NPEs still waiting for that oft-promised swing-back of the US patent pendulum
The extent to which the patent licensing world has changed over recent times was on full display at our second NPE conference in New York this week. NPE2016: The business of responsible licensing brought together some of the leading executives in the sector, along with intermediaries and advisers, to analyse and discuss the myriad challenges and opportunities currently facing the industry.
On the opening panel of the day, four NPE CEOs – Jim Skippen of WiLAN, Anthony Hayes of Spherix, Network1’s Corey Horowitz and Alexander Poltorak of General Patent Corporation – discussed how they were coping in the current climate. Skippen who was at MOSAID (now Conversant) before taking over as WiLAN’s head in 2006, is arguably as well placed as anyone to assess what has been a profound shift in the operating environment.
Fifteen years ago, he said, an NPE was better off financing its own litigation and not looking to do a contingency deal to fund its cases; while it made more sense to buy patent portfolios for cash rather than enter into a privateering style deal for little upfront cost and typically paying the seller once licensing deals are put in place. “Now we’re better of if we de-risk litigation and when we acquire portfolios we’re much better off sharing the risk,” Skippen said. He also pointed out that the much tougher conditions had radically diminished access to capital for many NPEs in the US.
WiLAN radically expanded its portfolio through a privateering deal when last year it picked up around 3,300 patents from Freescale Semiconductor. But it also acquired another large portfolio outright after paying $33 million for the former Qimonda patent assets. That portfolio was seen as too encumbered by some in the market to be worth the money, but Skippen revealed that WiLAN had already broken even on the acquisition.
The Qimonda price tag also reflected another change in the market according to Skippen. Whereas a few years ago he was more interested in portfolios worth $100 million-plus, now the pay off is much better on portfolios in the $20 million to $30 million range, as it takes far longer to break even on a larger portfolio.
In terms of the future prospects for the industry, the panel was split over whether consolidation would take place among NPEs. Poltorak insisted that it was inevitable given that sustainable growth was virtually impossible for a small company. “The only way to do it is some level of diversification,” he claimed, before adding that the future prospects for many small NPEs boiled down to “merge or go out of business”.
Skippen was not convinced that deals were inevitable claiming that it is “more difficult than you might think to put patent licensing companies together”. Plus, as he has highlighted before, the number of operating companies willing to do a privateering deal offers some NPEs a reliable source of new patents meaning that they don’t need to merge in order to grow.
Continuing on the theme of consolidation, Horowitz scotched any ideas that a private equity investor might act as a consolidator buying up NPEs while their valuations remain depressed. The problem, he said, was that any take-private deals would lumber the NPE with a pile of debt which, with typically unpredictable quarterly revenues, it would not be in a good position to pay off. “Going private is just taking on too much risk in an already unbelievably risky business,” he commented.
WiLAN’s Qimonda deal shows that for those with cash there are deals to be done, but while the volume of transactions maybe heading back up it’s generally accepted that valuations remain depressed. Hayes was not convinced that this meant it was a good time to buy. “It depends on your investment horizon and how you want to put capital to work,” he said. “If you have a long horizon and a lot of cash then sure this might be a good time to buy but I’m not sure I’d put a lot of money into this sector.” That, Hayes added, was particularly the case for investors weighing up whether to place their cash into a pure assertion model.
Spherix has recently looked to diversify its approach by entering into an agreement with EquitableIP through which Equitable has taken on the responsibility of licensing some of the NPE’s patents. That, Hayes admitted, was about offloading risk from his business – something which is particularly appealing at a time of so much uncertainty.
The prevailing mood among the CEOs set a particularly sombre tone for the rest of the event. It was by no means shared by all panelists and delegates (which this blog will follow up on tomorrow), but it did contradict the claims that the pendulum is starting to swing back to stronger patent rights in the US.
As one delegate put it: “The talk at last year’s event was about turning a corner, well it’s proving to be a pretty long corner.” The reality is that while the licensing climate might be improving for some patent owners, for many NPEs it remains very challenging. If the pendulum is moving back towards the centre, it’s not taking everyone with it.