Even a crude assessment of comparability is likely to differentiate between tech duds and blockbusters. However, a common blind spot is how functional differentiation can magnify the earnings capability of technology.

Analysts often assume that an industry’s inter-quartile range of reported royalties adequately reflects the range of tech utility. ‘Inter-quartile blinkers’ create utility-blindspots that can result in uncommercial conclusions:

• No amount of statistical analysis compensate for a bad dataset.

• Royalty databases exclude technology which is not good enough to be licensed. This happens to be the vast majority of patents, and a large proportion of software and data assets. As a result, the median of published royalties is higher than that of the IP population as a whole.

• Within industries the strongest technologies typically command far higher royalties than the upper-quartile. The selection of the upper quartile royalty of, say, 8% of revenue is not commercially logical if truly comparable IP commands royalties closer to 20%

Within an industry, not all tech assets enjoy similar legal protection. Obviously, a technology protected by a single provisional patent is not comparable to one protected by a portfolio of granted patents and associated trade secrets. More subtle differences can compromise comparability, for instance, with patented technology, relative questions include:

• Do patent claims cover the end-product or a manufacturing process?

• Do the claims cover commercially important features of the technology?

• How easy is it to design around the claims?

• How easy is to identify and prove patent infringement?

For unpatented software, copyright protects the expression of the code rather than the underlying functionality, so differences in the level of protection include access control to key algorithms. Contractual protection and the complexity of developing an equivalent asset.

Once an appropriate royalty is found for a particular technology, it is important to remember that this might require adjustment by jurisdiction, depending on the local status of patents and designs.

It is no surprise that competitive forces and profitability can vary significantly between sectors, between geographic markets, and over time. Yet royalty benchmarking are often silent on these factors. Due to the rate of tech evolution, the passage of time is particularly relevant to the royalty potential of a technology. Between regions, royalties can vary depending on levels of industry maturity, competitive forces and the availability of assets that contribute to the profitability of a technology.

In addition to an ongoing royalty, the pricing of IP licenses can include upfront fees and milestone payments. A $100 million upfront fee clearly influences the rate of an ongoing royalty, so it should be carefully considered in a benchmarking exercise.

In most industries, a percentage of revenue is a common royalty mechanism, but benchmarking can require adjustment to reflect differences arising from revenue at different points in the value chain (for instance, wholesale or retail revenue). In some circumstances, other royalty mechanisms better meet the characteristics of the asset or transaction.

The terms of licences vary according to the commercial circumstances and negotiating strength of the respective parties. Pricing is just one component of a licensing agreement, and arm’s length royalties can be influenced by clauses relating to exclusivity, R&D rights and duration.

This gets back to royalties being a profit sharing mechanism. To the extent that licensing terms influence the rights and obligations of the parties, they also influence the appropriate share of profits.