A growing concern: IP valuation, syndication and execution in Asia
Despite occasional claims by high-tech companies in Asia that they are ‘happy’ with their intellectual property settlements, they continue to get slammed by competitors and licensor threats. In Asia, survival is measured in margin against brutal competition, where the widespread practice of predatory licensing only adds to the irritation.
Historically, the Asia high-tech sector has had to endure a huge peak-to-trough gap in inbound to outbound licensing revenues. HTC’s recent settlement with Apple for an undisclosed ongoing royalty will undoubtedly disadvantage their bottom line. Samsung’s being ordered to pay $1.05 billion for infringing Apple patents is like an undisclosed balance-sheet liability. It is time for Asian high-tech firms to clear their collective throats, say: “Excuse me? You want to license me? That’s going to cost you,” and make it stick.
In late November 2012, Transpacific IP successfully purchased the Phoenix Technologies patent portfolio with the syndicated backing and investment of Asian high-tech operating companies. This article explores some of the intricacies of that transaction.
Rules of the game
For good reason high-tech firms in Asia would like to move up the licensing food chain. Like their US counterparts, larger high-tech corporations in Asia have intellectual asset management departments, which develop strategic patent portfolios and study the company’s intellectual assets for licensing potential. Of course, this path works better if your company has been at the forefront of innovation and filing the right patent applications for decades.
Even the most seasoned of trailblazers have found out that successful return on investment relies upon strong institutional know-how in licensing, solid technical and financial support, and management perseverance. Certainly this is a model that has made a great deal of money for big companies such as Apple, IBM, Qualcomm, Tessera and others.
In 2012, international patent applications filed under the Patent Cooperation Treaty (PCT) grew by 6.6 percent on 2011’s figures. Chinese telecommunications company ZTE, with its 3,906 published PCT applications, was the largest filer in 2012.
“ONLY WITH IP ENTREPRENEURIAL EFFORTS LOCATED IN ASIA WILL THE EFFICIENT EXCHANGE OF INFORMATION REQUIRED FOR TRANSACTIONS OF THIS COMPLEXITY ALLOW AN ASIAN COLLECTIVE TO START CHANGING THE PLAYING FIELD.”
There is a Chinese idiom: “neither money for foreknowledge, nor medicine for regret”, but in an IP world, you might be able to purchase something you did not invent to predate and medicate the patents grown in your own portfolio. There is no doubt that concepts of IP parity are a learning process.
For Asian companies to catch up with the big licensing revenue generators, their patent protection must include self-developed tech solutions and a deeper understanding of ‘assertion quality’ patents, and how to get them. Sitting on the weaker side in licensing negotiations should be a compelling incentive to create the right vehicles to procure the right patent assets.
The acquisition of key patent portfolios, either unilaterally or as part of a collective, could lead to licensing revenue or a reduction in litigation risk. Asia’s high-tech sector has had some participation experience in subscription-based IP portfolio purchases as clients for mainly defensive transactions.
An Asian IP syndication strategy
Investing in syndicated purchasing opportunities is always an option if you have the funds and understand what you are doing—both the benefits and the limitations. However, a syndication opportunity arising from an Asian initiative, and for Asian companies, is something that would take proven local IP expertise and global market insights.
For the subjective goal of moderating the negative pressure that IP licensing exerts on high-tech margins, the planning of balanced opposition is of great interest. The ability to turn a network of business competitors into cooperating licensors takes substantial experience and the appropriate amount of trust. Only with IP entrepreneurial efforts located in Asia will the efficient exchange of information required for transactions of this complexity allow an Asian collective to start changing the playing field.
The Asian IP landscape is not something new for Transpacific IP Group Limited, a multidisciplinary IP firm founded and based in Asia, which since 2004 has centred upon investment, assertion and analytical services relating to IP assets, with a more specific focus on patents in the high-tech electronics space.
Gold in them thar hills
Formed in 1979, Phoenix Technologies was one of the original licensees for the Seattle Computer Products operating system QDOS (Quick and Dirty Operating System). This technology was later called 86-DOS when Paul Allen and Bill Gates bought it in 1980 to forever link Microsoft to the personal computer (PC), where it was further developed into MS-DOS.
Phoenix helped launch the PC industry with its BIOS (Basic Input-Output System). BIOS literally brought the core elements of IBM PCs together making them work with MS-DOS. As that industry evolved, BIOS functions catalysed into the PC core systems software sector.
Phoenix has been the worldwide market share leader in the core system software sector for many years. Over that time it has amassed a significant patent portfolio. Mining that Phoenix portfolio could extract much more value than just a collection of patents focused on the BIOS. As an early innovator in the PC industry, Phoenix had anticipated and patented many pioneering aspects of security and computer architecture.
Bios is more than bios
Operating systems such as MS-DOS or Windows have always left much to be desired in application access to hardware. Broad areas for vendor differentiation have grown up around the disciplines that have emerged for core systems access. These disciplines include, inter alia, power and security management; monitoring, recovery, diagnostic, and upgrade maintenance; white label, multi-boot control and storage personalisation.
The concept of BIOS firmware has also evolved over the past 30 years to be a conduit into these core systems software areas. Standardised interfaces for today’s and tomorrow’s extensible firmware map the entry points for many fundamental applications. These are applications that generations of consumer devices have come to depend upon and are now incorporated into many hundreds of millions of consumer devices every year, from PCs to tablets, TVs and smartphones.
Assertion quality patents: expertise is crucial
There are no short-cuts around exhaustive patent technical due diligence when reviewing high stakes portfolios, such as Phoenix. Many hundreds of hours of expert technical claims analyses and market research are needed to dig out the highest value patents from a portfolio.
Legal due diligence must go through every avenue: perfecting the assets, estoppel and laches search, encumbrance diligence, and other important subjects. All of this—the expertise, the experience and the execution—is needed to create an assertion quality scripture that can later be quoted to purpose.
