An article by Simon Rowell, "Understanding Intellectual Property Value", was published earlier this month on IPFrontline.com. Reviewing IP methodology valuations, it inevitably discusses the cost-based, market-based and income-based techniques. On the cost-based methodology it says this:
All of this is fine. But now here comes my confession of ignorance. I have never, in my admittedly limited and subjective personal experience, seen a live example of the cost approach that has ever been used for anything to do with IP rights. Does anyone in fact use it? Or does it only exist in articles and talks on IP valuation as an example of something that isn't much use?
"... This method looks at the historical cost incurred to develop and create the intellectual property. ...
There are many inherent problems with the cost approach. The most significant is that it fails to reflect the earnings potential of the intellectual property. The value of intellectual property is derived from its earning potential, and not its cost. ...
If the intellectual property offers significant economic advantage in an active market, the use of the cost method is likely to understate its value. If, on the other hand, development has been inefficient or lengthy, the use of the cost method might overstate its value. Also, for many identifiable intangible assets, it may not be possible to develop a replacement, or it may not be possible to estimate the replacement cost.
In its favour, the cost approach is useful as a readily calculated bottom-line valuation".
If readers can enlighten me, perhaps referring me to examples of active use of the cost-based approach, I'd be very grateful. If it seems that no-one does use it, can we make all articles and talks on IP valuation one paragraph shorter by dropping it?