How Do Patent Companies Create Value?

One of the hottest sectors to invest in over the last decade has been the technology space. However, technology securities are also notoriously volatile, and dangerous. It takes a sophisticated investor, capable of quickly dealing with new information as it arrives, and interpreting some pretty complex technical details to build a successful portfolio in this sector.

While it would take more space than I am ever allotted for this segment to describe all the nuance of this industry, I would like to take a bit of time this week to describe some of the key functional aspects of the technology space that keep the money churning. Starting with a description of how it is that patent control companies (aka “patent trolls”) create value for investors, the economy, and society as a whole.
Patent companies earn revenues for investors  by suing as many people as possible. I hate to be so blunt, but that’s about the gist of it. They aggregate patents in a specific focus area through acquisition, and employ a team of legal professionals to pursue companies that are infringing on these patents. However, it is important to note that the objective of the company is not so much to win a massive law-suit as it is to setup licensing agreements.

The reason for this is because licensing agreements are much more cost and time effective for the company, and allows them to then apply their limited human resources towards other cases. The legal operations of a patent company will therefore usually be restricted to some aggressive negotiations between companies, and the arrangement of contracts to facilitate the infringing company’s usage of the patents in question. A perfect example of this sort of arrangement exists between Microsoft and Google.

Microsoft won a lawsuit for royalty revenues from every Android phone that is sold, because it was found that some MSFT intellectual property was used in the Android platform. The end result was a royalty payment of $5 per unit sold going to MSFT. In the eyes of patent control, this is a fantastic and efficient remediation of MSFT shareholders… not so much for Google holders though.
From an economic and societal perspective, patent control companies provide a valuable service to innovative companies. While people may grumble about the complexity associated with having to pay multiple patent royalties for any given device, it is important to remember that royalties fund future innovation from companies and individuals that build the functional aspects of products.

Paying royalties to patent control companies, they are funding additional acquisitions of patents from innovation firms or individuals, and therefore funding future innovations. What’s more, as patent companies aggregate holdings applicable to a certain field, they provide benefits of scale to purchasing companies by bundling the applicable royalties together into a single payment.

The end result is a more efficient licensing program for product companies, and a continued support of innovation for society. Like it or not, this structure for guiding the flow of funds from innovation drives the technology space forward. Best of all, these patent companies are in a position to pay some pretty juicy dividends, given the fixed structure of their incomes.