Latest on the Nortel bidding war

The deadline for submitting bids for the Nortel patent portfolio is clearly drawing near and "informed" leaks are appearing. Presumably intentionally to drive up the price. The latest leak is reported on the fierce wireless website and lists Apple, Google as well as the Chinese companies Huawei and ZTE as potential bidders. Nothing surprising there. The Nortel portfolio includes a number of gems which any company operating in the wireless space would love to have - if only to act as a bargaining chip in licensing and negotiating deals. Neither Apple nor Google have an extensive telecoms patent portfolio and so they would love to build the portfolio. Huawei and ZTE are starting to build massive portfolios, apparently subsidized by the Chinese government. Indeed Huawei is now one of the bigger PCT patent filers and ZTE claims to hold 10% of the essential LTE related patents. However, whilst they have many pending patents, their granted portfolio is much smaller.

Intriguingly two consortia including patent licensing firms are also in the running. One consortium apparently consists of Intellectual Ventures and InterDigital. IV is known for its accumulation of patents, whilst InterDigital possesses several patents that are relevant to mobile telecommunications standards (but has also lost some court disputes). The other consortium includes RPX - a patent aggregator that acts on behalf of several major companies to take patents "out of the market". RPX is currently planning its IPO as reported here and here. Will it be using some of the proceeds to purchase the Nortel portfolio.

These two consortia could clearly push the price of the portfolio up tremendously. Neither has much interest in cross-licensing since they do not actually make any products as such. RPX is aiming to buy up problematic patents to support their membership base (as explained here). No doubt having a ripe bag of telecoms patents will "encourage" a few more companies to sign up and help the IPO on its way. IV has until recently not been known for enforcement of its patent rights, whereas InterDigital has been active. So it will be interesting to see how that works out if they win the pot of gold. Both companies will have an interest in "monetarising" their new assets.

The sheer sums of money here are just mind-boggling. The size of the mobile telecommunications market is clearly massive, but it is also going to take a major investment for any company to justify the figures that are being talked about. It will not be unnoticed that none of the established players such as Nokia, Ericsson or Alcatel figure among the potential acquirers. They all have substantial portfolios of relevant patents - but then Nokia is known to be a backer of RPX and Ericsson purchased the LTE assets of Nortel some months ago and presumably got a license to the relevant IP thrown in with the deal. So they don't need the rights. Has this all been factored in? The IAM blog was sceptical about whether the bond purchasers who have pushed up the value of the Nortel bonds really understood the process.

Let's hope nobody has to see his car because of his Nortel patent portoflio.

Technorati Tags:
Nortel, Telecommunications

Patent Trolling doesn't pay, or does it.... in the long term?

An explosive tweet posted by compulsive innovator/investor Chris Dixon made the highlights of hip weblog TechCrunch last week and stirred a heated debate in the IP community. The co-founder of decision-making website Hunch found out in a report published by the University of Texas Management Company (PDF here) listing all of its private investments in venture funds and private equity funds and their results, that Intellectual Ventures – known by many as “IV” and considered by most to be the godfather of all patent trolls – has been severely underperforming notably with a negative internal rate of return (IRR) of 73% of their Invention Development Fund I and a negative IRR of their Invention Investment Fund II of 10%. As TechCrunch pointed out, this negative IRR does not necessary reflect the reality of the situation but it might suggest that the activity of patent trolling is not as lucrative as it appears to be. It also contradicts IV founder Nathan Myhrvold’s claim that his company, whose main goal is to build a large patent portfolio rather than developing new systems, is “turbocharging” the innovation process, especially when the performance of the two IV funds are compared with the ones of more traditional venture funds.

Joff Wild of IAM magazine, which has been posting regularly about IV and now certainly has a good understanding of the company’s business model, moderated the significance of Techcrunch’s claim in a recent blog entry:

"Before you can make any definitive statement on such a thing you have to know how old the funds are and what they are setting out to do. Acquired patents are rarely going to give you a quick return - they are slow boilers. So if you spend a lot of cash upfront on buying up portfolios, you may have to wait a few years before they start to pay dividends. Alternatively, if you are buying up "inventions" that have not yet even been patented - which is also something that IV does - then you have an even longer lead-in until potential monetisation can take place"

His point of view concurs with the answer of IV’s VP Finance Larry Froeber, who highlighted in a reply to Wild’s blog post that the method used by the University of Texas Management Company does not capture the true value of their business, as spending is the driving growth of IV.

I tended to agree with this view till I went through the comments of this blog entry (items posted on the IAM blog always generate a handful of insightful comments) and read what Tom Grew of Yu & Partners had to say:

"Interesting that, in current times as businesses focus more on delivering quarterly results and as a consequence reduce IP spend (and increase divestitures), we are allowed to say: It's ok, IV has a long term business model.
Will investors buy this though? Why should IV be special?
It's been running now for what, 10 years? Wouldn't you expect a ROI in that time - plenty of time to get a patent granted, and many of its investments have been already granted patents in any case. And isn't there a statistic that most patents take about 3-5 years to commercialize? This should be prime time."

In my opinion Tom Grew has a point here. A successful business strategy in the short term is a necessity to survive on capital markets and very few are the companies that managed to stand up after taking a heavy blow upfront. However it does not seem that IV lost the confidence of its investors, so does patent trolling pay and if it does when should investors expect a ROI? I guess we will only find out about it in a few years time.

Verizon borrows Intellectual Venture's IP

The Tangible IP blog recently reviewed the Economist's article on Intellectual Ventures (see here for the review). Head on the tails of the article follows a report that US telecommunications giant Verizon has exploited its USD 350 Million investment in Intellectual Ventures by having US Patent 5,410,344 assigned to it and then countersuing TiVo in its ongoing patent infringement suit (Verizon also allege in their counterclaim that TiVo infringe the following US Patents: 5,635,979, 5,973,684, 7,561,214, 6,367,078 which were already held by Verizon). The Assignment has not yet been recorded on the US PTO website which still lists an Intellectual Ventures subsidiary as the Assignee.

Intellectual Ventures has always maintained that it was not a "trolling" operation and here we have an example of the investment made by Verizon presumably paying off.

In another patent infringement dispute with Echostar, TiVo have been awarded damages of USD 200 million (down from the USD 1 billion claims by TiVo). The decision is being appealed according to a statement made by EchoStar. This was based on an assumed royalty rate of USD 1.25 per month per subscriber (according to the 10 Nov 2009 10-Q filing made by TiVo) Now I'm not certain of the market share of Verizon, but given it's size and reputation it may well be that the USD 350 million investment in Intellectual Ventures could easily pay off if the counterclaim against TiVo succeeds