James Malackowski makes his best money when times are tight. His Chicago-based intellectual capital firm, Ocean Tomo, shows companies how to price and sell their patented ideas, which during a financial crisis may be the only asset a business can easily market.
“Almost immediately, the phone started to ring more often when we entered the credit crisis, because companies began to turn to their [intellectual property] as a ready liquid source of cash,” Mr Malackowski says.
Ocean Tomo’s success highlights the complex market for innovation now functioning under the constraints of the credit crisis.
As research and development budgets are squeezed worldwide, businesses unwilling to take a chance on new ideas are hoping to profit from the ones they already own. Many worry this trend could stifle innovation in the short term. But Mr Malackowski says rising patent sales have made more technology available to the international market, giving rise to a new, piecemeal model of R&D that can help companies remain innovative in the teeth of a global recession.
Selling and licensing the rights to patents on everything from industrial designs to computer software can be lucrative. Intellectual Ventures, a Washington-based patent investment fund, has spent more than $1bn buying thousands of patents around the world since it was founded in 2000 by Nathan Myhrvold, a former Microsoft executive.
Some have accused Intellectual Ventures of hoarding patents for profit. Vincent Pluvinage, who manages strategic alliances and private equity for the company, counters: “This phenomenon about IP and liquidity is simply a byproduct of a larger phenomenon, which I call the globalisation of R&D.”
Mr Pluvinage says companies willing to trade patented knowledge have created a diffused global market for technological development that did not exist 15 years ago.
A generation ago, R&D was conducted mostly in-house by large corporations willing to invest in new technologies from their beginnings as wild ideas to fruition as commercially viable products. This model required a lot of capital and time, but companies adopted it because they felt any other approach could lead their ideas to leak out, jeopardising their competitive edge.
Trading in ideas first caught on when the dotcom bubble burst in 2000 and the technology companies it had created went up for sale. Since then, Mr Malackowski says the market has grown and strengthened whenever the wider economy feels the pinch.
Today, companies looking for new technology need not make the costly investment to develop it all on their own. Instead, they can turn to a market packed with IP for sale, thanks to the credit crisis. Buyers can pick off the bits and pieces that they need from cash-strapped patent traders and infuse other people’s work into their own products.
Mr Pluvinage points to mobile phones. Two decades ago, the first cellular technologies were developed by individual companies. But given the innovation wrapped up in a mobile phone today – cameras, LCD screens, PDA systems, web browsers, CPU chips – few companies have the resources to produce all of this themselves. Instead, technology products are financed and engineered by global companies that mix and match elements through patent trading.
The model is more capital efficient, diffuses the individual risk of technological development, and leads to more innovation in a shorter period of time – good news for R&D in a recession.
“We are actually seeing an increase in activity on both the sell-side and the buy-side,” says Andrew Ramer, president of Ocean Tomo’s intellectual property auctions arm. “Even in a downturn, companies are still going to bring new products to market and will need to continue with strategic acquisitions.”
And even though many companies are cutting their in-house R&D budgets, the market for piecemeal innovation has encouraged others to push forward with business models focused solely on the production of intellectual property, which they license to buyers along the R&D supply chain.
That CPU mini-computer chip in your mobile phone, for instance, was probably designed by ARM, a technology company based in Cambridge. It controls a huge chunk of the microprocessor patent market but manufactures very few products of its own, instead licensing its designs to other companies.
In October, ARM reported that revenues had risen by 7 per cent year on year for its third quarter. The company also recently announced a new IP portfolio programme, under which other companies may license packages of ARM technology.
The new approach is meant to reduce the time taken from product design to commercial marketing, as well as increase the flexibility of patent use to meet customer requirements, thus reducing the risk for ARM’s buyers.
Whether or not a company’s business model is one of pure intellectual property production, Mr Pluvinage says licensing patents for widespread use is, legally, a less complex way to make money than trying to guard an in-house portfolio.
“In many ways, licensing is an alternative to past practices of trying to monetise the intellectual property through litigation,” he says. “Litigation can be costly, unpredictable and dangerous.”
Intellectual property lawyers in the UK say they have seen a rise in companies filing lawsuits to protect their copyrighted IP, but less so for patents, which are far more difficult to defend.