Investing in Intellectual Property

Written by Marely Guzmàn

Introduction

This blog post focuses on investment profitability in intellectual property. While other forms of intellectual property will be discussed in this blog post, the main focus will be patents. I will expand on what investing is, the ethics surrounding investing, what intellectual property is, investing in intellectual property, the attraction of potential investors to intellectual property, and the market trends revolving around Apple Inc. and Starbucks Corporation; both companies have profited from various patents.

What is Investing?

Investing typically requires a person to buy a portion of a publicly traded company’s stock, which will hopefully increase in value over time. While a person holds these assets, they may yield returns on their investment depending on market volatility. According to Fidelity, investors want to generate a return on their investments, and this is typically done through appreciation and income. [1] Appreciation is when the assets have grown in value over the period that the investor has held onto the assets, for example, when a shareholder buys a stock at $10 per share and sells it at $25 per share ten years later. [2] Income is when the investment returns money to the investor without the investor having to sell their acquired asset. [3] Investments come in various forms including stocks, corporate bonds, commodities, or real property. [4] Although there are clear advantages to investing, there are also risks involved in all types of investing that can impact the financial welfare of an investor’s investment. One example of this is “market risk”, which will determine if the investment value of the investor will rise or fall due to “the market conditions.” [5] Another example is “business risk”, where the company’s operational or strategic actions affect the value of the investor’s investment. [6] There can also be political risk if the investor owns an international investment; the laws, regulations, or events in that country can also affect the investor’s investment. [7] The main focus of this blog post will be on the intangible (non-physical) assets owned and legally protected by a business or person, also known as intellectual property. [8]

Ethics in Investing

A very important element in investing is investing ethically, in which the investor’s ethical values are a part of their investment strategy. Investing ethically demands investors to look closely into companies that they are interested in buying into by ensuring that those companies are socially responsible. [9] A company acts socially responsible by treating their employees, shareholders, and customers with respect by straying away from unethical business practices. [10] There are many advantages to investing ethically which include (1) the investor benefitting emotionally and financially when the company they invest in behaves ethically, (2) the more people invest in ethical funds, the more those investments will grow in the future, and (3) the benefit of encouraging other companies to follow suit in improving its ethical practices to attract funding. [11] Investors who invest in socially responsible companies can have peace of mind in knowing that their investment will grow ethically. Within intellectual property investments, investors can be sure that the investment promotes ethical, innovative ideas and inventions.

What is Intellectual Property?

Intellectual property comes in many forms which include patents, trademarks, copyrights, and trade secrets. [12] Firstly, a patent is “an exclusive right granted for an invention, which is a product or a process that provides, in general, a new way of doing something, or offers a new technical solution to a problem.” [13] According to the United States Patent and Trademark Office, a patent may be granted to someone who has invented or discovered a new process, machine, manufacture, or composition of matter subject to the conditions and requirements of the law. [14] Some examples of famous patents are the light bulb, the phonograph, aspirin, etc. Secondly, a trademark is “any word, phrase, symbol, design, or a combination of these things that identifies your goods or services” and provides legal protection for the brand. [15] Some famous trademarks are Motown, Sony, Jack Daniels, Google, and Jaws. [16] Thirdly, copyright is “a type of intellectual property that protects original works of authorship as soon as an author fixes the work in a tangible form of expression.” [17] Some of what falls under the type of copyrighted work that is protected are paintings, sound recordings, books, movies, plays, etc. [18] To register a claim to copyright, one must go to the United States Copyright Office where the claimant must submit a claim application, pay a fee, and deposit the required number of copies of the work that they want to be registered. [19] Lastly, trade secrets are “intellectual property rights on confidential information which may be sold or licensed.” [20] For the information to qualify as a trade secret it must be commercially valuable, limited to a certain group of people, and there must be reasonable steps taken by the holder of the trade secret to keep the information a secret. [21] Trade secrets come in many forms, including business practices, designs, patterns, marketing information, recipes, product roadmaps, etc. [22] The McDonald’s Coca-Cola recipe is a commonly known trade secret by the average consumer. It is very common for the food industry to have trade secrets that involve recipes, production processes, and business practices because it helps distinguish it from its competitors. [23] Trade secrets for the food industry are an extremely valuable intellectual property option because they preserve its competitive advantage by protecting the unique trade secret, and they help to “cement” the company’s market position in keeping the trade secret that keeps consumers coming back. I will focus on investment profitability for patents.

Many firms have specialized in intellectual property investments and can provide potential investors with additional guidance on pursuing opportunities through this avenue. Investors have seen the appeal of intellectual property because its value is constantly fluctuating, it is seen as trustworthy and credible by consumers, and it provides growth opportunities for future ventures. [24] Intellectual property can create a lot of value for a company and the investor by creating recurring revenue or cash through these transactions: licensing it, selling it, using it as collateral for loans, or monetizing it through partnerships. [25] The question is whether investing in intellectual property will yield returns for an investor. One must look at the connection between profits and innovation. If the innovation is successful, then it is sure to generate profits in the future and have a positive impact on the investor and the company or inventor.

Attraction of Potential Investors

Potential investors look for many things when thinking about investing in intellectual property. First, they look to whether their investment in intellectual property can be valuable. Investors state that intellectual property provides a “competitive advantage” in generating high-profit margins compared to other competitors in the market, such as physical assets. [26] In addition to providing a competitive advantage, the value of intellectual property can increase over time. It does so when the intellectual property gains positive traction in the market and positively contributes to the company’s value. [27] Secondly, intellectual property can be leveraged to earn more in investments. This can be done by granting users rights to other people or businesses by licensing their intellectual property. [28] Licensing can be done in many ways. A person can create their licensing agreement and give limited or unlimited rights to the licensee, they can license it for a period of time to businesses or people, or they can collect royalty payments in exchange for the right to use the intellectual property. [29] Thirdly, investors are attracted to intellectual property that is already protected, patented, and lawfully registered. [30] This is attractive because it guarantees that no other competitors can take advantage of this property; with this guarantee, it can increase the valuation of the asset. [31]

Market Trends for Intellectual Property: Patents

Patents highly affect demand through the products and technology market, which has given the patent subjects an advantage in obtaining high market prices by limiting the profits of their competitors. [32] Although many patents have yielded high market prices, investing in patents is still very risky due to the possibility of patent infringement, which is the “unauthorized making, using, importing, offering for sale or selling any patented invention within the United States.” [33] Many companies have used patents to play a significant role in boosting growth in the market, which has contributed significantly to its success.

Apple, Inc. has benefitted from a variety of patents. (AAPl, NASDAQ). It patented one of the most famous design patents, the “electronic device” (U.S. Design Patent No. 580387S1), also known as the original iPhone, which Apple, Inc., patented as “an ornamental design of an electronic device, as shown and described.” [34] Other well-known Apple, Inc. patents are the “handheld electronic device” (U.S. Design Patent No. 489062S1), the “headband identification for a headband system” (U.S. Patent No. 11665462B1), and the “intelligent automated assistant for TV user interactions” (U.S. Patent No.9668024B2).[35]

Upon the announcement of the first iPhone in 2007, Apple, Inc.’s stock price was $11.94 per share, and a year later, that stock price grew 93.8% to $23.15 per share in 2008.[36] The following launch of the iPhone 3G brought a stunning 285.58% growth in the stock price from the initial drop of the iPhone, increasing the price per share to $45.68. [37] Today, December 1, 2023, the current stock price of Apple, Inc., is $191.24 per share, which is a growth of about 1501% since the conception of the first iPhone and all of the other products that Apple, Inc. has released falling under its products umbrella.[38] Apple’s patent for the iPhone allowed for a huge advantage in the market that differentiated them from the competition at that time by offering an electronic device that could serve as a camera, phone, and internet browser at the same time–it was a one-of-a-kind idea and product. The way that the product and its other patented products were designed and marketed has led to record-breaking sales for Apple, and tremendous growth in the market, and the release of each new Apple product sparks a frenzy among enthusiastic consumers which promotes this growth. This growth allows Apple to safeguard its patents, maintain exclusivity in the market, strengthen its brand, and have the ability to license its technology to others.

Another company that has benefitted tremendously from a variety of its patents is the Starbucks Corporation (SBUX, NASDAQ). One of its most famous patents is the “machine for brewing a beverage such as coffee and related method” (U.S. Patent No. 8794127B2), also known as the classic coffee machine. Other famous Starbucks Corporation patents are for the “disposable beverage cup lid” (U.S. Design Patent No. 516424S1), the “method and apparatus for automatically reloading a stored value card” (U.S. Patent No. 8156042B2), and a potential patent that is pending – an “automated dispensing system for customized beverages” (U.S. Patent Application Publication No. 2023/0021411A1).[39]

In 2010, Starbucks’s stock price was about $11.66 per share; this was around the same decade that it began accumulating more patents. Starbucks received more patents for its technology, products, and ideas, which helped Starbucks capitalize on its competitive edge to increase its stock price to $98.15 per share as of December 1, 2023. [40] This has been attributed to Starbucks’ market growth of about 743%. Similar to Apple, Inc., Starbucks has used the patents it currently has to contribute to its growth and success in the market. Starbucks has done this by having patents granted for many of its technologies and products used to have a competitive edge by creating a barrier-to-entry in the market for potential competitors like Dunkin Donuts. Starbucks’s protection of its ideas and innovations through patents and maintaining its competitive edge in the market has contributed to its growth in the market and coffee industry.

Conclusion

Intellectual property in its many forms–patents, trademarks, copyrights, and trade secrets–has served as very valuable intangible assets for investors. These assets have provided companies like Apple, Inc. and Starbucks Corporation a competitive edge in the industry and advanced a conducive environment for sustained growth in the intellectual property world. As seen in the previously mentioned companies, investing in ideas and innovations has further stimulated innovation and positively enhanced many publicly traded companies’ position in the market. In conclusion, an investor’s decision to invest in intellectual property such as patents is full of high risk and high reward, but it also is an investment in innovation within the intellectual property realm to further progress in a future of advancements.

References

[1] What is Investing?, Fidelity, (Nov. 20, 2023), https://www.fidelity.com/learning-center/smart-money/what-is-investing

[2] Id.

[3] Id.

[4] E. Napoletano and Benjamin Curry, What is Investing? How Can You Start Investing?, Forbes, (Apr. 4, 2022), https://www.forbes.com/advisor/investing/what-is-investing/

[5] Investing Basics: Risks, Financial Industry Regulatory Authority, (Mar. 16, 2015), https://www.finra.org/investors/investing/investing-basics/risk

[6] Id.

[7]Id.

[8] Will Kenton, What is Intellectual Property and What Are Some Types?, Investopedia, (Oct. 6, 2023), https://www.investopedia.com/terms/i/intellectualproperty.asp

[9] CFI Team, What is Ethical Investing, Corporate Financial Institute, (Oct. 6, 2020), https://corporatefinanceinstitute.com/resources/esg/ethical-investing/

[10] Id.

[11] Id.

[12] What is Intellectual Property?, World Intellectual Property Organization, (Feb. 28, 2020), https://www.wipo.int/about-ip/en/

[13] Id.

[14] Patent Essentials, United States Patent and Trademark Office, (Apr. 27, 2023), https://www.uspto.gov/patents/basics/essentials#questions; 35 U.S.C. § 101

[15] What is a Trademark?, United States Patent and Trademark Office, (Mar. 31, 2021), https://www.uspto.gov/trademarks/basics/what-trademark#:~:text=A%20trademark%20can%20be%20any,both%20trademarks%20and %20service%20marks.

[16] Michael Kondoudis, Famous Trademarks: A Complete Guide, The Law Office of Michael E. Kondoudis, (last visited December 13, 2023), https://www.mekiplaw.com/famous-trademarks/#:~:text=The%20public%20immediately%20recognizes%20them,NIKE%2C%20PEPSI%2C%20and%20WALMART.

[17] What is a Copyright?, United States Copyright Office. (Jan. 21, 2021), https://www.copyright.gov/what-is-copyright/#:~:text=Copyright%20is%20a%20type%20of,a%20tangible%20form%20of%20expression.

[18] Id.

[19] Copyright Basics, United States Patent and Trademark Office, (Mar. 8, 2018), https://www.uspto.gov/ip-policy/copyright-policy/copyright-basics

[20]Trade Secrets, World Intellectual Property Organization, (last visited Dec. 11, 2023), https://www.wipo.int/tradesecrets/en/

[21] Id.

[22] How can you maximize the commercial value of your trade secrets?, Potter Clarkson, LLP., (Jun. 24, 2021),
https://www.potterclarkson.com/insights/how-can-you-maximise-the-commercial-value-of-your-trade-secrets/

[23] Id.

[24] Stanton IP Law Admin., Why is IP Attractive to Investors?, Stanton IP Law Firm, P.A., (Jul. 20, 2021), https://stantoniplaw.com/why-is-ip-attractive-to-investors/

[25] Kirsteen MacKay, Intellectual Property: An Investor’s Guide, Value the Markets, (Mar. 29, 2023), https://www.valuethemarkets.com/analysis/investing-ideas/intellectual-property-an-investor-s-guide

[26] Dinesh Parmar, What Makes Intellectual Property Attractive to Start-up Investors?, Parker & Parker Patent & Trademark Attorneys, (Feb. 28, 2022), https://www.parkerip.com/blog/what-makes-an-intellectual-property-attractive-to-start-up-investors/

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Id.

[32] Rui Liu and Yongzhong Qiao, Research on the patent subject profitability based on the big data analysis, Journal of Physics: Conference Series, 2020, at 2.

[33] Patent Infringement, Neustel Law Offices, (Jul. 19, 2019), https://neustel.com/patents/patent-infringement/#:~:text=Infringement%20of%20a%20patent%20is,invention%20within%20the%20United%20States.; 35 U.S.C. § 271

[34] U.S. Design Patent No. 580387S1 (issued May 26, 2009)

[35] U.S. Design Patent No. 489062S1 (issued Apr. 04, 2004); U.S. Patent No. 11665462B1 (issued Oct. 20, 2023); U.S. Patent No. 9668024B2 (published May 30, 2017)

[36] Seth Archer, Here’s how Apple has done in the 10 years since the iPhone, Business Insider, (Jun. 29, 2017), https://www.macrotrends.net/stocks/charts/AAPL/apple/stock-price-history

[37] Id.

[38] Yahoo Finance, (accessed Dec. 2, 2023) https://finance.yahoo.com/quote/AAPL/history/, (AAPL, 2010-2023, historical data and closing prices)

[39] U.S. Patent No. 8794127B2 (issued Aug. 5, 2014); U.S. Design Patent No. 516424S1 (issued Mar. 7, 2006); U.S. Patent No. 8156042B2 (issued Apr. 10, 2012); U.S. Patent Application Publication No. 2023/0021411A1 (published Jan. 26, 2023).

[40] Yahoo Finance, (accessed Dec. 3, 2023) https://finance.yahoo.com/quote/sbux/history/, (SBUX, 2010-2023, historical data and closing prices)