It was an unprecedented business experiment. And the expectations for it were sky high. The media attended, as did 400 of the top people in the IP field--including representatives from General Electric Co., Microsoft Corp., E.I. du Pont de Nemours & Co., Siemens AG, Schlumberger Ltd. and BellSouth Corp. They all gathered at San Francisco's Ritz Carlton Hotel to observe or take part in the world's first diversified patent auction.
The 85-minute auction soon ran into trouble, though. One lot after another failed to sell. Apparently, the bids didn't reach the sellers' secret reserve prices. Of the lots that did sell, the vast majority went at bargain-basement prices of $2,000 to $15,000. This didn't leave much margin for sellers' profits, because the legal and administrative costs of obtaining a patent run on average between $2,000 and $15,000.
In the end, 26 of the 78 lots were sold for a total of $3.026 million (including the 10-percent buyer's premium). It was far less than the $100 million sellers had hoped to receive.
The April 6 auction was, nevertheless, a success, according to most IP experts. "For a first effort, it was surprisingly successful in many ways," says Q. Todd Dickinson, chief IP counsel for GE. "It succeeded as a process and in capturing the attention of IP managers about a new way to buy and sell IP rights."
The auction demonstrated there is a faster, cheaper and easier way for companies to profit from patents that no longer fit into their long-term strategies.
"This gives companies another arrow in their quiver in order to gain value from their IP," says Howard Hertzberg, licensing director for DuPont.
Moreover, many experts see this auction as just a first step. By helping to create a real market for IP assets, the auction might launch a profound change in the way companies handle their IP rights.
"There's a possibility we'll look back in a few years and say this was a real milepost in valuing and transferring IP," Dickinson says.
A Mixed Result
Statistics don't tell the full story of what happened at the auction. For instance, take the 22 lots that sold for $15,000 or less. They didn't bring in much money, but the sellers were happy with what they got, according to James Malackowski, president and CEO of Chicago-based Ocean Tomo, the merchant bank that set up the auction.
"This is better [for the sellers] than just letting these patents lapse, which is what happens to many patents," he says.
In addition, many of the low prices may have been an aberration, resulting from everyone's inexperience with patent auctions.
"Some people told me after the auction, 'If I had known that patent would sell for $15,000, I would have bought it,'" Malackowski says. But any last-minute buyers were locked out because all bidders had to register in advance and present a bank letter of credit.
Ocean Tomo has learned from this experience. In future auctions, Malackowski says, people will be able to register on site for bids of up to $50,000 without presenting a letter of credit.
Ocean Tomo also has learned from watching 52 lots fail to sell because the bids didn't reach the reserve prices. "We are going to work harder to reduce reserves by educating sellers as to what is logical for pricing," Malackowski says.
There was, by the way, a happy ending for some of the companies whose patents failed to sell during the auction. An additional five lots were sold for a total of $5.42 million in post-auction deals Ocean Tomo brokered.
A Learning Experience
Ocean Tomo's next patent auction--to be held Oct. 25 in New York--is likely to be bigger and better, according to many experts.
"As potential buyers and sellers become more comfortable with this auction process, more companies will become involved," says Mark Zyla, a partner at Willamette Management Associates, a Chicago-based IP consulting firm.
Not all patents, however, are good candidates for sale at auction. Internet, telecom and computer chip patents garnered lots of interest in San Francisco, with bids on one lot going as high as $1.9 million. On the other hand, automotive, mechanical and chemical
patents fell flat.
It's unclear why the latter group of patents had lackluster results. "Maybe the right bidders weren't there," Dickinson says. Or perhaps it is because there are fewer companies in those markets, which is Malackowski's theory. Older patents also ran into some problems. "Patents that were about to expire were less interesting," Hertzberg explains.
Moreover, the auction process isn't right for all buyers and sellers. "Patent auctions are most effective ?? 1/2 for a seller who is in a hurry. The seller can walk in, put it on the block and walk out," says Jeffrey Matsuura, of counsel at the Alliance Law Group and author of "Managing Intellectual Assets in the Digital Age."
Conversely, the auctions work best for buyers who can wait and browse among the various patents on offer.
"If you are a buyer who has a pressing need ?? 1/2 you need to take matters in your own hands and do it the old fashioned way," Matsuura says. "Do your own research [on who owns a relevant patent] and approach the patent owner directly."
Buyers will have many opportunities in the near future to hone their auction skills. After the upcoming October auction, Ocean Tomo will hold four more auctions through 2008, each of which will offer an increasingly broad array of IP rights for purchase. The October 2006 San Francisco auction, for instance, will include biotech patents and some trademarks. The Spring 2007 auction is expected to expand into copyrights and trademarks.
Ocean Tomo's real goal, however, is to get out of the auction business entirely. The company hopes its auctions will get businesses more comfortable with buying and selling IP, and this will eventually enable the company to set up a central exchange for buying and selling IP rights.
If Ocean Tomo could pull this off, it would solve one of the biggest issues facing businesses: how to appropriately value and monetize their IP. An efficient IP exchange would significantly lower the transaction costs of buying and selling IP and would enable sellers to get the highest prices for their assets, Zyla says.
But creating such an IP marketplace won't be easy. It will require businesses to fundamentally rethink their approach toward IP.
"Companies will need to realize that patent acquisition is a viable process," Malackowski says. "We have to teach away from NIH [not invented here] and help IP managers establish and justify budgets for patent acquisition--all long term endeavors."
Can it happen? Some experts are optimistic. "The auctions will change the marketplace," says Kevin Rivette, vice president of IP strategy at Armonk, N.Y.-based IBM Corp. "This is a building block to a real IP marketplace, and that's a good thing."