The Financial Exchange for the 21st Century
The New York Stock Exchange was founded in 1817. This was some 50 years after the beginning of the Industrial Age. The need for the NYSE was, in part, a result of the transition of the U.S. economy from one that was completely agricultural to one that was rapidly becoming industrial. During the course of the 1800s the NYSE became increasingly important to the economy as a financial market that could provide both financial liquidity to listed companies and as a way to establish valuation and worth of all companies traded.
In the 20th century the NYSE was joined by many other exchanges such as the AMEX and the NASDAQ. All these exchanges served to create liquidity, valuation and a way that investors could own and trade in shares of companies. These markets therefore became central to the miracle that was the U.S. economy of the past 100 years.
Some 30 years ago however, the Industrial Age started to give way to the Information Age and something interesting began to happen. The value of the hard assets as a percentage of total corporate value started to decline. As I have written here, in 1975 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. Another way of stating this is that intellectual property, or intellectual capital has become the dominant value in the corporate world of America. The patents, trademarks, and the ideas of a company were now four times more valuable than the machinery buildings and other hard assets.
This presents a problem. While there are many marketplaces that corporate executives can go to for the liquidation of unneeded machinery and real estate, there is no liquid marketplace where intellectual capital can be monetized. If 80% of the value of a corporation cannot be readily liquidated except by the selling of the entire company, there is no way to free up unneeded assets for cash. Currently the way that companies convert their intellectual capital into cash is through a very long and subjective process. The in house lawyer or head of IP gets on a plane and flies to meet his counterpart at another company where they begin a discussion about what respective patents might be worth. All this is done with poker faces and over a period that can last for months. Since there is no market measurement of the IP value, third parties are brought in to evaluate and then help the two companies reach a valuation of the patents.
This situation absolutely demands the creation of an IP marketplace that can serve companies to monetize their intellectual capital as the stock markets have allowed them to do with their stock. Three months ago I wrote here of a historic day that might well have started the movement toward such an exchange. Two weeks ago I was fortunate to witness and participate in the next step toward this historical necessity. Ocean Tomo, the company leading the way in this endeavor, hosted the IPX Chicago Symposium to formally launch the creation of both and Intellectual Property Enterprise Zone and the Intellectual Property Exchange Chicago.
While the meetings last spring were hopeful and introductory, the recent meetings were much more organizational with a feeling that the rubber was beginning to meet the road. The attendees, in addition to Ocean Tomo CEO James Malackowski and his top executives, included the Under Secretary of Commerce for Technology, Robert C. Cresanti, the Director of the Bureau of Economic Analysis, J. Steven Landefeld, Bob Shearer, CEO for the Center of Advanced Technologies, and the young and dynamic Chris Israel, the U.S. Coordinator for International Intellectual Property Enforcement. Also in attendance were IP executives from numerous Fortune 500 companies, several large law firms, the State of Illinois, the City of Chicago, several Chicago financial exchanges, universities and even a few representatives of hedge funds. Everyone named in this paragraph was pretty clear that the historical moment for the creation of an IP exchange was now and that if it wasnâ€™t going to be in the U.S. either Europe or China might soon take global leadership on this essential new marketplace.
The first step, to be launched next year, is the Intellectual Property Enterprise Zone. It is to be an actual physical location in a building in Chicago where representatives of corporations from around the world can set up small one to three person offices staffed by their IP staff professionals. This will allow companies to interact on a daily basis, greatly facilitating discussions about and transactions for IP assets. This is the first step to replace the arduous, time intensive flying-around-the-country-method described above. In a way it is hard to believe that something this basic does not yet exist.
The second step, to be launched a year or two after the IP Enterprise Zone is the IP Exchange(IPX), also in Chicago. This is much more complex and will take some time to perfect and develop. There will be many different investment possibilities. Companies will be certified for equity listing based on the quality of their IP portfolios. There will be IP related indexes based upon patents, brand/trademarks and copyrights. Building upon an emerging market reality, IPX will be the marketplace for IP backed debt offerings. In addition it is expected that the IPX will be a place for patent rich companies to offer IPOs to investors. All in all, the IPX will become the first exchange for the monetization of IP for the world and will, in many ways, mirror the functional necessity and operational efficiency of todayâ€™s major stock exchanges.
The IP Enterprise Zone and the IPX ride the wave of historical inevitability. Whether you refer to the current era as the Information Age, the Knowledge Age or the Shift Age, Intellectual Property is the emerging and dominant asset of our time. As the great stock markets were needed to amplify and enable the Industrial Age, so now will the IPX, and other IP exchanges that will follow will do the same for the current age and for the rest of this century. This why I think this is one of the most exciting and significant developments in the world today. It is transformative and essential at the same time. Stay tuned.