What would it mean for IP to be in a bubble, and what could we expect once such a bubble burst? The first thing to ask is what are the similarities with other bubbles that have occurred, and how could they be compared to intellectual property with an increasing attention to IP strategy? Investment bubbles grow out of a lack of economic understanding of the real market situation. But, can we say that IP is a market? Well, yes and no. We can identify optimized IP management with transactions that resemble those in other markets, but they are not transparent and immediate. Transaction costs, among others, are the major barriers to a real IP market emerging as we know them in other industries. So, it isn’t perfect, no real markets are, but is there enough market structure to be able to say there is a bubble?
Let’s start from the other direction. Rather than ask whether market conditions exist for intellectual property, which many would debate over terminology, let’s look at the characteristics of an investment bubble. Firstly, bubbles usually start growing by investors speculating that current positive trends will prevail in a predictable manner. This is what happened with mortgage-backed securities. Then, market analysts compound this effect by overconfidently reinforcing the belief to investors that returns will continue to grow at the same rate.
The bubble really starts to grow when group dynamics kick in. If the analysts are able to convince a requisite cluster of investors to believe in their forecasts, then the bandwagon mentality takes over, amplifying the effect. Investors flock to these investment instruments because they don’t want to be left out of the party. Would you? Well, this is when the bubble starts to burst. Performance starts to fall short of the rosy predictions and expectations, initiating a collapse. Some shrewd investors cautiously sell, triggering a stampede. This even causes prices to drop below market value.
Investment strategists would tell you to keep your composure, stay rational, scrutinize trends carefully, focus on the long haul, and beef up on your statistics enough to know that good things can’t last forever. All sound advice, but could one argue that intellectual property, with new approaches to IP strategy emerging at a faster pace, is in such a bubble? Many pundits say there is another technology bubble looming on the horizon, but even this is debated. Valuations are regularly exceeding by far their revenue prospects. Coupled with a slowdown in growth, speculation is rampant among both investors and naysayers alike of an inevitable collapse – what rational analysts like to call a recalibration.