Understanding the Value of Intellectual Properties

Part One
By Harlington L. Hanna Jr.

Intellectual Properties (I.P.s.) are the rights in creative productions attained through legal concepts such as patents, trademarks, copyrights, and industrial secrets. They are usually created by operation of law but can be acquired through transfer, sale, licenses and other contractual use agreements from the primary I.P. holders. They are the backbone, integrity, and engine of modern business. The acquisition and licensing of valuable Intellectual Properties is also the business of the future The ownership of valuable Intellectual Properties provides the owner or controller with the superior profits in any industry or business transaction.

To effectively value and acquire intellectual properties the businessman and investor must have a thorough working knowledge of these entities and how they relate to modern business operations.

To reach the top of the financial ladder you must aspire to own the intellectual property rights which allow you to participate in the superior profits in any industry. But first you must first be able to acquire them, and be sure to acquire the most valuable ones available at the time. Realize that you do not need to be the original producer of the product. There are many ways to acquire the rights in a product and many times acquiring just a part of some valuable intellectual property is all you may need. Remember the Bill Gates story. He and several of the other billionaires in the Microsoft company all got where they are by owning parts of the intellectual property in a relatively small and not exceptionally well developed piece of software called DOS. Now as of this writing in 1998 three of the five richest individuals in the United States are members of the Microsoft team and others are climbing fast. In fact the Microsoft phenomenon, Silicon Valley and other software and technology noueau rich, are prime examples of the power of ownership of valuable intellectual properties in this modern economy. Bill Gates and his colleagues from Microsoft and similar technology moguls will continue to move up the listings of the world's richest individuals as time passes simply due tot the inherent nature of the intrinsic way wealth which is based on valuable intellectual property grows in the modern economy. If you examine the rise of the newest group of the worlds wealthiest individuals you will discover that with each year more and more of these individuals will rise up the list. It's the type of property they own or control that counts.

A careful reading of a presentation made by Russell F. Parrs to a 1994 joint conference of the American Law Institute and the American Bar Association in Washington D.C. is insightful. Mr. Parrs is a noted expert on the value of intellectual properties in the future of modern business. He has written several books on the subject. If you are thinking of making money in business in our modern and global economy I encourage you to read what he has to say. In his 1994 address he states in part........

...... "It is intellectual property that establishes markets, dominates industries, assures national security, captures the loyalty of customers, and allows the generation of superior profits. It is intellectual property that keeps companies from becoming moribund commodity producers. Curiously, these powerful investment properties are difficult to define, sometimes impossible to touch, (and) born of the law"...............

"Recognition of intangible assets and intellectual property as keystones in the structure of business enterprise is rather a new concept but is fast becoming the dominant force behind strategic planning. In fact, intellectual property is often the ante required to enter into strategic alliances with others. Don't bring cash, because nobody wants it. Proprietary keystone intellectual property is the entrance fee. We are accustomed to thinking of a business in terms of its physical property. Our minds fasten on images of train loads of coal, oil rigs, blast furnaces, and production lines. We tend to equate the profits of a business with the successful employment of capital and labor but overlook that the catalyst in the capital-labor reaction is intellectual property. It is the inventions, designs, trademarks, copyrights, distribution networks, know-how and other intangibles that make the reaction successful."

"Corporations that properly manage intellectual property and intangible assets will be in commanding positions of economic power. The business world is splitting up into two types of companies: those who have intellectual property and those who do not. The have-nots will surely fade away unless they can gain access to patented technology and well regarded trademarks. The mere possession of industrial capacity is not enough to assure continued growth and profitability. Lacking unique intellectual property, all that remains for a corporation is the ability to mass produce a commodity or to manufacture for others as a job-shop. Either fate usually means slow growth and slim profits. Only a proprietary technological advantage or a well regarded trademark can save a corporate investment from mediocrity.".... He then quotes from George Glider in "Microcosm:The Quantum Revolution in Economics and Technology" who states " Today, the ascendant nations and corporations are masters not of land and material resources but of ideas and technologies."

In demonstrating the market value of some intellectual properties Mr. Parr goes on to state that......

".....An entirely new form of international commerce is evolving around transactions that are based upon the transfer of intellectual property separate and distinct from the products or services that the property supports. Licensing, joint ventures, and outright sale are the primary means by which intellectual property is exploited............. We have witnessed in the last decade corporate acquisitions and takeovers of enormous magnitude. Philip Morris purchased Kraft, Inc. For $13 billion and with it acquired one of the best collections of consumer product trademarks in the United States. Maxwell Communications purchased Macmillan, Inc. And received an irreplaceable collection of active book copyrights. The RJR Nabisco takeover required $25 billion; 80% of which was attributed to the acquisition of trademarks and other intangible assets...Jim Beam, a division of American Brands, purchased a collection of well known liquor brands from Seagram. The price was $372.5 million."

I encourage you to get a copy of Mr. Parr's books particularly if you want to prepare for doing real business in the 21 century....You may purchase them from the publisher John Wiley & Sons, New York, NY., or you may obtain the full text of his 1994 presentation from the ALI-ABA Committee on Continuing Education, Philadelphia, PA.

Understanding what makes a piece of intellectual property valuable or potentially valuable is the first step to acquiring the right stuff. Patents, Copyrights Trademarks etc in and of themselves may mean nothing ….the true marketable value of I.P's. must ultimately be determined.

Generally, unless the property involves some major break though in technology or possesses some uniquely or intrinsically valuable characteristics, the key to its value will lay in its prior wide spread exposure or potential for wide spread exposure. There are several academic and formalistic ways to judge the value of Intellectual properties such as the Value approach, the Market Approach, the Cost Approach etc., however all of these are as speculative as the other. To facilitate the discussion of I.P. value the two basic methods we suggest can be more easily referred to as the Intrinsic Value and the Exposure Value. These two general categories of potential value for Intellectual Properties are extremely important to recognize.

The Intrinsic Value method looks at the value of the I.P. in and of itself, and attempts to determine how important the I.P. is to furthering the technological progression of a particular industry. For example, a new drug for the treatment of an important disease, or a new operating system that will allow computers to operate faster and more efficiently. I.Ps. which afford such breakthroughs in technology have an intrinsic value which can be determined based on their potential use in the industry and the profits which may be derived from their application to leading edge processes in industry. Patents and industrial secrets and copyrights generally play the major role in this type of valuation.

Exposure value relates to potential value associated with the widespread use or widespread publicity association with the I.P. or its physical application. In such cases the I.P. or its physical application may not have any intrinsic value to industry, but due to its popularity it acquires important value. Examples of this type of I.P. are the copyrights in famous songs, books, and movies, and the trademarks associated with names of old traditional companies. Copyrights, trademarks and servicemarks usually are the types of I.P.s that develop value in this way. Entertainment productions for example, although generally unique, are so ubiquitous due to the ease of production that their value accrues more from the popularity they receive from widespread exposure or from being associated with a well know entity, artist or production.

Just as different types of I.P.s may be associated with the same product, the valuation of I.P.s. may be depedent on both intrinsic and exposure factors. In determining value both of these basic methods must be evaluated. A detailed evaluation will include many other factors. The following list of questions is important in ultimate value determination.

Important questions to ask and to be answered in determining the value of Intellectual Properties

How unique is the I.P. or its physical application.
How useful is it compared to its competitors.
What kind and amount of publicity has it received.
How newsworthy is its presence.
When is the term of the patent, copyright or other intellectual property expiring?
Who owns similar I.P?
What is the history of I.P. development of the company?
What are the ancillary I.P.s
What derivative I.P.s are associated or likely to be derived in the future?
How well protected is the I.P.
Are there any lawsuits pending for infringement or any threats of adverse litigation?
How soon is the I.P or its physical application(s) marketable?
What are the current and future applications of the I.P?
What type and amount of publicity has the I.P. received
What is the potential for value of the raw I.P. without use in applications?

Obviously each of these questions requires further analysis and expertise in reaching the answers. This is where further knowledge and expertise will pay off in the research process.

In addition, knowledge of the particular industry which you are researching is extremely important. One good idea is to develop a form or checklist which you can complete on each company or piece of intellectual; property you are evaluating. This streamlines and facilitates the evaluation process and improves your productivity and efficacy. An example of a specific form and checklist which can be used in evaluating entertainment productions such as music and videos follows.

 

I.P. Value Checklist

 Part Two

For Further details of the Hannaian Business network and its associated business opportunities visit the Business Opportunities Section of the Hannaian Publishing Website at http://www.hannaian.com/distribr.htm