One of the challenges of valuing intellectual property that is yet to be commercialized is the concomitant lack of market data. A solution to this problem is not simply a matter of “widening the net” and using industry or sector-wide data as proxies because, by its very nature, intellectual property must be novel or unique. Consequently, a broader view assumes away the distinguishing characteristic of the asset we are trying to value in the first place. In this new series of posts, I explore one approach to the solution; based on the key attribute of IP and conceptually suitable to the determination of the potential value of newly introduced intellectual property assets.
Characteristic Life Cycle
Introducing new IP, whether it is a new technology or a new product, feature, or trademark, faces an initial period of slow growth because it must compete with the pre-existing allocation of resources in industry or the composition of consumer expenditures. At later stages, growth accelerates as the technical innovation and/or value proposition embedded in a new brand become known in the relevant market and compete successfully. Eventually market share start to stabilize, in part because there are few market segments left to conquer. Finally, a technology will become obsolete, and firms will need to continue their growth in areas, so that the diffusion of once-new intellectual property comes to a stop.
The overall characteristics of this life cycle derive from the economics of any market, where the competition for scarce resources is the central driver. In contrast to most tangible capital, intermediate, and consumer goods, the applicability of these principles to intellectual property is very close to the mathematical property assumed in most models, and also because the economic value of IP stems from the fact these assets only have potential value if they can be successfully commercialized. In particular, intellectual property can be applied with significant flexibility, re-deployed through appropriate contracts. More specifically, it constitutes a non-rival good, in the sense that the consumption of some of the good by one sector of the market does not physically preclude another from its use; it is only precluded contractually. For example, the fact that one factory has licensed a technological improvement does not leave any less of that technological innovation for application in other factories. A rival tangible good used in that same factory, like raw materials, fuel, machinery or land, does in fact reduce the availability of it for all other uses.
Consequently, not only is the economic value of new intellectual property going to vary along its life cycle, its overall value can change if deployed in new uses, industries, or markets with no significant added costs or trade-offs. Thus, one can only truly determine an estimate of potential value of IP, subject to certain assumptions about the (future) extent of its application.
Illustrative Model No. 1
It will be useful to consider first the case of a new trademark which will be maintained indefinitely. This will leave for more complex model the gradual or cliff-like obsolescence of technology, commercialized copyrights, or some of a trademark’s attributes.
The graph above illustrates the anticipated growth in value for a new trademark, starting from zero up to its full potential value. The initial growth rate is slower than the approach to the full potential. With the addition of specific risk characteristics, this curve can be valued at its net present value. However, there is no reason why this curve, or any one particular curve or path, should be assumed to be “average”, “expected”, or much less “unique”. A set of trademark value paths like the illustrated above can be anticipated under various scenarios, and each one will map to a different net present value. Trademark value will thus not be a function of a sales forecast, it will be what in mathematics is called a value functional. And this concepts requires a whole blog post.
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