Back in the old routine

In the last 10 years, the sale of patent assets has become an important way to monetise portfolios and balance IP positions due to converging industries. As computing has moved from the server to the desktop to the mobile device to the wearable device, the landscape of IP rights has changed dramatically. Web services and cloud computing are another example of how technology convergence has profoundly altered the landscape of industry leaders. There are many new players in the market, while other companies have lost the influence that they once commanded. Corporate patent monetisation efforts amid constant budget pressure and active portfolio management are fuelling the transactions market. At the same time, funding from the sale of IP assets has improved capital access for small entities, inventors and universities.

Market trends can be difficult to access and understand because most patent deals are confidential, numerous assignments are recorded under shell entities and many transactions involve mergers, acquisitions and security transactions, or are otherwise distinct from a transaction that purely involves the transfer a set of assets from one entity to another.

USPTO assignments

To better understand the patent marketplace, AST has studied the 1,419,268 patent assignments that were recorded at the US Patent and Trademark Office between January 2010 and June 2014. Not all transactions are recorded, so the actual number of transactions is likely larger than our study. Each assignment is analysed by a team of researchers to eliminate those related to M&A, business unit sales, inventor to company, security, liens and name corrections, leaving those that reflect a pure patent transaction. The next step was for assignments to be consolidated into a single transaction and then for assignee/assignor names to be unified to parent entities. The data was then further analysed by classifying entities by type of business, revenue and locations of the companies involved, as well as the technology of the patents transacted.

Figure 1. Number of transactions and US patents by year

Since 2010, more than 3,709 patent transactions have been identified involving 68,430 US assets, 2,476 sellers and 1,517 buyers. With this volume of data, AST has identified several interesting trends.

The year 2011 had the highest number of transactions in the analysed period, with 1,128 transactions, including the famous Nortel transaction (Figure 1). Since then, the number of transactions per year decreased significantly until 2014, when transactions spiked sharply upwards, with 10,831 assets transacted in 372 deals through June. We estimate that 2014 may see a rise of more than 50% in the number of assets transacted as compared to 2013.

Figure 2 shows the number of patent transactions by industry category based on US and international patent classification class codes. Each transaction was assigned an industry category based on the technical subject matter of the patents involved.

Figure 2. Number of transactions by category*

*One category per transaction

High-tech dominates

The high-tech industry accounts for the majority (78%) of patent transactions since 2010. Over 60% of 2014 transactions contained assets related to communication and software technologies. Seventy percent of communication transactions were purchased by ‘patent holding companies’ – which we define as companies that make no products or services, such as non-practising entities and patent aggregators. Patent holding companies are also active in the semiconductor and software industries. More than 1,000 transactions relate to software technologies, with Intellectual Ventures a buyer in 33% of these purchases. Over 30% of assets in the ‘other’ category pertained to transactions related to the automotive industry.

When we look at the same data analysing the number of assets for each industry category (Figure 3), it reveals that communication assets are the most transacted assets. Several large operating companies are major sellers of these assets, such as Nortel, Hewlett-Packard, Panasonic, Ericsson, Kodak, IBM and Micron.

The Nortel Networks sale of 3,741 patents to Rockstar Consortium for $4.5 billion in 2011 is the largest patent sale in our study, in terms of both price and number of assets. The second largest patent transfer occurred in 2010, when 3,434 patents were transferred from Micron to Round Rock.

Some of the notable transfers of the first half of 2014 include:

• 1,408 communication patents from HP to Qualcomm (fourth largest since 2010);
• software patents from IBM to Twitter (sixth largest since 2010);
• electronics patents from Panasonic to IP Bridge;
• communication patents from Ericsson to Optis; and
• software patents from American Express to Intellectual Ventures.

Figure 3. Number of assets by transaction level category*

*One category per transaction

The sellers

When we take a further look at who is selling assets, it becomes clear that practising entities are the biggest sellers of patents (Figure 4). Over the last several years, the ratio of practising entities compared to patent holding companies as sellers and buyers has remained steady. Practising entities have contributed over 80% of the assets sold, while patent holding companies are the major buyers, purchasing 46% of the transacted assets. In recent years, more patent-holding companies have been trying to sell patents acquired over time, so we can expect to see an increased percentage of patent holding companies as sellers in transactions in the future. However, overall, patent holding companies acquire more than twice as many assets as they divest. Defensive consortia such as AST, RPX, OIN and CPTN represent 12% of the buyers in the market. Because defensive consortia ultimately represent practising entities, this means that over 54% of total transactions are purchased by practising entities. R&D institutes, universities and individual inventors are the sellers in 4% of all transacted assets.

Figure 4. Transacted assets by types of party

Large companies most active

Further, upon classifying practising entities by revenue (Figure 5), it becomes apparent that large companies – with over $500 million in revenue – are especially active sellers, accounting for 45% of practising entity transactions or 27% of all transactions. When looking at the number of assets transacted, the numbers are even higher: 78% of assets divested by practising entities or 62% of all transacted assets were divested by large companies. Large practising entities lead the buyer side as well, with 59% of transactions and 80% of assets purchased by practising entities. Smaller sized companies, with less than $100 million in revenue, are also active sellers, with 39% of practising entity transactions or 21% of all transactions, but only 12% of practising entity transacted assets. This is likely due to their smaller IP portfolios.

Figure 5. Practising entity companies by revenue since 2010

US patents most valuable

Generally, the fact that US patents are considered more valuable compared to other geographic counterparts is probably due to the litigious nature of the market, but the companies involved in the transactions are located worldwide. As shown in Figure 6, North American practising entities are the most active sellers and buyers with over 65% of transactions. Asian companies are now responsible for more than half of the patent filings worldwide, but historically they have not monetised their portfolios. However, our study indicates that the year-on-year ratio of divested assets by Asian practising entities is growing at a steady rate. Asian companies sold four times more assets in just the first half of 2014 than they did in all of 2010. The number of sale transactions has also doubled in recent years; and with the rising number of patent offerings from Asian companies on the market, we expect the ratio to increase further.

Figure 6. Practising entity companies’ location

Table 1 shows that 10 of the top 15 sellers are practising entities. IBM is the biggest seller, with over 6,111 assets or 11% of all transacted assets in 57 transactions since 2010. Eleven IBM transactions have involved more than 100 assets, including a transfer of 2,379 patents to Google. Sellers such as AT&T and Nokia are involved in smaller transactions. Twenty-four of 35 AT&T transactions involved under 10 assets. Allied Security Trust, with its ‘catch and release’ model, has been involved in 29 sales, including many of the assets purchased by the firm since 2007.