Intellectual Property is the New Valuation
In the last 10,000 years there has been three ages of humanity. The first age was the Agricultural Age which began around 8,000 B.C. when humanity stopped be nomadic and began to put down roots, literally. The advent of agriculture allowed humanity to start to build a social fabric that was placed based and that created values around land and the process of growing food.
The Agricultural Age lasted until the late 1700s, when the Industrial Age first began in Europe. With the commercial use of the new invention called the steam engine, the world started to change rapidly, with mechanized production, transport and the growing importance of cities as places of production and distribution. If you live in an urban area, what you see was largely created during the Industrial Age. Approximately thirty years ago the Information Age began in the developed countries. This age was initiated by communications satellites, computers, and historically unprecedented numbers of college graduates. The number of white collar workers surpassed the number of blue collar, or production workers, for the first time.
Each of these ages created not only new economic structures, activities and places of work, they also created new economic values. The dominant value of the Agricultural Age was land and the wealth that came from the land. Large landowners were regarded as the wealthy. Once the Industrial Age reached maturity, the new economic value became production. Wealth was created through production. The wealthy initially were the early captains of industry, the robber barons, whose colossal enterprises created unprecedented wealth. This wealth also migrated to the stock markets, where wealth was defined by the amount of stock anyone owned. Todayâ€™s legacy of the economic values of these two ages are ownership of real estate and equities.
The Information Age created the new values of data, information, decentralization, innovation and intellectual property. Fifty years ago the major exports of the U.S. were produced goods. Today it is intellectual property in the form of movies, music, books, software and higher education to name just a few categories. It has been clear to me for years, that now that we are fully in the Information Age, or the Knowledge Age, or as I call it, the Shift Age, what is important economically is intellectual property. A companyâ€™s patents and IP is now more important, and more valuable that all its machines, transport vehicles and office equipment combined.
In recent years, I have noticed that there was a trailing perception from the Industrial Age when it comes to perceiving value. It is called the Dow Jones Industrial Average, even though a number of companies that are part of this group are not industrial. I have intuitively known that IP was becoming more important that production in terms of value, but I wasnâ€™t sure, not being a finance person, what the financial markets were going to do to reflect this incredibly significant change in the world. Last week I found out.
I attended a meeting with a colleague in the offices of Ocean Tomo. What I found there was the answer I had been looking for. Ocean Tomo calls itself the Intellectual Capital Merchant Banc. Simply put, they are the company that specializes in valuation, management, measurement and transactions of Intellectual Property. Ocean Tomo is well known in the IP and corporate finance worlds as the company that is almost single handedly creating all aspects of the new IP marketplace.
In the meeting with CEO James Malackowski and members of his executive team I got detailed confirmation of what I knew intuitively must be true; that the value of IP, or intangible value, of companies was now much more important that tangible assets. Jim gave me a chart that was quite clear. In 1975, at the very beginning of the Information Age, 16.8% of the market capitalization of the S&P 500 was from intangible assets. By 1995, that number had grown to 68.4%, and in 2005 it was up to 79.7%, where I imagine it will level off in the years ahead. In the historically short time of thirty years there has been a fundamental shift in the concept of value, not unlike the transition from the land values of the Agricultural Age to the production values of the Industrial Age.
How to reflect this in the financial marketplace? Ocean Tomo has come up with a deeply researched and incredibly simple way: the Ocean Tomo 300 Patent Index [OTPAT]. This is an index of 300 diversified companies that own valuable patents.To quote the American Stock Exchangesâ€™ succinct description: â€œThe Ocean Tomo 300 is the first major broad based market equity index to be launched in 35 years, and follows the progression from the Dow Jones Industrial Average in 1896 to the Standard & Poorâ€™s 500 in 1957 and the NASDAQ Composite Index in 1971â€. While those mentioned indexes will continue to be important, as a futurist, I fully believe that the Ocean Tomo 300 Patent Index could well become the most important stock index in the next 20 years. All the other indexes are based upon Industrial Age constructs, and have adapted and revised themselves to better reflect the Information Age. The Ocean Tomo index is the only one based solely upon the values of the Information, or Shift Age, which is the age we are now in.
There are always companies and individuals that step into the breach, that jump into the future and show the world a new direction. To find one that is doing just that, in such a hugely important space, and whose operating premise is so historically important and correct was nothing less than thrilling for me. Knowing something would have to come into existence, and then finding that is has is exhilarating.
Next week I will be attending the Spring 2007 Ocean Tomo IP auction which should be incredibly interesting, and of course will be reported here. I should also be sitting down with a one on one interview with Founder James Malackowski.