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The Ever-Changing IP Monetisation Marketplace for Paes

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The Ever-Changing IP Monetisation Marketplace for Paes Moving markets The ever-changing IP monetisation marketplace for PAEs of available intellectual property, this article Entities whose business strategy discusses a significant in-flow of private is centred on IP monetisation are and public capital to support monetisation operating in an industry that is efforts as well as a maturing pool of serial performers, currently on their second or undergoing rapid transformation third generational cycle of managing PAEs and controlled growth and thus armed with a track record to approach capital markets and raise larger By Peter D Holden, George Park and amounts of funding. Anupama Jain Notwithstanding this upswing in activities, the PAE community faces Despite the naysayers, the momentum several significant challenges to sustain the created from seminal IP deals such as current level of growth, and – especially Round Rock Research and Nortel has considering the constant state of change – remained strong, resulting in continued it is hard to predict what the PAE landscape growth in licensing revenues and patent will look like 12 months from now. There sales. We have also seen continued is, however, an increased recognition from inflows of private (non-corporate) capital leaders in the PAE community that the into the IP ecosystem, put to work in a costs, complexity and legal uncertainty of plethora of ways, from the financing of litigation are increasing at the same time public shells via reverse merger through as margins are decreasing. This pattern is to the formation of dedicated IP funds and forcing behavioural and structural changes even to the creation and strengthening on the part of the PAEs, from seeking more of sovereign wealth funds from Asia. nuanced strategies for enforcement to Whatever euphemism is used to describe demonstrating a greater willingness to seek the resultant IP monetisation entities early returns through a more collaborative – patent trolls, non-practising entities than combative style. There is a clear flight (NPEs) or patent assertion entities (PAEs to quality by the more established PAEs, – this term is used henceforth) – there is acquiring larger, deeper, broader portfolios, no doubt that they are an important and putting more and higher-quality patents in growing part of the IP ecosystem, not only suits (and having even more in reserve) with in the United States but increasingly in much better financing. The better-managed Asia and Europe. In 2012 they represented PAEs operating at this level will prevail over 50% of patent suits in the United and prosper. On the other hand, there is States, and they now deploy significant no doubt in our minds that at the bottom amounts of capital and employ ever- of the market, the pursuit of punitive/ increasing numbers of highly qualified extortion-type suits will decline, and there personnel. will be a good deal of consolidation between We are seeing an increased volume and PAE operators at this level, as they seek to quality of patent offerings from major global create scale and pool capital. corporations and research centres, which As this correction continues – are now more willing to collaborate with which is a normal and healthy part of PAEs, whether openly or surreptitiously. an industry growing up – there will be Corresponding to the increase in the supply a healthy ‘secondaries’ market in which www.iam-magazine.com Intellectual Asset Management July/August 2013 37 Moving markets the better-staffed and funded PAEs will Figure 1. Illustrative ecosystem of patent monetisation entities buy or take control over the worthwhile litigation ‘books’ of ailing, under-funding or under-exploited PAEs. The holy grail Interdigital VirnetX DSS/Lex Acacia CopyTele of PAEs, whether public or private, is that no quarterly earnings report or Rambus WiLAN Pendrell RPX Marathon financial year is ever dependent upon a single settlement, sales event or outcome. Tessera MGT Unwired Spherix For this, there must be mutual funds of Planet holdings across different technologies and ParkerVision Vringo markets, different counterparties, different Recent entrants (many Publicly less than 1 year old) strategies for monetisation and even listed Internet Defensive groups Patents Corp different monetisation teams in order to companies Pools diversify income streams and manage risk accordingly. Mobile Unified Altitude Media Patent The legitimisation of IP monetisation via the public markets Phoenix IV HDMI Arendi Licensing GPC/IPH Pluritas Licensing Figure 1 provides an illustrative breakdown Fergason Mosaid Inflexion of selected entities in the patent Patent PMC Point Pragmatus MPEG-LA monetisation ecosystem, categorising such entities by whether they are publicly listed Papst IP Navigation Round Rock Sipro or private and whether, broadly speaking, Private companies the foundational intellectual property was IPVALUE AST Sisvel internally generated or acquired externally. Until recently, when speaking of public Inventergy OIN Via Licensing IP companies, we were often referring to a first generation of technology development Internally generated Externally generated corporations that generated their own patents patents intellectual property as an offshoot of product Not comprehensive, subject to change development activities; these companies included Interdigital, Tessera, WiLAN and Mosaid. They blazed a trail in terms of wait for uplift on the stock or formal listing delivering sizeable returns to shareholders back onto NASDAQ once revenues become and succeeded in raising additional capital forthcoming. Figure 2 highlights some of the through secondary offerings. more prominent transactions of this type in As licensing programmes based on the last 12 to 18 months. their core intellectual property have been Patent holders invited to participate winding down, the continued success of in these ventures need to look carefully these companies will be determined by at the distribution waterfalls for such their ability to expand beyond their core arrangements, since while the public technical areas of competence (eg, wireless market story is compelling, the high cost and semiconductor) into new markets such of this capital is often less understood in as med-tech or light-emitting diodes, terms of actual distributions received by as well as to develop the required skills the founding management teams net of to effectively acquire new intellectual investors’ return of capital, hurdle rates of property, without unacceptable decreases 5% to 10% and sizeable warrant packages. in revenues. For every success story (eg, VirnetX), The last year saw the rise of repurposed there are many others that are still public shell companies specifically fashioned waiting to generate revenues and achieve to monetise portfolios of patents acquired aspired results. or brought into the public company in This repurposed public vehicle model, some structured finance arrangement or however, does provide the management reverse merger. Many of these transactions team with much more liquidity than if were driven by hedge funds and private it were to seek private venture or debt equity funds in New York, fast becoming a funding, and it provides public investors centre for IP financing. In some situations with an entry point into IP monetisation, the public shell companies are dormant or serving as a demonstration that Wall underperforming operating companies; in Street is taking intellectual property more others, they are clean, capitalised over-the- seriously as an uncorrelated alternative counter bulletin board shells which, with asset in its own right. However, in several the newly acquired intellectual property, cases, these public vehicles simply do 38 Intellectual Asset Management July/August 2013 www.iam-magazine.com Moving markets Figure 2. The reverse merger phenomenon and the rise of public IP companies Openwave (OPWV): founded Apr 2012: sold mediation and May 2012: changed name to Sep 2012: charged Apple and 1996, with a focus on mobile messaging product businesses Unwired Planet (UPIP) and Google with infringement internet as a software supplier focus to IP licensing Jan 2013: acquired 2,400 in the mobile telecom sector and enforcement Ericsson patents ICO Global Communications Jun 2011: changed name to Oct 2011: acquired Feb 2012: litigation against ZTE (ICOG): founded 1995 to provide Pendrell (PCO) and focus to ContentGuard Apr 2012: acquired 1,300 patents in 5 transactions mobile communications IP monetisation; acquired IP patent holding company Mar 2013: acquired 125 services using satellites consultancy Ovidian Nokia patents Document Security Systems Oct 2012: announced merger Mar 2013: Lexington makes equity investment in (DSS): specialises in fraud and with Lexington Technology VirtualAgility, providing access to patent portfolio and counterfeit protection for Group, a private IP litigation against Salesforce documents & digital information monetisation company Innovate/protect Vringo (VRNG): founded in 2006 Mar 2012: announced merger with Aug 2012: raised US$31M to Mar 2013: announced with a focus on mobile products IP firm Innovate/Protect, acquiring buy 500 patents from Nokia partnership with Virginia Tech and platforms, including patents purchased from Lycos and Oct 2012: filed lawsuit Intellectual Properties video ringtones asserted against AOL, Google, etc against ZTE Sampo IP American Strategic Minerals Nov 2012: merger with Sampo IP Mar 2013: establishment of Mar 2013: filed lawsuit Corporation (ASMC): engaged in LLC, acquiring set of notification
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