist today but for Sarbanes Oxley and other related securities laws that make it too expensive to go public in the USA.

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June 18, 2012 - Posted by | Business Models, Patents | , , ,

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