( ESNUG 535 Item 10 ) ------------------------------------------- [01/30/14]
Subject: Warren Savage says GSA IP survey data shows IP liability limits
> P.S. In Q3'13, ARM sold a record 48 licenses to 24 companies, with
> total revenues up 26%, and shipped 2.5 B units, up 14% YoY.
>
> - from http://www.deepchip.com/items/0528-05.html
From: [ Warren Savage of IPextreme ]
Hi, John,
It's good to see that you've also been covering IP in DeepChip.
After noticing this, I thought your readers might also be interested in the
quarterly IP licensing data that the GSA has been tracking since 2Q10.
First off, I would venture to say that up until 2010, what was "standard" in
an IP licensing agreement was a mystery -- no one really knew for sure -- we
could only get random insights anecdotally by "asking around."
This survey changed everything by providing hard, statistical data about IP
issues that everyone can equally use.
---- ---- ---- ---- ---- ---- ----
SURVEY PARTICIPANTS:
A grand total of 267 different companies responded to our survey. Roughly
60% (160) are IP SUPPLIERS and 40% (107) are IP BUYERS. Their self-reported
"sizes" are:
IP SUPPLIERS
small :######################################## 51%
medium :############################## 38%
large :######### 11%
IP BUYERS
small :######################## 30%
medium :################################### 44%
large :#################### 26%
Note that throughout our survey, we separated the data by whether the
question was answered by an IP SUPPLIER or an IP BUYER. As a check, we
wanted to see if the two sides correlated -- and we were a bit surprised,
but happy, to see that the results correlated pretty well.
In my opinion, this speaks to our survey's credibility.
---- ---- ---- ---- ---- ---- ----
IP ROYALTIES:
Royalties are the lifeblood of any healthy IP company, as they represent a
continous revenue stream long after the original license fees were received
from the customer. As much as IP suppliers love royalties, IP customers
hate them, as they are a cost on the margin of their final device.
There's often a fierce private discussion between both parties about whether
there should be royalties, and if so, then an even more fiercer discussion
on exactly how much that royalty should be.
"What percentage of your completed IP contracts
included a royalty component?"
IP SUPPLIERS
0% - 20% :####################################### 50%
21% - 40% :##### 7%
41% - 60% :####### 9%
61% - 80% :######## 10%
>80% :################### 24%
IP BUYERS
0% - 20% :########################################## 54%
21% - 40% :############## 18%
41% - 60% :########### 14%
61% - 80% :####### 9%
>80% :#### 5%
Our survey data show a healthy number of deals include a royalty component,
but a majority of deals had none.
For example, 54% of IP BUYERS reported that only between 0 to 20% of deals
included royalties -- meaning that over 80% of deals they completed had NO
royalty-bearing IP.
---- ---- ---- ---- ---- ---- ----
IP MAINTENANCE AND SUPPORT:
Every engineer who uses IP is concerned about getting support and insuring
that their IP is under maintenance in order to get updates, improvements,
etc. Most engineers don't know that behind the scenes, a significant
negotiation takes place to ensure that their chip gets done and that also
the IP company gets what it needs to stay in business.
"Is the IP buyer required to purchase maintenance?"
IP SUPPLIERS
Yes :##################################### 47%
No :######################################### 53%
IP BUYERS
Yes :############################################### 60%
No :############################### 40%
"If yes, how long is the buyer paying for maintenance?"
IP SUPPLIERS
0 - 5.9 months :############# 17%
6.0 - 11.9 months :########## 13%
12.0 months :########################################## 53%
>12.0 months :############# 17%
IP BUYERS
0 - 5.9 months :########## 13%
6.0 - 11.9 months :############ 15%
12.0 months :########################################## 54%
>12.0 months :############## 18%
Our survey found that customers BUYING maintenance and support was common
with many IP companies. Roughly half of deals required time-limited paid
maintenance as part of the sale -- with the most common term being one year.
---- ---- ---- ---- ---- ---- ----
IP LEGAL INDEMNIFICATIONS:
If there is any IP contract term that stands out as the most contentious,
it's indemnification. For the non-lawyers out there, this is basically the
IP SUPPLIER standing behind his product so that if there is legal issue with
the IP -- such as patent infringement -- the IP SUPPLIER will "fix it".
"Fixing it" means that the IP company will use what means it has to remove
the infringement -- or fight it out in court to ensure IP BUYER doesn't lose
the right to ship devices containing the IP.
"What indemnifications is the IP buyer given?"
IP SUPPLIERS
Complete :######################## 31%
Some Carveouts :########################################### 55%
No Indemnification :########### 14%
IP BUYERS
Complete :############################################# 57%
Some Carveouts :######################## 31%
No Indemnification :######### 12%
The "level" of indemnification can vary quite a bit. A company can provide
complete indemnification, no indemnification, or complete indemnification
with a few carveouts. (As an IP seller myself, I have some doubts that 57%
of IP BUYERS are getting "complete" indemnification. That seems very high.)
"If carveouts, what concessions do the IP buyers
give to the IP sellers?"
IP SUPPLIERS
Exclude standards :#################### 25%
Exclude locations :############# 16%
other carveouts :############# 16%
IP BUYERS
Exclude standards :######### 12%
Exclude locations :### 4%
other carveouts :#### 5%
Examples of carveouts would be excluding certain IP standards like USB, DDR,
etc., or excluding certain geographies like Russia or Indonesia for example.
In the end, both parties need to be comfortable with the level of risk.
---- ---- ---- ---- ---- ---- ----
TOTAL IP SUPPLIER LEGAL LIABILITY:
The evil twin of indemnification in IP contracts is "IP supplier liability",
which in essence means how much exposure the IP company has toward its
customer in case something really bad happens (like getting sued over patent
infringement). Supplier liability defines the upper limits to which the IP
company would be held accountable in such cases.
These limits are in terms of multiples of IP sale price (<1X, 1X, 2X, >2X)
or % of business. (An example of "% of business" is if ABC IP seller sells
a total of $10 million for a mix of different IP to XYZ buyer, XYZ buyer is
only covered for a total of $10 million. It's like 1X of total sales.)
"How much will the IP SUPPLIER pay if they get
sued for something bad involving the IP they
sold to the IP BUYER?"
IP SUPPLIERS
zero :######### 11%
<1X :############### 19%
1X :############################################# 58%
2X :###### 7%
>2X :## 3%
% of biz :# 1%
uncapped :# 1%
IP BUYERS
zero :########### 14%
<1X :########## 13%
1X :#################################### 46%
2X :####### 9%
>2X :##### 6%
% of biz :###### 8%
uncapped :### 4%
It's an important clause for IP companies because often the size of IP deals
is relatively small compared to the amount of damage that could be incurred,
so the IP SUPPLIER and IP BUYER must negotiate a cap.
IP BUYERS need to understand that the IP suppliers can't assume the entire
risk of a customer's $100 M development project just for a $20 K IP sale.
IP SUPPLIERS need to understand that the buyers have a lot of money at risk
on the table.
---- ---- ---- ---- ---- ---- ----
IP COMPANY VALUATION:
If there's one part of this liability negotiation that should be recognized
above all else, is that these IP contracts held by IP SUPPLIERS are seen as
assets! You can have positive assets and negative assets. If you are a IP
SUPPLIER and you plan to eventually be acquired by a larger company, the
first thing they will look at is your contracts minus the liabilities your
company has signed up for. If you have done a good job in constraining
your risk to within industry norms, then you're pretty safe. But if you
gave away the farm to improve your sales -- then you will pay for it later
in your valuation.
The GSA has recently opened up a new IP survey, with a whole new set of data
that should be of interest to people who find this present data cool.
- Warren Savage
IPextreme, Inc. Campbell, CA
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