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Amsterdam Colloquium on Patent Amsterdam Colloquium on Patent QualityQuality
An Investment Point of ViewAn Investment Point of View
June 2007June 2007
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PrefacePreface
…the Market is Always Right…
3
DiscussionDiscussion
Does a Patent Marketplace Exist?
What is the Market Telling Us About Patent Quality?
The Importance of Certainty
Specific Consideration of Patents in Venture Capital Investments
4
Patent MarketsPatent Markets
Time
External
Control
Internal Maintenance
Licensing
LitigationVC
Public Equities
Auction
IPX Chicago
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DiscussionDiscussion
Does a Patent Marketplace Exist?
What is the Market Telling Us About Patent Quality?
Maintenance
Venture Capital
Public Equities
The Importance of Certainty
Specific Consideration of Patents in Venture Capital Investments
6
PatentRatings® System
ASSUMPTION #1:
Patent decision-makers will choose to pay patent maintenance fees only when the perceived value of the expected remaining economic benefit secured by the patent exceeds the amount of the maintenance fee, taking into account appropriate risk factors, anticipated rates of return, carrying costs, etc.
ASSUMPTION #2:
Patents that are more valuable are, on average, maintained more often than patents that are less valuable.
PREMISE:
By examining PTO maintenance records, we can identify certain patent “metrics” or characteristics that are statistically correlated to higher maintenance rates (higher value).
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PatentRatings® System
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PatentRatings® System
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PatentRatings® System
Categories of the PatentRatings® System’s factors:
Technology: The relative mortality or maintenance rates of similar patents within the same technology space. The technology factor considers the relative differences in mortality rates, but does not consider or assess the technical merits of a particular underlying invention.
Prior Art: The scope of prior art considered by the patent examiner. Relevant metrics include the number and type of cited prior art references, the average age of the references and the number of search fields considered by the examiner in conducting the prior art search.
Disclosure: Thoroughness of the patent disclosure. Relevant metrics include the number of words contained in the patent specification and the number of figures described.
Claims: Breadth and quality of the claims. Relevant metrics include the number of independent and dependent claims, claim types (e.g., method, apparatus, etc.), number of words per claim, and the presence or absence of specific limiting language such as “means” clauses and the like.
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PatentRatings® System
Categories of the PatentRatings® System’s factors (continued):
Prosecution: Prosecution history of the patent. Relevant metrics include length of pendency, number and type of documents filed, identity of the prosecuting attorney or law firm, and the identity of the primary and assistant examiners.
Ownership: Various factors relating to patent ownership (e.g., private or corporate, small entity or large entity, foreign or domestic, etc.) have been identified as statistically correlated to patent maintenance rates. IPQ scores are adjusted to ignore ownership factors. However, for certain purposes such as investment analysis and business valuations, it may be appropriate or desirable to use a modified IPQ score that takes into account ownership factors.
Other: Various other metrics not otherwise categorized.
For more information about the IPQ patent ratings system, model construction and statistical methodology, please refer to PatentRatings web site at
www.patentratings.com
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Example: Length of Disclosure
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Example: Claim Type
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Example: Number of Independent Claims
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Example: Number of Dependent Claims
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Example: Shortest Independent Claim
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Example: Related Patents
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Example: Cited Prior Art
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Example: Forward Citations
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Empirical Proof
…higher patent quality correlates to a higher probability of being licensed / commercialized…
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DiscussionDiscussion
Does a Patent Marketplace Exist?
What is the Market Telling Us About Patent Quality?
Maintenance
Venture Capital
Public Equities
The Importance of Certainty
Specific Consideration of Patents in Venture Capital Investments
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2000 Venture Capital Investments by Status1
0
15
30
45
60
With IP Without IP
To
tal 2
00
0 In
vest
me
nts
Defunct Active/Acquired
2000 Venture Capital Investments with Additional Funding1
0
15
30
45
60
With IP Without IP
To
tal 2
00
0 In
vest
me
nts
No Investment Addl' Investment
Venture CapitalVenture Capital
76%
84%
1 Based on VentureExpert search of seed and early stage investments in 2000 by Sierra Ventures, Sequoia Capital, Accel Partners, Kleiner Perkins, and Bay Partners.
16% 24%
2000 Venture Capital Investments by Type1
25%75%
With IP Without IP
50%
50%84%16%
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DiscussionDiscussion
Does a Patent Marketplace Exist?
What is the Market Telling Us About Patent Quality?
Maintenance
Venture Capital
Public Equities
The Importance of Certainty
Specific Consideration of Patents in Venture Capital Investments
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Public Equities
…higher patent quality correlates to higher gross profit margins…
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* These figures represent hypothetical, back-tested results. They were not achieved through live trading. Please see full discloses at the end of this presentation.
Pubic Equities
Ocean Tomo 300® Patent Index
January 1997 - December 2006
100
150
200
250
300
Ocean Tomo 300 Patent IndexS&P 500
-10%
20%
50%
80%
Dec 1996 Aug 1998 Apr 2000 Dec 2001 Aug 2003 Apr 2005 Dec 2006
Cumulative Excess Returnvs. Market Benchmark
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* These figures represent hypothetical, back-tested results. They were not achieved through live trading. Please see full discloses at the end of this presentation.
Public Equities
Manager vs. Benchmark: Sharpe Ratio through December 2006(not annualized if less than 1 year)
Sha
rpe
Rat
io
-0.2
0
0.5
1
1.5
2
2.2
10 years 9 years 8 years 7 years 6 years 5 years 4 years 3 years 2 years 1 year
Ocean Tomo 300 Patent IndexS&P 500
Manager vs Benchmark: Sharpe Ratio through December 2006(not annualized if less than 1 year)
Ocean Tomo 300 Patent Index
S&P 500
10 years
0.46
0.31
5 years
0.23
0.31
4 years
1.39
1.46
3 years
0.79
1.08
2 years
0.68
0.92
1 year
1.04
1.96
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DiscussionDiscussion
Does a Patent Marketplace Exist?
What is the Market Telling Us About Patent Quality?
Maintenance
Venture Capital
Public Equities
The Importance of Certainty
Specific Consideration of Patents in Venture Capital Investments
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Economic InversionEconomic Inversion
16.8%
83.2%
32.4%
67.6%
68.4%
31.6%
79.7%
20.3%
0%
20%
40%
60%
80%
100%
1975 1985 1995 2005
Components of S&P 500 Market Value
16.8%
83.2%
32.4%
67.6%
68.4%
31.6%
79.7%
20.3%
Tangible Assets Intangible Assets
16.8%
83.2%
32.4%
67.6%
68.4%
31.6%
79.7%
20.3%
16.8%
83.2%
32.4%
67.6%
68.4%
31.6%
79.7%
20.3%
Source: Ned Davis Research
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Importance of CertaintyImportance of Certainty
Research and development
Existing licensing and joint venture agreements
Venture investment
Public equity valuation
Emerging markets and planned exchanges
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DiscussionDiscussion
Does a Patent Marketplace Exist?
What is the Market Telling Us About Patent Quality?
Maintenance
Venture Capital
Public Equities
The Importance of Certainty
Specific Consideration of Patents in Venture Capital Investments
30
Citation AnalysisCitation Analysis
Novelty requirement of patents forces inventor/examiner to disclose similar technologies
Used to determine:
Relative value of specific portfolio patents
Relative value of entire portfolio
Related technology and technology holders
Value determination stems from widely held belief that patents referenced more frequently as prior art are more valuable
Establishes patent as foundation for subsequent inventions/improvements
More likely to contain significant technological advance
Studies have found significant correlation between number of citations and various measures of value
Also allows unique insight into holders of similar technology
Often in different/dissimilar industries
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Citation Analysis Example: Dell Inc.Citation Analysis Example: Dell Inc.
Rank Unified Assignee Patents Citing Dell
1 IBM 5872 Hewlett-Packard Company 5503 Dell Inc. 4794 Intel Corp 3735 Micron Technology, Inc. 2746 Samsung Group 1747 Sun Microsystems Inc 1578 Toshiba Corporation 1199 Hon Hai Precision Ind. Co. Ltd. 97
10 NEC Corporation 9611 3COM Corp. 9512 Fujitsu Limited 8913 Advanced Micro Devices Inc. 7814 Microsoft Corp 7415 Hitachi Ltd 6716 Gateway Inc. 6417 Texas Instruments Incorporated 5918 LSI Logic Corp. 5719 Sony Corporation 5120 Matsushita Electric Industrial Co Ltd 4821 Apple Computer Inc. 4722 Motorola Inc 4623 Canon Inc 4123 Lucent Technologies 4125 EMC Corp 4026 Mitsubishi Electric Corp 3326 Siemens AG 3328 Koninklijke Philips Electronics N.V. 3229 Cisco Systems Inc. 3030 Ericsson (LM) Telephone Co Inc 2831 Adaptec Inc. 2731 Areva Group 2733 Cognex Corp 26
Rank Unified Assignee Patents Cited by Dell
1 IBM 6482 Hewlett-Packard Company 5713 Dell Inc. 5004 Intel Corp 2405 Toshiba Corporation 1496 Samsung Group 1427 Motorola Inc 1128 Fujitsu Limited 979 Microsoft Corp 83
10 Lucent Technologies 8211 Hitachi Ltd 7812 Apple Computer Inc. 7612 Sun Microsystems Inc 7614 NCR Corporation 6415 Texas Instruments Incorporated 6116 Tyco International LTD 6017 Micron Technology, Inc. 5818 NEC Corporation 5519 EMC Corp 5020 Advanced Micro Devices Inc. 4821 Unisys Corp 4722 Koninklijke Philips Electronics N.V. 4623 Siemens AG 4324 Sony Corporation 4225 Mitsubishi Electric Corp 3926 Nortel Networks Corp 3827 Canon Inc 3628 LSI Logic Corp. 3529 General Electric Co 3029 Raytheon Company 3031 Alcatel 2831 Matsushita Electric Industrial Co Ltd 2833 Hon Hai Precision Ind. Co. Ltd. 25
Backward Citations Forward Citations
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Relevancy Mapping
Using statistical analysis of the relationships among issued US patents, PatentRatings can also generate patent relevancy maps. These maps can be useful to analyze:
Patent population of each technology type
Proximity between technology types
Existence of “technology voids”
Populations of patents in each technology area
Technology clusters
Areas of overlap in companies’ IP portfolios
Time varying trends
Technology area saturation
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Patent MappingProprietary interactive mapping software which displays the entire patent universeAllows point and click examination of any patent spaceCovers US Patents, Foreign Patents, and US ApplicationsFront End for the OT|PR Relevance Engine
Patent MappingPatent Mapping
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IPQ Mapping combines IPQ ratings and relational mappingTracks and ranks IP Markets Early Recognition of changing scores and trends in identified marketsIdentification of “white spaces”
IPQ MappingIPQ Mapping
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Technology Landscape Detail
Source: OTPR analysisSource: OTPR analysis
Company ACompany BCompany CCompany DCompany ECompany FCompany G
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Proprietary OT|PR Relevance Matrix
ASSIGNEE #Patents IPQ Relevance
Company 2 21 121.21 0.037
Company 3 107 94.983 0.010
Company 4 3 154.7 0.102
Company 5 8 127.86 0.042
Company 6 11 133.6 0.030
Company 7 2 128.35 0.095
Company 8 17 144.28 0.009
Company 9 8 97.962 0.028
Company 10 5 157.8 0.027
Company 11 1 154.8 0.124
Company 12 13 135.98 0.011
Company 13 2 157.5 0.066
Company 14 5 115.3 0.028
Relevance EngineRelevance Engine
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Competitor AnalysisSummary of a particular patent spaceIdentify major threats/opportunitiesIdentify major players and likely future entrants in any given technology space
Competitor Patent Portfolio AnalysisCompetitor Patent Portfolio Analysis
Low
Low
Low
Low
Low
Medium
Medium
Medium
Threat Level
121.8421109.793817Conexant Systems, Inc.
?20101.19253,150Infineon Technologies AG
121.61122109.31,2669,721Sharp Corp.
121.408120.81,6295,827STMicroelectronics Group
120.938105.138493ATI Technologies, Inc.
119.281167106.12,6425,012LG Electronics, Inc.
123.529184110.52,59518,680Sony Corp.
149.594103142.6998937Broadcom Corp.
Avg IPQ of
Relevant
# Relevant Apps
# Relevant Patents
AvgScore of
Total
Total # Pending
Total # PatentsCompany
Low
Low
Low
Low
Low
Medium
Medium
Medium
Threat Level
121.8421109.793817Conexant Systems, Inc.
?20101.19253,150Infineon Technologies AG
121.61122109.31,2669,721Sharp Corp.
121.408120.81,6295,827STMicroelectronics Group
120.938105.138493ATI Technologies, Inc.
119.281167106.12,6425,012LG Electronics, Inc.
123.529184110.52,59518,680Sony Corp.
149.594103142.6998937Broadcom Corp.
Avg IPQ of
Relevant
# Relevant Apps
# Relevant Patents
AvgScore of
Total
Total # Pending
Total # PatentsCompany
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Ocean Tomo Firm Description
Ocean Tomo is an integrated intellectual capital merchant banc providing the following services:
Expert Services including Financial Testimony and Surveys
Valuation including Appraisals, Patent Analytics and Patent Ratings
Investments including Private Capital, Public Equities and Patent Sale/License-Back
Risk Management
Corporate Finance including Merger and Acquisition Advisory and IP Auctions
Our goal is to assist our clients - corporations, law firms, governments and institutional investors - in realizing their Intellectual Capital Equity® value broadly defined. We seek to capture benefits inherent within the rapid growth of both intellectual property as an asset class as well as that intellectual capital unique to the special interests.
Our professionals are world-class innovators providing solutions to our clients’ needs. Our comprehensive range of products and services is unique and built upon a focused attention to intangible assets.
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Contact Information
CHICAGO200 West Madison
37th FloorChicago, IL 60606(312) 327-4400 Ph(312) 327-4401 Fx
DC METRO7475 Wisconsin Avenue
Suite 525 Bethesda, MD 20814
(240) 482-8200 Ph(301) 652-2885 Fx
ORANGE COUNTY19200 Von Karman Ave.,
Suite 600 Irvine, CA 92612(949) 222-1264 Ph
www.patentratings.com
PALM BEACH235 S. County Road
Suite 1Palm Beach, FL 33480
(561) 309-0011 Ph(561) 805-8765 Fx
SAN FRANCISCO101 Montgomery Street
Suite 2100San Francisco, CA 94104
(415) 946-2600 Ph(415) 946-2601 Fx
James E. Malackowski312 327 4410