A number of studies have shown that patent valuation is highly skewed. The majority of patents are barely worth enough to cover prosecution costs, a substantial number have a moderate return, and a few are highly valuable. Chris Anderson just wrote a book on taking advantage of highly-skewed markets — titled The Long Tail.
The effect of this skew in the IP world has been dubbed the “patent lottery” because most of the payout involves a low probability of a high return.
Lots of people think of the state-run lottery as a total scam because the expected value of a one dollar ticket is only about fifty cents. The state rakes-in about half of the cost of every ticket and pays the other half out in winnings. For anyone interested in wealth management and growth — this is not a good investment strategy. But, the state-run lottery is hugely popular with billions of dollars thrown at the system every year by hopeful winners. ($1.8b in Illinois alone in FY2005). People explain this phenom in many ways — usually some combination of arguments such as: (1) the thrill of playing is worth the fifty-cent loss, (2) we generally don’t do well calculating the return low odds, and (3) we make stupid choices. [Note here that I have purchased a number lottery tickets in the past — especially when the jackpot is very large.]
Unlike the state-run lottery, in the patent system we don’t really know the odds of success very well and we don’t know whether potential innovators are willing to play “bad odds.” I would like to get some input on this point. Question for readers:
Would you or your clients be willing to invest time and/or money in developing a new innovation that had only a small chance of reaping huge rewards if you knew that the expected (and most likely) return would less than your original investment?
Comments are open — you can also e-mail me firstname.lastname@example.org.
Of course, there are many reasons why firms go after new innovation — plenty of which have nothing to do with patenting. They may be receiving customer demands or they may want to be ready for a potential market opportunity. Many firms go for patents as a defensive measure or to protect their product line as best they can. That said, I know that some potential innovators dream about the NTP style litigation win or even a six-figure licensing deal. What I don’t know is how that dream factors into actual innovative and patenting activity.
Read the long tail blog.
Why is there no patent valuation blog?