AOL's sale of 800 patents to Microsoft for $1 billion dollars has echoes of Google's acquisition of Motorola for $12.5 billion. Both transactions involved companies that had been losers in recent years in the competitive world of modern media and high technology. Both also involved companies that appreciate the importance and value of holding strong portfolios of intellectual property. Many have likened this trend to a modern gold rush. Analysts and rivals of Google were quick to appreciate Google's motivation behind its acquisition of Motorola Mobility, the mobile phone maker. It hinges to a large extent on the patents held by Motorola. Google faced lawsuits from its rivals Microsoft and Apple over the successful launch of its Android mobile phone software. In this battle Google needed to give itself leverage against its rivals. Motorola offered Google this leverage in that Motorola had a formidable portfolio of patents, arising from Motorola's once strong position in mobile phone technology.
Motorola's market position had declined in recent years relative to its competitors and it is estimated that it held only 4% of the global market for smart phones. Despite its decline in market share Motorola still held a prime position in the world of patents, with its patents remaining central to much of the technology that is used in mobiles.
It is always difficult, although not impossible, to put a value on intangible assets like patents. It depends on a wide range of issues, not least of which is the strategic value to the buyer. Motorola held 17,000 patents, which apart from being a large portfolio is also of high quality with key industry patents in the portfolio.
There are some broad guidelines that are used for valuing patents in large portfolios such as this. Current market trends would value portfolios such as the Motorola portfolio at approximately $250,000 per patent.
Google paid substantially more than this. Reports have estimated that it paid at least $6bn for the patent portfolio - or an average of approximately $350,000 per patent. This is by no means at the upper end of the range for recent patent transactions. Take for example the sale of 6,000 patents from Nortel to a consortium led by Apple and Microsoft where the price was $750,000 per patent.
Some have asked if these sorts of transactions point to a new kind of tech bubble – a Patent Bubble. Patent specialists argue that this is not the case as the range of values that are being derived from large, well-positioned patent portfolios is consistent with valuations that have been achieved over the last decade. The reason for the sudden profile that these sorts of transactions are receiving is both as a result of the size of the transactions but also the pressure on companies to find other sources of unrealized value during the economic downturn. This additional value could come by way of enforcing patents against competitors or selling off assets (such as patents) that are no longer of strategic value (with the AOL transaction being a case in point).
South African companies are unlikely to be able to benefit from this trend as few hold patent portfolios large enough to have "residual" patent portfolios with substantial value. The challenge in South Africa still remains one of raising the awareness that patents can add substantially to the overall value of a business. All this starts with a conscious effort to actively manage intellectual property. This awareness needs to be driven by the board and senior management of companies.
We are starting to see stock markets "tune in" to the value of patents. In our view boards of directors of listed and private companies are going to have to engage more actively on the issue of intellectual property. They are going to have to demonstrate how they are creating additional value for their shareholders from active intellectual property management. Without this shareholders are right to complain that value is being left on the boardroom table.
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