It's no secret that patents are a hot commodity in the wireless industry these days. But what is interesting is the fact that intellectual property (IP) for the first time is emerging as a real asset class--something that companies are looking to aggressively monetize rather than sit on.
When Apple (NASDAQ:AAPL), Research In Motion (NASDAQ:RIMM), Microsoft (NASDAQ:MSFT), EMC Corp. and Ericsson (NASDAQ:ERIC) walked away with bankrupt Nortel Network's trove of some 6,000 patents for $4.5 billion, they set off a frenzy that significantly broadened the demographic of people aware of patent assets and their value to a company. Suddenly private-equity folks who were once vaguely aware of IP are now trying to pressure their partners to monetize their patents, one patent expert told me.
Of course, Google's (NASDAQ:GOOG) announcement that it plans to buy Motorola Mobility (NYSE:MMI)for $12.5 billion is primarily about patents and the company's need to defend the Android OS. The search giant's acquisition is Motorola's portfolio of more than 17,000 patents, many of which relate to wireless standards and non-essential wireless patents, as well as 7,500 patent applications in progress. Google said it would use Motorola's patents to protect the Android ecosystem from patent lawsuits.
Long-time patent holding company InterDigital, seeing the popularity of patents skyrocket, has sought to capitalize on the frenzy by declaring that it is for sale. Both Nokia (NYSE:NOK) and Qualcomm (NASDAQ:QCOM) are reportedly interested in acquiring InterDigital, according to a Reuters report, joining a growing list of companies interested in snatching the firm's valuable patent portfolio.
We'll likely see a number of investors start calling for companies to sell off patents. Motorola's billionaire activist investor Carl Icahn--the company's largest single shareholder--began raising the issue of selling off patents in July when he noted that Motorola's patent portfolio is "substantially larger" than Nortel Networks' portfolio. He told the Wall Street Journal that the company is actually worth $13 billion, significantly more than its $7.5 billion market value.
Recent research from MKM Partners LP suggests that Alcatel-Lucent's (NYSE: ALU) patents might be worth twice as much as the $4.5 billion Nortel Networks got for its patents. That $9-billion sum is more than the estimated $7.8-billion value of the company itself.
But IP is tricky. The patent experts I talked to say a very small percentage of any company's given patents are actually worth anything. Estimates vary but 2 percent is a number that is talked about. Still, when vendors sue each other over just a few of those patents, judgments come down to billions.
Another aspect for companies looking to sell off patents is whether that move makes sense. Are they realizing the full potential now, or could their value continue to rise? Remember that LTE royalty rates aren't totally set in stone. While most believe that the rates won't be any greater than what is set for W-CDMA, who gets the lion's share of those rates is still up in the air. Of course, it all comes down to who has good IP.
Still, it appears we have entered the patent asset bubble reminiscent of the Internet bubble.--Lynnette