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Patent Valuation – Quantitative Approaches

Andrew Godsey, VP Sales

Microsoft’s corporate VP of Intellectual Property Group, Horacio Gutierrez, recently announced that Microsoft is building a patent valuation tool. A recent article in IDG Connect highlights an interview with Gutierrez in which he reveals that the inspiration to build a patent pricing model came from reading the book “Moneyball.” (Moneyball outlines the approach of Oakland A’s GM Billy Beane that is now infamous in the world of baseball. Beane has used a quantitative approach, rather than the historically accepted qualitative approach, to analyzing baseball players in order to get the most bang for his buck under a limited operating budget). As Guitierrez explains in the interview:

“While everybody was going through the discussion of talent selection the way they traditionally do it, which was with the old scouts who’ve been around the business for 50 years or so, saying ‘This kid’s got a good arm,’ ‘He looks like a ballplayer,’ and ‘He’s got a cannon,’ and all of these qualitative things, they started to have people come in and start to crunch numbers and realized that a lot of the things they were measuring, and taking as measures of success, were the wrong things”

He goes on to say:

“They came up with a whole different framework and started to come in and acquire a number of players that were under-appreciated by everybody else, but based on the metrics that, according to them, mattered, they were incredibly valuable. So, for many years the Oakland A’s have been able to have a fraction of the budget of the Yankees and yet consistently make it to the playoffs, which the Yankees can’t do,”

Moneyball is all about improving the previous way of analyzing baseball players by focusing on statistics that more accurately assess any given ballplayer’s value over another potential prospect. Likewise, patent valuation tools should move beyond standard approaches in order to get a more accurate understanding of a patent’s actual value. The apparent intention behind Microsoft’s new valuation tool is to reach this goal, assisting Microsoft’s managers in accurately assessing best steps when considering alternate IP defense strategies.

Patent Valuation software tools certainly are not a new concept. (GTT has been using one internally since its inception and began offering it as a service for our clients’ benefit over 5 years ago). Many patent valuation tools available offer simple analysis with few variables. Most don’t afford estimated value ranges for the patent, but rather provide ambiguous patent scores that are difficult to translate into information useful for making necessary business decisions. In the IDG Connect article, Gutierrez references forward citations, backward citations and applicable market revenue as key metrics to define the quality of a patent portfolio. These metrics certainly are important, but additional relevant metrics must be taken into account in order to provide accurate information IP managers need to make critical decisions.

GTT’s Quantitative Valuation Tool has always led the way by providing our clients with insight into their portfolio by confirming high value assets and uncovering additional monetization opportunities, including a probable transaction value range. GTT’s Quant is powered by our Transaction History Database. Drawing on hundreds of patent transactions recorded over the prior ten (10) years and constantly updated to reflect current market trends, GTT’s quantitative assessment analyzes key patent metrics and links them to real-world transactions through regression analysis.

Understanding how a patent compares to another patent is interesting. In fact, it can be helpful in improving the understanding of your portfolio’s value, much like there is real significance in a scout’s assessment of a young pitcher’s arm being a “cannon.” Ultimately, however, quantitative assessment is no substitute for a comprehensive analysis of select high value assets that are driving the particular business decision.