Intellectual Property – the Irish opportunity

I spoke this morning at the Intellectual Property Ireland 2010 conference in the Davenport hotel in Dublin.   A summary of my speech follows::

Eamonn Laird kindly introduced me as the current President of Engineers Ireland.  Engineers’ week last week was very busy for us,  and included the publication of our report on the education of mathematics and science in our schools.   But also last week,  in my capacity as Chair of the Science Gallery,  we launched “LoveLab” which explores the scientific principles underlying attraction and love.

As I listened to the previous speaker  Frank Gannon (SFI) discuss a few minutes ago the distinction between intangible and tangible assets,  I reflected that the scientific study of the intangibility of love is an interesting case!    But I also reflected how several of our economic commentators seem to focus only on tangible assets,  and emphasise how the benefits of the smart economy will be increased productivity – by which they mean more units of output for given units of input.  For me,  this view of productivity is rather old fashioned and certainly manufacturing oriented.   In my view,  a key objective of the smart economy is to raise the value,  rather than the sheer volume,  of output:  rather than being overly concerned with low unit costs and cost competitiveness,  we should instead be focussed on how to create high value services and goods for the global market.

This morning I have been asked to say a few words about the fiscal value of intellectual property (IP).   IP has been high on the agenda of the Innovation Taskforce.   There are a number of aspects,  not least the transfer of IP from our higher education institutes into commercial exploitation,  and I note several of the technology transfer offices are amongst the audience.  However this morning I want to give a few thoughts about a different aspect which the Taskforce have also been discussing,  and that is the value of intellectual property.

We have had a large number of submissions to the Taskforce,  and many of them are available at the Taskforce website.   Can I quote an interesting observation from one of the submissions,  from A&L Goodbody:

“Ireland is said to have made its mark on IP almost 15 centuries ago as the birthplace of copyright law. Historical studies on the topic of copyright commence with the tale of St Colmcille in Ireland, who copied a gospel manuscript which belonged to St Fintan without his consent. St Fintan reported the matter to the High King of Ireland, who decided to hold an ecclesiastical court to rule on the matter; and in a judgment which would have consequences for centuries to come, he stated: ‘To every cow its calf, to every book its copy.’”

Intellectual property includes patents, copyrights, design rights, and trademarks.

There is operational cost in the administration of large portfolios of patents and other registrations, keeping alive those justified by cost and risk analysis; determining which should be allowed to expire; and determining licensing opportunities, and where appropriate infringement allegations.

Intellectual capital is increasingly being recognised by accounting rules in various jurisdictions. Sophisticated financial instruments exist for tangible assets, and there is an opportunity to replicate these for intangible assets too. The royalty streams from a selected portfolio of IP can be bundled and securitised. Trading of fiscal instruments for IP can assist firms amortise their R&D investments.

The 10-year-old IP securitization market is however still an immature and “exotic” market. Securitization of intellectual property first came to public notice in 1997 when the singer/composer David Bowie issued bonds on royalties from 25 of his albums.

These “Bowie bonds” have since been followed to an extent by some other composers and for film rights, and even by some fashion brands, although many of these transactions have up to now been placed privately rather than on the open market. Successful securitization requires a number of key points: the right to assign licenses from the owner to an arms-length entity as a sale (and not a loan, for which a bankruptcy court might attempt to recover the asset after a failure of the original owner); clear ownership (e.g. no third party rights, such as heirs to an estate); unlikely technology obsolescence (“Bowie bonds” did not foresee the advent of the internet as a substantial distribution channel); and no other diminuation of the asset over time (e.g. the right of licensees to in turn sub-license, without recourse to the licensor).

The biggest recent intellectual property securitizations to date included the Dunkin’ Donuts’ $1.6 billion securitization of franchise rights in 2006 as part of an $2.4 leveraged buyout (LBO) by three private equity firms – including royalty fees, licensing fees, lease payments etc. The $1.8 billion Sears Holdings transaction in 2007 transferred 3 brands (Kenmore, Craftsman and DieHard) to special vehicle which issued bonds, from which Sears licensed back the brands based on royalty payments.

Outside of the entertainment and fashion industries, the pharmacology and life-science sectors appear to be interesting IP securitization opportunities because of the regulatory approval processes involved (e.g from the FDA) which in turn strengthen the value of an IP asset.

Vertex Pharmaceuticals, a US biotech company, successfully placed via Morgan Stanley a 250M$ securitization in July 2009, from which investors repaid from contractual milestone payments on a drug still in development. Morgan Stanley bankers have done 18 such drug based securitization deals since 2004.

However even outside of these sectors, and in the ICT sector in particular, there are opportunities to pool IP across a small group of collaborating vendors who collectively hold IP for a particular technology. By assembling the IP, from multiple owners, into a single holding entity, licensees have then a single point from which to license technology in a predictable way, and licensors can share the proceeds in an agreed fashion. In turn, securitization may be applicable for the holding entity.

Securitization is attractive to firms holding IP for a number of reasons. The first is that securitization may be a lower cost way of raising finance than more traditional means, particularly if the IP is not built into the market value placed on a firm by traditional financial value measures. Secondly, securitization may enable a firm to place some of the risk associated with the future performance of IP onto the capital markets. Thirdly, it may allow a firm to extend its strategic direction into entirely new markets by monetarising its traditional IP.

In the USA, a number of companies are pejoratively classified as “patent trolls” or, more correctly, as “non-practising entities” which own IP but do not themselves use it for new applications, but rather attempt to collect royalties from existing users. Such companies include Asure/Forgent (holding patents for JPEG compression); (founded with investments from Ireland’s U2, and holding patents for streaming media); (holding patents for flash file systems); NTP (holding patents for wireless email, and have long standing litigation against RIM); and Patriot Scientific (holding some key microprocessor patents). In turn, a number of multinationals are working together, for example, in Allied Security Trust and in RPX to collect and hold key patents for specific technology sectors. Intellectual Ventures has a reputed 5B$ of committed funding and has been assiduously collecting key patents on a world wide basis.

Ocean Tomo in Chicago has introduced the first public auctions of IP. It also has pioneered the first stock market index based on the value of IP held by publicly quoted companies, and their respective ability to capitalise on that IP. In 2008, Ocean Tomo also founded the IPXI, the “world’s first financial exchange focussed on intellectual property”.

What is the real value of IP ? Some believe that the value of IP which has been generated by our higher education institutes is only proven once not only have patents been awarded, but also licensed. I might go even further and say the real value of IP is its potential securitization value: that is, IP really does have value if it can withstand the scrutiny and rigour required for securitization, including clear ownership, technology obsolescence strength, well-written license agreements, and so on.    If IP cannot in principle be securitized,  then frankly it may have questionable sustainable value.

Strengthening an IP portfolio, perhaps by co-operation with other players, requires a deep understanding of a specific industry, its value chains, and the critical intellectual points in those chains. A competence in securitization of industrial IP in turn implies a deep understanding of global industries and markets. It also requires expert domain knowledge from professional engineers and scientists.

The multinationals are currently the major repositories of IP. Much of it is passively held defensively in the event of infringement allegations by competitors, a mutually-assured destruction approach. Some of it is dormant, being inappropriate for the markets being currently addressed. Some multinationals are seeking to opportunities to license their non core and dormant IP. Some multinationals are more active about prosecuting infringements of their IP. Some are seeking to license even their core IP into entirely different markets by exploiting it in “converging” opportunities.

The fact that Ireland has a considerable portfolio of multinationals,  operating across different market sectors,  gives Ireland a unique advantage over many other competing jurisdictions.

Ireland has a timely opportunity to emerge as a global capital for the administration, licensing, and trading of IP. We have a pool of professional engineers and scientists, in part as a result of SFI and the State’s public investment in science. We have expertise in financial management and complex products, through the International Financial Services Centre (IFSC). USA headquartered multinationals already have considerable experience in working within the Irish system, and have the comfort of dealing with a community where English is the primary language. Equally, Ireland has experience of the subtleties of the USA system which may then benefit EU firms. The EU presents challenges to USA corporations in navigating its range of legal systems, languages and cultures.

As the A&L Goodbody submission to the Taskforce also noted:

On the legislative side, there is arguably no other country in Europe that can say it has a better statutory framework when it comes to IP. All of the core Irish legislation in relation to trademarks, patents, copyright and related rights have been introduced in the relatively recent past. The Copyright and Related Rights Act 2000, dealing with copyright in all the different technologically advanced forms, as amended on an ongoing basis since its introduction, is one of the most sophisticated pieces of legislation in Europe. The Irish legislative framework gives significant comfort to companies considering creating and managing their IP assets in Ireland.

It is all well and good to have the laws in place, but companies also need to be able to rely on and effectively enforce those laws. When it comes to enforcement, Ireland is ahead of the game on that front too: a Commercial Court was established in 2004 and with its introduction came a new IP disputes forum. A division of the High Court, the Commercial Court was set up to deal with major commercial and IP cases. Historically, cases that would have taken between two and three years to get to full trial are now generally disposed of in less than one year – offering a much more speedy litigation process than many of our EU neighbours. Given the speed with which cases are dealt with, and the fact that IP disputes are often multi-jurisdictional, this enables companies to strategically choose Ireland as the jurisdiction in which to enforce their rights, based on the likely completion date for trial. In relation to interlocutory applications, costs are often awarded at the interlocutory stage, providing a very powerful mechanism in the fight against IP infringers.

I,  and several of my colleagues on the Taskforce,  believe that Ireland is well-positioned to take a leadership role in the management of IP on the global stage. With leadership and facilitation by the Government,  this could be one of the real opportunities for the Irish smart economy.


About chrisjhorn
This entry was posted in innovation, Intellectual Property, Ireland, Mathematics, patents, Science Gallery, SFI. Bookmark the permalink.

5 Responses to Intellectual Property – the Irish opportunity

  1. Steve Collins says:

    Interest talk Chris (though I missed the live version). I think it’s worth making the distinction between sustainable value and perhaps more transient value of IP. In the entertainment space in particular, not all IPs satisfy the “non-diminuation of asset over time” in reality, and in fact there’s a definite assumption of limited shelf-life of IP (e.g. no-one will be paying big money for the Crazy Frog ring-tone IP, but there’s still serious legs left in the Harry Potter IP). Incidentally, it’s estimated by commentators on the web that EA paid as much as $100m for the world-wide rights to the Harry Potter IP in video games, back in 2000.

    When measuring value of IP, securitisation as defined is perhaps more of a function of value than a prerequisite (it’ll be secured if it’s valuable, but not necessarily vice versa). I’d always err on the “will someone pay for it” litmus test, and measure the licenses of IP, rather than securitisation of IP, which still to me seems like a step in the process of value creation.

    • chrisjhorn says:

      Absolutely. Securitisation of entertainment – and indeed other intangible – assets are almost always a weighted bundle of a collection of underlying assets, modelled as discounted cash flow (DCFs) under various scenarios and (most cited) a monte carlo analysis.

      My point was that if (a bundle of..) IP is robust enough to be securitised, and underwritten by a financial house, then it is almost certainly of the highest value – this is the (IMHO) gold standard. If on the other hand “will someone pay for it?” is to be the measure, then sure, put the IP up on eBay and somebody somewhere may well bid for it and buy it….

      best wishes

    • This is a very interesting talk.

      Clearly if Ireland wants to grow its knowledge economy it will need methods to quantify the value of the Knowledge assets that we are investing in. However, we would be making a big mistake assume that the only knowledge assets with value are ones to which we have acquired exclusive rights (e.g. by a patent).

      In the IT sector, the open source movement has proven that it is possible to make substantial money out of IP assets without restricting other people from also trying to make money out of the same assets.

  2. Delighted to see that you are working to keep this on the public agenda.

    However I wonder how much traction you will get.

    Even though it is recognised that intangible assets compose 80% of the market capitalisation of the S&P 500 (Ned Davis Research), what percentage of IDA executives are charged specifically with intangible business?

    The answer (as of the last IDA annual report) is 0%.

    Unfortunately, in official circles, IP is still often viewed as some kind of exotic tax vehicle.

    I am a huge cheerleader for your work with the Innovation Taskforce. I really hope the results prove my comment to be outdated.

    Raymond Hegarty, IP Commercialisation

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