Risk Management

Size Matters for IP Portfolios

Companies that rely on licensing revenue from intellectual property must have a minimum of 200 licensing agreements in their portfolios, says a new...
Marie LeoneAugust 4, 2006

Bad news if you’re a small tech, biotech, or media company: you’re not going to grow.

That’s the blunt conclusion of a new study, which says organic growth is not an option for companies that live and die by intellectual property, but have fewer than 200 licensing agreements in their IP portfolio. Those companies have two choices, states the study: become an acquisition target or face a steady decrease in licensing growth.

Released last month by PricewaterhouseCoopers, the “2006 Licensing Competitiveness Study” concludes that companies with less than 200 licensing agreements will find it difficult to grow their revenue-producing portfolios under current market conditions. According to David Marston, U.S. leader for PwC’s Licensing Management Practice, they don’t possess “the momentum” needed to expand their current number of agreements.

PwC surveyed 151 CFOs and chief information officers at technology, biotechnology, and entertainment and media (E&M) companies in the United States — all sectors with a significant amount of IP activity.

Marston explains that companies with smaller portfolios lack the economies of scale that companies with larger portfolios have, and therefore are constrained by limited legal, business, and capital resources. This wasn’t the case during the 1990s, when the economic boom fueled organic growth and innovation.

Marston contends that companies with small portfolios tend to be less established, and therefore less recognized in the marketplace. It’s a “harder sell” to convince customers to pay royalties to an unproven company with an untested patent than it is to collect royalties from an established company, he adds. As a result, companies with a relatively small number of licensing agreements are not predicting much portfolio growth.

The study results underscored Marston’s point. Large technology companies — those with more than 500 licensing agreements — were 12 percent more likely to predict increased licensing volume than smaller technology companies. In addition, small companies in the technology, biotechnology, and E&M sectors that began 2005 with more than 250 licenses predicted much more rapid increases in the size of their IP portfolios than did companies with fewer than 250.

Part of the overall problem is that compared to large licensors, companies with a small number of licensing agreements are more likely to be acquired before their IP portfolios reach the critical mass that brings increased growth. That’s fine, says Marston, if the companies’ strategic goal is to be bought, or perhaps go public.

Among companies forecasting licensing revenue growth in 2005, the majority were in the technology sector, which is dominated by large companies that predicted licensing revenue growth of more than 10 percent. Meanwhile, small companies in the technology, biotechnology, and E&M sectors estimated an average growth of 5 percent.

Marston also pointed out that companies with more established portfolios have an easier time monetizing IP than do companies with newer portfolios. That’s due to several reasons, including the fact that start-up licensees often require a staged plan to begin paying full royalties, some companies offer discount royalty deals to gain market share, and untested patents are undervalued by potential licensees that don’t feel pressured to pay.

Marston says that small-portfolio companies can try to reverse the negative growth trend, however. One important practice is to stay “laser-focused” on potential licensing rights. Essentially, small companies have to be prescient about where royalty challenges will come from, and develop “airtight” agreements that potential licensees are timid about challenging, says Marston.