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Brokered Patent Market 2014

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Every year, we carefully track the brokered patent packages for sale on the open market and provide insights into the comprehensive state of the market and how it is changing. 2014 has seen prices drop and the deal flow slow down but what does it mean for the future of the market? We present highlights from our annual report.

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Brokered Patent Market 2014

  1. 1. Business Sense • IP MattersBusiness Sense • IP Matters Attorney-Client Privileged & Confidential 1 Brokered Patent Market 2014 Kent Richardson November 18, 2014
  2. 2. Business Sense • IP Matters Overview • Market softening: lower % sales, sold at lower price • 618 estimated packages • 7801 estimated assets • Estimates sales rate of 22%, down from 51% Key facts • $260M 2014 vs. $283M 2013 • 173 people employed WW in 58 brokerages Market size estimate Attorney-Client Privileged & Confidential 2
  3. 3. Business Sense • IP Matters Sales Rate: Market Worsening Attorney-Client Privileged & Confidential 3 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% <1 <2 <3 <4 <5 <6 Cumulative%Sold Time from Package Listing Date to Sale Date (years) Cumulative Sales by Years from Package Listing Date 2009 2011 Predicted 2013
  4. 4. Business Sense • IP Matters Sales Rate: Market Worsening • Chance of selling a package has decreased • Listed in 2009: 51% • Listed in 2011: 33% • Listed in 2014: 22% estimated • Drop reflects difficulties we hear • Brokers are having selling packages • NPE funding issues Results • 961 packages sales, data analysed by year listed • Sales data necessarily lags (up to 18 months) behind the actual Comprehensive dataset Attorney-Client Privileged & Confidential 4
  5. 5. Business Sense • IP Matters 0% 5% 10% 15% 20% 25% 30% 35% 1 <=5 <=10 <=25 <=50 <=100 <=200 %ofpackages Number of assets per package Distribution of Package Sizes (Total Assets) % Assets 2013 Market % Assets 2014 Market More Smaller Packages Attorney-Client Privileged & Confidential 5 • Smaller packages (<5 assets) have a higher sales rate Sales
  6. 6. Business Sense • IP Matters • Heavily skewed towards software and cloud computing • Impact on packages post CLS Bank v. Alice? • The most common three categories • Represent almost 50% of packages • Application software, • Cloud computing • System infrastructure Cloud focus Packages are Focused on Cloud Attorney-Client Privileged & Confidential 6 113 68 56 55 48 40 37 33 29 17 16 12 3 2 2 0 20 40 60 80 100 120 Applications Software Cloud Computing System Infrastructure Software Semiconductor Communication Services Wireless Application Development and Deployment SW Miscellaneous Consumer Electronics Communication Equipment Components Computing Equipment Imaging Displays Service Provider Networks Package Distribution By Tech Category
  7. 7. Business Sense • IP Matters Asking Prices per Asset • Average asking price per asset dropped by 12% • 2013 Market: $305K to 2014 Market: $269K • Average asking price per US patent has dropped 23% • 2013 Market: $467K to 2014 Market $360K Asking Prices per Asset • No pricing impact • 25% better chance of a sale if there is an EOU Impact of EOUs Attorney-Client Privileged & Confidential 7 All packages, top and bottom 5% of data points from each set removed Packages with EOUs, top and bottom 5% of data points from each set removed US$ per asset US$ per US Patent US$ per asset US$ per US Patent Average $269 $360 $280 $367 Min $31 $50 $39 $63 Max $750 $1,425 $750 $1,071 StdDev $219 $258 $219 $244 NumData 419 410 190 188
  8. 8. Business Sense • IP Matters More Lower Priced Packages Attorney-Client Privileged & Confidential 8 110 146 74 41 29 10 0 20 40 60 80 100 120 140 160 <$500K $500K-1M $1-2M $2-4M $4-10M $10-20M Distribution of Asking Prices (top and bottom 5% removed) $US
  9. 9. Business Sense • IP Matters Public Deal vs. Brokered Market Attorney-Client Privileged & Confidential 9 0 100 200 300 400 500 600 700 800 900 <$500K $500K-1M $1-2M $2-4M $4-10M $10-20M Public Deals Public Per Asset Price (US$K) in Relation to Broker Asking Price Per US Per Asset Public Deals 2012-Present Public Deals 2010-Present • Public prices dropping too • 2010 to 2014: $827K average per asset • 2012 to 2014: $673K average per asset • Public deals still well ahead of brokered market and not representative Public deal vs. brokered market
  10. 10. Business Sense • IP Matters Average Asking Price per US Issued Patent by Tech Category (US$) Attorney-Client Privileged & Confidential 10 • Tech categories are strong drivers for asking price • Communication services demanded 207% of the asking price per US issued patent for semiconductors Pricing by tech category • Includes both high-end and low-end assets • Average asking price per US issued patent including outliers: $304K Wireless pricing $470 $445 $404 $388 $367 $344 $314 $309 $293 $276 $227 $186 $- $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 Communication Services Cloud Computing Communication Equipment Applications Software System Infrastructure Software Computing Equipment Consumer Electronics Application Development and Deployment SW Components Miscellaneous Semiconductor Wireless Average Asking Price per US Issued Patent by Tech Category
  11. 11. Business Sense • IP Matters Brokers • 58 brokers this year, 55 last year • 16 brokers listed 10 or more packages • Accounted for 72% of the listed packages • Top 4 brokers accounted for 33% of listed packages • Little technology specialization amongst brokers • Exception: brokers affiliated with semiconductor reverse engineering houses Results about brokers Attorney-Client Privileged & Confidential 11 Brokers with 10 or More Packages Adapt IP Ventures Global IP Law Group ICAP Iceberg Intellectual Asset Group (IAG) Intellectual Profit IP Offerings ipCapital Licensing Company IPInvestments Group Munich Innovation Group N&G Consulting Patent Profit International Quinn Pacific Tangible IP ThinkFire Tynax
  12. 12. Business Sense • IP Matters Reason for passing 2013 Market 2014 Market Technology area does not fit 64% 70% Actual market adoption is too small 6% 12% Evidence of use fails to map properly 13% 5% Pricing 4% 5% Unresolved prior art 7% 4% Remaining asset life too short 4% 3% Bids due too soon 2% 2% Clients Focus on Efficient Filtering • Being selective early in diligence is beneficial to everyone • Buyers spends less time and money analysing a package on which they will pass • EOU analysis and prior art searches are more labour-intensive costly than other diligence activities • Evidence of use fails to map properly: 2014 Market: 5%, 2013 Market 13% • Unresolved prior art: 2014 Market: 4%, 2013 Market: 7% Results Attorney-Client Privileged & Confidential 12
  13. 13. Business Sense • IP Matters Distribution of Seller Type by Sale Year Attorney-Client Privileged & Confidential 13 2013 and 2014 All Years Operating Company 62% 64% Inventor 21% 20% NPE 11% 8% University/Research 4% 3% Defensive Aggregator 1% 3% Investment Bank 0% 1% Unknown 2% 1% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
  14. 14. Business Sense • IP Matters Distribution of Buyer Type by Sale Year Attorney-Client Privileged & Confidential 14 2013 and 2014 All Years University 0% 1% Inventor 1% 1% Defensive Aggregator 15% 13% NPE 38% 43% OpCo 46% 43% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
  15. 15. Business Sense • IP Matters Conclusions • Price down 12% • 6-18 month lag in the data • Trending lower • Brokers asking for upfront fees Price dropping – tougher market • 556 packages • > 7000 patent assets • Good time to be a buyer Robust, viable market • Continued focus on efficient filtering packages to identify patents of interest • Analysis of actual sales data Next steps Attorney-Client Privileged & Confidential 15
  16. 16. Business Sense • IP Matters Summary of Data Summary of Data Packages studied June 2013 to May 2014 556 Number of issued US patents 4271 Total assets 7021 Packages old enough to have sold Q1-Q3 2013 351 Percentage sold in first nine months 10% Asking price per US issued patent US$360,000 Asking price per listed patent asset US$269,000 Percentage packages selling 32% Average number of US issued patents per package (excluding packages with over 200 assets) 12.6 Median number of US issued patents per package (excluding packages with over 200 assets) 3 Percentage of packages with 10 or fewer issued US patents 81% Annual sales US$260 million Number of people employed as brokers (est.) 173 Attorney-Client Privileged & Confidential 16
  17. 17. Business Sense • IP Matters Attorney-Client Privileged & Confidential 17 BUSINESS SENSE • IP MATTERS ROL Group has over 60 years of IP strategy and execution experience. We ask the business questions first. We blend in-house and large law firm experience to create clear steps for success. We guide companies through unique IP challenges—like buying and selling patents, developing licensing programs, defending against patent assertions, and creating a value-driven IP portfolio. We give direction to businesses that share our passion for new ideas, creative problem solving and forward motion.
  18. 18. Business Sense • IP MattersBusiness Sense • IP Matters Backup Attorney-Client Privileged & Confidential 18
  19. 19. Business Sense • IP Matters Market Size Methodology To derive the market size, we first estimated the number of new packages brought to the market in a year (764 as discussed above). We then used the 36-month sales rate (22% sell), recognizing that the number could be as high as 32% (predicted above). As noted above, sales rates calculations are delayed by the sales window and assignment data (up to 18 months), so we decreased the expected sales rate based on our current estimates of 22%. We used this same practice in last year’s paper, reducing the sales rate from 50% to 30%, and our estimate was confirmed by this year’s numbers being 32%. Then, we discounted the sales price from the asking price (65% of the asking price). We believe that the actual sales price is one of the more difficult areas to estimate because so few transactions are reported. We adjusted the number of US issued patents per package to 10.45 to take into account the large number of small packages and the pricing differences of big packages versus small packages. While the average number of US issued assets per package is 12.6, the median is only 4, and smaller packages are more likely to sell. We believe that the price and number of assets could be 50% below or above this number. Using the adjusted number of issued US patents per package brings us to a total market of $260 million per year. Using an average commission rate of 20%, the revenue from this market for brokers is $52 million per year. We back-tested the market size by estimating the average loaded labor rate per broker ($300,000 a year). This gives 173 brokers. Assuming that four brokers work in each brokerage shop, this results in 58 brokerages (our data shows 58). Each brokerage would bring about 13 packages to the market per year; however, our data shows a few brokers bring many packages to the market, with the majority bringing a few packages. This 2014 Market size estimate seems to foot with a comparative calculation base on the estimated 2013 Market size in last year’s paper. Last year we estimated the 2013 Market to be 624 packages per year; therefore, we are seeing a 22% increase, to 764 packages, in package flow as discussed above. On the surface, this appears to be a drastic increase in the market size, but the number of packages is only one element in calculating market size. Other factors include: the smaller packages size and lower prices. After accounting for the 16% decrease in average US issued patents per package and the 12% decrease in asking price per US issued patent, and the result is that the total value of the market decreased by 10% from the 2013 Market to the 2014 Market. This would produce a 2014 Market size of $254 (compared to $283M in 2013). Attorney-Client Privileged & Confidential 19
  20. 20. Business Sense • IP Matters Sales Rate Continued •2011 Listings •No sales from packages listed in 2011 have been recorded in the past year •6% of listed packages sold in the second year on the market •15% of 2009 packages selling in their second year •3% of listed packages sold in the third year on the market •13% of 2009 packages. Sold in their third year Timeframe •Buyers are making decisions more rapidly •Suggests buyers are establishing formal evaluation processes Takeaways •First year sales rate was determined by sales of packages listed in 2013 that had been on the market for more than 12 months •Listed January 2013 through May 2013 on the market. Then, the sales rates from packages listed in •2011 and 2012 were used to determine how quickly sales would fall off in subsequent years •Again, we believe the market is actually worse than these numbers show 2013 estimates Attorney-Client Privileged & Confidential 20
  21. 21. Business Sense • IP Matters Package Sizes • All packages <200 assets listed in the 2014 Market (6/1/2013 to 5/31/2014) vs. <200 asset packages in the 2013 Market (6/1/2012 to 5/31/2013) Dataset • In the 2014 Market, the average package size decreased significantly • 2014: Average package contained 12.6 total assets and 7.8 US issued patents • 2013: Average Package contained 18.0 total assets and 9.3 US issued patents • The percentage of packages with 10 or fewer assets was similar from 2013 to 2014 • increased from 68% to 71% • Significant growth in the number of packages containing 11 to 25 assets • Drop in total assets on the market despite increase in number of packages • Does not appear that large packages were broken up into smaller ones • Possible that the assets that we previously put in larger packages are no longer being brought to the brokered patent market. Results Attorney-Client Privileged & Confidential 21
  22. 22. Business Sense • IP Matters Distribution of Asking Prices •2014 Market: 83% of packages contained pricing guidance •Slight decrease from the 2013 Market: 87% of packages had pricing guidance •Likely that this decrease is due to our methodology change •Additional packages we now capture that are outside of our client’s buying areas are discussed less with brokers; therefore, there are fewer opportunities for pricing guidance to be added after the initial receipt of the package. •Significantly higher than historical numbers (56% in the 2012 Market) •Receiving this pricing information with more ease •Brokers often give pricing information to us in the initial email or package documentation •Brokers are more likely to provide it in response to email requests •Previous years many brokers would only provide pricing via phone calls Pricing guidance •The distribution of package prices has shifted significantly to lower priced packages •2014 Market: 62% of packages had an asking price of less than $1M •2013 Market: 53% of packages had an asking price of less than $1M •2014 Market: no $20M+ packages. Results Attorney-Client Privileged & Confidential 22
  23. 23. Business Sense • IP Matters % of Sales with EOUs by Sale Year Attorney-Client Privileged & Confidential 23 25% 43% 43% 51% 75% 57% 57% 49% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2012 2013 2014 No EOU With EOU
  24. 24. Business Sense • IP Matters EOU Impact on Sales • Broker providing an EOU does not increase asking price • Broker providing an EOU increases the chance of sale • Packages with EOUs provided accounted for more than half of the sales in the first five months of 2014 • Distinct advantage considering that most of these sales came from the 2013 and 2014 Markets • Likelihood of an EOU being provided was 33% in 2013 Market and 41% in 2014 Market • A broker has about a 25% better chance of a sale if there is an EOU • In the tougher market, including an EOU seems prudent Pricing by tech category Attorney-Client Privileged & Confidential 24
  25. 25. Business Sense • IP Matters Sales by Package Size •All data referring to sales is viewed by calendar year, not market year Note on all sales data •Small packages sell more frequently across all years •2013: 84% of packages sold had fewer than 25 assets •Sales distribution is disproportionally high for small packages relative to the distribution of packages by size listed the same year •Not only are small packages more commonly listed, but also that they have a higher rate of sale Results Attorney-Client Privileged & Confidential 25 2014 2013 2012 All Sales # Assets All Assets US Issued All Assets US Issued All Assets US Issued All Assets US Issued 1 23% 38% 19% 31% 35% 39% 24% 36% 2 to 5 35% 27% 34% 25% 27% 25% 34% 27% 6 to 10 15% 15% 19% 17% 12% 14% 17% 16% 11 to 25 10% 6% 12% 9% 8% 11% 10% 8% 26 to 50 8% 8% 10% 6% 8% 0% 8% 5% 51 to 100 4% 2% 5% 5% 8% 0% 5% 2% 101 to 200 4% 4% 2% 6% 4% 11% 3% 5%
  26. 26. Business Sense • IP Matters Time to Bid on Packages that Sold •We also analysed how much time a buyer really has to bid on a package. While there is no pressure to bid quickly on undesirable packages, we wanted to focus on packages that have sold in order to calculate when buyers need to make buying decisions. •Sales shown to center in range of 4 to 6 months after the bid due date (sales occurring in recent years) •Sale date is the recorded date of USPTO assignment •Bids are placed significantly earlier •Average is around a 3 month delay in recording assignments •Additional 2 week timeframe between reaching an agreement and closing the sale •Center of the curve shifts from 5 months after the bid due date to closer to 1.5 months. •For sold packages: •25% chance that the agreement between the buyer and seller was made on or around the bid due date •50% chance that an agreement was made by 1.5 months after the bid due date •Buyers must now get their bids in on time or request additional time from the broker to not miss opportunities •Due to the operationalization of buying programs, the packages that sell are selling fast Results Attorney-Client Privileged & Confidential 26 Sold 2014 Sold 2013 Sold 2012 All Sales Months Receipt Date Bid Due Date Receipt Date Bid Due Date Receipt Date Bid Due Date Receipt Date Bid Due Date Sold before 2% 2% 0% 8% 0% 5% 1% 5% Same month 0% 4% 3% 2% 0% 20% 1% 6% 1 to 3 16% 23% 16% 30% 21% 15% 16% 25% 4 to 6 18% 26% 21% 21% 32% 20% 20% 22% 7 to 12 35% 26% 43% 34% 32% 30% 35% 29% 13 to 18 20% 13% 14% 2% 7% 0% 15% 6% 19 to 24 6% 4% 0% 0% 0% 0% 6% 3% >24 2% 2% 3% 4% 7% 10% 5% 4%
  27. 27. Business Sense • IP Matters Repeat Sellers • Despite the slight increase in NPEs selling their assets, no NPE sold more than one package • 9 nine entities sold more than one package from 1/1/2013 to 7/7/2014 • 7 of these entities were operating companies • These sales account for • 21% of sold packages • 32% of sold assets, and • 35% of sold US issued patents • Average sales rate, sold packages/listed packages, of these 9 companies is 69% • More than twice the expected rate of sale on the open market Results about sellers Attorney-Client Privileged & Confidential 27 Repeat Corporate Sellers Alcatel Lucent NXP Semiconductors AT&T Cypress Semiconductor Earthlink Leap Wireless UT Starcom
  28. 28. Business Sense • IP Matters Who is Buying • Listed the buyer for all sold packages • Categorized every buyer into a type • Analyzed the distribution of these types by year sold Methodology • Sales occurring from 1/1/2013 to 7/7/2014: • Operating companies: 46% of purchases • Last year’s paper: 35% of sales listed prior to 2013 were purchased by operating companies • NPEs: 38% of purchases • Last year’s paper: 56% of sales were purchased by NPEs • The decrease in NPE purchasing activity likely relates to a decrease in buying by Intellectual Ventures Inc. while waiting to fund their “Invention Investment Fund 3.” We have started to see Intellectual Ventures resume buying, so we may see the NPE number rise in the coming year • Defensive aggregators: 15% of purchases • Last year’s paper: 8% of sales were purchased by defensive aggregators Results • From 1/1/2013 to 7/7/2014 • 59 buyers purchased 112 packages • 14 buyers purchased multiple packages • Repeat buyers account for 58% of the purchased packages • Top 4 buyers accounting for 35% of the purchased packages Repeat buyers Attorney-Client Privileged & Confidential 28
  29. 29. Business Sense • IP Matters Package Frequency by Month Attorney-Client Privileged & Confidential 29 0 10 20 30 40 50 60 70 80 June July August Septem ber October Novem ber Decem ber January February M arch April M ay NumberofPackages 2013 Market 2014 Market

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