Is a patent bubble about to burst, or are we all full of hot air?
“Analysts are beginning to get concerned about a patent price bubble forming, where the amount of money a company, or indeed an individual investor, will pay for an intellectual property (IP) portfolio rockets out of all proportion to what it's worth,” wrote Brid-Aine Parnell in The Register.
“Beginning to get concerned” is a bit glib, even for the generally elite readership of El Reg. It’s been over three years since Brian Kahin wrote “The Patent Bubble...Still Growing” in response to a Wall Street Journal article on Nathan Myrhvold’s Intellectual Ventures. “Patents have been touted as the currency of the knowledge economy,” Kahir wrote. “Over the past ten years, an exuberant cottage industry has grown up around valuing, exchanging, monetizing, and investing in patents as assets...[but] patents are not conventional assets, despite the fact that many people would like them to be. They are not even a right to use the technology. They are only a negative right to stop others from using it.”
In defense of El Reg, there’s no denying that the past few months have seen a huge wave of new and increased activity on the patent side of the tech industry. Sticking with only the biggest headlines, we’ve had the Nortel portfolio sale, Google’s purchase of Motorola, big-name bids on companies such as InterDigital, Eastman Kodak’s NME transition, and not to mention litigation such as Oracle vs. Google, Microsoft vs. Motorola, Apple vs. Samsung, Apple vs. HTC, etc...
“There is clearly a patent-hoarding mentality in technology -- and in mobile communications, specifically," said Wharton’s Andrea Matwyshyn, in a collaborative Knowledge@Wharton guest column in The Street.
Colleague Kevin Werbach added "’There's a state of open warfare around patents. If you want to play in this space, you need to bring some assets to the table." According to Werbach, patent accumulation is largely a defensive strategy, "Given the prevalence of lawsuits, companies are gobbling up intellectual property so they have an arsenal to use in countersuits. Two companies with large patent portfolios will often settle a lawsuit with a cross-licensing pact.”
“If you're going to count your patent assets, you should also come to terms with the patents you may be facing,” wrote Kahin. “In an environment where there are thousands of patentable functions in a product or service, along with large numbers of innovators working independently and getting their own patents, there will be many, many more patents that belong to others than belong to you.”
“Thousands”? Try 250,000. That’s the estimated number of patents in a given smartphone, according to Richard Waters of the Financial Times. Back In July, Waters characterized the essential problem of the patent bubble by saying that “the value of individual patents is almost impossible for investors to assess, given how lax patent-issuing practices over the years have brought about such a jungle of overlapping claims.”
He went on to say, “Extracting value from patent holdings is becoming a game of chicken in which the stakes have been rising fast. Companies that seek to license their IP must be prepared to follow through with legal action if they don’t get what they want, adding to lawsuits already jamming the courts...as the stock market starts to tune in to the value of patents, this exposes an unedifying reality. To keep their shareholders happy, corporate managers are likely to feel compelled to take a more aggressive stance with their IP. Whether shareholders will see any benefits is likely to end up a roll of the dice.”
The 250,000 figure (whether founded in fact or not) was widely repeated, including in an August 3, 2011 post on the Official Google Blog by David Drummond, Senior Vice President and Chief Legal Officer of Google. Drummond blamed his company’s loss of the Nortel auction on “a hostile, organized campaign against Android by Microsoft, Oracle, Apple and other companies, waged through bogus patents...our competitors want to impose a 'tax' for these dubious patents that makes Android devices more expensive for consumers. They want to make it harder for manufacturers to sell Android devices.”
Perhaps Mr. Drummond truly believes in Google’s “don’t be evil” role, but there’s no denying that his company is a major player in the larger game of Mutually Assured Patent Destruction. It is extremely difficult to believe that Google would not have joined forces with anyone and everyone in the Nortel auction in order to hurt Apple’s smartphone market share. But in either case, the final bid on Nortel’s portfolio -- $4.5 billion -- is regarded as grossly over-valued, and a clear indication of a dangerously over-extended patent price bubble.
“This frenzy would be comical if it weren’t such as waste of the balance sheet,” writes Larry Dignan of ZDNet. But even if we accept his assertion that “the valuation for patents has been set at ‘ridiculous’”, one must remember that worth equals exactly as much as what someone is willing pay for it -- until it isn’t.
Although Zachary Roth and David Martin were talking about pharmaceutical patents in “The Patent Bubble” (way back in 2005), the prognosis consists of the same warnings: “If patent challenges became more frequent, waking up the investment community to the fact that many are worth little, and causing a sudden loss of confidence in patent-holding companies... If investors lost confidence in the status of patents as reliable assets, it's not just big patent-holding corporations that would take a hit...somewhere in the neighborhood of 7-10 percent of the total tradable market doesn't exist. Not 'is overvalued.' It doesn't exist. So what you're left with is a bubble that is preserved for maintaining a selective ignorance. And that selective ignorance is something that will come back ultimately and haunt the market in some remarkable ways."
The conclusion is fairly clear. The technology sector and venture capitalists in general remained comparatively unscathed when the housing bubble burst, and the consumer market has consistently been showing limited promising signs. However, the unpredictable effects of a burst patent bubble -- especially in the exceptionally robust mobile market -- may very well be the last thing that a treading-water world economy needs. Of course, there’s no consensus that there really is a dangerous patent bubble about to burst, there’s no consensus that its effects would be as devastating as some claim, and after all -- we’ve been talking about this for years now and nothing bad has happened yet. Right, Reg?