John is the CEO of Rockstar, the company that was set up by
a consortium of Apple, Microsoft and others in 2011 to run the
patent portfolio it bought from Nortel Networks at auction for
$4.5 billion. John argued that IP should be carried on
companies’ balance sheets. If it had been, Nortel
would not have gone bankrupt.
The problem is that accounting principles do not have any
way to recognise the value of IP – unless there is a
transaction, such as a sale or licence. The value is not even
zero on the balance sheet: it’s not there at all.
As a result, CEOs feel no pressure to know the value of their
Explaining a slide showing a typical corporate structure,
Imagine I am the CEO. The board is my wife, and the CFO,
general counsel and so on are my children. As with any
husband, you can bet that whatever keeps my wife up at night
also keeps me up. The audit committee on the board makes sure
I know when it is concerned.
But IP counsel only reports into the general counsel, not
any part of the board. It is like one of my
kid’s music teachers. I’ll talk to
her now and again, but she’s hardly a day-to-day
The accounting situation has shaped an entire generation of
chief executives, John said: "CEOs today move between
companies, and to them the balance sheet of Starbucks looks
much the same as Nortel; neither has IP on it. Yet when Nortel
was sold, the IP turned out to be 50% more valuable than the
rest of the company put together."
"At one point, we had an opening on the Nortel board, and I
suggested that the new person should have some experience of
IP. You should have heard the laughs around that room. That
seems ridiculous now."
When I questioned him, John admitted there was no easy way
to value IP. There is cost of filing, cost of R&D, revenue
from licensing – all are highly inaccurate, but
anything else requires highly speculative calculations about
the future of the industry concerned.
John likened the problem to that of valuing stock options,
which everyone thought was impossible until pressure led to the
implementation of the
Black-Scholes pricing model. I think that’s a
little bit of a stretch – stock options refer to a
market, equities, that is highly liquid, relatively stable and
well understood. Patents are none of those. Indeed, the fact
that Nortel would be highly unlikely to fetch $4.5 billion for
its patents today shows how unreliable valuation is.
But the problem is a genuine one that has led to some
counter-intuitive results. IP professionals everywhere could do
with understanding a little more of the accounting side of what