Props to Intellectual Property
Jun 30, 2012 5:00 AM PT
What is the real value of intellectual property in the United States?
Let's estimate this using the most inclusive definition of intellectual property: patents, copyrights, trademarks, trade secrets, customer lists, business know-how, and other secret sauce.
Relationship to Market Capitalization
An oft-cited statistic is the relationship of intellectual property to market capitalization. Consider the analyses by the investment bank Ocean Tomo and supported by the excellent work of Kevin Hassett and Robert Shapiro.
Both estimate that around 80 percent of market capitalization is due to intellectual assets, including patents, copyrights, trademarks and business know-how.
Market Capitalization of the United States
What is the total market capitalization? The Wilshire 5000 index suggests the total value of the U.S. equities market is US$14 trillion. This does not include privately traded companies.
The Organization for Economic Co-operation and Development published a study several years ago that estimated the size of the private market at approximately 10 percent of the public market. That would suggest the total market capitalization would be approximately $15 trillion.
Estimate for Intellectual Property Value
Using the market capitalization metric thus gives a value of 80 percent of $15 trillion, or $12 trillion in intellectual property value.
How can it be this high? Certainly some businesses are IP-intensive, such as software companies (since so much high-tech manufacturing has fled overseas). However, any business manager knows that there are thousands of bits of information -- customer lists, training methodologies, barbecues to enhance teamwork -- that are proprietary and defended to preserve competitive advantage.
This figure of $12 trillion should warm the hearts of patent and trademark lawyers everywhere.
Economic Output of Intellectual Property
How much does this contribute to the economy? We know that about 133 million people are employed in the United States (this number is remarkably hard to find but easy to read here, with roughly 22 million employed by the government, according to the UK newspaper The Guardian.
Therefore, we have about 111 million private sector employees.
The Commerce Department's Global Intellectual Property Center (GIPC) provides analyses of the number of jobs in each state that are "IP-direct" jobs and the output generated by these jobs.
In general, about 15-20 percent of the workforce is employed in IP-direct jobs. The output of those workers varies strongly across the United States. In Kansas, the direct IP workers produce an added $40 thousand per head in economic output, while in California it is a staggering $300 thousand.
If we estimate that the IP product is roughly $150 thousand per head to account for the state-to-state variations, for 15 percent of 111 million, or 16 million workers, the IP directly produces about $2.4 trillion in value each year.
The GIPC estimates that intellectual property contributes $5 trillion annually to the GDP, but this includes the net IP value -- that is, the total output to the economy, not the difference due to IP. We will use the $2.4 trillion figure to estimate the value strictly from the IP.
Ratios and Other Interesting Figures
Let's calculate the ratio of the value of the intellectual property to the annual output it generates. This would be equivalent to a revenue multiple for estimating valuation. Doing this math -- realizing $2.4 trillion in economic output for a value of $12 trillion -- gives us an Intellectual Property Multiple ("IPM") of five. In other words, the value of the IP is realized in about five years.
However, for states in which the per capita output is much higher than the $150 thousand, the payback time may be much shorter.
Another interesting figure is the $2.4 trillion relative to the national GDP of $15 trillion. In other words, one-sixth (16 percent) of the national output is generated by intellectual property.
This analysis -- brief and flawed as it is -- leads to several other interesting ideas:
If intellectual property is generated on a per-employee basis in the private sector and generates outsized outputs (for instance, $400 thousand per person compared to $100 thousand in California), creating these employees is absolutely critical. The increase in wages certainly pays off on a macro-economic scale.
Like other multiples comparing price to output (i.e., price-to-earnings), the IPM specified here will be sensitive to bubbles. I have not yet done any analysis over different years or related methodologies to see how it varies, but this should be interesting.
The variations across the states would also be a fascinating study.
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