State of Innovation

Patents and Innovation Economics

IPXI’s Business Model Should be More Like Amazon’s

I have written extensively on the problems I see with IPXI’s model to market licensing rights to patents.  Their model is based on a commodities contracts type of model, where unit licensing rights can be bought and traded.  I believe a model based on how Amazon sells books would be more effective and open up the patent licensing market to smaller entities and inventors.  This sort of retail licensing system would allow inventors to post an invention that they are willing to license with a unit licensing rate for one instance of the invention.  For software enabled inventions the unit licensing rate might be based on a per execution basis or a time limited period.  The retail licensing system would issue a certificate that the licensor would use to prove that they had bought a license and only be good for one instance or execution.  It is my assumption that the unit licensing rates would be so low that it would be easier to license the invention than infringe.  The license would not come with any warranties of validity or non-infringement, but would come with a warranty of ownership of an issued patent.  In addition, there might be bulk unit licensing discounts and a chance for the inventor to sell their engineering talent to help implement the invention.

This system would reduce the cost of licensing.  Avoid some of the problems of IPXIs model, such as having a limited number of unit licenses and it would open up the market to individual inventors and small entities and spark an inventive wave that we would all profit from.

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August 30, 2013 Posted by | -Economics, -How to, Innovation | , , | Leave a comment

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.

June 18, 2012 Posted by | Business Models, Patents | , , , | Leave a comment

IPXI: Securitizing Patents

IPXI is an attempting to create an exchange for the transfer of patent rights.  Their website states that they intend to offer Unit Licensing Rights (ULRs) that can be bought and sold on their exchange.  A URL represents the right to use a patent in one instance of a product.  For instance, if patent A covers a new fuel injection technology, the owner of one URL in patent A has the right to produce one engine using the fuel injection technology.  IPXI’s website provides the following example:

For example, let’s say Company A owns a patent on technology that it uses in jet engines. But that technology also has applications in the production of truck engines. So, Company A decides to offer a ULR contract on IPXI permitting the purchaser to produce 5,000 units of its product with Company A’s patented technology. Company B, a truck manufacturer, realizes the usefulness of the patent and purchases the ULR contract from Company A through the exchange. Company B now owns a license to produce 5,000 truck engines using Company A’s technology.

The reported goal of IPXI is to reduce the cost of licensing technology compared to the present method of bi-lateral lawyer heavy negotiations.  This is a noble goal, but IPXI’s website is very short on specifics.  Apparently, this is because the exact methods of the exchange will be worked out by the founder members sometime in the future.  Right now IPXI is trying to find enough founding members to make the exchange viable.

I have written on ideas to create such an exchange.  For instance see Jump Starting a Secondary Market for Patents , in which I argue that Standards Committees could be converted into an exchange for transferring patent rights.  I note that IPXI founders are going to function very much like a standards committee.

Here are some of the problems in no particular order that will need to be resolved in order for IPXI to be viable.

Market Exclusion:  In IPXI’s example above, it is not clear that Company A can exclude the purchasers of its ULR from making a competing product.  The licensing fees may not make up for the lost market share, in which case companies will only offer patents that have no strategic value to themselves.

Number of ULRs:  Are the number of ULRs for a patent limited?  If they are limited, a company is going to be reluctant change their manufacturing process to incorporate this new technology.  Also the company will be reluctant to buy all the potential number of ULRs they might need up front.  If they are not limited, then the purchaser is going to worry about dilution of their ULR shares.  If they pay ten dollars per URL today, will the company holding the patent right suddenly flood the market next year and they could buy the ULRs for a dollar next year?

Validity:  What if the patent underlying the ULR turns out to invalid?  Is the money refunded?  Is the patent researched for validity before the offering?  If so are there any guarantees associated with the opinion?

Infringement Offensive:  Who is responsible for defending a patent if it is infringed.  Clearly, the value of my ULR decreases if the underlying patent is being infringed.  The best answer to this question would be that IPXI defends the patent, sort of like ASCAP.  In that case IPXI would undertake its best efforts to defend the patent if it agreed the patent was being infringed.  There would be no ramification if IPXI were unable to prove infringement.  Unfortunately, this does not meet the stock exchange model.

Infringement Defensive:  Are the seller’s of the ULR in the patent guaranteeing that practicing the patent does not infringe any other patents?  Is the issuer or IPXI going to conduct a clearance search?  If not the value of the ULR are going to suffer accordingly.  If the underlying patent is contested in court, who has the responsibility for defending the patent?  I believe the best way to solve this problem is to have IPXI defend the validity of the underlying patent.  But what if this causes a conflict between two patents that IPXI has issued ULRs for?

Accounting:  How does the issuing company know that the purchaser only built the number of licensed items they purchased ULRs for?  Does anyone have a right to an accounting?  If so who?

Process patents:  How does the ULR deal with process patents?  What if the process is not related to a number of units?  For instance, what if I have a way of processing integrated circuits?  Do the ULRs apply to the number of wafers?  What if the wafer diameter changes?  What if the pitch on the wafer shrinks?

Exclusive Licenses:  IPXI admits that its present model only works for non-exclusive licensing.  I think this is a minor problem.

 

Conclusion

I think IPXI’s goal is admirable.  However, I think there are a large number of issues to resolve before the idea is viable.  Ultimately, I believe IPXI needs to take on a much larger role than a standard stock exchange.  I think an enhanced ASCAP model is more likely to be viable.

June 4, 2012 Posted by | -Economics, Patents | , , , , | Leave a comment