Patent Based Business Models - Copyright Immendo Ltd 2011

Patent Based Business Models

2010 02 07 Marcus Malek
©Immendo Ltd. 2011

Agenda
• Background
– What you can do with patents and why it’s a business
model.
• The importance of Litigation
– Why it’s the double edged sword that drives the market
• Patent Based Business Models
– From A – Z of making money from patents
• Other IP Based Business Models
– Believe it or not; not everything is patents
• Key take outs and next steps

2
© Immendo Ltd. 2011

What you can do with patents and why it’s a
business model.
BACKGROUND

So, let’s start on the easy side of things, 6 months into
ICM, what can you do with patents?
• License
• Sell
• Litigate
• Give away
• Collateralize
• Securitize
• Raise funds
• Sell rights to license
• Sell rights to litigate
• Insure
• Insure against lawsuit

4

And because it’s IP/IPR, the options are not
mutually exclusive
• Either do the “simple” way
– Litigate and license
– Sell and keep license
• Or you could be a bit more exotic:
– Litigate it, sell rights to license within certain fields,
offer free to NGOs/Uni/NFP
• Or you could go for leverage:
– Securitize income streams within your field, keep
license and right to sub license, sell right to litigate
within a certain field, try to sell patent for defense
within other field

5

So now we’ve seen the options – but what
makes them into different business models?
• Revenue models/streams
– How will we make money
– What’s the frequency of payments
• Strategy
– Can we make it fit with our existing business
OR
– Can we exploit a gap in the existing ecosystem
• Incentives / USPs
– Why will it work
– Do we have a larger agenda / greater good?

6

Even if incentives and strategy seem
difficult – the key challenge is revenues
• Usually when setting revenue models you use
known metrics:
– Cost / supply chain costs
– ROI / IRR for invested capital
– Financial metrics from exits / PLCs
– Sales prices for products/services
• But more importantly, there’s also an existing
market used for benchmarks ...

7

So what are the benchmarks for patents?
• Royalty payments
– Confidential
• Patents sales
– Confidential
• Technology licensing
– Confidential
• Collateralization rates/terms
– Very confidential
• Securitization rates/terms
– Some data, but very very small market
• Return criteria for investors
– Very confidential
• R&D Costs
– Large sums are public, but costing per patent is very confidential

8

So how can you do any revenue modeling
for patent based BMs?
• Looking at the market, there only seems to be
one commonly agreed standard / benchmark
– Litigation and damages
• Although not perfect it does satisfy key
criteria:
– Cost structures
– Returns (and timing of returns)
– Exit strategy

9

Why it’s the double edged sword that drives the
market and business models.
THE IMPORTANCE OF LITIGATION

Litigation / damages is popular since it sets
the “Big number” you can then derive from
• Although not a perfect example, damages and
income from litigation settlements has
become the de-facto standard of modeling
many patents revenues
• Looking at litigation would give you the “Big
Number” to which you could then apply a
number of discounts to suit your scenario.
• The main idea is (probably) that it does
represent the opportunity cost of patents.

11

Litigation
The opportunity costs of patents?
• As an economist I find it helpful to think about
litigation as the opportunity cost.
• As always in economics, it’s just a model:
– Not every patent can be litigated
– Not true for new markets / tech
• But on a portfolio level for mature technology it’s
a decent model.
• The most important limitation though – mainly
(only?) works for US legal system.

12

Before moving into business models, it’s
probably helpful to explain litigation
• Litigation mechanics
• Punitive Damages
• The Cost Of Litigation
• Patent Trolls
• Nuisance Suits

13

POP Quiz
“How do you determine validity
and claim scope of a patent?

14

The US Patent System
(Chicken or the Egg)
• Do we have too many or too bad patents?

• Do we need specialist courts / judges?

• Can we really patent “anything under the sun?

• Is this really efficient – do we stifle innovation?

• Would it be better without patents?

• Is it really feasible to have to wait 3-5 years for a patent infringement
trial?

• “Should we really file our suit in Delaware, I’ve heard Texas is better”?

15

Regardless:
There is an uncertainty.
An uncertainty you can bet on.

16

And it seems as if more and more parties
are willing to take the bet
Trends in patent filings and litigation 1991 - 2009

Source: PWC 2010
17

Litigation Mechanics; a crash course
- Leading up to the litigation
• Investigate the patents
• Use outside law firm
• Establish likelihood of infringement
– Produce claim charts
• Contact potentially infringing party with your
demands
– Cease and desist
– Pay royalties
• If the other party does not respond – go to court

18

Litigation Mechanics; a crash course
- Steps in a litigation
1. File a complaint
– Other party will answer and say:
• They don’t infringe
• Your patent is invalid
• You don’t own the patent
– And so the ball gets rolling..
2. File more detailed complaint and ask for a jury
– Potentially change courts
– Add extra lawyers
3. Other party potentially countersues
– Not true for NPEs
4. You settle outside of court
– If not, they you push the case through and bet on the outcome

19

But people do settle, outside of court (In
the 3 arenas – business wins)
Patent Infringement Cases2000 – April 2008
Five Districts (CAND, DED, ILND, NJD, TXED)

Source: Ropes & Gray, IPLC, Cornerstone 2009

20

And if you don’t, you take a huge risk – but
also go for the big bucks
Top 10 largest initial adjudicated damages awards: 1995–2009

Source: PWC 2010
21

Punitive Damages – The root of all evil or
road to Eldorado?
• Contrary to Swedish (and most European) systems, the US system awards
punitive damages.
• For patent litigation it’s either lost profits, price erosion or a royalty based
on sold goods.
• Up until recently these percentages have been large, leading to an
escalation in damages.
Median patent damages awarded, 1995–2009 Type of Damages

Source: PWC 2010 22

Tying on to our previous discussion
Damages = “Big Number” used in
revenue modeling

23

Looking at the upside, it’s a no brainer, but
of course there’s a downside - cost
• Patent litigation is extremely costly, lawyer costs are by far the
largest.
• As costs are often in the millions of dollars, a periodic payment
scheme could be advantageous.
• This is the reason for so called contingency lawyers.
– Take some money up front
– Take a large piece (often 25%) from settlements

Source: RPX, Allied Security Trust, AIPLA
24

Patent Trolls – Elephant in the room?
• Patent troll is the common (derogatory) term for
companies not manufacturing products / doing R&D
(NPE) and who make money mainly by litigating
patents.
• With such a description companies like Rambus would
end up in the same category.
• Although a popular target for “stifling innovation” by
lawyers, NPEs also require lawyers for all their
litigations.
• In reality – it’s a clever financial construction (all
“moral / greater good”, thoughts aside)

25

Nuisance Suits – Driving the value by
exploiting the system?
• What people really seem to be upset about are
litigations without a really profound infringement
case.
• The US system has a built in mechanism where
you can force people to court = force costs upon
them.
• This incentivizes (according to some) parties to
file a suit and hope for a settlement that would
be smaller than answering the complaint.
– In practice, trying to find an arbitrage situation.

26

Regardless – NPE suits are increasing
The Number of Active Distinct NPEs as Plaintiffs

Source: Allied Security Trust, Patent Freedom

27

But suits are mainly tied to Hi-Tech and to
the large CE/Telecom companies.
Lawsuits, per tech sector.

Damages, per tech sector.

Companies with most NPE suits.

Source: Allied Security Trust,
Patent Freedom, : Ropes &
Gray, IPLC, Cornerstone 2009
28

Litigation – Intermediate Summary
• Litigation is taking a bet, or actually many bets
• Litigation is very costly
• Most cases settle
• Litigation is mainly tied to high-tech
• If going for a verdict and winning, the sums are
often multi million dollar
• Because of the large sums and people working on
contingency – litigation has become a calculated
bet.

29

And as litigation has become a
calculated bet with costs / income;
we have our first rudimentary
patent (opportunity cost) revenue
model.

30

A – Z of making money from patents
PATENT BASED BUSINESS MODELS

The A-Z of patent based business models.
• Overview of most (all?) known business models.
• Quick and dirty for comparison, rather than in
depth knowledge.
• Looking at:
– Incentives
– Typical Revenues
– Buyers, sellers, licensees
• Every business model will be exemplified with a
company

32

Comparison of Patent Based Business Models
Offensive Patent Strategy
1. Design and license
2. Research, license tech + IP 9 6
3. Research & license patents
4. Research and litigate 4
5. Acquire and license 7a 5
6. Acquire and litigate
7. Pool 10
a) Aggressive
b) Non-Aggressive
Corporate / Private Funding 3

Institutional Funding
8. IP Trust
9. Litigation Trust
10.Aggregation
11.IP Secondaries 16
12.IB Funds
13.Defensive Pools
a)Non-Profit 17 12
b)VC Backed
c)Open Source 2
14.Securitization 11
7b 13b
15.Collateralization
16.Brokerage
17.Consultancy 15 14
18.Auctions 13a 1
19.Patent based ETFs
20.Invalidation
13c 20 18 8 19
Source: Internal analysis © Immendo Ltd. 2011 Defensive Patent Strategy

1) Semiconductor design and license the
designs and IP
• Description: Companies research, develop and patent
semiconductor / IC / SoC designs and license the
designs and the related IP and IPRs
• Typical licensors: Semiconductor manufacturers Offensive Patent Strategy

Corporate / Private Funding
• Incentive: Stick to core business, no need to produce
the actual chips – enough to license.

• Typical Structure: Listed / Private Company
• Typical Income: Royalty percentages + up front for IP.

• Example: ARM.
• UK based ARM are developing cores for application
processors (e.g. Cortex A8 or dual core Cortex A9)
which then, as an example, becomes part of the Defensive Patent Strategy
processors in your iPhone 4, Samsung Galaxy Tab etc.

34

2) Research and license technology and
patents
• Description: Dedicated research centers that do
R&D then generate IP which is then monetized
together with technology through licenses or
given for free within field of use or geography. Offensive Patent Strategy

• Typical licensors: BigCo in same country

• Incentive: Help country with innovation
• Typical Structure: Part government, part BigCo
• Typical Income: R&D funding and royalites

• Example: ETRI (Electronic and Telecom Research
Institute)
• Korean, collaborating with Samsung, Hynix, LG Defensive Patent Strategy
and are co-inventors plus give blanket license to
Korean companies.

35

3) Research and license patents
• Description: Doing R&D within specific field
and then licensing patents, potentially
litigating to companies within industry and
also coming up with new solutions. Offensive Patent Strategy

• Typical licensors: Companies within specific

tech sector
• Incentive: Lower costs and stick to key skills
• Typical Structure: Public / Private Co
• Typical Income: Royalties and settlements

• Example: Rambus, Defensive Patent Strategy

• Developing new busses for RAM memories
and then aggressively licenses / litigates
memory manufacturers.

36

4) Research and litigate
• Description: Entities doing research within a
field, patenting and then primarily litigating.
Not focused on technological advances.
• Typical licensors: BigCo within certain tech

field

• Incentive: Low Costs, aggressive returns
• Typical Structure: Listed / VC backed
• Typical Income: Settlements , Royalties

• Example: Interdigital
• Performs R&D and litigates and licenses all Defensive Patent Strategy

major handset manufacturers.

37

5) Acquire portfolios and license
• Description: Acquiring mature portfolios and
using licensing knowledge to generate returns.
Also quite prone to litigation. Often acquiring
known/”heritage” portfolios. Often operating on Offensive Patent Strategy

a portfolio basis.

• Typical licensors: Big Co, across technologies
• Incentive: Knows the licensing/litigation
business, aggressive returns
• Typical Structure: Small VC backed / public
• Typical Income: Settlements , royalties

• Example: Wi-Lan Defensive Patent Strategy
• Canadian company, started with licensing
parental control technology, then quit R&D and
started acquiring portfolios to license / litigate.

38

6) Acquire patents or rights and litigate
• Description: Company solely relying upon third party
patents. Acquiring them or just rights to them and
then litigating aggressively. Often acquiring patents
from lone inventors , small Co. Aiming to maximize Offensive Patent Strategy
value per patent rather than per portfolio.

• Typical licensors: Big Co across technologies

• Incentive: Get “cheap” patents from small inventors,
share proceeds with them and lawyers.
• Typical Structure: VC / Public
• Typical Income: Settlements and licenses

• Example: Acacia
• Has acquired more than 150 portfolios across many Defensive Patent Strategy
technologies, setting up entities which then aim to
maximize value for each patent.

39

7) Pool the patents for standards
a) Aggressive
• Description: Aiming to gather patents relevant to a
certain standard and then licensing everyone using it.
Often aggressively or prone to litigate.
• Typical licensors: Big and small Co within specific tech Offensive Patent Strategy
field

• Incentive: Securing a dominant position within a

widespread specific technology, then making everyone
pay their part.
• Typical Structure: Small / medium private company
• Typical Income: Public royalty schemes, based on fixed
amount per product.

• Example: SISVEL
Defensive Patent Strategy
• Seen by many as the epitome of this, trying to license
everyone to MP3 patents, which may or may not be
invalid. But technology is widely used.

40

7) Pool the patents for standards
b) Non Aggressive
• Description: Aiming to gather patents relevant to a certain
standard and then licensing everyone using it to promote
interoperability and sales of products using it. Patents must be
declared by the entity as a part of the program but are often still
owned by original assignee. Offensive Patent Strategy
•

Typical licensors: Big and small Co within specific tech field
• Incentive: Ensuring proliferation of technology through lowering

of licensing transaction costs.
• Typical Structure: Consortium of BigCo
• Typical Income: Public low-price, per unit, royalties from
everyone using the technology.

• Example: MPEG-LA
• Great story within video. Promoting the MPEG-2 standard by
licensing every device at a fixed price, 2.50$, and creating massive
incomes for the patent holders and something close to 1000 Defensive Patent Strategy
licensees.

41

8) IP Trust work
• Description: Taking over IP matters for
“sleeping” / holding companies.
• Typical buyer of service: Big Co Offensive Patent Strategy
• Incentive: Lower costs, give single USP for

people already needing other trust work

• Typical Structure: Small Co in “tax haven”
• Typical Income: Subscription based

• Example: IP Trust
• New Luxemburg entity offering IP trust work
for any client listed in Luxemburg with less IP
knowledge.

42

9) Litigation Trust
• Description: Assigning patents from BigCo to a
trust to generate income in “other name” on
patents.
• Typical licensors: Big Co Offensive Patent Strategy

• Incentive: Maximize value of patents not core to

business. “Attack” entities which could be
• Typical Structure: Trust or remote entity to
create “smoke and mirrors’
• Typical Income: Settlements

• Examples: Multimedia Patent Trust, Mobile
Media Ideas Defensive Patent Strategy
• MMP is an Alcatel-Lucent outfit litigating their
patents against BigCo
• MMI is a trust litigating Sony and Nokia patents

43

10) Patent Aggregation
• Description: Amass patents within technologies for
FTO or strategically strong position. Emerging model
with mainly one player. Income generated through
licenses within fields or re-selling patents. Offensive Patent Strategy
• Typical licensors / buyers: Big Co / New entrants

• Incentive: Gather all patents from different assignees

to have blanket FTO and very strong licensing position
• Typical Structure: Corporate backed
• Typical Income: Licenses

• Example: Intellectual Ventures
• IV is the main actor in this field having more than
30000 patents and supposedly generating more than Defensive Patent Strategy
1$B through licensing and recently also starting with
litigation.

44

11) IP Secondaries
• Description: Use financial muscle to buy mature
IP assets, add value, and resell, license, venture
etc.
• Typical sellers / buyers: BigCo / Strategic, new Offensive Patent Strategy

entrant, entities in litigation

• Incentive: Providing liquidity in market, allowing
for “cheap” purchase price, then adding value to
acquired assets to generate high ROI
• Typical Structure: PE / VC backed.
• Typical Income: Sales

• Example: Coller IP Capital Defensive Patent Strategy
• PE Fund, acquiring mainly large portfolios,
reselling/licensing smaller parts at attractive
ROI/IRR

45

12) Investment Bank Funds
• Description: Investment bank funds investing in
patents instead of financial assets. Using typical GP/LP
structure and bank being passive but raising funds
from institutions / private wealth. Offensive Patent Strategy
• Typical investors / GPs: Private wealth / known IP

management firms

• Incentive: Give investors alternative/exotic options for
diversification
• Typical Structure: Fund is LP, once raised it hands
capital to GP to manage investment
• Typical Income: Sales, licensing, venturing

• Example: Austrian Alpha Patent Funds
• Have raised 150+ M EUR over 4 funds. But have been
troubled with their GPs, changing many times. To date
not generating any returns.

46

13) Defensive patent pools
a) Non-profit
• Description: Offering subscriptions to companies
to fight NPEs. Members put money in escrow and
the pool gathers patents which the members can
take a license to at their discretion. Offensive Patent Strategy

• Typical members: 1+ $B Companies

• Incentive: Fight NPEs, “insurance”. Pool finds
“toxic patents” and members take a license.
• Typical Structure: Trust or similar
• Typical Income: Member fees

• Example: Allied Security Trust
• So far the only one. To date around 20 members Defensive Patent Strategy
and acquired approximately 350 patents (in 24
portfolios).

47

b) VC Backed
• Description: Offering “lawsuit protection” to
members, who pay membership based on size. The
pool chooses which patents to buy and members get a
license. Patents then re-sold. Assets acquired mainly Offensive Patent Strategy
from NPEs or litigiuos entities.

• Typical member: Big and small Co in litigation prone

industries
• Incentive: Pay up front fee to lower litigation strain
• Typical Structure: VC / PE backed.
• Typical Income: Member fees, re-sold portfolios

• Example: RPX
• The main (only?) actor in this field and ar right trying Defensive Patent Strategy
to IPO. They have around 70 members paying 50k –
5$M per year. To date they claim to have invested 250
$M. RPX is backed by very well known VC’s.

48

c) Open source
• Description: Pool to gather all patents for
specific technology area and make them freely
available.
• Typical licensors: Smaller or software based Offensive Patent Strategy

companies

• Incentive: Promote certain software, open
innovation “everything should be free”
• Typical Structure: Company backed / consortium
• Typical Income: Fees from consortium, often
non-profit

• Example: Open Invention Network Defensive Patent Strategy
• Promoting Linux. Wants to buy all Linux patents
and make them freely available. Promoted by
Novell, Red Hat, Sony, NEC, Philips, IBM

49

14) Patent Securitization
• Description: Securitization of patents or patent
royalty streams. Then turned into financial
instrument you can invest in.
• Typical parties: SPV and underwriters Offensive Patent Strategy

• Incentive: Generate leverage for party

securitizing, gain money from interest for
borrowers
• Typical Structure: Bank backed SPV
• Typical Income: Interest plus transaction costs

• Example: Royalty Pharma
• Most well know example, where royalty streams Defensive Patent Strategy
from pharma patent licensing were securitized in
an SPV which the attracted many investors.

50

15) Patent Collateralization
• Description: Collateralizing patents or patent
revenue streams to get. The problem is to bridge
the understanding gap and the proper interests
• Typical debtors / creditors: Small Co, startups Offensive Patent Strategy

• Incentive: Get loan using patents, but not pay

too high interests
• Typical Structure: Boutique Banks
• Typical Income: Interest and potential patents in
case of default.

• Example: Paul Capital, Alset IP, Paradox Capital
• All doing collateralization. But more details don’t Defensive Patent Strategy
exist.

51

16) Brokerage
• Description: Acting as a proxy for a market
place and joining buyers and sellers of
patents.
• Typical buyers / sellers: Big Co, new market

entrants, parties in litigation

• Incentive: Helping people find the patents
they need.
• Typical Structure: Small, or even one-man-
bands, well connected in the market.
• Typical Income: Transaction percentage
• Example: Thinkfire, iPotential
• Perhaps the most well known. Both claim to
generate 1+ $B in transactions

52

17) Consultancy
• Description: Specific IP/Patent consultants
• Typical clients: Technology heavy BigCo or
SMEs Offensive Patent Strategy
• Incentive: Provide expertise and specific

knowledge

• Typical Structure: Private Co
• Typical Income: Running fees and potential
success fees.

• Example: IP Value
• IPV are good example of this. VC backed and Defensive Patent Strategy

helping stalwarts like BT, Xerox and PARC.

53

18) Auctions
• Description: Conducting patent auctions and in such a
way matching buyers and sellers.
• Typical sellers / buyers: Small Co, lone inventor /
Intellectual Ventures, NPEs Offensive Patent Strategy

• Incentive: Trigger buying environment for high price
through competitive bidding. Trying to lower

information asymmetry through DD material.
• Typical Structure: Small Co
• Typical Income: Percentage of transactions

• Example: ICAP Ocean Tomo
• Ran a number of auctions, but were never successful
long term. Mainly IV as a buyer and very large gaps Defensive Patent Strategy
between expected and actual prices.

54

19) IP Based ETFs
• Description: Create an ETF based on IP
performance or IP heavy/savvy companies.
• Typical investors: Assuming people looking for
exotic diversification alternatives Offensive Patent Strategy

• Incentive: Use IP strength as proxy for companies

and bundle them as diversification ETF
• Typical Structure: Traded SPV
• Typical Income: ROI and costs for management

• Example: Ocean Tomo
• Are running 3 indexes on NYSE: Euronext, where
the basket of companies with the strongest Defensive Patent Strategy
patents.

55

20) Patent Invalidation
• Description: Offering service of invalidating
patents on behalf of clients.
• Typical buyers: Companies in litigation Offensive Patent Strategy
• Incentive: Using crowdsourcing to invalidate

patents as a defense/tactic in litigation

• Typical Structure: Small Co, large network
• Typical Income: Paid per assignment

• Example: Article One Partners
• AOP is running such a program and has CIP
advocate Marshal Phelps on their board.

56

Interim Summary
- Patent Based Business Models -
• There are many models, across the spectrum
of funding and strategy.
• Many business models practiced by mainly a
single entity.
• Roughly evenly split between offensive /
defensive models and corporate / institutional
funding.

58

Believe it or not; not everything is patents
OTHER IP BASED BUSINESS MODELS

Copyright Sales
• Description: Selling portfolio of copyright, often rights to
music catalogues.
• Typical buyers / sellers: Financial Institutions / Struggling
artists, estates, record labels
• Incentive: Liquidity and exit for record labels
• Typical Structure: Varies
• Typical Income: Transaction percentage for brokers and
then running royalties on all music

• Example: The rights to Michael Jacksons music has been
sold a couple of times, for example Dutch pension fund ABP
owns two catalogues.

60

Copyright Securitization
• Description: Securitizing income from artistic works to, with help of
investment SPV, to get more funds.
• Typical investors / debtors: Exotic investors / struggling artists
• Incentive: Alternative way of financing for artists / record labels.
• Typical Structure: SPV which owns royalty streams, investors invest
in that SPV according to share.
• Typical Income: Transaction costs + interest

• Example: David Bowie famously securitized his back-catalogue into
a bond (so called “Bowie Bonds”) to free up cash for his next album.

61

Trademark Sales
• Description: Selling trademarks
• Typical buyers / sellers: New entrants, Big Co /
struggling companies, estates
• Incentive: Liquidity
• Typical Structure: Brokered deals
• Typical Income: Transaction percentage

• Example: A quite famous trademark, iPad, was sold
from Fujitsu to Apple in 2010. Another example is the
trademark “GI” which is now being auctioned.

62

Key Takeouts
• Litigation is important as it is often the way to
maximize financial income of a patent.
• Litigation is increasing and driving a number of
business models.
• There are roughly 2 dozen business models, with
widely different strategies, funding , revenue
models etc.
• Most patent business models are very new,
people are still exploring new options.

64

Next time we meet..
• We’ll discuss the patent marketplace
• Besides more discussions on strategy, we’ll also
focus on:
– Pricing and valuation
– The ecosystem
• And try to answer some questions:
– Is there really a patent marketplace?
– Can we use proxies from other assets to model a
market?

65

Thank you for your attention!

Any questions?
mmalek@immendo.com

Patent Based Business Models - Copyright Immendo Ltd 2011

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