By Ruth Alexander Increased interest in intellectual property is leading to greater growth investme...
By Ruth Alexander
Increased interest in intellectual property is leading to greater growth investment opportunities, according to Derek Lygo, who heads the UK Growth and UK Mid Cap funds at Dresdner RCM Global Investors.
Companies with intellectual property rights are those that have copyrights, patents, trademarks and design rights.
Lygo said these rights give companies multiple revenue streams, high margins and low overheads while allowing them to create barriers to entry. Lygo said: "This is basically a wake-up call to investors to take smaller and medium sized companies much more seriously, because if you have a good idea it can translate into big profits quite quickly."
He said the economy is moving from one that is industrial-based to knowledge-based. He said intellectual property, soft assets and other intangibles increasingly make up the bulk of the asset base for wealth production in society.
Lygo said the burgeoning knowledge economy has given rise to a new ecology of competition in which the wars once fought for control of markets are now being waged over the exclusive rights to new ideas innovations, and inventions.
He said: "Only that which is unique to you and not accessible to your competitors, such as your knowledge, skills, and business methods can offer ground upon which you can differentiate yourself in business.
"Cheaper shoes, more shoes, or even selling shoes 24 hours a day will not offer much of an advantage anymore because anyone else can do the same. A better way forward is to track shifts in consumer tastes in shoes and then to rapidly meet the demand with new styles. There is money in that idea and I want to invest in companies like that."
A growing number of companies are seeking to gain a proprietary market advantage. IBM, for example, has increased its licence income from $30m to $1bn over the course of 10 years.
Lygo said: "If the corporate sector is taking intellectual property asset management seriously, then, as an investor, so should I."
The number of new US patents issued in 1998 reached nearly 155,000, a 33% increase on 1997's figure. International patent applications rose by 23% in 1998.
He said: "Along with this explosion of patents has come a boom in the revenues derived from patent licensing, as companies realise intellectual property is among their most valuable of assets.
"Patent licensing revenues have shot up 700% in the past eight years alone, from £15bn in 1990 to well over £100bn in 1998. It is likely that revenues could top a half-trillion dollars annually by the middle of the next decade."
Lygo said intellectual property rights can be the sole asset of a company such as Arm, or it can be a peripheral part of a company's business. Either way, he said, a lot of revenue can be generated from it.
He said the most common method of generating revenue from intellectual property rights is from license payments.
Revenues generated in this way often have higher margins because the company that has intellectual property rights incurs no further costs in its commercialisation.
The only costs the companies have are the research and development costs and the intellectual property rights application costs, Lygo said.
So once these costs are reimbursed, he said, any further revenue goes straight to the bottom line, with obvious implications for margins.
Companies with intellectual property rights also generate revenue from royalties.
He said: "Siemens allowed BTG access to 1,900 of its medical technology patents. Medical technology is not a key part of Siemens' revenue stream or business model and BTG has a great deal of expertise and success in this area.
"BTG now has the ability to out-license this intellectual property right, or develop it further themselves. The two companies will share the revenues generated from the intellectual property right."
All-day event on 24 April
Consequences could be more severe than in stress tests
AFH has six segregated mandate funds
Variable operating expenses