Market Overview

Patents Patents Patents, Litigation Litigation Litigation, More More More

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As we discussed in our January 20th report – “IPR Battles Heat Up with Kodak(NYSE: EK), Apple (NASDAQ: AAPL), Research in Motion (NASDAQ: RIMM) and Nokia (NYSE: NOK) in the Ring; Keep an Eye on Qualcomm (NASDAQ: QCOM) and InterDigital (NASDAQ: IDCC)” – intellectual property rights as they pertain to the mobile ecosystem continue to heat up. We would argue the flame powering that heat has intensified and could be considered to be a roaring fire. Per data from Bloomberg, both Apple and HTC are involved in more litigation in terms of patents than they were in 2007. Moreover both are on track to beat their respective 2008 and 2009 records.

Consider that the International Trade Commission (ITC) has been rather busy with Apple - last year Nokia sued Apple, and Apple countersued, with both companies accusing the other of patent violations. In just seven months, the companies have exchanged five suits and countersuits. The ITC has also begun investigating claims made by Kodak against Apple, as well as a suit from Elan Microelectronics. Apple and HTC are not alone in these efforts as lawsuits filed in the last several months include Kodak suing Apple and Research in Motion over imaging patents, and Apple and Nokia have been battling back and forth as have Nokia and InterDigital. Earlier this year Motorola (NYSE: MOT) lost a patent infringement claim against Research in Motion after a UK Judge rejected the claims made.

Our view has been the following: while it is rather accepted that wireless technology companies cross license technology and patents from one another, patent infringement cases are likely to escalate as a defensive move to protect IPR assets as well as an offensive to monetize IP and patents as a business model. Mobile devices and the larger connected device market are embedding a greater array of capabilities and technologies (connectivity, imaging, sound and the like). In our view, one area to watch will be audio and sound quality, including background noise cancellation, which we suspect will becoming increasingly important as these smartphones and longer term connected devices become more multimedia devices for not only music and short clips but also movies, TV and gaming. The latter is an interesting one because Dolby (NYSE: DLB) has just announced it will bring its 5.1 Audio to LG phones.

That offensive/defensive patent strategy is also evidenced by strategic decisions. While a more obvious reason for Hewlett-Packard (NYSE: HPQ) acquiring Palm (NASDAQ: PALM) is to get into the smartphone market, an underlying reason could be Palm’s patent portfolio. Comments from PatentVest CEO Anthony Mazzarella shared in Investors Business Daily “Based on our metrics, the value of Palm’s intellectual property is along the same order of magnitude as Apple. Other offensive moves include the purchase of 122 patents from Nokia and Sony by MobileMedia Ideas this past January. In March, MobileMedia filed lawsuits against Apple, Research In Motion, and HTC and per comments from the company it is “in communication with approximately 200 companies making thousands of products."

With that as a backdrop, here is a snapshot of what has been going on in recent months:
• In March, Apple sued HTC alleging it infringes on 20 Apple patents relating to touch and menu controls.
• April 25 – Per data from the European Telecommunications Standard, with 22% share of patents for LTE technology, Qualcomm (NASDAQ: QCOM) leads the pack followed by InterDigital (NASDAQ: IDCC) with13% share. Asian competitors Huawei, Samsung and LG, which hold 11%, 10% and 9% of 168 essential LTE patents respectively.
• April 27 - Microsoft (NASDAQ: MSFT) signed a patent agreement providing broad coverage under its patent portfolio for HTC's handsets running the Android operating system. The agreement states that Microsoft will receive royalties from HTC. While terms were not disclosed, media reports suggest HTC likely pays Microsoft $20 to $40 per phone such as the new HTC Droid Incredible from Verizon Wireless (NYSE: VZ). We suspect Microsoft will pursue patent payments from other companies that make phones (and other devices?) based on Android software.
• May 7 - Nokia lodged a patent infringement suit against Apple in Madison, Wisconsin claiming Apple's iPhone and iPad violate five Nokia patents.
• May 12 - HTC responded to the Apple litigation with a complaint at the U.S. International Trade Commission requesting the agency to halt imports and sales of iPhones and iPads in the U.S. alleging those devices infringe on five of HTC’s patents.

We continue to see the patent heat turning up and with that in mind we have updated our valuation table for IP companies. We would note upward earnings revisions in the shares of Dolby, Qualcomm and Rovi (ROVI) for 2010 in terms of both revenues and earnings.

 

Best,

 

Chris Versace

The Thematic Investor

Posted-In: HTC LG SamsungLong Ideas Small Cap Analysis Tech Trading Ideas

 

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