New study on patent licensing and transaction costs

Bob Litan and Hal Singer have just released a new report Unlocking Patents: Costs of Failure, Benefits of Success. Written as part of their economic consulting firm Economists Incorporated, the report looks at the barriers to successful commercialization through patent licensing.
Their conclusion is that a great many patents are never licensed due to transaction costs:

Unfortunately, these innovations are impeded rather than facilitated by the current patent system. The reason is that the current patent licensing system does not scale–that is, the transactions costs associated with consummating the tenth (or hundredth) licensing deal is no less than the transactions costs associated with consummating the first. (emphasis in original).

Now, I’m sure that there are other reasons that some patents are not licensed. Litan and Singer mention litigation risk as another issue. But, the technology may be ahead of its time. It may need further development. There may be additional technologies needed before the technology is commercially viable. There may be changes in the market and/or consumer demand that have to occur before the technology is commercially viable. Or the patent may just cover something that sounded like a good idea but is a dud.
But transaction costs are a factor — and a factor that can be dealt with. In that respect, the Litan & Singer echoes the conclusions of an Athena Alliance report from 2008, Intangible Asset Monetization: The Promise and the Reality:

The purpose of monetization is to raise funds, either through revenues in the case of sale and licensing or through investment capital in the case of collateralization and securitization. To the extent that funds are available through other mechanisms at lower costs, the incentive for monetization disappears. Thus, the higher the transaction costs, the less the incentive. This is true in all forms of monetization. If the cost of patenting a technology and/or the costs of licensing that knowledge is high, there is less reason to do it.

This is especially true for securitization where the deals are essentially unique, one-off transactions.
Litan and Singer point to a number of ways to address the issue. They conclude that emerging private sector solutions (such as U.S. Patent Utility, RPX Corporation, and LOTNET) can help overcome the problem without needed changes in law or regulations. While I support these efforts to standardize licensing, I do believe that the wider issue of collateralization and securitization will need broader efforts including changes in government regulations. For example, bank regulators need to understand and standardize how patents are treated for purposes of loan collateral. (See our papers “Intangible Assets: Innovative Financing for Innovation”, and “Building a capital market for intangibles”).
Litan and Singer’s report has highlighted an important issue in the innovation system. I hope the combination of public and private sector efforts can successful address the problem.

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