A broad range of intangible assets are lumped together by the rather nebulous term intellectual property. It always covers patents, copyrights and trademarks. It is sometimes expanded further to include any know-how and trade secrets over which a company has some sort of legal claim.
The term is much beloved of lawyers specialising the area, and of companies that claim to have a lot of it. From an investor's point of view the important things are:
- how much cash these generate
- whether they can reduce risk by raising barriers to entry.
The three main types of intellectual property granted by law (patents, copyright and trademarks) have very different characteristics.
The ownership and validity of copyrights is usually clear. Trademarks are a little less certain because they can be lose through becoming generic terms in common use, however most financially important trademarks are safe enough for this to be a minor concern.
Patents are highly uncertain. Apparently valuable patents are frequently found to be invalid by the courts. There is also a positive uncertainty about patents and a patent portfolio may be more valuable than is realised. Companies frequently fail to enforce valuable patents. This may happen accidentally or deliberately. A company may simply fail to realise that an idea it has patented has, either through independent re-invention or through copying, been put to use elsewhere.
A patent holder may also deliberately avoid enforcing or publicising a patent till the opportune time, maximising its value using by keeping it a submarine patent.
These uncertainties are one of the reasons the cross-licensing of patent portfolios is important in certain industries.
Patents have a limited life. Many patented products, such as drugs, may take years to reach the market. This means that many cash flow streams derived from patents last for less than twenty years, and a high proportion of these cash flows have only a few years to run. This is a particularly important in the pharmaceutical sector.
Copyright on recent works (created in the last few decades) lasts long enough to be safely regarded as perpetual from a financial point of view. However, a few companies have "libraries" of older material whose limited remaining time in copyright may need to be considered.
The life span of trademarks is more complex. They potentially last perpetually, but, as mentioned above, they can be lost.
Copyright is automatic on the creation of a copyrightable work and it does not require registration. Trademarks and patents are expensive to register. Patent litigation can also be very expensive, and the effects on the loser's business can be disastrous.
Copyright and trademark law are fairly similar in most developed economies. Patent law varies more - the US allows patents on business methods, and a far wider range of patents on software than other countries.
It is interesting, if not particularly relevant to investment decisions, that patent and copyright laws are the subject of considerable controversy, largely because there is little actual evidence what economic effect they have. What all involved do agree on is that the effects are large and far-reaching!