Wednesday, November 12, 2008

Existing Sources of Investment Information Failed Us: Patent Landscaping Analytics Provide a Necessary Innovation for Investors

As global stock markets continue to struggle, smart investors seeking to capitalize on relatively cheap stock prices are searching for promising investment opportunities. Unfortunately, however, most investors are likely relying on the same sources of investment information that failed to accurately predict the current stock market situation. If the predictive nature of this information has been wrong time and time again, why do investors continue to rely on it? The answer is pretty simple: investment professionals lack knowledge that alternative sources of information exist.

One such alternative approach to making investment decisions involves using patent landscaping analytics to assess existing investment in a particular product or technology area. My research demonstrates that properly conducted patent landscaping analytics can effectively allow one to predict the future trajectory of product development by companies.

For example, as I have written about here and here, the fact that Google and Yahoo intended to significantly invest in Intenet-based television technology was fully predictable from their patent filings many months before Google and Yahoo actually made their respective public announcement of such plans. AT&T's launch of its U-Verse Internet television service was similarly predictable from the volume of patent filings in this technology area.

One looking to invest in a company or investment fund with offerings in the Internet television-related area would have been well-served by using this information to decide to move forward with caution. That is, Google, Yahoo and AT & T's respective deep pockets should serve as a signal that competition in this area will be fierce in the foreseeable future. This means that even if a company or technology emerges that is superior to those currently being offered, these "big boys" may still win in the marketplace. Therefore, a potential investor in Internet television technology should take great care not become enamoured with a superior technology or apparently brilliant start-up business plan, because the patent landscape demonstrates that the Internet television marketplace will be a tough place to play.

Of course, the above example is a look into the rear view mirror because Internet television has already been introduced to consumers. More interesting would be application of patent analytics to products and technology that have yet to make it to market in significant form. One such area is biofuels, where examination of patent filings can demonstrate what companies are making technology investments.

For example, corn-based ethanolic biofuels gained acceptance in the market in recent years. However, this technology now appears to be on the wane because of the huge increase in food prices that occurred during 2008 due to greater demand for ethanol. Market forces clearly demonstrated that biofuels should not be made from food sources, such as corn. As a result, biofuel technology appears to be moving toward non-food mass starting materials.

One such source of non-food mass starting material is switchgrass. Not only is this plant unsuitable for providing food such that its use will not cause food to be re-directed toward fuel production, recent research demonstrates that it is a more efficient source of ethanol than corn. Thus, it would appear that switchgrass biofuel technology holds good investment potential. Nonetheless, before getting excited about investing in technology related to switchgrass-derived biofuels, a smart investor should look to see whether any company owns patent rights in this technology area.

To this end, a patent search reveals that there are only 7 patent filings that mention "switchgrass" and "biofuel" in the claims--all patent applications. The earliest filing date of any of these applications is late 2006, thus signifying that this technology is only just emerging. This information demonstrates that one seeking to invest in this area should examine these patent filings in more detail. This investigation should focus not only on the claim scope and technology "quality," but also on whether the owner of the claims has the requisite deep pockets to make it more likely that their technology will succeed in the marketplace. Additionally, after investing, one should regularly re-check the relevant patent filing information related to switchgrass-derived biofuels to determine if investment assumptions and projections still remain viable.

There are no doubt countless other examples of how patent analytics can improve the quality of investment decisions in emerging technology areas. While investment professionals may find patents an unfamiliar and arcane source of information to include in their vetting and selection processes, recent events in the world financial markets indicate that change is needed in the way that money is invested in companies and technology. Integration of patent information into investment decision-making could constitute a necessary innovation.

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