Bullish about patents?

Ok, so we have traded stocks, currencies, commodities, art, weather, electricity ... what next? Looks like the world is never out of ideas. At least James Malackowski, the CEO of Ocean Tomo has one. In an interview last month with Fox Business news, he discussed his ideas about an IP exchange. The interview video is available at www.foxbusiness.com.

The online patent auction platform created by Ocean Tomo has been one of the pioneer efforts in this area. There are several other websites offering a patent auction platform. But in most cases an auction is a one time phenomena in a patent's life. Then how does James Malackowski propose to build an IP exchange where patents could be traded like stocks, everyday, every minute. The concept of a "Synthetic Royalty Stream" appears to be one solution for this problem. Though synthetic royalty is not a very new concept but it is definitely not very popular either. Synthetic royalty is an investment mechanism where the investor would pay a lumpsum for a percentage share of a product's future revenue.

The issue now is to associate a synthetic royalty stream with a patent. Consider the case of a hypothetical company with one patent. Following are the steps in which the company can turn its patent asset into a liquid financial instrument:
1. Launch an SPV which holds the patent as an asset
2. Attribute a share of its product revenue to the patent and hence the SPV
3. Collect funds from investors in return of a stake in the SPV
4. The investors then trade their stakes as the product revenues rise or fall
5. These stakes will involve the risk of a substitute technology replacing the patented technology in the product

Several variants of the above mechanism can be used to make liquid financial instruments out of patents. The investment fraternity will need more technical support than ever to assess the risk associated with these instruments. Attributing a share of product revenues to a patent will involve development of standard methodologies for assessing royalty rates. This task will become even more challenging when revenues from multiple products need to be attributed to multiple patents. AT&T Knowledge Ventures (KV), under the leadership of Abha Divine has set an example of successful implementation of this process. AT&T KV implemented a methodology to annually measure the impact of its IP Portfolio on its per share earnings. It will take lots of such successful examples and a lot more standardization of processes before the world can start trading in IP.