Patent valuation: Income approach
What is the income approach to patent valuation?
The income approach is the most popular method of patent valuation. Also known as the Discounted Cash Flow (DCF), it looks at the future cash flow from the patent’s potential commercial use and considers a patent’s value as the current predicted cash value of the future benefits. Companies may also consider the relief from royalties, a sub method of the income approach, which assesses the royalty costs a company is avoiding by owning a patent.
What are the advantages to the income approach?
- A focus on future earnings
- Consistency when comparing a patent portfolio
- Most widely accepted and understood approach1
What are the disadvantages of the income approach?
Patentees need to understand the risk factors associated with the income approach2:
- Overestimating the useful life of a patent
New patents might make existing technology outdated
- Strength of a competitor’s patents
A new patent by a competitor may make existing technology obsolete and decimate the value of an existing patent. When Qualcomm, Apple and Google moved into the mobile space, many of Nokia’s patents decreased in value
- The cost of enforcing and defending the patent
Any patent remains constantly open to attack from competitors which can sometimes invalidate the patent or licenses and licensees could be held liable to pay damages
Relevant information is not always available when creating assumptions about future cash flow, especially in diverse and evolving markets such as technology
- Determining which component of a technology offers the most income
A certain feature of a technology might make it more valuable; patentees need to be careful not to overestimate the value of a patent.
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1 http://www.oecd.org/sti/sci-tech/35428822.pdf 2 http://faculty.darden.virginia.edu/chaplinskys/PEPortal/Documents/IP%20Valuation%20F-1401%20_watermark_.pdf