“Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening" -- Tom Goodwin, SVP, Strategy and Innovation, Havas Media
|The world: changing|
In truth, equity research and investment analysis have changed little over the years. While layers of sophistication have been added, along with new models to help make sense of the data and deliver that all important investment edge, investment decisions are still largely based on the same financial indicators they always have been: revenue, profit, dividend and debt. There are many sensible reasons for this. First, the data is readily available; secondly, financial data can be a proxy for the current and future health of the company. Conversely, the position for intellectual property rights (IPRs) is very different. Companies are not required to include these assets on their balance sheet and most companies do not even disclose what they have.
However, in a parallel universe, vast quantities of data relating to key IPRs have been accumulated. Until now, however this has not been accessible to the financial markets, for numerous reasons: the available data is complex, incomplete, distributed and only comprehensible to IP specialists such as patent attorneys, licencing executives or litigation lawyers. So, while everyone agrees that intangible assets are valuable, there is no uniform or easy way to value them. The investment community in turn has resolved this conundrum largely by ignoring intangibles -– which is understandable, given there has been no reliable access to data, and no simple and cost-effective means by which to understand the relative merits and downsides of IPR portfolios. In short, ideas might be assets but, if their value cannot be understood in the wider context of the market, how can they begin to inform investment decisions?
In this changing world, where a significant part of corporate value is captured and represented by these assets, there is pressure for improvement and change. Smart investors are increasingly recognising that access to meaningful insight around IPR value and risk could provide a vital competitive edge. Perhaps more importantly, it is increasingly true that equity and investor research that does not offer meaningful, credible insight as to corporate intellectual property strategy, risk and value is simply incomplete. For instance:
has a material impact on share price: Investors need to
understand the mechanisms that create this impact and develop an ability
to forecast them. That means assessing organisations’ IPR
strategies, the value and risk associated with their patent portfolios and
how these issues impact on value drivers like innovation and product
development, as well as risks like competitive pressures.
intelligence offers a new understanding of R&D: Research and
development is the engine room for ideas and IP rights, but it remains difficult
to measure. Combining known financials relating to R&D with IPR
analytics promises a fuller understanding of return on R&D
expenditure, helping investors to forecast how effectively investment in
innovation will translate into revenue and market share in the future.
IP strategy can shine a light on corporate strategy: Looking at
trends in patenting activity, for instance identifying a recent refocus,
can deepen understanding of corporate strategy - and can explain how
businesses monetise IP assets that otherwise seem out of step with current
analysis is incomplete without a view of IP: A market sector
review must now take into account the main players’ sector specific
patenting activity. No view of their relative strengths and
weaknesses, and therefore the dynamics of the sector, can be complete
- Patent litigation risk is corporate risk: Given how important IP is to corporate value and competitiveness, and the sheer scale of patent litigation today, this is another issue that simply cannot be ignored. Expensive, uncertain and misunderstood, it can precipitate the award of huge damages and even see crucial patents ruled invalid.
Big data to the rescue
Intellectual property has for a long time been recognised as an indicator and driver of corporate health. There have been numerous studies that show that investments in companies with a strong IP portfolio are a better bet. However, until now, there has been a chasm between this rhetoric and the reality because the financial markets have had virtually no information about IPRs as an asset class.
|Big data: big need|
for machine learning
This approach is best understood by reference to a simple two-by-two grid:
In this visualisation, the position of two companies T (the focal point of the analysis) and C (a competitor or peer) are compared relative to each other. T has lower IPR value and greater risk than C. The relative positions are generated from data associated with the size, quality and nature of the IP portfolio (a value driver), whether the companies aggressively assert their IP, or conversely are frequently targeted by others (a risk driver), and known licensing activity of both, as both licensor or licensee (a value driver).
|Data aggregation and analytics are not|
the only way of shedding light in the darkness,
but they are a lot more efficient.
The recent UKIPO Banking on IP? study identifies the obstacles
to using IP as security for debt. Access to trusted data is
identified as a key obstacle to be overcome.
IP litigation is a major risk for companies across a broad range of
sectors including technology, media, telecoms, pharma, biotech, capital
goods and financial services. The insurance markets will only engage
at scale when provided with reliable data relating to events and
- Investment: Over the past five years there have been over 10,000 patent transactions, with only a few making the headlines e.g. Nortel, Motorola Mobility, Kodak. With increased transparency, there is potential for increased liquidity around IP.
For now, however, investment research remains in relative darkness when it comes to understanding IPRs and intangibles more generally – and that will remain the case until the investment community engages with the big data solutions that can deliver real insight. Until then, we will continue to observe the effects that flow from a massive asymmetry of information, which sometimes leads to chaos and at other times ruthless arbitrage.
An example of chaos is the 12% fall in GoPro shares after an Apple camera patent was granted. Aistemos has published data proving that this is one of several thousand similar patents. Absence of real time analytics is an obstacle to rational pricing. Kyle Bass (Hayman Capital Management) is the most recent example of the novelties of the patent system being used for financial gain. He has organised the filing of multiple court actions against companies including Shire, Biogen, Acorda Therapeutics and Calgene. As the stock markets struggle to assess the implications, Bass is able to short the stock [for the latest news of Kyle Bass's challenges, click here].
The moral of this blogpost is that big data is bringing big change. Thanks to the increased availability of data, the low cost of cloud computing and smart implementations of data science, intangibles will no longer be invisible and the role of ideas as assets will be sufficiently understood to help shape investment decisions on a massive scale.
This blogpost is based on an article written by Aistemos CEO Nigel Swycher for the CFA Society of the United Kingdom's Summer 2015 Big Data Special Issue of Professional Investor.