May 6, 2020
The relief from royalty method is premised on comparable licensing transactions and their underlying royalty rates. Royalty rates found in such transactions are assumed to represent a market price surrogate for the licensed assets.
However, license agreements are not traded on active markets; typically, they represent random transactions between two market participants, lacking a pricing mechanism like with numerous participants in oligopolies. Reservations about the market price surrogate have been widely expressed by solicitations to consider the particular circumstances that lead to a license agreement, including information asymmetry, distribution of power, relatedness between the parties, timing and the like.
Recently, researchers of Cornell University and University of Hong Kong have published a study on the effects of market power of licensors and licensees on royalty rates (Gaurav Kankanhalli and Alan Kwan; “Bargaining Power in the Market for Intellectual Property: Evidence from Licensing Contract Terms”). Market power is measured by relative firm size and margins. The results demonstrate that firms with higher market power can command more favorable royalty rates – licensors higher rates, and licensees lower rates.
These findings are plausible and expectable. They are yet another evidence that the market price tenet with royalty rates is a tricky illusion. However, the applicability of these findings in practice is hampered because timely market power data for the parties to a license agreement often do not exist.
The MARKABLES dataset meets these challenges. Each case includes size data (revenues) and profitability data (sales multiple or enterprise value / revenues), allowing for an analysis and adjustment of the market power effect in each peer group.