In 2006, Chicago-based Ocean Tomo launched an ambitious plan – provide a market where inventors, small companies and large corporations could buy and sell patents at open auction, a sort of Sotheby’s for IP. Yet after early success, Ocean Tomo’s auction model has hit rough seas.
By B. Collins
It was early April and Dean Becker was in combative spin mode.
Becker is vice chairman at Ocean Tomo, a pioneer in hosting patent auctions. Previous events generated $12 million, $19 million, even $23.9 million. But the company’s IP auction at San Francisco’s tony Ritz-Carlton hotel in late March this year posted poor results. Six lots sold out of 81 offered, netting $2.75 million, an all-time low.
“It was a great learning day,” Becker said of the company’s ninth auction since 2006. “We had unrealistic value expectations. Lots were priced way too far in advance.”
Buyers and sellers weren’t on the same page, “clearly just a mismatch,” he said.
There were other disconnects. The media buzz before the auction centered on Lot 38 – more than 15,000 hours of video and some 16,000 photos from The PTL Club, the bizarre religious program of the 70s and 80s featuring the late Tammy Faye Bakker and her secretary-raping, embezzling televangelist husband Jim, who did prison time for accounting fraud. The lot seemed like a random item amid the typical GPS, software and other high-tech offerings in the Ocean Tomo catalog.
Ocean Tomo called the PTL collection “a rare and unparalleled archive.” Saturday Night Live’s Seth Meyers poked fun at it on his Weekend Update segment.
“Here’s how the auction went,” Meyers quipped. “Do I hear nothing? Nothing? Nothing! Going once! Going twice! Sold! To nobody because no one would want that.”
Becker wasn’t amused.
“Our business is stronger than ever and things are great,” he said. “Show me anyone who’s had the guts and vision to do these events. Show me what they’ve done.”
Things would be different at the July gathering, he vowed. “We’re looking forward to a really successful auction.”
A London-based company bought Ocean Tomo’s auction business in June. The July show went on as scheduled under Becker’s direction as the new president of IPAC Ocean Tomo.
The July auction in Chicago featured 29 lots.
Four sold for a total of $1.57 million, the lowest dollar figure in Ocean Tomo auction history.
It was early August when I again found Dean Becker in combative spin mode.
“The July auction was a building block,” he said. “We sold more after the auction than during the auction. You will see a lot of exciting changes for the spring (2010) auction in San Francisco.”
How many lots did you sell after the auction? If you sold more after the auction than at the auction, what does that say of the auction model? Changes? What sort of changes?
He didn’t want to say just then, but if I called back in a week he’d fill me in on all the details.
“I’m up against a deadline,” I said. “What if you get hit by a bus in the meantime?”
Becker wasn’t amused. He hung up on me.
Do Your Bidding
Ocean Tomo was founded in 2003 by James Malackowski, a former finance and investment advisor and member of the IP Hall of Fame Academy. Ocean Tomo had five business units, including IP valuation, risk management and investments. But the auction business it launched more than three years ago – with its theater, pomp and pageantry – tended to generate most of the company’s headlines.
“The auction,” according to company literature, “was designed to bring a sense of urgency and closure to IP transactions, create a center for IP liquidity and effectuate transparency for a market in which none had historically existed.”
That involves inviting hundreds of prospective buyers and sellers – on their own dime – to swank venues in San Francisco, Chicago and Paris for two-day events. Attendees shuffle from one pre-auction seminar to the next throughout Day 1. Typical session names: “Monetizing IP in Distressed Markets,” and “The Advantage of Defensive Patent Aggregation.”
Between sessions, attendees power network in the halls, exchanging cards over business talk and freely available Pepsi, coffee, Heineken and other beverages and snacks.
Luminaries such as Charles Osgood, anchor of CBS News, deliver keynote addresses at lavish gala dinners. On Day 2, after a few more seminars, the live auction is held. Erudite British automobile auctioneer Charlie Ross used to conduct the events.
Ocean Tomo charged sellers an upfront fee of $1,000 to $6,000. This filters serious sellers from those with unrealistic expectations. Ocean Tomo also charged sellers a 15 percent sales commission; buyers paid a 10 percent premium.
Patent auctions have taken place for years, but were nearly always been confined to a few patents from a single company. The Ocean Tomo model showcases a variety of patents from a number of industries, and includes patents, trademarks, domain names, even music. A catalog of Jimi Hendrix studio recordings fetched $15 million from an anonymous bidder at Ocean Tomo’s fall 2006 auction, accounting for most of the nearly $24 million in intellectual property sold.
Agere, 3Com, AT&T, BellSouth and IBM have participated. As have independent inventors. San Diego real estate agent and part-time musician Martin Eldridge invented a GPS “tour guide” in the mid-90s. He sold it at the spring 2008 auction for $1.1 million.
“Financially,” Eldridge told Inventors Digest (see Going Once. Going Twice. Sold! February 2009), “it was the best thing that ever happened to me.”
Upbeat press releases almost always follow the auctions, typically noting that the events produced “strong results for buyers and sellers alike.”
In June, London-based ICAP, an interdealer broker and post-trade services provider, bought the auction business from Ocean Tomo for a reported $10 million in stock and cash. Becker, who remains a vice chairman at Ocean Tomo, became president of the operation. Nine other Ocean Tomo employees came with him.
Michael Spencer, group CEO of ICAP, said in a release: “Patent brokerage is an exciting new field that will help to provide a marketplace and access to liquidity for an asset that has historically not been served by a vibrant trading market.”
The July auction was vibrant for Michael Parris, inventor of computer memory chip ProMOS Technologies lot. Bidding opened at $500,000. It didn’t sell on the floor. Yet it eventually sold for $900,000.
“The system worked,” Parris was quoted in an ICAP Ocean Tomo release. “The team was fantastic.”
The July auction was the first time all reserve prices – the minimum price set by the seller – were revealed. That’s generally not done in auctions.
“Disclosing the reserve price brought in more registered bidders than ever before.” Becker said in a news release. “We knew that if we opened at the reserve, bidding would take the asset to its value in the marketplace today. With the economy in a state of recovery, ICAP Ocean Tomo remains the pioneer of the only open Live Patent Auction in the world and continues to re-engineer the IP marketplace.”
Still, only four lots sold at auction in July.
Not everyone is convinced the auction is the best venue for patent sales. Traditional and emerging online IP brokers handle transactions without the public bidding wars. And many companies, including HP, offer some of their patents for sale directly through their Web sites.
“These (July) results seem to support the thesis that patent buyers are being much more selective,” observed Terry Ludlow on the technology blog Chipworks. “A buyer probably needs a clear value proposition that the prospective patents directly support. I suspect that prospective buyers are also demanding high quality due diligence packages to review before the auction.
“No one is buying speculatively,” he added. “And with the relatively high reserve bids published for the patents, most of the lots attracted no bids at all! The aggregators seem to have been entirely absent. ICAP must be a little disappointed in the performance of their new acquisition.”
Industry competitors were quick to grave dance.
“Auctions work well for commodities,” said Ron Epstein, founder and CEO of IPotential, a patent broker. “Auctions work poorly for knowledge assets” such as patents, he noted, which can require up to $50,000 of due diligence to assess.
“I think the general attitude in the IP community,” he added, “has been a certain amount of caution as to whether patent auctions make sense in anything other than extraordinary circumstances.”
“I am pretty sure that ICAP is in this for the long term,” Joff Wild, editor of IAM magazine, an IP-focused publication and booster of Ocean Tomo in the past, said on his blog. “Now there will be some time to take stock and maybe make a few decisions about where things are heading.”
Becker called back the week this issue was going to print. He canceled the auction slated for early November in Paris. But he wasn’t conceding defeat.
A growing number of corporate buyers, he said, “needed much more time for diligence between now and the Paris date.” Many of those want to buy patents “for defensive reasons, to protect their product lines.”
The change of plans marks a reversal from his earlier thinking that IP lots needed to be published closer to the actual auction. In fact, ICAP Ocean Tomo won’t be publishing a printed catalog before the next auction, scheduled for spring 2010 in San Francisco. It will be available online, updated on the fly. A printed edition will be available for those attending.
Although most lots from the July event were bought after the floor bidding, he said new corporate and government buyers have expressed a desire for an open, public auction and that the model is viable and valid.
He said the spring 2010 auction, like the July event, will reveal reserve bids, but he declined to detail other adjustments.
“You will see a lot of exciting changes,” he said. “We have a multiyear plan and we’re going to stick to it.”
Ocean Tomo’s IP Auctions
Spring 2006, San Francisco
Lots offered: 78
Lots sold: *26
Total sales: $3,026,100
*Five lots reached terms off the bidding floor, with reported additional value of $5,420,000, bringing the total cumulative auction transactions to 31 lots and $8,446,100.
Fall 2006, New York
Lots offered: N/A
Lots sold: 26
Total sales: $23,903,000
Spring 2007, Chicago
Lots offered: 67
Lots sold: 34
Total sales: $11,428,500
Fall 2007, Chicago
Lots offered: 75
Lots sold: *38
Total sales: $11,599,500
*One sale occurred right after auction ended.
Spring 2008, San Francisco
Lots offered: 85
Lots sold: 53
Total sales: $19,629,500
Fall 2008, Chicago
Lots offered: 88
Lots sold: 48
Total sales: $12,842,500
Spring 2009, San Francisco
Lots offered: 81
Lots sold: 6
Total sales: $2,750,000
*Summer 2009, Chicago
Lots offered: 29
Lots sold: 4
Total sales: $1,570,000
*First for ICAP Ocean Tomo