Business Model Insights From Five IP Pure-plays
are lawsuits related toasserting the non-organically developedpatents acquired for diversification purposes.The diminished licence size and highenforcement costs of non-organic patentassertions are two troublesome scenarios.Maybe all of these lawsuit filings are neededto establish alpha licensing success in newvertical markets, although they may also beindicators of strategy and value-addedshortcomings.From both my own experience atCellport and observations studying the fivefirms, overwhelming evidence reveals that itis easier to accomplish licensing leadershipin a vertical tech space of organicallydeveloped essential patents created toadvance a one-time greenfield market ofinnovation design. Large mega hardwareproducers shrewdly avoid facing essentialpatent inventors at the negotiation table whoare passionately explaining their inventionhistories and eager to tell the courts howthey got ‘ideajacked’. However, when patentpure-plays stray from the vertical tech spacesthat they helped to pioneer, the portfoliosthat they acquire from other vertical techspaces yield less impressive results. Lowerlicensing amounts from the acquiredportfolios — often looking more like trollsettlement rates of US 2 million or less —www.iam-magazine.comare vastly under the historic licenceagreements in the tens of millions of dollarsfrom the firms’ organically developedessential portfolios.Clearly, IP licensing competencies, goodcash flow and significant balance-sheet cashare all high on the list of impressive assetswithin each firm. Today’s strategies ofincremental patent filings and purchasingpatents as a gross aggregator in therespective founding vertical markets shouldcontinue to deliver high-margin IP-licensingcash flows. But the current strategy ofdiversifying into other silicon-basedsemiconductor electronic markets viaacquiring portfolios seems unspectacular.There may be better and bolderopportunities for investing cash and usingskilled human licensing capital than on theassets of a greying electronics market.Lessons from Big PharmaThe large pharmaceutical companies faced asimilar ‘greying horse’ problem over the pastdecade, often trimming internal R&Dinvestments in chemistry labs due to thesteep drop-off in blockbuster drugs such asLipitor (Pfizer), Seroquel (AstraZeneca) andPlavix (Sanofi-Aventis), which are also sooncoming off patent. A low yield in maturingmarket investments in the traditional scienceof compound chemistry, coupled with ageingpatent portfolios, forced the bigpharmaceutical firms to shift innovationgears. When they realised the magnitude ofthe innovation crisis, the pharmaceuticalgiants became eager investors in thegreenfield markets of biotech. In the 1980sand 1990s biotech firms were consideredfringe opportunities with risky prospects.But as sales and profits at Amgen, Genentechand Genzyme exploded, the fringe biotechpeople became the sought-after disruptivedarlings of Big Pharma’s ambitions. Asbiotechs provided Big Pharma with morenew products for distribution, the race toacquire and invest in young and disruptivebiotech firms was on.The future: finding disruptions ingreenfield marketsIf the founders of Tessera, InterDigital,Mosaid, Rambus and WiLAN had launchedtheir firms with the licensing strategy andclosing skills that exist in today’s Stage IIIpure-play organisations, they would likelylook more like a Qualcomm. Irwin Jacobs,Qualcomm’s founder, sold his previous firm,Linkabit, in the mid-1980s, but becauseLinkabit owned very little of the intellectualproperty it developed, the sale price was adisappointment to Jacobs. Hence, in his nextIntellectual Asset Management May/June 2012 33
Play the gamecompany, Jacobs inspired innovation throughhis visionary leadership and Qualcommbecame known for its voracious patentfilings and world-class licensing prowess.Given the fabulous cash reserves andlicensing skills of Tessera, InterDigital,Mosaid, Rambus and WiLAN, a ‘disruptiontech division’ targeting future greenfieldscould yield more spectacular returns thanbuying patents in other electronic verticaltech markets and trying to license into amaturing market loaded with prior art.I am not recommending that these firmstransform into prototypical venturecapitalists, but that they develop newcompetencies (Stage IV) for findinggreenfield disruptors and creating the nextAmgen or Qualcomm. Learning how to fundand empower disruptive thinkers onfrontiers of the material sciences would begood for their image and the world and, ifsuccessful, would deliver outlier returns.Scant few cash-rich investment vehicleshave the IP-skilled human capital to architectvital IP optimisation. Tenured licensingskills could likely parlay significantadvantages to disruptive innovators ingreenfield markets. As Big Pharma haslearned, disruptive breakthroughs are bestcreated and grown away from a maturingcorporate entity.An overview of the five IP pure-playsFollowing are brief summaries of thehistories and major products offered by theInterDigital, Tessera, WiLAN, Mosaid andRambus.InterDigital (NASDAQ:IDCC) - verticaltech space: cellularThe company was started in 1972 by SherwinSeligsohn, a successful young Wall Streetbanker who had a vision of delivering stockquotes to beach vacationers. Theimpossibility of delivering on Seligsohn’svision challenged his entrepreneurialinstincts, so he founded InterDigital to buildhis wireless visions. After much systemdesign progress and a successful initialpublic offering in the early 1980s,InterDigital sold its Ultra Phone system toover 300 system operators worldwide.Unfortunately, the Ultra Phone design wastwo semiconductor generations behindcellular and it quickly became a datedtechnology.By the late 1980s, the success of cellulardoomed Ultra Phone, and InterDigitalexperienced years of white-water challengesas it shifted from product ambitions to aStage III organisation. Redirecting itswireless design resources towards patent34 Intellectual Asset Management May/June 2012Table 1. Summary of InterDigital’s financial performance (US )Licence revenueOther revenueR&D % of revenuePre-tax profitCash & 345M18.12%238.447M541.669MTable 2. Summary of WiLAN’s financial performance (C )Licence revenueOther revenueR&D % of revenuePre-tax profitCash & le 3. Summary of Tessera’s financial performance (US )Licence revenueOther revenueR&D % of revenuePre-tax profitCash & 4.585%100.821M475.005Mopportunities with time-division multipleaccess (TDMA), the technology used in most2G cellular systems, in the early 1990s itthen acquired SCS Mobilecom’s goldmine ofessential code-division multiple access(CDMA) patents, which were ironicallydeveloped by the Jacobs-led design team atLinkabit in the mid-1980s.Efficiently, InterDigital followed theMotorola, Nokia and Ericsson licensingsuccesses in the TDMA market and did thesame in CDMA after Qualcomm delivered aviable ecosystem. Although InterDigital hassuffered litigation setbacks and enforcementdelays, its licensing successes with Asianfirms appear to have some degree of designand other synergies.Today, the company invests tens ofmillions of dollars to advance wirelessdesigns, and is active in technologystandards bodies and in purchasingadditional patents. With a wireless-centricpatent portfolio in the thousands,InterDigital has created and purchasedenough wireless intellectual property to beconsidered a leading wireless aggregator.www.iam-magazine.com
Play the gameTable 4. Summary of Mosaid’s financial performance (C )1995Licence revenueR&D % of revenuePre-tax profitCash & %33.421M97.809MTable 5. Summary of Rambus’s financial performance (US )Licence revenueOther revenueR&D % of revenuePre-tax profitCash & 2.009M* This loss is an anomaly. The company paid US 171 million in employee stock-related expenses.Its previous year pre-tax profit was US 13.8 million.Given the current wireless patent thicket ofcommingled technologies, the big shift inwireless superpowers makes for directionaluncertainty at InterDigital. Will InterDigitalbe acquired for its cellular patents or stay inthe business of an IP pure-play and work tobuild a Stage IV organisation?WiLAN (NASDAQ:WILN, TSE:WIN) vertical tech space: wi-fi airlinkIn the late 1980s Hatim Zaghloul, anEgyptian immigrant with a recently mintedPhD from the University of Calgary, broughta fresh set of eyes and energy to the wirelesslabs of a well-endowed telephone monopolyin western Canada called TelusCommunications. After Zaghloul showedvision and leadership in wireless systemdesigns at Telus, he received funding tolaunch a research project called “NetworkLiving”.Zaghloul wasted little time in recruitinguniversity friend Michel Fattouche as aresearch colleague. Given the variety ofchallenges with TDMA, Zaghloul andFattouche focused on pushing the envelopewith wireless air interface experiments.While trying to improve on TDMA cellularnetwork challenges, the researchersdeveloped meaningful improvements inorthogonal frequency-division multiplexing(OFDM), an Airlink scheme for widebanddigital communication such as wi-fi. By 1991Zaghloul and Fattouche had ideas forsignificant advancements in OFDMtechnology; but Telus did not want towww.iam-magazine.compropose yet another cellular standard in thealready fractured North American market. In1992 Telus set Zaghloul and Fattouche free todevelop OFDM in their own company,WiLAN.During the first five years of WiLAN’shistory, Zaghloul and team built animpressive portfolio of contiguousessential patents on making OFDMtechnology a robust commercial platform.Zaghloul was the chief visionary and tirelesspromulgator of the virtues of OFDM as alow-power, high-data bandwidth wirelesstechnology. He took full advantage of thepatent system, and as soon as a new designwas filed, he lectured broadly on the benefitsof WiLAN’s OFDM advancements.Symbolically, in 1998, when the Instituteof Electrical and Electronics Engineersassembled a standards body to finalise whatwould become Wi-Fi Standard 802.11, manyof WiLAN’s essential patents got adopted inthe standard, yet WiLAN never sent arepresentative. Like the other IP pure-plays,WiLAN chose to enter the product businesswith a commercial launch in 1998, followedby an IPO in 2001. As WiLAN’s productbusiness prospects diminished, the use of itsessential patents by other firms in theburgeoning Wi-Fi market presented a StageIII challenge. By 2005 WiLAN began apolitically rancorous restructuring processand turned itself into an IP patent pure-play.Early licensing efforts were successful andafter several additional equity fundings,WiLAN bought more wireless patents, alongwith some cable transmission technologyand sensor patents. WiLAN has had lesssuccess in signing meaningful licenseesoutside of its organically developed area ofwi-fi-centric patents. The company’s recentfailed attempt to buy Mosaid leaves it poisedfor a new strategy. Because the firm has overC 100 million in cash-like assets and anassertive licensing organisation, WiLAN’sstrategy is sure to evolve.Tessera Technologies (NASDAQ:TSRA) vertical tech space: chip packagingIn 1990 Tom DiStefano and Igor Khandrosleft IBM’s chip research centre to start adesign consulting firm with a keen eyetowards developing innovative solutions inthe nascent semiconductor production andpackaging world. By providing consultingservices to keep the doors open, Tessera wasable to fund its first prototype chip-scalepackaging system after seven years. This longand difficult development cycle gaveTessera’s talented engineering team time tosolve many challenges and in turn build animpressive portfolio of contiguous patents inIntellectual Asset Management May/June 2012 35
Play the gamethe greenfield technology market of chippackaging.After six years of toil, a blockbuster salescoup landed Tessera its first customer: Intel’ssizable flash production division. The Intelcontract, followed by a win with Rambus,helped to position Tessera to gain bettermarket access and respect among Asianmemory chip producers. A public offering in2003 infused nearly US 100 million intoTessera for its second decade ofopportunities.Tessera has reported impressive royaltygrowth numbers and invests heavily in chipand non-chip research, along with patentpurchases. To shore up its ageing chip-scalepackaging portfolio, Tessera bought a chippackaging design firm’s intellectual propertyin 2005. Then, for what appears to be marketdiversification ambitions, the company spentheavily on large patent portfolios to buildcompetencies in imaging and optics, anddedicated R&D funds to this space. Tessera’saverage licence agreement from its image andoptics portfolio has been markedly belowUS 2 million per licensee.Tessera has made an interesting bet oncreating disruptive leadership in a field suchas electro-hydrodynamics. With the firm’s2011 performance down, recent managementchanges at Tessera appear to be diminishingthe imaging and optics business, and ifelectro-hydronamics shows greenfield-likepromise, the firm may pioneer yet anothermarket. Although ageing, Tessera’s uniqueand deep portfolio of essential patents inchip-scale packaging should provide positivecash flow for years to come. With nearlyUS 500 million in cash or equivalents on thebalance sheet, good engineering andlicensing skills, Tessera remains impressive.Mosaid Technologies (TSE:MSD)(nowprivate) - vertical tech space: memory chipsIn the late 1960s Dick Foss and Bob Harlanbecame friends while working in a transistorchip lab at Plessey Electronics. Dissatisfiedwith UK labour rules that favoureddraftsmen over engineers, they moved toCanada and joined Nortel’s ambitions toadvance memory chip designs. By 1975Nortel realised that the company’sbureaucratic roots were incompatible withthe rapidly advancing chip business andscuttled the business. Freshly unemployed,the two Plessey mates once again took afresh approach and founded Mosaid. Mosaidstarted by anointing itself as the technicalombudsman in the nascent and burgeoningmemory chip business. With cutting-edgeinsights into the rapidly evolving world ofdynamic random access-memory (DRAM)36 Intellectual Asset Management May/June 2012chip developments, Foss and Harlan soldsubscriptions to their analytics-rich DRAMresearch reports. By the late 1970s theiranalytics work led them to develop a familyof DRAM test equipment, which became abranded product line that delivered growingrevenues and analytics level insights for chipdesign innovations.Mosaid’s own DRAM designadvancements were first filed with the patentoffice in the mid-1980s and thenpromulgated to its subscribers in thememory chip business. The insightsgarnered from being an industry ombudsmanand in the test equipment business enabledMosaid to build up contiguous essentialDRAM patents in the 1980s and SDRAMdesigns in the 1990s, which provided Mosaidwith unique IP strength.Mosaid’s growing test equipmentproduct line delivered profits and designsynergy, but created relationship obstaclesfor patent licensing. In 2005 a Wall Streethedge fund forced a shake-up of the board ofdirectors, and a year later Mosaid divested itsbranded test equipment business andbecame an IP pure-play of its organicallydeveloped essential patents in the memorychip business. Over the past five years, bothMosaid’s build-up of licensing skills and itsrevenue from memory chip licences havebeen impressive. The early results from itspurchase of wireless patents have beenpredictably less so.Shortly after Mosaid consummated alicensing management agreement with Nokiaand Microsoft for a large portfolio ofwireless patents, it received an unsolicitedacquisition offer from WiLAN. After a seriesof deft, chess-like moves by Mosaid’smanagement, private equity investor SterlingPartners purchased the company for a sumover eight times Mosaid’s revenue.Action planAFor a Stage IV IP pure-play with an interestin allocating licensing executive resourcesand cash to the high-risk world of disruptiveinventions, the following recommendationsmight be considered: Allocate a percentage of balance-sheetcash to fund disruptive technologyprojects in greenfield markets. Market the firm’s licensing competenciesalong with its ability to co-invest in avariety of research communities. Create investment and strategic IPofferings to help investment fundstransition a disruptive tech jewel into thenext Amgen or Qualcomm; IP licensingskills along with co-investing provide aunique combination of value that shouldprovide access to prime investmentopportunities at various investmentfunds. Attend meetings on innovative thinkingand disruptive ideas.Rambus (NASDAQ:RMBS) - vertical techspace: memory chipsIn 1990 Rambus founders Mike Farmwaldand Mark Horowitz proposed numerousdesign ideas that resulted in contiguousessential patent filings for increasing thecommunication speed between a circuitboard’s primary microprocessor and a newgeneration of DRAM chip design. Rambuswas a classic Silicon Valley start-up; within afew years venture capitalists owned over50%, kept engineering focused ondevelopment and brought
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