New study on patent licensing and transaction costs

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Bob Litan and Hal Singer have just released a new report Unlocking Patents: Costs of Failure, Benefits of Success. Written as part of their economic consulting firm Economists Incorporated, the report looks at the barriers to successful commercialization through patent licensing.

Their conclusion is that a great many patents are never licensed due to transaction costs:

Unfortunately, these innovations are impeded rather than facilitated by the current patent system. The reason is that the current patent licensing system does not scale--that is, the transactions costs associated with consummating the tenth (or hundredth) licensing deal is no less than the transactions costs associated with consummating the first. (emphasis in original).

Now, I'm sure that there are other reasons that some patents are not licensed. Litan and Singer mention litigation risk as another issue. But, the technology may be ahead of its time. It may need further development. There may be additional technologies needed before the technology is commercially viable. There may be changes in the market and/or consumer demand that have to occur before the technology is commercially viable. Or the patent may just cover something that sounded like a good idea but is a dud.

But transaction costs are a factor -- and a factor that can be dealt with. In that respect, the Litan & Singer echoes the conclusions of an Athena Alliance report from 2008, Intangible Asset Monetization: The Promise and the Reality:

The purpose of monetization is to raise funds, either through revenues in the case of sale and licensing or through investment capital in the case of collateralization and securitization. To the extent that funds are available through other mechanisms at lower costs, the incentive for monetization disappears. Thus, the higher the transaction costs, the less the incentive. This is true in all forms of monetization. If the cost of patenting a technology and/or the costs of licensing that knowledge is high, there is less reason to do it.

This is especially true for securitization where the deals are essentially unique, one-off transactions.

Litan and Singer point to a number of ways to address the issue. They conclude that emerging private sector solutions (such as U.S. Patent Utility, RPX Corporation, and LOTNET) can help overcome the problem without needed changes in law or regulations. While I support these efforts to standardize licensing, I do believe that the wider issue of collateralization and securitization will need broader efforts including changes in government regulations. For example, bank regulators need to understand and standardize how patents are treated for purposes of loan collateral. (See our papers "Intangible Assets: Innovative Financing for Innovation", and "Building a capital market for intangibles").

Litan and Singer's report has highlighted an important issue in the innovation system. I hope the combination of public and private sector efforts can successful address the problem.

October employment

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Good news continues on employment as the BLS reports that employment rose by 214,000 in October with a down tick in the unemployment rate to 5.8%. The increase was not quite as large as the 235,000 that economists had forecast but the unemployment rate was in line with expectations. The number of involuntary underemployed (part time for economic reasons) continued to decline in October as the number of those who could only find part time work dropped. Slack work actually increased slightly. However, the total involuntary underemployment remains well above pre-Great Recession levels. As I've noted before, the high level of involuntary underemployed constitutes a waste of human capital.

Involuntary underemployed Oct 2014.png

September trade in intangibles

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This morning's September trade deficit data from BEA is not so good. The overall deficit rose by $3 billion to $43.0 billion. This was due almost completely to a $3 billion decline in exports. Import were basically unchanged - up by a slight $0.1 billion - even with a surge in consumer electronics imports. The deficit in petroleum goods was up only slightly. The drop was far greater than economists' expectation of a $40.2 billion deficit. The slowdown in exports is thought to reflect the slower economic grow in our trading partners in Europe and Japan. It will also likely cause a downward revision in 3Q GDP estimates due out later this month.

The surplus in pure intangibles was virtually unchanged in September at $14 billion. The only real change from August was a decline in exports of maintenance & repair services which was offset by very slight improvements in other sectors.

The really bad news was a huge jump in our Advanced Technology deficit, which hit almost $10.5 billion in September. That was an increase in $6 billion over August. Imports of information and communications technology dropped surged by nearly $4 billion. Small drops in exports and increases in imports in other sectors accounted for the rest of the decline.

Advanced Technology goods also represent trade in intangibles. These goods are competitive because their value is based on knowledge and other intangibles. While not a perfect measure, Advanced Technology goods serve as an approximation of our trade in embedded intangibles. Adding the pure and embedded intangibles shows an overall surplus of only $3.5 billion - down from $9.5 billion in August due to the large deficit in Advanced Technology goods.

Intangibles trade-Sept14.png

Intangibles trade parts-Sept14.png

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Oil goods intangibles-Sept14.png

3Q GDP shows continued growth in intangible investments

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This morning's advanced estimate of U.S. 3rd quarter GDP from the BEA shows a healthy growth rate of 3.5%. Economists had forecast an overall growth rate of 3%. Personal consumption, exports, nonresidential fixed investment, and spending, and state were all major contributors to the growth. Part of that growth in nonresidential fixed investment was a 4.2% growth in business investments in intellectual property products (IPP), i.e. research and development; entertainment, literary, and artistic originals; and software. IPP investments had increased by 5.5% in the 2nd quarter.

Note that the measurement of intellectual property products by the BEA does not encompass all types of intangible assets. While the inclusion of R&D and entertainment, literary, & artistic originals in the GDP as an investment is a major step forward, more work on measuring intangibles still needs to be done.

IPP percent 3Q14 - 1st.png

Gap gets it

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As readers of this blog will know, I have occasionally posted stories about companies who don't seem to understand the meaning behind the phrase "our employees are our most valuable asset." The most recent of these was a month ago when I nominate IBM for the Circuit City award for how to destroy your human capital. The award commemorates how Circuit City fired its most experienced workers as a cost cutting measure -- only to see the company go into a death spiral as their human capital ebbed away (see earlier posting). IBM won the award for mandating additional training for some workers (a good thing) but cutting their pay while they were in training (a very bad thing).

But there is good news as well. Today I am inaugurating the anti-Circuit City award. [I know, not a great name, but it will serve until I come up with something better.] And today's awardee is Gap. They seem to understand the role of human capital. According to a recent story in the Washington Post ("At Gap, selling a place to work, not just khakis"), Gap has been increases their wages and focusing on gender parity. Two reasons. One is to raise the company's appeal to customers. Second, to retain a higher skilled workforce.

Technology is increasingly making the job of a front-line retail worker more complex than folding T-shirts or using a cash register. For instance, the prevalence of "reserve-in-store" programs means there's a focus on finding workers who can convince shoppers to buy more than just what they reserved online."What we're asking our sales associates to do today versus what we asked for in the past is much more," [Gap HR Executive Dan] Henkle says.

Gap gets it.

    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.

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