The Nokia-Microsoft Transaction: Further Thoughts on Strategy and Valuation

Fellow blogger Mike recently discussed ("Microsoft Acquires Nokia Handset Business and Licence-Related Patents"), here, the high-profile acquisition by Microsoft of Nokia's handset business. Permit me to offer my own view of certain aspects of this blockbuster transaction. To remind readers, Microsoft paid 3.79 billion EUR for the mobile phone and smart devices business units plus certain support assets and activities (the business "itself") and an additional 1.65 billion EUR for a 10-year non-exclusive licence (subject to possible extension in perpetuity) to use certain Nokia patents. I scratched my head and did a lot of on-line digging in search of a previous example where multiple billion dollars were paid for a non-exclusive licence, but my efforts came up empty. Whether or not these licence arrangements, having regard to the sums paid, are indeed without precedent, the more interesting question still remains: what do we make of these licence arrangements, given that the previous mega-patent transactions of recent years have focused in whole, or nearly in whole, on the acquisition of patent ownership of large patent portfolios? Two reports of this transaction offer somewhat different perspectives.

First, let's consider the 3 September Reuters report by Dan Levine ("Why Nokia didn't sell its patents to Microsoft"), here. Until the transaction, it is claimed, Nokia had not widely licensed its handset-related patents, instead using its patents as a shield against competitors. That will change, said a Nokia spokesman, "[o]nce we no longer have our own mobile devices, following the close of the [Microsoft] transaction, we would be able to explore licensing of those technologies." That is well and good, but it takes two enter into a non-exclusive licence arrangement, so why did Microsoft agree to take such a licence rather than to acquire the patents?

One answer may simply be that, when compared with several of the mega-deals for patents, most notably the Google-Microsoft Mobility transaction, Nokia simply did not receive an offer for the amount that it wished to receive for sale of its patent portfolio to Microsoft. Maybe yes, maybe no, given all of the second-guessing about the amount actually paid by Google that are attributed to the patents. The better answer, as suggested in the article, is not simply a case of the licence arrangement being the best available option. Rather, the licence was part of a strategy for the exploitation of the company's patents.

In particular, it is connected with Microsoft's attack on Android manufacturers. Thus, it turns out that Microsoft has already succeeded in convincing approximately 20 Android manufacturers to pay royalties, thereby adding a further cost to the overall Android system. The argument is that, by leaving the patents in the ownership of Nokia, the company can separately sue the same Android manufacturers, with the intention of obtaining a royalty and further adding to the cost of the device. The article called this step a "pincer movement" made possible by the ownership of Nokia in the patents. If this be correct, we can expect to witness, over the next several months, multiple law suits for patent infringement and filed by Nokia.

A somewhat different approach is offered on the FOSS patents blog post of 3 September ("1.65 billion euro patent licensing portion of Microsoft-Nokia validates Nokia's portfolio"), written by the perceptive Florian Mueller, here. Of particular interest are two slides set out in the post, taken from a "strategic rationale" document furnished by Microsoft (Mike's post provides a link to the document). Most notable are the following claims by Microsoft:

1. Microsoft is taking an assignment of more than 8500 design patents;

2. The utility patent portfolio that is the subject of the Nokia licence to Microsoft consists of more than 30,000 granted patents and pending applications and is described as one of the most valuable portfolios in the wireless connectivity industry.

3. Microsoft will taken an assignment of the benefits of more than 60 third-party patent licenses.

Mueller observes that Microsoft, unlike Google, already has a strong patent position (witness its success in smart-phone litigation and convincing 20 Android device manufacturers to take a licence with recourse to litigation). Thus it had no interest in acquiring the Nokia patents, but merely in ensuring that it would be free from interference based on these patents, whoever ultimately owns them. The blog also suggests (and others have apparently discussed more directly), that Nokia now is in a position to assert its patents against other parties for the purpose of obtaining royalties (and thereby becoming a "patent assertion entity" or even a "patent troll"?).

Despite the stark differences between the Google-Motorola Mobility transaction, in which the portfolio was acquired by Google, and the Microsoft-Nokia transaction, which emphasizes the grant of licences by Nokia, there are still some common nagging questions: (i) how did Microsoft reach the 1.65 billion EURO valuation for the licences; (ii) how did Microsoft assign a value to the design patents acquired; and (iii) how did Microsoft reach the conclusion that the Nokia portfolio is a particularly strong one?

More generally, Florian states that "Google grossly overpaid for Motorola's patents", apparently based on the thin record of successful litigation resting on these patents. Maybe yes, maybe no. Perhaps Google assigned a large value to the fact that in acquiring the patents, it precluded acquisition by someone else. Perhaps Google has other metrics by which it is valuing the success of its patent acquisition. As for Microsoft, the entire acquisition may make sense only if the company can make a go of it in the smartphone industry. If Microsoft fails, then not only can it be claimed that it "overpaid" for the Nokia patents, but in doing so, it precluded these amounts from being utilized by the company to develop other product categories. Seen from this vantage, the ultimate strategic concern is not the potential benefits flowing from the grant of the licensed rights, but rather the very transaction itself. As such, the issue of the licensing is at most a matter of high level (and expensive) tactics. Without being trite—"only time will tell."

“A Kodak Moment” or “Rembrandts in the Attic”: The Valuation for the BlackBerry Patent Portfolio

On the heels of the announcement that BlackBerry would start looking “at strategic alternatives,” the web has lit up with commentary and speculation on the value of the BlackBerry patent portfolio—a whopping 5,000 plus patents and almost 4,000 patent applications! (here, here, here and here) And, the value is – well, $2 billion.  Or, maybe $3 billion.  But, well, under some circumstances could be $5 billion.  Wow.  A $2 to $5 billion range?  To be fair, these valuations are being made “on the fly.”  I do hope that this time the folks doing the valuing are taking into account, at least, how extensive the licensing of the critical patents in the portfolio has been (apparently a mistake with the Kodak portfolio valuation), the existence of noninfringing substitutes, the relevant markets, the construction of the claims and potential prior art not considered by the relevant patent offices. (How much is that analysis going to cost?) 

Could the portfolio be a "Rembrandt in the Attic" (or a lot of them)?  Again, how extensive has the licensing of the patents been?  At least one analysis has pointed out that there is quite a bit of term left on some of the BlackBerry patents.  And, in early 2013, Intellectual Asset Management reportedly gave the BlackBerry Patent Portfolio a relatively high rating based on quality and quantity of patents and BlackBerry supposedly has been spending "$1.5 billion to $2 billion" on R&D a year. Here is the Envision IP analysis (and update) of the BlackBerry Patent Portfolio.  ThinkFire will release its analysis of the present BlackBerry Patent Portfolio soon.    Anyone need a shield or something to trade?    

Besides the valuation issue, it will be interesting to see if the BlackBerry patents are eventually used by so called “patent trolls” to hold up other entities since BlackBerry (Research in Motion) was such a famous “victim” of NTP and has been an outspoken critic of "patent trolls."  (the sword).  Again, anyone need a shield?  We shall see how the game plays out. 

Kodak, Patents and the Deal That You Can't Refuse?

Let's start from the end: No, I am not going to let this subject disappear quietly.

Several months ago I wrote about "Patent Valuation, T.S. Eliot and the Theatre of the Absurd" here, where I commented on the steadily decreasing valuation of the Kodak patent portfolio. The saga continues. Last week it was reported by Joe Mullin on arstechnica.com here that Kodak has entered into a credit line of $793 million dollars with its bondholders, provided that the company can raise at least $500 million from the sale of its portfolio of patents. The arrangement still needs approval of the bankruptcy court, it is reported.

The names of potential purchasers remain a combination of smartphone companies--such as Apple, Google and Samsung-- on the one hand, and patent aggregators, such as Intellectual Ventures here and RPX Corp. here, on the other. The article goes on to make a number of points that are not entirely clear to me:

1. "Because such a wide range of entities is working together to buy these Kodak patents, it is unlikely that they would fall into the hands of patent trolls or be used for other types of patent attacks."--I don't quite follow this. What does it mean that these entities are "working together"? Are they allocating the patents between them? If not, what is the nature of this coordination? Moreover, depending upon on how you define a patent troll, both Intellectual Ventures and even RPX Corp can be seen as having troll-like characteristics.

2. "This deal would allow Kodak to get one big lump-sum payment rather than eke out its patent cash in court."--This seems to be a bit of false dichotomy. Did anyone really believe that Kodak's patent folio was going to earn the company aggregate recovery in the amount of many hundreds of millions of dollars? Is sale of the patent portfolio really a commercial alternative to continuing to slog it out in courts?

3. "But the endgame will remain the same: competing companies--and, indirectly, consumers--will still have to pay a hefty tax to buy out a dying, but patent-rich, business"--This is not clear to me at all. Who are the competing companies and why are they paying "a hefty tax" for the patents?

4. I do not understand the pricing dynamic that it taking place here. In particular,
what are the pressures that are being brought to bear on these potential purchasers so that they agree to pay an amount greater than if there was a free auction of the portfolio? What comes to mind is that the bondholders want to pressure the perspective purchasers to fork over at least a half-billion dollars or take the risk that the patents fall into the "wrong" hands. Maybe that is the "hefty tax" that is referred to in the article.

More generally, I would really love someone to dig into how it came to pass that the same patent portfolio was given a valuation of over two billion dollars last year. Who had in interest in championing this over-estimate? How was this supposed to translate into fees or other income for interested parties? Is there an IP equivalent here to the tawdry conduct of several major investment houses a half decade ago, who were flogging investments of the same bundles of assets that they were shorting (i.e., betting on their price decline)?

Stated otherwise, it seems to me that the time has come for at least certain elements of the patent valuation business to come clean on what happened. Greed, misjudgment, or something more sinister?

Mega-Patent Portfolio Sales: Chimera or Here to Stay?

I do not usually use this blog platform to offer my counterpoint to a post by one of my IP Finance colleagues. However, I will make an exception this time in connection with Rob Harrison's interesting post of yesterday--"AOL posts profit based on Microsoft patent sale" here. Rob focused on the connection between the $1.056 billion dollar sale by AOL to Microsoft for a large chunk of its patent portfolio (Microsoft then turned around and sold a large portion of these former AOL patents to Facebook) and the rise of AOL's share price to a level not seen in years.

Rob concluded as follows:

"The whole deal has been presented as beefing up Microsoft's patent portfolio in the search business and helping Facebook's patent dispute with Yahoo. Certainly the volume of patents probably means that both companies have probably a better arsenal to defend themselves in this and future patent suits. AOL's shareholders can comfort themselves in having realised value from a substantial IP portfolio built up over the past fifteen years."

I have recently questioned elsewhere ("Of Medieval Marauders, Tulips and and the Sale of Patent Portfolios", here) whether the sale of these mega-patent portfolios, starting with the $12.5 billion sale by Motorola Mobility to Google, is the most graphic example of the potential value to be extracted from a properly developed patent portfolio, or the result of a number of idiosyncratic circumstances that have created a distorted market for patents, bordering on being a full-fledged patent bubble (interestingly, an item this week suggests that, contrary to previous accounts, patents may not have been the sole driver for the Motorola Mobility purchase. As reported by Washingtonpost.com on July 25th, "A report from VentureBeat highlights that Google’s acquisition of Motorola Mobility was only partially fueled by patent acquisitions, which many suspected was the main drive behind the deal. The report says that only $5.5 billion of the $12.5 billion deal went to patent acquisition. Google hasn’t provided much information on its strategy for Motorola, saying only that everyone should expect “some changes” at the hardware maker.").

Circling back to the AOL-Microsoft transaction, I would make the following comments in response to Rob Harrison's observations, to try and get a better understand the nature of the $1 billion plus payment received from Microsoft.

1. How much did AOL expend over the years to register, maintain and enforce these patents over the 15-year period?

2. To what extent did AOL receive licensing fees from third parties with respect to these patents?

3. What portion of salaries and other company resources can be attributed to the invention and registration of these patents?

4. To what extent did expenditures in the patent portfolio constitute forgone investment in other AOL activities?

5. Can we determine a rate of return with respect to these patents? How does it compare with the rate of return on other AOL assets?

6. As a matter of policy, to what extent should patents primarily serve the shareholder's interests in boosting share price by a one-off enhancement of revenue within the company?

7. Is the sale of the patents in the name of shareholder value another way of saying that management did not make effective internal commercial use of its patents?

8. Is it any coincidence that sale of these mega- patent portfolios has occurred about the same time as investment banks have made a push to introject themselves into this market (and earn substantial fees as a result), see "Investment Banks Seek Business in Patent Deals as M&A Work Slows", Bloomberg.com, June 25th here?

It appears that the sale of mega-portfolios of patents is not going away, especially in these difficult economic times and, with it, increasing questions about what is going on.

Valuing a diluted brand: the Pierre Cardin challenge

In a piece for the Wall Street Journal last month, "Pierre Cardin Ready to Sell His Overstretched Label", Christina Passariello gave an account of the exercise in which still-active designer and hyperactive licensor Pierre Cardin is currently engaged in selling his business.  In brief:

".... Ever since luxury-goods giant LVMH Moet Hennessy Louis Vuitton paid richly for Italian jeweler Bulgari SpA in March, valuations of fashion houses have been on the rise. The industry is entering an acquisitive phase for the first time in a decade. ... The price Mr. Cardin wants — €1 billion, or $1.46 billion— is a stretch, industry watchers say.

Bankers estimate it could be worth about €200 million—but even that is a guess because of a lack of financial information. ... Mr. Cardin doesn't have a clear idea about his company's annual sales, which are garnered by some 400 license partners world-wide. ...

Says Mr. Mallevays [ex-LVMH executive, founder of boutique investment advisory Savigny Partners], "From a due diligence perspective it's an absolute nightmare, and goes contrary to the fact that he wants a lot of money for it." ...  

Like other fashion companies such as Dior and Gucci, he parlayed his cachet into licensed products far removed from fashion. But he went much farther, starting from a first license for porcelain crockery in 1968. There are Cardin toilets, strollers and heating units. Some 20 years ago, however, fashion labels began to realize that too much licensing harmed their global reputation. Now, fashion houses carefully handpick their licenses in areas that are related to the core business: Gucci has a perfume license with Procter & Gamble Co.; Swiss watch giant Compagnie Financière Richemont makes Ralph Lauren timepieces.

Not Pierre Cardin. He continues to farm out his name to thousands of products world-wide....

In recent years, sales and profits at several of Mr. Cardin's subsidiaries have continued to slowly increase, according to the company's public records. Still, there is no global picture of his finances. Making his financial empire more nebulous, he claims to owns a 5% to 10% stake in each of the companies he licenses his brand to, as part of the royalties he collects....

Asked how he came up with the billion-euro valuation, [Cardin] takes out an old greeting card and, scribbling, says, "If I ask €10 million per product, which is nothing at all, per country, multiplied by 1,000, that makes one, two, three...." Dismissing the profusion of zeroes, he concludes, "One thousand products, 100 countries, that's how it calculates. It's nothing." ...".

The question for readers is this: how does one approach the valuation of an IP portfolio which contains a bundle of copyright and design rights which is likely to defy organised attempts at due diligence, and which is underpinned by a brand which is (i) extremely diluted through decades of apparently promiscuous licensing but (ii) highly recognisable and attached to a large number of product sectors in a correspondingly large number of countries?

A second question relates to the prospects of turning such a brand around by jettisoning some of its excesses and refocusing it by creating a new, fresh image to tie to the brand recognition and which promises a prospect of a good return: is this exercise feasible and, if so, how should it be tackled?

IP Valuation seminar: a chance to visit Budapest

IP Finance has learned from Hungarian Patent Office (HPO) economist Peter Kaldos that there's a highly useful seminar coming up shortly.  "IP Valuation for Technology Transfer".  Organised by the World Intellectual Property Organization together with the HPO, the event takes place on Thursday 28 October. According to the conference blurb,

"The efficient transfer of technology to industry partners is increasingly a key objective for many research institutes and universities. Valuing technology created as a result of R&D activity can assist with creating successful partnerships and with the technology transfer process [it can also assist in destroying successful partnerships, if it's not properly handled].

The purpose of the seminar is to discuss how IP valuation tools and methods can be used by research institutes and technology transfer offices (TTOs). The aim is to bring together experts in technology transfer and IP valuation, to initiate discussion, and to call for increased cooperation in this field.

Issues addressed will include: When and why is IP valuation relevant for research institutes and TTOs? Is IP value a good indicator of whether research funding is efficiently allocated to R&D projects? [This question could occupy the whole day, given a chance] The optimisation of the technology transfer process by using IP valuation tools. How can the results of an IP valuation assist with decision-making related to R&D and patenting? communicating the significance of research results? out-licensing technology? forming spin-off companies and joint ventures? bringing in investors and increasing capital? efficiently allocating funding to R&D projects by calculating IP value?".

Speakers are Dr Robert Pitkethly, of the Said Business School and Oxford Intellectual Property Research Centre, Oxford, Theo Grünewald (Steinbeis-Transfer-Institute, Berlin, Germany), Dr István Molnár (Szeged-BIOPOLISZ Innovation Services Ltd., Szeged, Hungary) and Peter Kaldos himself.

For further information and for registration, click the seminar website here.

Valuing Patents and Litigation

Patent valuation has always been an art rather than a science. The value is often more dependent on the eye of the beholder than an "objective" value. And probably rightly so. A company that can exploit a patent is prepared to pay much more for the rights, than one that needs to invest substantially in the means to exploit the idea.

Rob's been intrigued to hear recently about a case in which a substantial deduction was applied to the value of IP rights because they "had not been tested in litigation". This seems to be crazy and almost encouraging litigation. It's probably true that a patent that has survived litigation and had the whole weight of a defendant thrown at it is probably more valuable - it becomes almost impossible to challenge the validity. That might justify a premium. Most such patents, however, tend to be narrower in scope than the original grant. It's almost inevitable that some prior art emerges from unknown sources that will limit the scope of the original patent. So litigated patents tend to offer a smaller degree of protection, but are certainly future proofed against further prior art attacks. Their ultimate value could have changed either way - a reduction in claim scope can also mean a reduction in value.

So what's the conclusion? It looks to me that whoever carried out the valuation has not really considered the implications. When a court case in the US can cost upwards of USD 1 Million it does not seem to be a terribly good idea to apply a general reduction in value because the application had not been through litigation. Any good valuation expert should be in a position to at least instruct a prior art search to be done on a patent to see whether it is likely to be substantially litigation proof and that would generally be a much better approach than merely discounting the value because something "might be found". Certainly the search is going to cost an awful lot less than the court case.

Peter Zura's 271 Blog on Patent Litigation Statistics here.

Denis Crouch's chart on litigation reported here.

Valuation: an art, a science or an outcome?

"Brand Value: What is Your Company Really Worth?" is the title of a short article penned by Kelvin King (Senior Director, Valuation Consulting) for ACID (Anti Copying in Design) and published last month. In the course of his article he writes

"Valuation is an art more than a science and is an interdisciplinary study drawing upon law, economics, finance, accounting, and investment. It is rash to attempt any valuation adopting so called industry/sector norms in ignorance of the fundamental theoretical framework of valuation.

Valuation procedure is, essentially, a bringing together of the economic concept of value and the legal concept of property. The presence of an asset is a function of its ability to generate a return and the discount rate applied to that return. The cardinal rule of commercial valuation is; the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances".

This is a useful reminder for businesses that depend on the creation or use of IP rights for their profitability. The literature tends to be written, often for good reason, in general terms, and business decision-makers -- particularly in SMEs -- are constantly reminded that their IP is valuable, that it is worth spending money on obtaining and protecting it, and so on. But when they want to dispose of an IP right, they are sometimes disappointed to discover how little value in monetary terms is placed on their rights in contrast with their own financial and emotional outlay. Expectations are raised, but the reality can be very disappointing -- and the truly valuable IP rights are always in someone else's sector, not one's own.

The value of an IP right can seem very small if there's no-one on hand to buy it, take a licence for it or indeed infringe it. It can also appear to grow in the hands of someone who can "talk it up", enhancing its commercial value by praising its functionality or marketing utility, which in turn emphasises the subjective and variable nature of the value of an IP right. In short, valuation may be neither an art nor a science but an outcome -- the result of interaction between interested parties, be they buyer and seller, licensor and licensee or borrower and lender.

Life sciences and valuation -- a new book

Via Technology Transfer E-News comes a report that the co-founders of Avance, a life sciences valuation firm with offices in the US and Switzerland, has published a guide to life sciences valuation that contains useful information for business development and licensing professionals as well as TTOs, researchers and investors.

Boris Bogdan and Ralph Villiger, in Valuation in Life Sciences: a Practical Guide (Springer, 2008, 334 pp.), explain how to translate characteristics of drug and medical device development into valuation, also furnishing industry data. The authors emphasise the utility and realistic outcomes of proposed methods of valuation by including many practical examples, including some complex licensing and company structures. More details of the book can be viewed here.

The value of designs - "Design can deal a winning hand"

An article on the Packagingnews website of 5 June highlights the difficulties of measuring the value of designs and the perceived value to clients.
It is available at http://www.packagingnews.co.uk/news/814874/Design-deal-winning-hand.
It mentions the RODI – the “return on design investment”.
The definition of this term on the Design Council’s website (see http://195.157.47.227:8080/design-council/showGlossary.do#g17)reads as follows: “Similar to standard ROI (return on investment), RODI isolates the specific return on design spend. Although only one in eight businesses currently pinpoints RODI with accounting procedures, we hope that doing so will become more common.”

Further information on this intriguing ROI measuring tool can be found for example at: Design Council’s Value of Design Factfinder - http://www.designcouncil.org.uk/en/About-Design/Research/Value-of-Design-Factfinder/ - “Businesses which use design perform better than their rivals.”

or at

VMSD (the “leading magazine for retail designers and store display professionals”) - http://www.visualstore.com/index.php/channel/62/id/12874 - “It’s the holy grail of retail design: demonstrate the return on investment that retailers will net from the new store layouts they commission.”

And this is a link to the UK’s Design Business Association’s Design Effectiveness Awards page which explains the judging process of the Award: http://www.dba.org.uk/awards/judging.asp. It sets out details of how the Award judges assess the commercial impact of a design.
Unfortunately we have just missed the entry deadline for 2008 – next time lucky in 2009.

Searching for corporate eyeballs

Much has been written about the business logic (perhaps out of desperation?) driving the proposed Microsoft-Yahoo merger, namely securing a bigger piece of the Internet search market now dominated by Google. A short article by Janice Fioravante, "Searching for Meaning," in the most recent issue of Institutional Investor, suggests that the Google model for reaping profits from search engines may itself ultimately give way in part, at least for the enterprise, corporate market.

The Google-type of search is described as not "particularly useful to corporate strategists seeking specific business intelligence or to securities researchers trying to stray on top of market-moving developments at companies they cover." The result is that both the search engine heavyweights, as well as smaller providers, are trying to find a better way to meet the needs of the enterprise market. Microsoft has agreed to pay $1.2 billion for a Norwegian company, Fast Search & Transfer. The perceived strength of the Fast Search technology is that it allows for "searching within large enterprises, behind the corporate firewall. Other companies vying in this space include Autonomy Corp., Endeca Technologies and Vivisimo.

The securities industry (to the extent that it has not been battered by recent events) is also trying to get into the game. The goal here is do "deep searching to mine the Web for nuggets of intelligence in domains that the Yahoos and Googles don't [currently at least) routinely reach, such as intranets, chats and blogs." The goal is a few, highly valuable pearls rather than a myriad of undifferentiated sand pebbles. Goldman, Sachs has apparently gotten into the act, investing in a company called Connotate as well as entering a market agreement with this company, so they maybe some substance in this approach.

One way to look at this is that this blooming of a thousand search-engine blossoms will take its toll on the Googles and Microsofts. But my heart of hearts tells me that the enterprise search market is not a disruptive technology, and that the big boys will find a way to dominate this emerging submarket as well.