It's hard to overstate the importance of intellectual property, the creative side of industry, to the United States economy – especially in an era when there is a (mistaken) perception that the United States can no longer compete.
It's a complex, interwoven subset of the economy, and it consists of more than just royalties for music and television – although that's part of it. Software, hardware, entertainment, medicine, science, technology – all of these generate immense quantities of intellectual property revenue.
A Hugely Important Segment
You must consider that…
…More than 50% of the world's total intellectual property revenue flows directly into the United States. …Intellectual property rights touch nearly every facet of our immense economy.
…Employment, either direct or indirect, in 313 IP-intensive industries account for some 40 million jobs, nearly 28% of all jobs in our economy.
…And those are good jobs; they pay on average 42% more than non-IP-intensive work.
…IP-intensive industries add $5.06 trillion in value, nearly 35% of the United States' GDP in 2010.
…Nearly 61% of American exports, $775 billion, come from IP-intensive industries.
The figures, from the United States Patent and Trademark Office, more or less speak for themselves.
They point to the United States as possibly the most creative and innovative society on Earth. Even as the overall economy wheezes along, intellectual property continues to grow, playing an ever more vital role.
A Main Driver in International Relations
The sheer value of intellectual property is such that there are entire industries geared toward protecting it, and it has become a major driver in international relations.
Consider the relationship between the United States and the People's Republic of China. Don't tell David Cameron or Queen Elizabeth II, but the Sino-American relationship is the most important foreign relationship we have. It may be the most important foreign relationship on the planet, and intellectual property rights have become a sticking point.
Why? Because theft of intellectual property – bootlegging, for want of a better word – remains a big problem in China, and American companies, whether they be Apple (NASDAQ:AAPL), or Microsoft (NASDAQ:MSFT), or Cisco (NASDAQ:CSCO), face big revenue losses in the Chinese markets.
These companies are missing out on millions because, although there are reasonably strong protections for intellectual property rights in China, enforcement is lacking – so much so that it's doubtful whether our relationship can take the next steps without big changes.
Here at home, there are armies of lawyers, lobbyists, and legislators gunning for violations of copyright and intellectual property law. If there's any doubt as to the value of American intellectual property, consider the fact that SOPA, the Stop Online Piracy Act, was more or less written by entertainment lawyers for Re. Lamar Smith (R-TX) to introduce in the House.
There are many interesting and potentially profitable ways for investors to derive benefit from intellectual property. Since intellectual property is basically an intangible, there are unique challenges and opportunities. But the sheer number of patents on file and pending is a sure sign that decent opportunities abound.
One of the most direct ways of IP investing would be "brand investing," whereby the investor seeks out companies with attractive, profitable brands.
The Coca-Cola Company (NYSE:KO), Nike Inc. (NYSE:NKE), Starbucks Corporation (Nasdaq:SBUX), I.B.M. Corp. (NYSE:IBM), the list goes on. Starbucks is interesting because they've turned a commodity, coffee, into a special product, Starbucks' Coffee.
Imagine if someone could do that for oil or corn with the same effectiveness? The risk here is that a brand falls out of favor, or becomes otherwise compromised. The real potential comes in discovering a brand that hasn't hit it big yet; the next Starbucks, the next Coca-Cola.
Another popular way to tap the intellectual property vein is venture capital or debt investment. Individuals or groups of investors pool their money and fund promising new ventures. Anyone taking this road – which is littered with the dead, it must be said – must carefully evaluate the venture before moving forward. How effectively has management dealt with intellectual property? Is the IP's value reflected in the share price? These are questions investors need to ask before going ahead.
A Highly Speculative Play
If homework isn't your strong suit, you could buy shares in companies that do all this stuff for you – while making a killing.
There are some publicly traded capital investment firms that deal directly with intellectual property and patents, defending them. That's right, this is a way to play both patents and the Patent Wars.
One such company is MGT Capital Investments (NYSEMKT:MGT). MGT pursues potentially profitable patent litigation, moving in where precedent seems likely to break their way. These shares should be considered a highly speculative play.
This is a textbook nano-cap stock; $13.56 million in market capitalization with 3.25 million shares on offer and a beta of 1.96. With volatility nearly twice that of the S&P as a whole, this stock makes weird moves, and any major share purchases are sure to make waves. But this company is more or less one favorable verdict away from turning in gains.
Starbucks may have cornered the market on coffee, but here's the one commodity no one's looking at that's set to explode.
U.S. Patent and Trademark Office:
Intellectual Property and the U.S. Economy: Industries in Focus