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Vol. 21 No. 5 — May 2004

Ask Bob Stembridge, customer relationships manager at Thomson Scientific, how the patent information industry looks today, and he replies: "It's pretty exciting, both for customers and service providers. For users, there is a rich variety of services on offer, both commercial services and services from the public sector. And for providers, advances in technology promise the opportunity of reducing production costs and penetrating new and broader markets."

The message from MicroPatent president Dan Videtto is similarly upbeat. "The patent information industry is experiencing a period of exciting change and opportunity," he says. "We see IP [intellectual property] strategy becoming much more central to corporate strategy. As a result, more and more IP-related consulting firms are in the marketplace—a clear sign that companies are seeing value from IP management."

Certainly, patenting is growing. According to Stembridge, the U.S. Patent and Trademark Office's (USPTO) most recent statistics (from 2002) show a 2.3-percent increase in patent applications over 2001, with 333,688 applications. During the same period, the European Patent Office saw a 4.4-percent increase to 165,100 applications.

But is there money to be made from selling patent information these days? After all, the current patent fever comes at a time when patent and trademark offices (PTOs) are themselves taking an increasing role in the distribution of patent information, thereby threatening vendors with a bad case of disintermediation blues.

Under Pressure

Balanced against the excitement is concern over PTOs providing no-cost access to patent information on the Web, acknowledges Stembridge. "Commercial revenues are under pressure," he concedes.

Indeed, despite vendors' bullish public pronouncements, signs of industry distress are plentiful.

For instance, companies that offer little more than copies of patent documents have been severely sideswiped by the free services offered by the PTOs. "A number of companies that were focusing on document delivery don't exist any more," reports Willem Geert Lagemaat, CEO of Dutch-based vendor Univentio. "They have gone away because the documents are available on the Web for free."

This is not surprising. Roy Zimmermann, principal patent information specialist at medical technology company Medtronic, points out, "When one can download full-image documents in little time, at high resolution, for little or nothing in cost, then it is no longer possible to make money selling copies, via fax or rapid shipment, for $1 to $2 a page, as was the case just 5 or 6 years ago."

In other instances, companies that are mesmerized by visions of making large profits from today's obsession with intellectual property have overreached themselves, developing, for example, overpriced products of interest to too small a market segment. The most spectacular casualty here was patent analytics company Aurigin Systems, which collapsed into bankruptcy 2 years ago.

Further proof of market turbulence is evident in the wave of consolidation that has engulfed the industry—an invariable sign that too many companies are chasing too few customers. The two main predators are MicroPatent, which has snapped up companies like Faxpat, Optipat, and Aurigin, and Thomson Scientific, which has acquired, among others, Delphion, Current Drugs, and Wila Verlag.

For MicroPatent, which started out as a document delivery company, the first priority was to buy direct competitors. But in order to broaden its offering, it has also acquired other IP-related businesses. And with the PTOs chipping away at its primary business, it has also sought to move up the value chain, most notably by buying the remnants of Aurigin. Videtto explains, "MicroPatent acquired Aurigin Systems in 2002, adding advanced patent analytics to our growing portfolio of services, which now includes patent and trademark data, IP analytics, file histories, professional research, and consulting."

Meanwhile, Thomson, which historically sold its value-added bibliographic products via third-party hosts like Dialog, Questel•Orbit, and STN, desperately wanted to forge a more direct relationship with its customers. It also wanted to get into the full-text business. Having failed to achieve these aims with Patent Explorer (Thomson's own Web-based product that was abandoned in 2000 after significant investment), the company acquired Delphion.

"This acquisition fills an important strategic gap for Thomson," explained former Thomson Scientific CEO Mike Tansey at the time. "It allows us to integrate a global full-text patent research, analysis, and delivery platform into our array of value-added information solutions."

Product Development

Acquisitions provide quick fixes. But vendors know that survival also requires continuous product development. At MicroPatent, there's currently a strong focus on products that are designed to help companies integrate patent information with other types of data and embed it into corporate work-flow processes. The ultimate goal, says Videtto, is to provide "enterprisewide patent solutions [so that] patent and nonpatent information can be effectively managed as well as quickly and efficiently shared across the organization."

Also keen to get into the data-mining business—but having lost out to MicroPatent in the auction of Aurigin—Thomson developed Derwent Analytics. Launched in 2002, Derwent Analytics is a data-mining and visualization tool based on Search Technology's VantagePoint data-mining software.

And to exploit the benefits of being part of a large and diverse information business, Thomson is currently working on a range of subject-based portals. These will aggregate different Thomson content through a common front end. "The aim is to extend the value chain by developing a service that leverages different kinds of content across Thomson," explains Stembridge. "Not just patents and scientific information."

The first portal, due to be launched by the end of the year, will be targeted at the life sciences market. Others are expected to follow.

Given the speed with which patent documents are now available via PTO Web sites, currency has also become a significant issue for Thomson. Today, for instance, it can take several weeks for a patent to be processed before entering Thomson's flagship patent database, Derwent World Patents Index (DWPI)—the time it takes to incorporate Derwent's unique value-added A&I information.

To make the patents available to users more quickly, Thomson recently launched Derwent World Patents Index First View, a continuously updated database of newly published patents that are yet to enter DWPI.

"With the availability of all the raw data from the PTOs—pretty much on the day of publication—user expectations are for faster information," says Stembridge. "First View will be a companion file to DWPI. We will add a little bit of value-add upfront and make that available very rapidly after publication, allowing users a sneak preview of the patent information that is in our internal processes."

The problem, of course, is that however quickly commercial providers update their files, they can never match the currency of the PTOs.

Cost Burden

But there's a more serious issue than currency. With basic patent data now a commodity, the pressure is on commercial providers to offer more and more—and better and better—added value, including increasingly sophisticated A&I services and ever more complex search and analytical tools.

While Stembridge may talk optimistically about how technology enables a decrease in production costs, the reality is that creating premium patent information costs money. For vendors whose products require a high degree of manual indexing (Derwent, IFI, CAS, et al.), these costs are particularly daunting since this process requires highly skilled indexers.

And as patent applications continue to rise, the cost burden grows. This burden is further increased by the USPTO's decision to start publishing patent applications as well as granted patents. With users demanding that more and more jurisdictions get covered, increased patent activity is just the tip of the cost iceberg.

The size of the challenge the latter factors pose for database producers can be gauged by comparing the increase in patent applications quoted earlier (2.3 percent in the U.S., 4.4 percent in Europe) with the number of new inventions added to DWPI. In 2002, this was 760,198, an increase of 14.6 percent over 2001. In 2003, nearly 903,000 new inventions were added, an increase of 18.7 percent.

To add to the pain, new International Patent Classification codes will be introduced next January. This will mean many more codes and greater frequency of updating. Not only will these additional codes need to be added to new records, but existing records will have to be updated too. All in all, says Stembridge, it will have a "major impact on patent information database providers" and incur additional cost.

As if that weren't enough to contend with, the bread-and-butter business of commercial providers is simply melting away as their core user base of professional searchers turns increasingly to the PTO sites for first-level data. "You go to a PIUG [Patent Information Users Group] meeting and you will hear the experts saying, 'Oh, we don't use free services. You can't get quality searches from the free searches,'" complains David Dickens, director of Questel•Orbit's patent business. "But they do use them."

The consequent loss of revenue, he adds, makes it harder to invest in new products, better services, and additional value-added features. Unfortunately, says Dickens, patent searchers appear to be oblivious to the problems this poses for database producers and online hosts. "My feeling is a lot of these core users have blinders on when it comes down to [understanding what commercial suppliers of patent information] have to do to survive and what kind of threat they are under."

This gap in understanding was evident when Dialog launched First View in March. Patent searchers responded to the news by immediately criticizing Thomson's decision to create a new file rather than incorporate the partially indexed records into DWPI. This was done, complained Nancy Lambert, a senior information analyst at ChevronTexaco, in a posting to the PIUG mailing list, "despite our urgings that the current (not yet abstracted or indexed) records be merged into DWPI."

To add to user frustration, First View records include valuable classification and reference data currently unavailable in DWPI. When the records are migrated to DWPI, however, this information is lost.

Responding to the criticism on the PIUG mailing list, Thomson's Neil Larque regretted the loss of the First View data and agreed that a merged file would have been preferable. However, he explained: "[T]echnical constraints in our current DWPI production system have made this impossible at this time. We are making significant investments in a new editorial system, which will remove these technical constraints."

Investments, alas, that may never be recovered.

Niche Market

Vendors now find themselves in a vicious circle of rising costs and falling revenues. Their hope is that they can break out of this by significantly growing the market for patent information. Videtto says, "Patent analysis and patent portfolio management open up the use of patent information for making business decisions to a much larger audience, including economists, business leaders, licensing executives, analysts, and policymakers, and it encourages the incorporation of patent trend indicators into many decision-making arenas."

But can the market really be grown? Ann Chapman, director of the small London-based patent information vendor Minesoft, doubts it. The fact is, she says, that patent information is a niche market. "It does have limits, so perhaps [the] growth expectations [of vendors] are unrealistic and can only be achieved through acquisition."

A niche market, however, implies a limited number of potential customers. Consequently, further acquisitions would be unlikely to increase market size. Whatever Stembridge and Videtto may say about new and broader markets, it's difficult to see how this can be achieved. Moreover, even if large numbers of new—inevitably unsophisticated—users were to acquire a taste for patent information, they would surely turn to the simpler services of the PTO sites, not the premium-priced and (for them) over-engineered products of commercial providers.

Besides, says Philip Leith, a professor at Queen's University in Belfast, Northern Ireland, commercial vendors lack the right mind set for broadening their customer base. "I tried, as part of my research, to get access to one or two of the patent-analysis packages (Derwent Analytics, for example)," he complains. "They told me that it wasn't worthwhile bothering with me because 'I wouldn't be able to afford it.'"

Put simply, the problem is this: Basic patent data is now available for free, and the market for value-added information is saturated. But given the increasing costs of producing value-added products, simply standing still is no longer an option for commercial providers.

Unfortunately, standing still is what the patent information industry appears to do best—financially, at least. Consider, for instance, the performance of Derwent Information over the last 10 years. In 1991, the company made a profit of $12 million on sales of $62 million. By 2002, profits had risen to just $14 million on sales of $121 million. If this is the best the industry's recognized market leader can achieve despite regular injections of cash from parent Thomson, what hope can there be in today's far more challenging environment?

"From a purely financial perspective, it's hard to see the traditional patent information industry thriving in the short run under the current competitive pressures," concludes Medtronic's Roy Zimmermann.

And if patent database producers don't prosper, how can online hosts—who rely to a considerable extent on sales from premium patent information—hope to survive? "I'm quite concerned about the long-term viability of some of the online traditionals: the Dialogs [and the] Questel•Orbits of the online information industry," adds Zimmermann.

Some view the predicament of the "traditionals" (online hosts and database producers) as a tragedy. Others take a more Darwinian view. "When I look at the 'traditional vendors,' I see bloated organizations like Derwent and Delphion with really archaic products sold by sales forces with the budget of the GDP of some small countries," says Ron Simmer, proprietor of PATEX, a Canadian search and consulting service. "The other day, I paid a lot for some Derwent records that were missing data that was free on esp@cenet [the European Patent Office Web site]."

Or as Leith puts it, "I don't have much sympathy for [them] since they have to a very large extent actively encouraged a complex system of accessing raw data and failed to develop new markets."

Indeed, for the Darwinists, the disappearance of the traditional players is not only inevitable but even desirable. Were it to happen, however, could it have a greater impact on the distribution of patent information than people realize? In part two of this article, I'll look more closely at the activities of the PTOs and consider the long-term impact they could have on the patent information market.