I was reading an interesting article by one of my favorite bloggers, Bob Cringely, where he brought up the notion that maybe Apple’s Siri infringes on old Excite patents.  I am not a lawyer and have no idea if that’s true or feasible, but it once again underscored in my mind the current push on IP by the major tech companies.

The value of patents has never been more evident than in recent times.   Companies are building up their portfolio of patents not only to protect their intellectual property, but to also fend off lawsuits from competitors.  Billions of dollars are flowing into the space, as evident in the Apple / Microsoft consortium’s $4.5b buy of Nortel’s ~6k patents in June 2011 (the largest patent buy in history!) and Google’s purchase of Motorola Mobility for ~$12b (of which ~$7b of value is speculated as the value of Motorola’s 17k patent portfolio).  Many believe the main motivation behind Google’s move was to protect against future Android lawsuits by Apple, Microsoft and others.  This is a lot of money but its likely well justified when put in perspective of the large markets and revenue opportunities these companies are trying to protect.

However, it wasn’t until I started digging in a little more that I realized that protection from a competitor’s lawsuits is not the only reason patent value is being highlighted lately.  The main culprit: Non-Practicing Entities or NPEs (sometimes called “Patent Trolls”).  NPEs are companies that don’t have any operating businesses at all, but have many patents that they use lawsuits to extract value from operating companies.  Exemplifying this, as the WSJ pointed out this year, luminaries like Jay Walker (the founder of Priceline) created Walker Digital in 1994 to house his patents;  however, it wasnt until this year that  he partnered with IP Navigation Group to “monetize” the patents, handing out over 30 lawsuits against large players like Google and Apple.   Another NPE example is Lodsys, who in May 2011, filed suit against App developers Rovio (Angry Birds developer) and Electronic Arts (Sims 3) – Apple and Google joined the fray to support their app developers.

However, for anyone even remotely interested in this topic, NPR did a fantastic piece on the underbelly of the increasing NPE lawsuits and Nathan Myhrvold’s Intellectual Ventures in particular (full version here).  Intellectual Ventures is a NPE and holds a vast array of patents that it “monetizes” through lawsuits.  NPR did some math around the investor funding of Intellectual Ventures (IV) that indicates Intellectual Ventures will need to sue for ~$35B  in revenues over the next 10 years (up from $2b in revenues today) to provide the necessary returns for the investors who put $5b into the company!  I point to all these examples to underscore the gigantic market for patent lawsuits.  Now we can see why Apple and others are spending so much money in accumulating their own patents: it’s for defense against not only competitors, but billion of dollars of lawsuits from the non operating companies, like Intellectual Ventures.

So maybe Cringely is right – maybe a lot of the voice / gesture technology we just saw debut at CES technology could be attacked by NPEs.  I dont know.  Two things are for sure though: patents are hot and NPEs need to generate revenue.  While I obviously believe in protecting IP, I cant but help feel it’ll be the entrepreneur / consumer that loses in all of this….

Robert S. Peck, CFA
President CoRise Co. LLC


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