Five Minutes With Gerard Pannekoek
Q: What are the origins of the Intellectual Property Exchange?
A: The origins really date back about four to five years when Ocean Tomo was approached by the state of Illinois. They had the foresight that intellectual property (IP) at some point in time was going to be traded on an exchange, just like stocks and commodities. They wanted that exchange to be in Chicago because Chicago has a rich history of starting exchanges -- stock exchanges, commodity exchanges, and most recently, the carbon exchange. So, they actually provided the grant that Ocean Tomo used to develop the initial product ideas for the exchange. That was the very origin, and I think that dates back to 2006.
Q: What makes this attempt to launch an IP exchange different from other tries in the past?
A: There are a number of platforms available, but they are really focused on the buying and selling of patents, so it’s a one-off transaction. ICAP is active in that space. You have an entity called yet2.com, and there’s a few other platforms where they just list patents. If you’re interested in buying a patent, you can purchase it there. It’s different from our model, which is strictly a licensing model.
Q: What about the current environment will make an exchange like IPXI successful?
A: You now see that shareholders as well as board members and executive management are starting to recognize that they’re sitting sometimes on tens of thousands of patents, and they are not generating any money on it. From that perspective, where the industry has moved over the last couple of years plays tremendously in our favor. If you look at the alternatives for IP or patent monetization, you can either use the patents yourself and have nobody else use the technology. If you think you don’t need a certain patent, you can sell a patent through a brokered market or auctions, or you can license it, [where] you identify who needs your technology and you try to get a string of royalties from them. That process is extremely inefficient. It’s extremely nontransparent. There are no standardized terms; there’s no marketplace where you can check on what people are paying for it. The transaction cost alone because of the legal fees included sometimes makes it prohibitive for companies, especially for smaller companies and medium-sized companies to access technology, and [then] license technology.
And with the help from some of the world’s largest IP owners, we had a number of town hall meetings, multi-day industry sessions, [and] we basically came up with the first set of rules that all these IP owners believe is going to be the initial template for the market.
Q: How will you create demand for contracts like these?
A: There are going to be two distinctively different types of buyers. The “operational users”... are ghost entities that must take a license because they use a technology. That is an almost built-in demand that we have. Secondly, the market will be accessible for qualified institutional buyers. Those are sophisticated institutional investors, investment firms, that have already started to view IP as an asset class. There are a number of hedge funds and investment entities that have invested in intellectual property over the last couple of years. These companies, and we’ve had discussions with many of them, will basically form a view of the market value of the technology, most likely a long-term view, and buy or sell on the exchange, according to that view. So, we will have liquidity providers and operational users.
This is very important for everyone to understand about this market. The fact that a patent or a patent portfolio is offered in a different way, basically through a listing on an exchange, does not take away the legal obligation from a licensee to purchase it. Companies who have to take a license under the current, inefficient bilateral licensing model are not released from that obligation by virtue of the fact that this is now a different offering.
Q: What is the significance of the funding that IPXI received?
A: Our current parent company, Ocean Tomo, has been basically the provider of money for the past three and a half years, together with some 12 or so “angel investors.” It’s obvious that if you want to go to the market in a credible way, you need to build the infrastructure, and that is not something that is easy or inexpensive to do. So, the importance of the funding announcement is that we now have sufficient capital to build out our infrastructures - staffing, trading technology, other aspects of the business. More important is the fact that the process of looking for strategic investors couldn’t have yielded a better result because having an exchange as one of your strategic investors obviously is of great benefit to us because it gives us access to an existing regulatory trading structure, liquidity providers, and a wealth of knowledge and contacts, similar to the fact that Philips is a strategic investor. Not only are they putting some of their ideas on the exchange, but they have a wealth of contacts. Philips is being viewed as one of the most efficient and significant IP licensing firms in the world. They have a stellar reputation as such, and are also recognized as being at the forefront of new initiatives in the IP monetization world.
The Chicago Board Options Exchange (CBOE), Royal Philips Electronics (Philips), Ocean Tomo and those 12 early investors are providers of capital. The universities, as well as Philips and Com-Pac International, have committed to issue one or more Unit License Rights (ULR) offerings on the exchange, and for each company, a minimum aggregate market value of $50 million. In other words, there’s more than $250 million in listing commitments for the exchange.
Q: Has innovation been a part of your career from the start?
A: One of the reasons that I was really attracted to this is that once this market is successful, I think it actually is serving a bigger good, so to speak. It has a societal benefit. Once corporations, small and large, can put a price on different technologies, it will help them in more efficiently allocating their R&D budgets. You’ll see smaller firms, entrepreneurial firms, benefit from this licensing model, and that by itself will also stimulate innovation. And why is innovation so important, and especially in today’s world? Because innovation creates jobs. And that’s the part that I really like about it.
To a certain extent, [this] experience resembles my experience with Richard Sandor in creating the Chicago European Climate Exchange some 10 years ago. There’s no question in my mind that the rule book that’s on the table right now, in two years will look completely different. It’s going to be a learning experience, and that’s what these companies have committed to. They think that business is strong enough. We’re going to go to market and we’re going to learn from the experience.