Google has made a big splash with its patent purchase program. It says it wants to keep patents out of the hands of those who might be tempted to assert them against Google. That sounds fair enough, but there is more at stake than meets the eye. Google is trying desperately to build a large patent portfolio. In the world of high tech, patents are, among other things, like poker chips that one needs to take a seat at the table. Companies like IBM have more chips, and Google is tired of paying them for the privilege of dominating online search engine driven commerce.
Patents are poker chips for a seat at the table
The results of the high profile experiment are just in: Google announces that it bought 28% of the patents it liked, out of “thousands” of submissions, after zeroing in on those deemed “relevant” to its business, according to Kurt Brasch, senior product licensing manager at Google. The results were published in IEEE’s Spectrum Magazine, which can be relied on—if not for incisive, probing analysis—at least for accurate reporting of the data as disclosed by Google.
Google bought 28% of the patents it liked
Some other stats Google shared:
- Median price of submissions was about $150,000
- Several submissions priced at more than $1 billion, including one for $3.5 billion
- Half of submissions came in at under $100,000
- Lowest price Google paid for a patent was $3,000; the highest was $250,000
- 25 percent of submissions were from individual inventors, the rest from operating companies
- Of the 75 percent from operating companies, about a third were handled by brokers
The careful reader will understand that one cannot tell from these stats how many patents Google actually bought or how much Google paid for its purchases. It might have bought five patents. It might have bought 500.
Google buying spree—5 patents or 500?
I personally have led a similar patent acquisition program for a major electronics and computer hardware manufacturer. The program I ran was more proactive. My team of lawyers and experts identified patents of interest and contacted the owners directly.
Here’s what I found, and what I can read into the Google buying spree.
Best patents are not for sale
The highest and best use of a patent is to protect a revenue stream based on actual use of the patent. Such high-value patents are not for sale or rent.
I have made the ask. Operating companies will not sell patents that they are actually practicing. They won’t even talk about it!
The value of blockbuster patents is extraordinarily high and yet extremely difficult to measure. They don’t bring in royalty checks. They don’t have a purchase price. They are almost literally priceless, and that is the hardest thing in the world for most companies and executives to understand: The most profitable patent portfolio brings in zero revenues from sale or licensing of the patents.
Best patent programs get zero licensing revenues
Don’t believe it? Try asking Big Pharma for a license to compete with their patented blockbuster drugs. They’re making billions by practicing the patents. Why would they sell or license them to competitors? That would destroy their own exclusive market, creating generic competition that sells for 1/20 of the brand price. Thus, the most valuable patents assure growing revenues at profitable prices for commanding market leads even though the patent department doesn’t seem to bring in a dime.
A top-notch patent program is based primarily on internal inventions, i.e., it is home-grown, partly because the best patents, those being practiced for profit, are not available for purchase at any reasonable price. Moreover, a company that knows and minds its business will make valuable inventions worth patenting for its own business.
Indeed, Google is obtaining upwards of 2,000 U.S. patents each year, placing it in the top 10 companies for patents. And this is for a company that doesn’t even like patents! Google’s intellectual property (IP) has multiple components: Its trade secrets—its search engines, algorithms, data processing, confidentiality agreements (NDAs), and customer lists—are of enormous value, and its trademark is a famous brand, yet it must have patents to play in the profitable field of electronic commerce.
Regarding Google’s recent patent acquisition project, based on my experience, I am confident that most of the patents purchased by Google were not being practiced for profit by the sellers. In other words, Google bought paper patents. Still, on average, they might be worth six figures each, which seems to be in the ballpark of the somewhat vague stats disclosed by Google.
Maybe Google’s experiment obtained a lower average purchase price than it paid for each of the thousands of Motorola patents and applications that it previously bought for about $4 billion. But surely at least some large number of the Motorola patents were being practiced for profit, which gave them real value, perhaps approaching their purchase price of about a half million per patent.
Similarly, the smaller Nortel patent portfolio, also developed by an operating company, sold for $4.5 billion to Apple, Microsoft and others, shortly before Google bought Motorola for its patents. The Economist calculated an average price of $750,000 for each of the Nortel patents. If that price seems “exorbitant,” to use the Economist’s term, compare it to the value of a blockbuster drug patent worth billions of dollars per year. Moreover, analysts say that Apple and the other Rockstar patent buyers stand to profit handsomely from their substantial investment.
The Motorola and Nortel patent portfolios were available for purchase only because those companies were in dire financial straits. Shipwrecks create stranded assets. In my experience, those are the kind of valuable patents that can be bought. Even then, the patents command high yet apparently justifiable prices. Even powerful, wealthy companies sometimes walk away empty-handed from such auctions.
Good patents are hard to buy, painful to sell, profitable to practice
The fact is that it is hard to buy patents of real value on the open market. It’s even more painful to sell such patents. Where does that leave the company that wants to build a valuable patent portfolio? It means that the successful tech company must do the hard work of inventing and patenting and practicing the patents for revenues and profits.
You know those engineers and coders who work down the hall from you? They might seem ordinary to you. In fact, they think of themselves as ordinary. Neither they nor you think of them as “inventors.” They’re just doing the job they were hired to do, applying their technical knowledge to solve the problems in front of them. But they know your company’s technologies and your customers’ needs, and in solving those problems they’re making inventions. Instead of waiting for a Motorola shipwreck or buying patents on the open market, you just might want to back your own people’s work with patent filings. Here’s a suggestion: Ask them what they’re working on. You might be surprised.
In sum, if you have a choice between (1) buying patents, (2) selling patents or (3) inventing, patenting and practicing, you might want to pick Door No. 3. It isn’t sexy or flashy—it’s hard work and it doesn’t correlate precisely or immediately to the bottom line—but it can make real money through exclusive sales of proprietary products for market leadership at profitable prices. That, my friend, is what patents are all about.