A Lloyd’s Coffee House for the 21st Century

Warren Buffett once said, “Risk comes from not knowing what you’re doing.” He wasn’t talking about the dangers of portfolio manager inexperience; he was stressing the critical importance of information. For Buffet, the more you know, the more likely you are to make a reasonable, logical, low-risk decision.Conversely, without adequate information and market transparency it is impossible to make rational financial choices.

And yet that is what all of us in the patent market do on a daily basis. We accept unnecessary levels of risk simply because we don’t have established tools and venues for sharing industry information.

RPX recently hosted its first annual conference with a goal of changing the status quo and introducing transparency to our opaque industry. The conference brought together a broad cross-section of market participants and experts, and was a first step toward creating an environment and structures that would allow for easy sharing of data on patent pricing, acquisition activity, trends in IP litigation, developments in patent law and government policy, and more.

If history is a guide, the IP market has a good chance of successfully building such an environment. Three hundred years ago the international shipping industry was – like the patent market of today – in its infancy and facing the twin challenges of high risk and low information transparency.

Investors and underwriters that provided capital and risk management for commercial shippers were operating independently. There was little or no detailed information on shipping routes, sailing times, cargo manifests, weather, currents, reliability of captains and crew, or any of the myriad other data that would help make rational investment decisions. As a result, marine shipping and underwriting was an extremely volatile market.

But after Edward Lloyd opened a coffee house near the Thames in1687, things began to change. Lloyd’s quickly became the favored gathering place for ship owners, captains, marine underwriters, and insurance brokers. And just as quickly it became the central repository of and clearinghouse for the critical information they possessed.

Where underwriters and insurers had previously made financial decisions based on incomplete, inaccurate, or out-of-date information, they now had comprehensive and verifiable data on all aspects of commercial shipping. And where they had before made financial decisions unilaterally, they now had ready access to peers with whom they could collaborate, partner, and pool resources

And share risk. The greatest innovation to emerge from Lloyd’s wasn’t the expansion and greater transparency of information. It was how that information was used by market participants to rationalize the underwriting and insurance of vessels and cargo. The task of sailing from the Spice Islands with a cargo of nutmeg was just as difficult as it was before Lloyd’s was formed, but because investors and operators could efficiently share the risk of the voyage with multiple parties, they could focus on expanding their businesses without the risk of being financially ruined by a single unfortunate event.

Lloyd’s, of course, wasn’t an insurer, per se. It was a third party, an honest broker: a source of information to, and a disinterested enabler of, insurance underwriters. Without that innovation, insurance as we know it wouldn’t exist today.

Today the IP market is at the same early-stage inflection point the insurance industry was at 300 years ago. Our task now is to make our industry more efficient and less prone to risk, and building a 21^st century equivalent of Lloyd’s coffee house is a good place to start.

Our market needs reliable sources of pricing data; of asset descriptions and analysis; of like-minded investors or buyers or sellers; of potential collaborators; of declared competitors. We need the level playing field and trusted trading venue that Lloyd’s provided. RPX is certainly committed to providing that 21^stcentury version of Lloyd’s for the patent market, and other participants have also demonstrated a willingness to build structures to share information, mitigate risk, and rationalize the IP industry.

All of which is reason for optimism as our young, multi-billion dollar market continues to grow. To date we have all been operating largely in the dark, but as an industry we are beginning to control the risks in our financial decision making. We are starting to know what we’re doing. Continuing to expand that awareness will be crucial if our market is going to succeed in the long run.