Intellectual Ventures Creates a New Kind of Market from Scratch: Tales From the Wild West Era of Patents

3/30/11Follow @curtwoodward

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are great at describing technology, but you never want one of them to do a house closing for you,” Merino says. “That was a level of complexity that was really something that we had to work on because understanding who owned what, what rights could they actually transfer to us, and what rights would we own, was a very important aspect of our business.”

So if there was no equivalent of an IP title company to sort out who owned what, did Intellectual Ventures just make one up?

“That is exactly what we did. And yeah—it’s a significant operation for us. Basically the whole second floor is dedicated to that … it’s a bunch of paralegals,” Merino says. “Simple example: A company goes bankrupt and has a set of IP. A lot of people might say well, the IP court can transfer everything. Well, you’re right, the IP court can transfer everything—that you actually own. But the question is, do you actually own that or not? And as you go through the tech booms and busts, companies might have gotten merged and divested three, four, or five different times.”

“We’ve actually thought at various times, is this a service that we provide to the entire industry?” Merino adds. “But right now it serves our needs. We think it is a competitive advantage. But I’ll tell you, it really is something that gives you a sense of how nascent that market is.”

Today, Intellectual Ventures says it manages a portfolio of more than 30,000 patents. Myhrvold recently said the company pulled in $700 million in licensing revenue last year, and the company says its cumulative licensing revenue has reached about $2 billion. Merino estimates that licensing generates about 90 percent of the company’s revenue, as opposed to the other long-buildup processes of inventing or incubating ideas and spinning them off into companies, such as the TerraPower nuclear energy venture.

Why in the world was there such a space just sitting there for Intellectual Ventures to swoop in and seize? Surely there have been plenty of financial whizzes in the past who could have done the same thing, since it’s applying some pretty basic economics to an asset market.

“When I first went out and was creating the market for buying, I’d go to these cities and—typically in the states—go and hit all the law firms and give them a little pitch. And invariably, every second or third law firm I’d walk into, someone would say ‘You know, I had the exact same idea two years ago … but the problem is, I had no idea how to get the capital,’” Merino says. “So what happened was, frankly, it was access to capital. This was the first time somebody really applied capital to this.”

Now that the market is somewhat more established, Intellectual Ventures is seeing some interesting opportunities for monetizing its portfolio—the kind of thing that typically turns up the volume on allegations of troll-dom. And the revenue doesn’t just come from seeking licensing fees with lawsuits as an enforcement mechanism, although the company isn’t shying away from that tactic. Merino points to two recent deals, one with Verizon and another with Vlingo, where Intellectual Ventures’ patent portfolio was employed in the separate company’s intellectual property battle, basically as a sort of commodity. [Corrected first deal example to Verizon, not AT&T.]

“In both of those cases, we worked with those companies to basically get the patents that we’d bought so they could use them as kind of an equalizing factor in a lawsuit,” Merino says. “This is a very common sort of practice for us now, and what it comes out to be is a bit of a hedge. It’s no different than creating a currency hedge or anything else—it’s an IP hedge.

“We’re creating a hedge where, for relatively reasonable cost, somebody can get access to a tremendous amount of IP, both for defensive purposes as well as licensing purposes. We like to think that’s something that is reasonable and good. For anybody else to do what we’ve done, which is to go out and buy all these assets, it would cost them a tremendous amount more.”

So if Intellectual Ventures sees itself as a new breed of broker making a new kind of market in intellectual property, you have to wonder where these guys see the market going. After all, if they start showing a good business opportunity, they won’t be the only ones in the space forever. Merino says an efficient patent market will probably happen, but, “I’m not so sure that we’re going to get there in my lifetime.”

“Where would we like to see this go? … I think all of us realize the American economy is about knowledge,” Merino says. “I’d love to see a whole bunch of garage inventors who are getting compensated for their inventions, and are moving products and services and new ideas forward, having somebody else commercialize them, but are getting compensated fairly. And that would be a great testament to the American way.”

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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