Photo courtesy of Anadarko Petroleum Corp.
Stephen C. Glazier, K&L Gates LLP, Washington, DC
New patent strategies have developed to help increase earnings and market capitalization of corporations in the oil and gas industry. These strategies provide metrics for improved competitive benchmarking and budgeting for patent programs, and for improved calculation of return on investment (ROI) for patent programs.
New fundamental metrics
To implement these strategies, new fundamental metrics to measure the quality of corporate patent strategies have been developed. These metrics are often particular to individual corporations and custom designed for them. They may also be custom designed to fit certain industry sectors such as exploration, production, energy equipment and energy services. Once these metrics are identified for a particular company, or a particular industry subsector, a database can be populated for analysis.
Competitive benchmarks and targets
Once the metrics and the database have been developed, they can be analyzed to develop benchmarks for patent strategy performance and budgets to place a company at its target competitive level relative to its industry. For example, a company can target whether it wants to be the top performer in its industry, or at the median or if it will be satisfied with a lower percentile performance at a lesser budget. This provides an objective basis to plan to outperform the competition. By placing this analysis on an objective quantitative basis, it improves on the subjective seat-of-the-pants approach to performance targets and budgeting.
Measuring ROI for patent strategies
These objective new quantitative metrics allow a real calculation of return on investment in patent strategies. In this approach, major products and services (including software enabled products and systems of a company) are classified according to whether or not they are covered by patent positions. Then the market share and gross margin of each product, service, and software system are used to populate the database. Then the aggregate market shares and gross margins of the patented products, services, and software are calculated and compared with the aggregate market shares and margins of the unpatented products services and systems.
The differences in market share and gross margins, of the patented products and services over the unpatented, indicate the cumulative impact on earnings and hence the return on the patent portfolio. Comparing this return against the cost of the portfolio indicates the ROI of the patent portfolio. Higher returns on patent investments are found in some studies along these lines, when compared with returns found in a traditional analysis of only patent royalty cash flows. A complete ROI analysis can then be made with total returns from the market share-margin returns added to returns of the traditional royalty — litigation awards cash flow analysis.
This new objective calculation of patent return investments pursues the greatest value of patent portfolios. The traditional ROI analysis for patents looked at only identifiable discrete cash flows generated by patents, such as from license royalties or awards from infringement litigation. However, the greatest value of patent portfolios is often not from the identifiable cash flows from deals or litigation. Instead, the greatest value of patents often comes from a portfolio's impact on the business plan through added market share, increased margins, and the resulting impact on product sales, and earnings. This calculation of ROI usually indicates a much higher ROI than the identifiable cash flow only analysis.
Patent strategy and market cap
The above analysis of the impact on earnings of patent strategies enables an analysis of the impact on market capitalization of the patent strategies. The above calculation of increased earnings from patent strategies, multiplied by the applicable price-earnings ratio for the industry, yields the impact of patent strategy on the market capitalization of the patent holder. This measurement of the economic value of patent strategies tends to far exceed the cost of developing patent portfolios.
Patents as investments with ROI, not overhead
Viewed from the ROI point of view, it is clear that investment in good patent strategies is important for competitive performance in an industry, and has a high ROI. Investment with a high return is something that industry wants more of. This is an alternative to the traditional view of patents as overhead items; that is, overhead is something that industry seeks to ration and reduce. This increasingly popular view of patents as a high-yielding investment, and not overhead, is one of the drivers for increased patent activity and commercialization in US industry.
Basic rules for metrics
In developing specific metrics customized to an individual company or industry, three rules can be followed:
- First, as is the case with the entire patent strategy, there needs to be vocal support for the program from the top management of the company. These programs are difficult to implement from the bottom up.
- Second, metrics developed for a company should be customized to address the special organization and activities of the company.
- Third, interface the metrics with the business plan of the company. Just as effective patent strategies must be integrated with the business plan and pursue the same objectives as the plan, metrics that measure the patent strategies should also accommodate the business plan and measure the patent impacts on the plan.
Empirical data of impact of patents
Recent studies in this new quantitative approach through patent strategy metrics includes an interesting review of 78 new products and services by venture capitalists in California. The study indicates that an early patent position for a new product or service has a dramatic impact on business performance, compared to related products and services without early patent positions. Specifically, the early patent position about doubles the chances of receiving further financing, and correlates with about a 50% reduction in the chance of failure of the new product.
Impact of metrics on financing
As indicated in the study above, these new metrics of patent strategies can have an impact on financing in industry. Particularly, the new patent strategy metrics are new statistics for the fundamental analysis of investment opportunities, and facilitate enterprise evaluation in any equity transaction, including calculation of price in M&A transactions.
Sell the patent story
Presenting the patent strategy story together with the patent metrics can be an important part of the company presentation to the investment community in financing situations.
Patent early, patent often, enforce for ROI
A macro result found in these quantitative studies is that patenting more, patenting early, and enforcing more patents against competitors (when it is done in a manner that pursues the actual products and services of the company and the business plan), has greater impact on earnings of the patent owner. And this impact can be measured.
Market-driven invention audits
Invention audits to identify targets for new patents should address the goals of the business plan for future markets and products, and then work backwards to direct patent development into those areas. This market-driven patent audit strategy should have a higher ROI than the technology-driven patent audit, in most cases. (The technology-driven patent audit looks at the "cool" technology being developed in the company and pursues patents for it. Although this can yield very valuable results, it may have less impact on the business plan and earnings.)
ROI analysis of patent enforcement litigation
Patent enforcement litigation opportunities for a company's patent portfolio can also be evaluated for their ROI through their impact on the business plan. These litigation opportunities can be evaluated with an expected value analysis like any other investment alternative. This can include an analysis of the potential impact on market share, margins, and earnings.
The views herein are those of the author and are not necessarily those of any other party.
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