Online Intellectural Property Exchanges

In their recent book on markets for technology, Arora, Fosfuri, and Gambardella (2004) explore the key benefits of markets for technology and the primary reasons that such markets fail to form. In light of their arguments, promising development aimed at solving the market failures caused by information failures and high transaction costs may be found in the institution of "online intellectual property exchanges."

Beginning in 1999, a number of entrepreneurial startup ventures emerged on the Internet with explicit business plans for creating virtual trading floors for intellectual assets. These online exchanges for IP were inspired by the basic Internet business-to-business (B2B) model, and their promotional efforts have touted the promises of free-market efficiency. The typical online IP exchange consists essentially of an embellished IP informatics service, or even more simply a list of technologies, augmented by basic services to allow technology owners and technology "buyers" to initiate negotiations for a license. Some of the premier exchanges have designed creative and comprehensive transaction-mediating and transaction-managing services, often integrated with more conventional operations of seasoned licensing professionals. Table 18-2 provides a recent list of active web-based IP exchanges, but consolidation is expected to continue, with ultimately just a handful remaining.

Indeed, several serious concerns arise in considering the potential for patent exchanges to optimally redistribute technologies to those who can make the most valuable use of them for society at large. Exchanges are, in general terms, best suited for highly repetitive, routinized transactions of clearly defined, standardized, and readily priced assets, goods, or contracts, albeit including contracts for services (Kaplan and Sawhney, 2000). Patents and licenses, however, do not very often exhibit such qualities. The specified in patents are highly heterogeneous, are often difficult to clearly or completely define, and may be impossible to evaluate sufficiently until well after considerable experimentation and refinement have taken place (i.e., well after the licensing transaction). Furthermore, innately held differences between sellers and buyers in their respective valuations of a technology may be wide enough to make it difficult to arrive at a clearing price for a license. These factors create uncertainties that darken the prospects for spot transactions of patents or licenses on an exchange.

Two relatively rare types of patents, however, do have qualities that should make them more conducive to online promotion. The first are those few patents that cover highly important general-purpose research methods, for which a winning marketing strategy would be to grant as many routine nonexclusive licenses as possible throughout the entire industry (which was the licensing strategy for the famous Cohen-Boyer patents of UC-San Francisco and Stanford). Holders of such general-purpose patents would benefit greatly from the low transaction costs of online promotion and distribution. Second, more numerous patents protecting highly specific and well-defined incremental improvements to familiar downstream products or processes could also be distributed online. These kinds of inventions are often most valuable when exclusively sold or licensed to the one specific potential user who values that innovation the most. Holders of these patents would benefit from the ease of finding and notifying a potential buyer and from the low transaction costs for executing a routine transaction. Finally, however, the bulk of patents that fall somewhere in between these two examples, either in terms of importance or in terms of generality of application, will likely be difficult assets to transact in the online exchange environment.

Table 18-2. Online IP exchanges, as of September, 2003

Name

Web address

2XFR (by the Patent Café IP Network)

http://www.2xfr.com/

Brainhead

http://www.brainhead.com/

Buy Patents

http://www.buypatents.com/

Global Techno Scan

http://www.globaltechnoscan.com/

Intellectual Property License Exchange

http://www.iplx.com/

International Invention Register

http://www.inventionregister.com/

IP Marketplace

http://www.ipmarlcetplace.com/

Knowledge Express

http://www.knowledgeexpress.com/

New Idea Trade

http://www.newideatrade.com/

Patent & License Exchange (pl-x)

http://www.pl-x.com/

Patent Auction

http://www.patentauction.com/

Pharma Licensing

http://www.pharinalicensing.com/

Tech Tuesday (Technology Source Group)

http://www.techtuesday.com/

TechEx

http://www.techex.com/

Uventures

http://www.uventures.com/

Virtual Component Exchange (VCX)

http://www.thevcx.org/

Yet2

http://www.yet2.com/

Online exchanges face other important difficulties. They currently are squeezed in an economic vice-clamp. On the one side, the business model depends upon attracting numerous buyers and sellers to make licensing transactions and then charging a small flat fee or a percentage commission on each transaction. Yet, to achieve a sufficient volume of transactions, a site must maintain what may be called sufficient "IP liquidity. " IP liquidity is maintained not simply by listing a large overall number of available patents, but, more importantly, by listing a sufficient "density" of available patents within any given industry or field of technology, thereby providing potential customers with a sufficient selection to warrant their entering the site and searching for needed technologies. On the other side, the ability of online exchanges to maintain such liquidity is squeezed by intense competition. Startup costs for establishing a new website to host an exchange are quite low, and a large number of online patent exchanges now exists (see Table 18-2 on the previous page), each scrapping for a relatively small proportion of the total market for patent licenses and each possessing only a very low density of patents in any given industry. The overall market is fractured, and most of the individual online licensing markets are currently too small to operate reasonably as exchanges.

In a specific field such as agriculture, no single online exchange provides access to all of the relevant IP currently available. In particular, searching for listings of "agricultural" or "agricultural biotechnology" patents turns up spotty or empty results even on the most developed online exchanges. Indeed, surveying the many online exchanges is itself a significant search cost for a laboratory researcher or technology manager seeking access to a technology. Those in search of a specific kind of technology have to go site to site, registering numerous times for web site memberships, remembering passwords, and in some cases paying significant fees for membership or pay-per-view for patent listings in which they are not yet sure they are interested. Two things would help to alleviate this problem, at least for a given industry such as agriculture: (1) a drastic consolidation of the online patent exchanges into a unified marketplace or (2) a universal cross-listing of current offerings across all of the online patent exchanges.

Consolidation or universal listings would, however, do little to circumvent the "matchmaker's dilemma, " yet another problem to which the online patent exchange business model is susceptible. Once a potential buyer (or licensee) has discovered an interesting patent that has been listed by a seller (or licensor) on an exchange, the buyer-seller pair may find it more economically advantageous and secure to go offline and deal directly with one another, thus dispensing with the hapless matchmaker and avoiding a commissions payment. Much like a dating service, the patent exchange may excel in providing first-time introductions, but it does not want to meddle further in a new technological relationship. The matchmaker dilemma threatens to constantly sap away the volume of technology-bearing, fee-paying traffic needed to maintain the IP liquidity of the market and the revenue base of the online exchange.

The value to society of more efficient technology markets—that is, more efficient mechanisms for getting good ideas deployed in their most valued applications—could be enormous. Where markets for technology are viable and competitive, the economic rule of efficiency calls for private enterprise to handle the creation of such markets. Public exchange services should be considered to support the formation of market mechanisms for IP and technologies only in those areas where wider social benefits can be anticipated and where it is unlikely that a private enterprise could support itself.

In the end, however, regardless of whether an IP exchange is privately or publicly backed, only those patents with characteristics that are amenable to the exchange mechanism will be made accessible. Other patents simply will not be distributed via this channel. Given the strategic (or monopoly power) value of many proprietary technologies, patent holders will likely decide not to offer them in an open market. In even these cases, however, it is possible that some type of mutually enforced agreement will offer holders of strategic patents a way to realize the value of their own patents while at the same time giving broader access to the protected technologies.

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