Economist: Breadth Of Patent Portfolio Better Than Betting On One Winner

Determining the value of patented inventions is almost akin to a guessing game, said a speaker at the World Intellectual Property Organization yesterday. Companies should try to spread their patents over related technological innovations rather focusing on one patent, hoping it will be “the philosopher’s stone”.

It is difficult to measure the value of patents without a well-defined market, and although it is clear that patents are an asset, there is no real trading market for patents, said Alfonso Gambardella, professor at the Università Commerciale Luigi Bocconi in Milan, and founding member of the European Policy for Intellectual Property.

The value of patents is composed of the value of the invention and the patent premium (the added value that a patent brings to the products, mainly on prices), he said, adding that there is a range of difference in the patent premium even in monopolistic situations. For example, a patented invention facing few alternatives on the market would have a higher value than an invention encountering alternatives, even with different technologies, he said.

A number of factors render the determination of the value of patents difficult, he said. The value determined by a company is often calculated from the point of view of the company and the value it represents for the company. However, the value for which the patent can be liquidated can be very different, he said. Patents are often linked to other assets, Gambardella said, and fluctuations in those other assets will influence the value of the patents.

If the market value of a patent is higher than estimated by the company, there will be a technology trade, however, if the patent value is below the estimation, many patents are left unexploited, he said. There is “no magic algorithm” to determine a patent value, he added.

During this session of the WIPO Seminar Series on the Economics of Intellectual Property, Gambardella presented the results of two separate studies he co-authored with Dietmar Harhoff and Bart Verspagen. They are: “The Value of European Patents” [pdf], and a draft paper “The Determinants of the Private Value of Patents” [pdf].

The distribution of patent values stretches widely from less than €30,000 to more than €300 million, according to Gambardella. A few patents have a very high market value, and the patents’ value distribution is really skewed, he said. The value also depends on industries with pharmaceutical patents generally being on the higher end of the scale and small devices on the lower end.

In the study on the value of European patents, the authors found that the mean value of European Patent Office-granted patents is about €3 million euros, while the median is about one-tenth of that and the mode is just a few thousand euros. Different ways of calculating an average lead to different numbers. The authors also said that their analysis could only explain about 11 percent of the variance of patent value.

For companies, it is easier to increase their number of patents than increase the value of individual patents, Gambardella said. It is better to create different patents on technology-related inventions, than betting that one of them could be a valuable patent, he said.

Companies should put resources into the breadth of their patent portfolio rather than into the depth of the inventions’ value, he added. About two-thirds of patent portfolios in Europe have just one patent, he said.

Gambardella was asked about the disputed strategic extension of patents known as patent evergreening, by which companies obtain new patents on an existing technology about to fall into the public domain through minor technology changes. He said it is still a “grey area” to determine how much of the effort to diversify patents on a technology is a strategic effort to extend patents, compared with providing new technology-related inventions. This area requires further study, he said.

The draft paper is based on a survey of European inventors, part of a research project named PatVal-EU [pdf], conducted between 2001-2003 by six research units in France, Germany, Italy, the Netherlands, Spain, and the United Kingdom.

“The value of innovation is bound by uncertainties;” said the paper, but “the technical value of the invention only explains a modest part of its economic success.” It seems ineffective, the paper says, to “insist on one specific invention by concentrating resources on it.”

Two other papers were mentioned, both by Gili Greenberg, a PhD student at Università Commerciale Luigi Bocconi. Gambardella said the papers showed that granted patents increase the value of start-up companies. Granting patents can be a value-creating process for younger firms, he said, because it provides an independent assessment of their value.