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Of Rembrandts, Nuclear Weapons, And Throwing Stones Into Glass Houses – or Why Intel might (or should) Win the Auction For The Nortel Patent Portfolio?

Of Rembrandts, Nuclear Weapons, And Throwing Stones Into Glass Houses – or Why Intel might (or should) Win the Auction For The Nortel Patent Portfolio?

Guest Blog By: Eduardo Sanchez

Intel might be, or should be, the winner of the auction for the Nortel patent-portfolio scheduled for Monday, June 27, 2011. The ensuing activity for the Nortel portfolio has seen an unusual number of late moves, and fueled even more speculation about its outcome, and potential consequences.

In little more than a decade since Kevin Rivette’s book Rembrandts in the Attic was published, patents have gone from being referred to as precious but forgotten works of art, to being described as nuclear weapons being lobbed against rivals in the IP wars of the 21st Century. This language has only helped increase the speculations about the Nortel auction, while adding very little to the understanding of the truly strategic and transformational nature of the events unfolding before us, and the effect it has had on the firms engaged in it.
The latest list of potential bidders has expanded to include some of the biggest players in the high-tech industry, giving rise to interesting reviews such as this one at the Tangible IP Blog.

I would like to add one extra dimension to the analysis done thus far on the subject. To do that, I will borrow the IP / Product Matrix [1] developed by Mark Blaxhill and Ralph Eckhart in their Book: The Invisible Edge, Taking Your Strategy to the Next Level Using Intellectual Property.  This is shown in FIGURE 1 below:

FIGURE 1

 

Before proceeding, one should keep in mind that on the IP / Product Matrix, the horizontal axis represents the strength that a company has in IP. The vertical axis represents a company’s market share or sales-power.

Next we will need some definition for each quadrant of the IP / Product Matrix[2]:

The Target Firm: Plenty of manufacturing, lack of IP strength.
- Rely on manufacturing cost advantages to build market share, compete purely on cost.
- New comers to areas with established technologies.
- No IP of their own.
- They bring little to negotiations when negotiation licensing deals.
- No R&D or marketing expenses allows them to quickly become formidable competitors
- Growth Path: Glass House
i.e.: High tech companies in emerging markets. Example: ZTE

The Glass House Firm: balanced growth, large patent portfolios, and large market share at the same time.
- IP is used only as a supporting asset in support of manufacturing and marketing.
- Try to avoid entanglement with IP of others.
- Lack complete technological autonomy.
- Need competitors’ IP for their own products.
- Its competitors are in similar position to its own.
- Cross-licensing is common to avoid legal action, in effect they create “hidden licensing networks”
- Most companies remain in this “visible and vulnerable” glass house.
- Growth Path: Shark
- i.e. Intel, Apple, Google, HP, Nokia, Ericsson, Motorola, TI

The Minnow Firm: newer and smaller-market businesses.
- More options as they grow and evolve
- Modest product sales
- Developing new-technology portfolio
- Growth Path: Chose to evolve into either Sharks or Targets, along either axis.

The Shark* Firm: Company of ideas. Plenty of IP Strength.
-Focuses on Innovation. Pure IP Play. No manufacturing.
- Strong negotiation position when licensing its technologies.
-Licenses IP to all manufacturers
- Path to growth: Already a top “predator”
i.e.: Tessera, Qualcomm, Interdigital, universities

FIGURE 2

 

In Mark Blaxhill and Ralph Eckardt’s words, the Shark label is one “we apply with respect: These companies are highly fit and often relentless models of commercial innovation”.

When we use the IP / Product Matrix to plot the potential bidders for the Nortel Patents, those in red text, and others who have chosen to remain on the sidelines thus far, the relative strength positions, with respect to each other in the mobile / telecom, interesting patterns emerge. This is shown in FIGURE 2.

Apple, RIM, and ZTE all license technologies from competitors / peers in the upper right corner, or the glass house quadrant, and from the firms in the lower right corner, or the Shark quadrant. This makes sense as the first two manufacturing mobile handsets, and ZTE manufacturing mobile gear. All three might seek to strengthen their IP position by acquiring the Nortel portfolio, which will also result in reducing the royalties they pay to others (Sharks, or Glasshouse types) which would increase their margins per manufactured device. This move takes these three companies from being on the Target Quadrant, in so far as mobile devices / telecom is concerned, and places them firmly on the Glass House Quadrant. There they can become even more formidable competitors in that space with a robust patent-portfolio that others will seek to license rather than suing them.

Ericsson and Google seek to strengthen their IP position by acquiring patents and use them defensively / offensively. In the case of Google at least, to protect its Android ecosystem and beyond as the Nortel portfolio includes wireless, Wi-Fi, internet search, social networking and LTE the next generation in mobile, according to this blog by TechRawr. Ericsson seeks to acquire a few more essential patents to enhance its waning 2G portfolio. They both acquire, for “internal consumption”, if you will. Ericson’s position in the telecom Industry and its recent forays in the IP world to acquire patents is very ably delineated here by Andrew Watson at the Tangible IP blog and, also here by Pramath Malik at the TechRawr blog. Already in the Glass House quadrant, Ericsson seeks to strengthen their IP positions.

RPX and Intellectual Ventures (IV), both considered potential bidders, and already owners of significant strong patent portfolios, might seek to further strengthen their IP holdings by acquiring the Nortel portfolio to better serve their clients and make their IP offering more attractive. RPX and IV have strong position in the Shark Quadrant already (although not necessarily a perfect fit for the definition of a shark firm). The possible incentives for these two to participate in the auction are described here by Mr.Watson of the Tangible IP Blog.

The rest of the firms listed, that are not bidding, like: Samsung, Microsoft, Nokia, Qualcomm, and Interdigital, are a mixed bag ranging from those already in the Glass house to the Shark Quadrants. They have very strong patent portfolios to strike licensing deals, inbound or outbound, from each other, and are confident that they would have access to the Nortel patents one way or another. They also seek to continue to protect their Glass House by acquiring even more patents. This is the case with Samsung and Microsoft who license defensively through RPX already, or from the likes of Qualcomm or Interdigital, in Samsung’s case. Microsoft in particular receives royalties from handset Taiwanese manufacturers HTC as reported by Fiercewireless here, and has recently partnered with Nokia supplying the mobile OS (Windows Phone 7.1 Mango) for its next generation of products, a move Nokia made at the expense of its own mobile OS MeeGo that co-developed last year with… (surprise, surprise) Intel.

Intel is, I believe, the special case of the bunch, and as Mr. Andrew Watson of Tangible IP Blog admits here, not much is known about its intentions or the business reasons it claims it has to bid for the Nortel Portfolio. However, already some have pointed out to Intel’s very recent acquisition of Infineon’s Wireless business, IP, employees, and management included.

Intel is the Glass House Firm par excellence. Since being selected as one of the two companies to supply IBM with components, the Intel 8088 processor, for its open architecture PC (if you recall the other was Microsoft and the MS-DOS OS it bought to supply IBM) Intel has been supplying essential building blocks first to the PC, then the “Internet economy”, and now wireless communications. It holds still a central and very important role with most of its sales coming from the PC market.

Most importantly, Intel has excelled at executing open innovation strategies licensing technologies from its suppliers to manufacture its own product. Intel owns 100% of its world class manufacturing operations. It also engages in the definition of standards, and in the development of new technologies with partners, as was the case with WiMax, and as mentioned above it has co-developed solutions as it did with Nokia and its MeeGo Mobile OS last year, to name only a few examples of an extensive list.

Often some of these initiatives fail (MeeGo), or are overtaken by rival or newer technologies and industry standards, as was the case with WiMax, but Intel sees this as necessary “enabling” activities to increase its market share while nurturing its “ecosystem”.
Initiatives and projects may fail, but Intel is left with the IP and key knowledge that it is willing to license and let others use to enable their success in the marketplace. Being in the Glass House Quadrant itself, Intel wants others to increase their sales to maximize its own. The net result is that everyone benefits.

Intel is re-aligning, yet again, its resources to become, and continue to be the “Sponsors of tomorrow™” as stated on their website. For example: some might remember the very successful early years of Intel’s Centrino Processor technology and the effect it had on the proliferation of “hot spots” and increased sales of laptops. It launched an entire line of wireless products which included mobile processors, micro-architecture, main board chipset, and wireless network capabilities. Today, Intel states on its website that “Intel Centrino wireless technology will allow you to stay connected throughout your busy day by providing great coverage and reliable connectivity while consuming minimal power.”

Intel has further commented on the Infineon acquisition : “The business enhances Intel’s existing communication portfolio with leading wireless mobility and cellular platforms, bringing together Intel’s strengths in WiFi and 4G WiMAX with WLS’ leadership in 2G and 3G, and a combined path to accelerate 4G LTE. Collectively these building blocks further support Intel’s move to serve a broader array of customers and market segments with best-in-class computing solutions founded on energy-efficient performance, Internet connectivity and security.” This according to Intel’s own press release. The Nortel patent portfolio acquisition in this context would be a logical next step to take for Intel.

The central position that Intel had in the computing industry over the last 30 years is being reinforced by Intel’s upper management by acquiring Infineon’s lines of products and by adding it to its own, pairing it up with its world class manufacturing capability, operational excellence, and an already robust IP portfolio.

A Nortel IP portfolio acquisition will not only make Intel stronger, it will make its customers stronger, by giving them access to “building” blocks that already contain the technology and IP bundled so they can focus on developing and manufacturing the next generations of products, be it tablets, netbooks, networks, or handsets.

Intel is, in short, fulfilling its role as the Glass House par excellence, only that it is going much further this time. Intel is morphing itself into a version of a House made of “transparent aluminum”. This is the same transparent aluminum, a super strong transparent material, designed by the character Scotty, the famed Engineer of the Starship Enterprise in the movie “The Voyage Home”. Scotty used it to build holding tanks that enabled them to fly a whale and its calf back to the future to once again save Earth. (If interested, You can see a clip here)

Landscape for Nortel Patent Auction

. Intel is transforming itself so it can transform the industry. There is no other firm currently bidding for the Nortel patent portfolio that can make such claim.

• Apple, while already one of the most valuable companies in the world (based on recent market cap figures), is seeking to strengthen its own position. Apple still remains a proprietary system house. Intel can help it and enable it while doing the same for others in the industry.

• RIM faces the same challenge while struggling to keep its line of products competitive. It could also benefit from Intel’s “building blocks” to do that.

• ZTE, while not as much is known about it, seems like it seeks to become a Glass House company. They would have access to licensing Intel’s technology anyways should they choose to use Intel’s building blocks to design its products. This would save it the cash required to develop IP and compete with the others, and can continue to focus on development and manufacturing activities.

• Samsung, Nokia, Microsoft and Ericsson are all in need of the IP, and all have had joint development efforts and licensing deals with Intel. Intel’s ownership of the Nortel Patents will help them, and not hurt them as it would if any of the other competitors were to acquire the portfolio.

By morphing from the traditional Glass House to becoming the Transparent Aluminum House, Intel not only strengthens its own IP position, but by extension also that of its customers. This is similar to that approach handset manufacturers follow when seeking mobile OS suppliers. They seek an OS that shields them from lawsuits and therefore potential injunctions at the ITC.

What would the new Intel look like?

Intel The Transparent Aluminum House: balanced growth, larger and very strong patent portfolios in wireless, and large market share at the same time.
- IP is used as strategic asset in support of its manufacturing and marketing of its own operations and that of its customers.
- Almost impervious to entanglement with IP of others but willing and very capable to license and enable an entire industry.
- Lacks absolute technological autonomy, but owns superior IP /technology which uses to collaborate with others.
- Needs competitors’ IP for their own products, and continues to excel at open innovation strategies to obtain it.
- It assumes competitors are in a similar position to its own. (Only the paranoid survive!)
- Cross licensing is common to avoid legal action but assertively used to maximize return on investment on its IP, “hidden licensing networks” that dilute IP ROI are less frequent.
- Growth Path: Continuous improvement on this business model.

In summary, only Intel has already positioned itself to become a force multiplier able to enable an entire industry with its technology, a role it has fulfilled for over three decades now. If Intel wins the bid for the Nortel Patent portfolio, the value added to the entire industry would be greater than that achieved if one of the other competitors won it. The other companies could lack the strategic vision and industry wide perspective Intel has shown to bring historically to its business models. If others win the bid, the industry might revert to business as usual.

The Boards of Directors and CEO’s of the competing bidding firms will consider these facts with the result that the fierce bidding wars many predict may not exceed the US$ 2 billion. It does not make business sense to spend that much capital to accumulate patent portfolios to let them sit idle while second-rate development and manufacturing operations flounder, cash strapped, churning out mediocre products. Case in point: Nortel. This is how the Nortel Patents became available, an imploded glass house that failed at executing its marketing, manufacturing, and development operations.

An alternative scenario where return is maximized by selling parts of the Nortel portfolio to different bidders is feasible. If indeed this is the case, it will be a sad indicator that IP is not seen as of yet, and is not employed as the truly strategic asset that it has become. The result will be to leave the bidders all equally vulnerable and condemning them to continue to live in the “visible and vulnerable” glass house where patents are acquired to ensure immunity from lawsuits, in a permanent state of fear. Why? in the words of Mark Blaxhill and Ralph Eckardt “because companies that live in glass houses, should not throw stones.”

You can read about or reach Eduardo at: http://about.me/eduardoasanchez

For inquiries regarding Foresight Valuation Group, please reach us by completing our online contact form.

Notes:

[1] Blaxill, Mark, and Ralph Eckardt. “The Company You Keep.” The Invisible Edge: Taking Your Strategy to the next Level Using Intellectual Property. New York: Portfolio, 2009. 91. Print.

[2] Blaxill, Mark, and Ralph Eckardt. “The Company You Keep.” The Invisible Edge: Taking Your Strategy to the next Level Using Intellectual Property. New York: Portfolio, 2009. 91-94. Print.

 

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Intellectual Property Issues Related to App Development

Intellectual Property Issues Related to App Development

As of June 2011 there were over 350,000 iPhone apps and over 65,000 iPad apps listed on the Apple App Store. Since the summer of 2007, apps have not only created a new market for mobile software applications, but have also been the subject of copyright, unfair competition and patent infringement disputes.

An interesting IP guide to App developers from Lowenstein Sandler PC points out that, while the explosion of apps provides fertile landscape for entrepreneurship and quick ramping up of customers, it also creates an environment where apps are released without the same level of attention to intellectual property that exists in more traditional business ventures.

The guide provides a list of useful suggestions for app developers to consider while creating and protecting an IP portfolio covering their applications—including the following:

  • File First, Launch Second – app developers should consider filing a patent application with the USPTO prior to offering an app for download or disclosing the idea.  If developers wait more than a year from the time of releasing an app to file a patent application, they run the risk of losing their US patent rights.
  • Choose Your name Wisely – developers are encouraged to select a name that does not cause confusion with a similar name in the marketplace.  Name selections should be done after a trademark search has been conducted.
  • Open Source Considerations – developers need to review all open source code license agreements for software incorporated in the app, to make sure that any developed code is not free to the public and all rights associated with it are lost.
  • Trade Secret Protection – developers often rely on trade secret protection without taking the necessary corporate measures to implement such protection.  A decision needs to be made early on whether to obtain trade secret protection or patent protection, as the use of trade secrets can block the ability to later obtain patent protection.

App-related patent litigation activity is already in full swing, as indicated by the recent filing of a patent infringement lawsuit by patent holding company Lodsys against a group of Apple app developers.  In an interesting move, Apple has actually legally intervened on the developers’ behalf by releasing a letter saying that its own license protected the developers.  On June 9, 2011 Apple filed a further motion in court claiming that, by going after the developers, Lodsys is really targeting Apple’s own technology and its relationships with its developers.  Apple is therefore asking to intervene as a defendant, as it has an interest to protect thousands of other developers and is therefore not interested in just quickly and cheaply resolving the lawsuit.  In yet another interesting turn of events, web analytics company ForeSee Results is now also suing Lodsys over infringement letters that Lodsys sent to its customers.  ForeSee is seeking to invalidate the patents underlying the Lodsys lawsuit, which Lodsys originally acquired form Intellectual Ventures.

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On Poker Chips and Farmville: Intellectual Property Issues in Social Media Games

On Poker Chips and Farmville: Intellectual Property Issues in Social Media Games

Gaming on social networks has quickly become the most visible category of online games, according to a newly released study from research firm Parks Associates. The study reports that social gaming revenues hit $1 billion in 2010 and further predicts that they will reach a level of $5 billion over the next five years. Many of the big traditional game publishers have left the PC market to focus on the consoles, and the traditional game publishers who have entered the Facebook market are focusing on competing with Zynga for the new demographic of casual gamers.

Zynga is the dominant player in Facebook games, with more than 250 million monthly active users. Market analyst firm Appdata reports that Zynga’s top game, CityVille, has more than 90 million monthly active users, making it the top game on Facebook. Meanwhile, Zynga dominates the rest of the top ranks with 45 million users for FarmVille, 35 million users for Texas HoldEm Poker, and 14 million players for FrontierVille. Last year, Zynga reportedly generated $850 million in revenue and an operating profit of $400 million. It has also acquired 14 game companies in the last 12 months. Most social games are free to play, while users pay real money in small amounts for virtual goods, a common strategy for user monetization.

This relatively young industry has already given rise to some interesting intellectual property disputes and challenges. Third party virtual item sales have long been a gray area when it comes to the legal precedents governing the copyrights and intellectual property of game items. It would seem Facebook poker chips in online Texas HoldEm poker games are now falling into this category as Zynga last year filed a lawsuit in United States District of California against online sellers of Facebook poker chips in their popular online game Zynga Texas Holdem Poker. The Complaint alleges copyright and trademark infringement, among other things, while referring to “virtual property” and “virtual currency.”

Another interesting intellectual property dispute centers on the trademark rights to the “-Ville” suffix for social media applications. The question at hand is an interesting one—does the success of Zynga’s two Facebook games give rise to its exclusive rights in the “-ville” suffix for social media applications? Zynga became aware of Blingville’s intentions to produce a Facebook game application under the mark in November 2010, which prompted it to send three cease-and-desist letters in an attempt to block Blingville’s use of the name. In its letters, Zynga asserted that the BLINGVILLE mark for a social networking game violates the Lanham Act, as there is a likelihood of confusion with Zynga’s similar games “containing the letter combination of ‘ville.’” In response, Blingville filed the instant action seeking the court’s judgment that BLINGVILLE does not interfere with Zynga’s trademark rights.

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