Originally published July 1, 2011
Usual foes gang up in anti-Android play
Earlier this week, it was reported that a small Canadian Non Practicing Entity (Wi-Lan) paid $8M dollars for approximately 60 patents belonging to a US based company. Wow! That’s lot of money for such a small portfolio some said. Poor fools… For those in the know, it must have felt like experiencing a small tremor when you know perfectly well about the “Big One” about to follow.
It happened this morning: the much publicized patent auction of prized Canadian telecommunication equipment Nortel, now in bankruptcy, came to an end with a consortium of US and Canadian companies (Apple, Microsoft, RIM, Sony, EMC, Ericsson) agreeing to pay a whopping $4.5B dollars for the 6000 patents (2600 US) still held by Nortel! Now we’re talking business.
For those who have a bigger calculator than mine and don’t have to remove a few zeros to make the average cost per patent, that comes up to 750K/asset, and to $1,73M/US asset, as the price is generally calculated based on the US assets only, with little value assigned to foreign counterparts. Ironically, if you consider that most of Nortel’s equipment and other tangible assets had already been sold for 1,13B last year, it perfectly validates the rule of thumb that intangibles comprise 80% or more of the capitalization of most companies. We now have Exhibit A.
Those are unprecedented numbers and everyone who even remotely deals with intellectual property, (which is pretty much everyone nowadays whether they know it or not) should pause for a moment and try to comprehend the forces at work here. For those who had not noticed, there is a global commercial war being waged and patents have become the new lethal weaponry. At $5-10M to defend any litigation and court awards that are often in the tens or even hundreds of millions, dropping a single patent over a company can make a rather big hole in a financial statement. This war is also a form of reverse cold war as players from all countries coalesce to the US territory to fight. Exactly the opposite of how the US normally prefers to fight. Why is that so? Because the price people are ready to pay for patents is directly proportional to how much revenues they can model in terms of asserting those patents against others and extracting licensing fees. And the litigation happy country we live in has by far the most fertile soil for nourishing these battles. By contrast, in China where –contrary to general belief- patent owners have a 98% win rate in litigating their assets, the average award is between ten and twenty thousand dollars…
Who are the winners and losers in this historic transaction?
The Winners: The day a deal is announced, they guy who won the bid always feel like the winner. Most often, he overpaid. Her, only time will tell. One thing is sure, the consortium above definitely makes for strange bedfellows. It might be simply referred to as the ABG (“Anything But Google”) group. Let’s be clear: this auction was essentially a mobile play where most of the major patent litigation is already happening. Note that the consortium is based around either the Windows or RIM OS. Google, who is desperately short in patents as a new comer, will now be forced to pay its dues to the other guys if it wants to continue to license its Android OS. The free ride is over guys!
The trustee in bankruptcy and the firm who handled the auction also look like geniuses today. They are certainly richer! Frankly, all they did is build a sandbox and let 40+ kids come and play until the strongest kid (or gang here) rules the house and the other guys are voted off the island. The Apprentice meets Survivor, in a sense.
Patent Litigators: you can imagine them rubbing their hands in delight as this manna from heaven is going to allow them to keep their kids in college for many years to come, which is a pretty good strategy considering there are no jobs waiting for those.
The Losers: Google stands to be the most visible loser here and one might say they brought it on to themselves to a large extent. A few months ago, they made a public offer at –what now seems like a paltry- $900M for the Nortel portfolio, as an attempt to discourage other bidders. Someone should tell them that if you want to impress the girl, you don’t flex your muscles in the parking lot adjacent a bodybuilder convention. As a result, the auction reportedly attracted 40+ serious bidders. Also, by going public alone, they shut themselves out of the type of coalition that the winners formed. Last time I checked, the Art of War was still sold on Amazon…
The Canadian people: Canadians have many things to brag about, but very few of those are high tech companies. Nortel was long a bright spot in the white immensity, the homegrown company that didn’t sell itself to US interests, at least not alive. Now they are selling the corpse. On Canada Day on top of it.
The Shareholders: If the reports are right, none of the common shareholders of Nortel stock (i.e. “normal” people who invested in the stock via the usual markets) stand to receive a penny. The bulk of the proceeds will go to secured creditors, mostly large US banks. Very sad.
If there is on silver lining here, it is that The Sale -as it will now be referred- squarely puts the whole IP ecosystem in a new light; investors who crank billions each year in new startup ventures can no longer afford to dismiss the IP questions as “ancillary” and throw dollars after dollars enamored by crystal ball generated pro forma financial statements. Nor can business owners continue to ignore the likelihood that they –like most people- have to pay a patent tax to someone- and that they’d better figure out sooner than later ways to remain in the “lower bracket”!
Happy Canada day everyone! I can only surmise what the 4th of July will bring us