We analyze Intellectual Ventures’ patent portfolio. 33% of IV’s assets from their January 2016 public list are gone today. 26% of US issued patents have expired. 10% of IV’s issued US patents have sold, 96% went to NPEs, and the rate of sales is accelerating.
With the negative press around court decisions against patent holders, you might have heard that the patent market has collapsed/is collapsing. So, is it? In short, no. Looking at the first half of 2015 compared to the first half of 2014, patent package sales are up 39%.
At the ROL Group we track the packages for sale on the brokered patent market in our proprietary database and analyze the USPTO assignment database each quarter to identify sales of unsold packages from the past few years. We identified 42 package sales with the transaction occurring 2015 Q2. In this post we will share the top buyers and sellers from the quarter and look at sales trends.
Top Buyers from 2015 Q2
It was no surprise that Intellectual Ventures continued to be a top buyer, this time buying as III Holdings 6, LLC. But in this case, all of the purchases we found were bought from Xerox, this quarter’s top seller; it’s likely that IV created a bundled deal to purchase all of the Xerox packages. RPX, the other top package buyer seems to have focused on smaller packages than Intellectual Ventures did and purchased their 7 packages from 6 different companies. Nineteen (19) additional sales were found that occurred in 2015 Q1.
Top Sellers from 2015 Q2
As far as the sales trends are concerned. We are continuing to see year-over-year growth sales with every quarter having had more sales than the previous year’s corresponding quarter. The average year-over-year growth in the past four quarters almost 40% (compounded quarterly sales increase of 8.6%). It is important to note that the average size of packages has been decreasing (See our paper on the 2014 Brokered Patent Market) and, therefore, an increase in packages sales does not necessarily mean an increase in total asset sales.
Package Sales by Quarter
For more information about the qualities of packages that sell, take a look at the PDF of our analysis of the 2014 brokered patent market in IAM Magazine and keep an eye out for our analysis of the 2015 market to appear in IAM Magazine early next year.
Methodology update: We have updated our process to use the executed date of the assignments at the USPTO, rather than the recorded date, based on the updated USPTO assignment site. This increased our data accuracy, but may cause some difficulties in comparing with prior reports.
At the ROL Group we perform quarterly analysis on patent packages offered for sale on the open market and our 2015 Q1 analysis showed that the number of sales is trending up significantly. 2015 Q1 sales are up 81% over 2014 Q1.
While sales are trending up, the asking price per asset is has been trending down as discussed in our IAM article 2014 Brokered Patent Market.
To determine sales we cross check each patent in every brokered package with the assignment data from the USPTO website. If a single asset in a package transfers from the listed seller to an outside entity then we consider the entire package sold as of the date the associated reel/frame is recorded by the USPTO. While this procedure is the same as in previous articles, for this post we did all analysis based on the recorded date of the sale rather than when it was identified. Due to USPTO delays in recording assignments, the 2015 Q1 sales may be understated.
Who is buying?
The top buyers in 2015 Q1 were RPX, a Canadian numbered company, and Intellectual Ventures, for their Intellectual Investment Fund 3. These buyers accounted for 42% of all of the packages purchased in 2015 Q1 and RPX alone accounted for 28%. Other companies that purchased multiple packages and their recent buying history can be seen in the chart below.
IV’s Buying Activity
We previously discussed Intellectual Venture’s buying in our blog post, Intellectual Ventures is Buying Again and our July/August 2014 IAM paper What’s Inside IV’s Patent Portfolio. Because they represent such a significant portion of the market, we want to revisit it for an update.
As can be seen in the above graph, December 2014 through February 2015 represents a return to buying after a short hiatus. It should also be noted in February 2015 we identified a reel/frame representing the assignment of 16 assets from Spansion, LLC to III Holdings, LLC. For our analysis, we are treating this purchase as 1 package, but it is important because we believe that IV actually cherry picked assets from a list of approximately 2800 assets related to flash memory semiconductors.
By looking at the purchase rate of assets rather than packages, we projected asset purchases by Intellectual Ventures as follows:
Based on their Q1 purchases, we expect to see IV purchase slightly more assets this year than last year. This is nowhere near their peak buying of ~5600 assets in 2008, nor their buying from 2007 to 2013 which accounted for at least 3000 assets per year.
At the ROL Group we carefully track the packages for sale on the brokered patent market in our proprietary database. This quarter we analyzed the USPTO assignment database to identify sales from unsold packages from the past few years. We identified 37 sales and in this post we will share the top buyers from the quarter.
Buyers identified as purchasing multiple packages in the ROL Group 2014 Q4 sales review
III Holdings is a comprised of the packages purchased by III Holdings 1, LLC. and III Holdings 2, LLC.. As identified our previous blog post, Intellectual Ventures is Buying Again, III Holdings 1, LLC is the name of the of Intellectual Ventures Invention Investment Fund 3 (IIF3). We are assuming that III Holdings 2, LLC. is also a part of IIF3. So, Intellectual Ventures is again the most dominant buyer in the market.
It is important to note that these are exclusively purchase from the brokered market and do not include private purchases.
In order to identify a package as sold, the assignment data for each of the US issued patents in a package is compared to the deal intake date in our database. If the recorded date of an assignment of any asset is found to be after the deal intake and the assignment if from the entity listing the package to a different entity then the entire package is marked as sold. These records are human reviewed to account for internal and historical assignment cleanups. Additionally, the recorded date is used rather than the executed date because there can be multiple executed dates within one Reel/Frame.
However, because sales are based on the date on which the sale is recorded at the USPTO, both the identification of the sale and the date of sale may be delayed. Many buyers do not immediately record their sales with the USPTO after the deal closes – the average delay is three months, based on spot-checks of a random sub-sample of the sold packages. For this reason, some of the sales listed above may have actually occurred prior to 2014 Q4
Today, IAM Magazine will publish the ROL Group’s third annual report on the brokered patent market. The article will appear in the January issue of IAM, and is now available on our website. We wanted to use this opportunity to highlight two key points: the types of entities that are buying and selling patents and how their behavior has changed over time as well as the tech areas that are selling.
Now available for download from our website (updated March 19, 2015).
The chart below is similar to one in the IAM article; however, here we compare the sales data from January 1, 2013 through July 7, 2014 to the sales data from January 1, 2009 through December 31, 2012 to highlight changes over time.
The largest change is the drop in the percentage of total purchases by NPEs. The decrease in NPE purchasing activity likely relates in no small part to a decrease in buying by Intellectual Ventures while waiting to fund its Invention Investment Fund 3. We have started to see Intellectual Ventures resume buying, so the NPE number may rise in the coming year. Decreased NPE buying increases the percentage of total purchases for other entity types and moves operating companies into the number one spot for buyers. On the sellers side, NPEs were also seen to sell more, though no NPE sold more than one package, and defensive aggregators sold less than in previous years.
Next we wanted to look at what types of assets are selling:
When we receive a package for sale, we classify it into one of 16 general technical categories and 98 sub-categories. Using the general technical categories, the sales data demonstrates the market being skewed towards internet computing. Application software, cloud computing, and system infrastructure software account for 55% of the sales. It should also be noted that the listing rates for tech categories are related the sales rates, but neither the rates nor the ranked technical category order are the same.
Please take a look at the full article for many more details including analysis on brokers, package flow, prices, package sizes, sales rates, factors that increase sales rates, and the total market size.
In December, IAM Magazine will publish our third report on the brokered patent market. The article will appear in the January issue of IAM, and will be available on their website to members December 1. We hope that you find the information useful in your patent buying, selling and valuation. Below is a sneak peek of some of our findings.
Overall, the market is softening with a lower percentage of packages selling, and those that do are selling at a lower price. We estimate the market size to be $260M (2014 Market) vs. $283M (2013 Market) and to employ 173 people worldwide in 58 brokerages.
The chance of selling a package has decreased significantly, as has the sales time frame. Packages listed in 2009 had a 51% chance of selling over 4 years on the market. We estimate that only 22% of packages listed in 2014 will sell.
Packages on the market have decreased in size. This creates a larger number of packages on the market with just a few assets. Notably, smaller packages (<5 assets) account for about a third of sales. Therefore, of the expected 22% total sales, most will be small packages.
Asking prices dropped; the average sales price per US issued patent has decreased 23% from the $467K (2013 Market) to the $360K (2014 Market).
The market is heavily skewed towards software and cloud computing as the three most common categories: application software, cloud computing, and system infrastructure account for almost 50% of the listed packages.
Semiconductor is the fourth most common technology category for packages, but the price per asset in this category is much lower than in other categories.
Our IAM paper also includes data relating to the types of organizations buying and selling, buyers’ filtering and diligence processes, what buyers expect of brokers and much more.
As always, we continue to collect and analyze data about market to find new trends and make new insights to gain a deeper understanding of the patent market.
IV’s new fund bought 16% of all the packages sold in the first half of 2014. As a follow up to our article “What’s Inside IV’s Patent Portfolio?” we examined Intellectual Venture’s recent buying practices, and in particular, buying for their new fund. We found 14 recorded assignments to III Holdings 1, LLC; this is IV’s new Intellectual Investment Fund 3 (IIF3). Although there has been speculation in the broader community about whether IIF3 is funded, we believe that these assignments are public evidence of funds committed from IIF3.
At the ROL Group we perform quarterly analysis on patent packages offered for sale on the open market. We saw a significant number of packages purchased by III Holdings 1, LLC. RPX has identified this III Holdings 1, LLC as an NPE entity. III Holdings 1, LLC could not be found as a litigant in any patent litigation. However, we have confirmed that this is a holding company for Intellectual Ventures’ IIF3 buying.
Using assignment data from the USPTO website to identify sales, our Q1 review identified 35 package sales and our Q2 review identified 50 package sales. Of these, III Holdings 1, LLC was the assignee on 5 (15%) of the sales identified in Q1 and 9 (18%) of the sales identified in Q2. The details of the packages are as follows:
As for the money IV spent on these assets, an approximation can be made by scaling down the expected sale price to 65% of the asking price, as described in “The Brokered Patent Market”. Using this method, $4.39M of IV spend was identified in the Q1 review and $8.06M in the Q2 review for a total spent of $12.45M. Not anywhere as high as past years, but IV is buying in IIF3.
Using the actual assignment dates, the following histogram represents IV’s estimated spend per month on open market patent deals in IFF3 since the first confirmed assignment.
Importantly, IV is successful at buying at the low end of the market so the estimated total spend may be high. The flip side, is that private purchases are not reflected above, if private purchases were included IIF3 spending would be higher.
When analyzing a large patent portfolio it is often difficult to determine where to spend diligence dollars first. In order to direct us to the specific assets that are more likely to be interesting we developed an in house heuristic ranking system. It is based on static patent characteristics. The image above describes the specific component scores for each of five characteristics. We used this system to rank the assets in Intellectual Venture’s patent portfolio (IAM Magazine, Issue 66 July/August 2014).
These component scores are then summed to create a raw rank (max 100) and bucketed into groups of interest. High > 85, Medium > 75 and everything else is rated as Low. It should be noted that theses rankings are intended for the general grouping of patents by likelihood of value, not for direct patent-to-patent comparison. It is possible for a specific low ranking asset to be of more interest and value than a high ranking one.
We have used this method across projects for over five years and have found that when compared to both alternative (more complex) scoring systems and initial human review (< 1 min per asset) of 1000+ asset portfolios it yields similar, though not identical, groupings. Overall, this ranking method has given us a very high return while maintaining simplicity.