Monday, 25 February 2008

Online markets and IP trading exchanges

"Online Markets for IP: the New Role of IP Trading Exchanges" is written by Dr Roya Ghafele (International Research Scholar, University of California at Berkeley, Haas School of Business). Dr Ghafele is a member of the IP Finance weblog team. The contents of this article are her own and do not necessary reflect those of the Haas School of Business.


ONLINE MARKETS AND IP TRADING EXCHANGES

Markets for IP are opaque

Remember the fundamental microeconomic principle that supply and demand determines the price?

Only, with markets for intellectual property (IP), that mechanism just does not kick in. Not that IP has features that would make it impossible for a potential buyer and seller to interact, rather buyers and sellers simply don’t know of each other; thus the difficulty of determining the price. Markets for IP currently remain opaque and underdeveloped, worldwide.

Trading exchanges for IP may be a way to overcome this challenge. Contrary to listing exchanges, trading exchanges have as the sole goal to bring willing buyers and sellers together. In the past, the most various exchanges have been created. Hollywood got its own movie exchange, insurances companies traded catastrophe options and even vegetarians looking to date other vegetarians have their own “veggiedating.com” exchanges. Just, exchanges for IP have not seen a major breakthrough, perhaps because right holders prefer to keep their IP hidden away, so to avoid attracting patent trolls or other unnecessary competitors.

A new paradigm for IP

Clearly, the prevailing paradigm of intellectual property protection has not been of help and eventually prevented to look at IP as a tradable business asset. Under the IP – Rights perspective IP is still largely viewed as a defensive right, a right to exclude. The right holder secures its market share by preventing other market participants from embracing a similar concept, idea or approach. The primary strategic IP emphasis of most businesses remains based on a defensive understanding of IP that considers IP as an effective barrier method. While these strategies may well have helped to secure a firm’s freedom to operate, they have hardly contributed to leveraging IP as a potential source of revenue and funding.

Fail it, fail it better (Samuel Beckett)

The idea of an exchange for IP is not new. During the dot.com bubble, several U.S. based companies raised Venture Capital money to build an online market place for IP. Significant amounts of money were invested to acquire the necessary technology for online trading. The basic business model of first generation exchanges was relatively clear cut. Online IP trading platforms kept a certain percentage, usually around 10 – 15% of the transaction. Slight variations existed though. While some exchanges were by invitation only, others allowed anyone in be it a university, a SME or a big corporation. By the same token, the valuation and rating methods employed varied. The idea was good, yet not good enough. Most exchanges did not meet investors’ expectations: Primarily because of insufficient leverage and because some of the exchanges charged too high entrance fees. “It was like throwing a party, where no one came.”

Another reason may be that certain IP exchanges had databases that were neither particularly user friendly, nor particularly deep and wide in scope. Also, these exchanges were listing exchanges and not trading exchanges and badly neglected their marketing. That, on top of a general market perception of IP as a legal instrument serving to protect rather than promote caused the early death of many IP based online businesses. When the bubble burst, many first generation exchanges shut down. Surprisingly, for quite some time, nobody touched the idea again, perhaps because of the collective trauma experienced by new technology entrepreneurs during the dot.com crash.

What profile for a successful IP trading exchange?

Can the new millennium marks the era for IP trading exchanges?
Probably, if certain strategic aspects are taken under consideration.

• Innovate the business model
The innovation of a trading exchange needs to be in the business model, not the technology it uses. In this sense, an IP trading exchange can be compared to a network business since it aims to move international information on IP. A functioning trading exchange can not operate in isolation, but needs to be part of a broader network of additional actors. Just like NASDAQ would not work without brokers who bring bonds and stocks closer to the end user, a broker can pro-actively approach IP owners and their representatives to engage in trading their IP trading.

• Bring small and big players together
A successful IP trading exchange helps to counterbalance asymmetries between SMEs, Small and Medium Sized Enterprises, and large corporations. It can be the exchange, where “garage girls and guys” and multinational companies can come together, meet eye on eye, create win/win deals and help overcome funding challenges.

Acknowledging that SMEs do not necessarily have the means to hire an attorney to do the legal work of the exchange, contracts and licensing agreements need to be available for download on its website. To help determine licensing fees, free online scoring tools for IP need to be equally made available.

• Provide a distinctive value added to you customer
A successful IP trading exchange needs to comprise patent information from databases from the U.S.A., the E.U., Australia and Japan and also have the means to collect developing country information. The database needs to offer consistency of form, technology, style and the patent information needs to be put in a format readable for everybody. In this sense it can offer the IP community tools for in-depth prior art search. Law firms, patent offices in developing countries and innovators aiming to get a better picture of the current state of the art should be able to do so, in an easy, comfortable and informal way. In the knowledge based economy information platforms facilitating the exchange of knowledge are crucial for business success. As such, a well structured IP trading exchange can provide a whole new pathway for innovators and their IP, both in terms of market transparency and background research.

• Empower the Intellectual Property Owners
A smart IP trading exchange helps to save users time and costs. Since it is a trading platform open to everybody, the relationship intellectual property owners have to their attorneys can be redefined. Attorneys can provide advice on structuring the licensing deal, a market based transaction generating direct revenues for the owner. Designed as a one-stop, an IP trading exchange should furthermore offer the whole set of tools users need to perform their search for a potential licensor or licensee. Helpful in understanding the competitive market structure and looking for business partners outside the traditional realm, an IP trading exchange democratizes the innovation process.

• Do your homework in marketing
Finally, a successful business strategy for an IP trading exchange needs to address the following questions: What can be done to assure the use of the exchange? Who is the target group? What are customers looking for and how can an IP exchange help them achieve their goals? How can trust and confidence be built up? If the next generation of IP exchanges does their homework well, it can provide substantial leverage, to its customers, its bottom line and society as a whole.

Taking the Next Step

An IP trading exchange stands for a disruptive Intellectual Property paradigm and offers a new perspective on the internationalization of business operations. It can be to IP, what eBay is to the retail market: simply bring buyers and sellers together!

The idea of first generation exchanges was good, but it is going to be the smart business model that makes or breaks the success for IP trading exchanges so to provide the space necessary to turn every single patent, trademark or copyright of an organization into a cash cow.

Source: Telephone Interviews conducted from September 2007 to December 2007 with A. Gibs, M.Grota, IPB Bewertungs AG, Tech EX.com, Global Intellectual Property Exchange (to be launched in the second half of 2008), Kevin Rivette, Cameron Gray of Ocean Tomo.

3 comments:

Charlie Green said...

Congratulations on this post's selection to the Carnival of Trust http://trustedadvisor.com/carnivalofTrust/
hosted this month by Duncan Bucknell at his IPThinkTank Blog http://duncanbucknell.com/blog/288/The-March-2008-Carnival-of-Trust

This was a fascinating piece for me, because it's something I was not aware of. In particular, I'm intrigued by your insight that the power of a market was in this case perhaps impeded because IP rights have been traditionally consided rights of exclusion.

How does one create a market in things which others consider to be licenses for secrecy? It's an interesting question for students of trust, as well as of markets and innovation.

Congrats on the selection, and thanks for an informative piece.
Charles H. Green
www.trustedadvisor.com

Anonymous said...

Hi,

I am the co-founder of a patent commercialisation competition known as "Synergy". Its URL is www.synergy.ntu.edu.sg

The objective of such a competition is with the hope of creating an innovative platform for the exchange of patents.

However, I am facing difficulties in securing support from industry and academia, as rightly pointed out by you in the difficulties faced by several past IP exchanges.

I hope to raise awareness of Synergy and perhaps some other forms of support also.

I invite all IP commercialisation and trading enthusiasts to visit http://www.synergy.ntu.edu.sg/ to share your comments and if you agree and share my vision (after reviewing Synergy's website), I would be glad to discuss further with you.

Best Regards,
Abner Koh

Please contact me at this URL http://www.synergy.ntu.edu.sg/contact.html
or 2006.synergy@gmail.com

Roya said...

A more comprehensive version of this note can be found in the IPR Helpdesk Bulletin No 37 & No 38, 2008. The title of the paper is: "Giving the World's IP a Marketplace: The New Role of Trading Exchanges for Intellectual Property", by Roya Ghafele, Ph.D.