Until recently, companies primarily used intellectual property (IP)—-trademarks, copyright, patents, and other types of intangible assets protected by law—-defensively and followed the traditional sequence of inventing, developing, manufacturing, marketing, and selling an invention. Also known as the “transactional approach,” this model characterized IP as a bargain: businesses conceded the public’s eventual unencumbered right to produce the invention in exchange for a period of limited exclusivity.
Today’s knowledge economy, however, has spurred a seismic shift in how businesses generate capital from IP. Companies find themselves sitting on prodigious portfolios of IP, intangible assets of which they use only a small portion in their primary products and services. Rather than allowing these assets to remain inactive, many businesses have found a way to monetize their IP without ever actually producing it.
In this way, while they are not using their IP in a traditional sense, they are still finding interesting and innovative ways to derive value. Below, we explain how, by leveraging their IP in the following ways, companies have minimized risk, increased revenue, and encouraged capital formation.
1. Third-Party Licensing
This IP monetization strategy involves licensing to other companies the right to use particular patents. Typically, these licensing agreements are most lucrative when businesses license patent rights to companies in industries that don’t directly compete with them. IBM exemplifies the value of this practice—having won more patents than any other U.S. company for 21 consecutive years, the technology company’s licensing revenue is on track to hit $2 billion annually.
2. Trademark Licensing
When a licensor, or trademark owner, grants a licensee the right to use its trademark in commerce, the result is a contract known as a trademark license. While trademark licensing is old news in some industries (think of celebrities licensing their names for perfumes or restaurant corporations creating franchise agreements), the practice has just begun to evolve in other industries. For example, in 2003, the City of Huntington Beach, California lent its “Surf City USA” nickname to a credit card company for $500,000 per year to use as the theme for a new card.
3. Intellectual Property Collateralization
Collateralization is more accessible to many firms than other monetization methods, because it is cheaper and less complex than securitization, which typically requires a significant amount of money derived from IP assets. Collateralization requires lenders instead of investors, with lenders extending credit in exchange for IP collateral. Usually, an asset-based lender will issue a loan based on the value, especially the disposal value, of a company’s IP assets.
4. Patent Donation
In addition to its value as a monetization tool, patent donation has highly attractive tax benefits. Many companies also donate their patents to universities in order to build connections to early-stage research. Companies like Ford, DuPont, Procter & Gamble, and Dow have all made very large and very public patent donations. For instance, in the late nineties, Ford donated nine manufacturing patents valued at $22 million to the National Center for Manufacturing Sciences.
5. Patent Sales
Just like personal property, IP can be sold, conveyed, or transferred to generate revenue. A company might choose to sell a patent under several circumstances, including when the market for the product didn’t develop as anticipated, the company changed in a way that makes the patent less useful, or a sale is the only way for a business to recoup its investment in the invention. For example, Motorola recently sold 17,000 patents to Google for $12.5 billion dollars, simply because the patents had more value in Google’s portfolio.
6. Mergers and Acquisitions
The purchase or sale of corporations often involves an IP monetization analysis. During the due-diligence phase of acquisitions, companies typically examine their targets and relevant IP assets. After this analysis, managers must examine how they will exploit the assets they will gain. These assets are then divided according to whether they would generate more revenue through donation or licensing.
7. Royalty Securitizations
Companies increasingly are taking creative approaches to financing IP assets. In the world of copyright, for instance, royalty securitizations have garnered a lot of attention because the royalties that flow from them are fairly stable, and the small risk-to-return ratio attracts investors.
David Bowie’s so-called “Bowie Bonds” are a famous example of royalty securitizations. In 1997, rock musician David Bowie issued asset-backed securities, or bonds, of present and future revenues of his first 287 songs (25 albums) recorded before 1990. Bowie’s songs served as the collateral backing the ten-year bonds, which Prudential purchased in 1997 for $55 million.
Bowie’s scheme was quite ingenious; by forfeiting royalties for a decade, he made $55 million up front, which enabled him to purchase the rights to his songs owned by a previous manager. The bonds have long since expired, and Bowie now owns the rights to all of his songs.
8. Trademark Securitizations
Another massive and relatively untapped source of revenue, trademark securitizations involve the sale of rights to use a trademark in exchange for royalties from the licensees of the IP rights. To date, one of the biggest trademark securitization transactions took place in 2006, when Dunkin’ Donuts secured the $1.7 billion financing of IP and leases arising from its fast-food brands.
Motivated by the need to repay a $1.5 billion debt, Dunkin’ Donuts issued notes to be repaid from franchise royalties by Dunkin, Baskin-Robbins, and Togo’s Eateries franchisees; rent from franchisees for facilities leased to them; and the third-party licensing of Baskin-Robbins’ IP for the sale and production of ice cream. The strength of its brands enabled Dunkin to fully repay its debt through the monetization of its IP.
In the current economy, whether you use IP in the traditional sense has very little bearing on its potential value to your bottom line. With monetization techniques like patent sales and third-party licensing, you can derive systematic value from your IP without having to produce anything. In this way, it’s not so much what you do with your intangible IP assets; it’s how well you monetize what you have.
Protecting Your IP
Do you have questions or concerns about how to monetize and protect your intellectual property? Contact a knowledgeable trademark attorney today to review your options and discuss your rights.
