The race among tech giants to accumulate patents is often compared to stockpiling a nuclear arsenal as a deterrent to an all-out war.
The way this cold war works, the analogy suggests, is that patent holders often negotiate something of a litigation cease-fire, agreeing to cross-license each others innovations rather than face a barrage of infringement cases in court. That's why Google, which has a scant patent portfolio to combat litigation from rivals, agreed to spend $12.5 billion in cash yesterday to acquire Motorola Mobility.
But there's a flaw in the analogy. In real cold wars, new weapons can be created as long as governments are willing to spend the money. That's not how the battle shapes up in the mobile device world.
"There's a limited supply of relevant big patent portfolios available," said Christopher A. Marlett, chief executive of MDB Capital Group, an investment banking firm that focuses on intellectual property.
It's an arms race, to be sure. It's just that the available arms are scarce. And with recent deals--such as the sale of 6,000 patents and patent applications from Nortel for $4.5 billion to a consortium that included Apple and Microsoft, as well as the proposed Google-Motorola acquisition--the arms are getting harder and harder to find.
Of the top 20 mobile device patent holders in the United States (see the table below), Marlett speculates that maybe four companies, after Motorola, might one day consider selling some or all of their mobile device patent portfolios. They are Research In Motion, Alcatel-Lucent, Yahoo, and Sony. Two other companies not on that list--Eastman Kodak and InterDigital--are also likely sellers in the white-hot mobile device patent market.
In a recent research note, Evercore Partners analyst Alkesh Shah noted that "Managements are likely to feel increasing pressure to monetize their intellectual property...especially if stock prices do not fully reflect patent value."
"This is a great outcome for all shareholders of Motorola Mobility, especially in light of today's markets," Icahn said in a press release.
InterDigital, a wireless technology company in King of Prussia, Penn., put itself on the block last month as intellectual property prices soared. Its shares climbed more than 60 percent, as companies, including Google, approached the company about acquisition. After Google announced its Motorola plans, InterDigital shares tanked, shedding 14 percent of their value and closing at $64.96, after investors fretted that Google might now lose interest in the company.
But MDB's Marlett has no doubts that the patent arms race will continue, and he thinks the next big portfolio to go could be Kodak. The imaging company said last month that it is considering selling some 1,100 patents covering capturing, storing, organizing, and sharing digital images, increasingly important technology for mobile devices. Those could include an image previewing technology patent that Kodak alleges is being infringed upon by Apple and Research In Motion.
That patent alone has huge financial significance for the various companies fighting the patent arms war. That's because there's so much uncertainty surrounding it. The administrative law judge overseeing the case at the U.S. International Trade Commission ruled in January that phones from Apple and RIM do not infringe on the patent. But a full ITC panel rejected parts of that decision, forcing him to reconsider the case. But just last month, the judge announced plans to retire, reassigning the case to another administrative law judge.
"If you're Apple, are you going to let Google buy those patents? No way," Marlett said. "I believe the bidding on those patents is going to be ferocious."
That's one reason why shares of Kodak, a company that struggled and offers shareholders little other hope, closed up 4 percent yesterday at $2.15.
Alcatel-Lucent is another underperforming company that may face shareholder pressure to sell its intellectual property jewels. The telecom equipment maker's shares have sunk 41 percent since May. But Alcatel, which acquired Bell Labs when it bought Lucent in 2006, may be able to unlock some value from the sale of its patents. And Alcatel's shares rose 4 percent after the Google-Motorola deal was announced to $3.84.
The biggest prize may be RIM. The maker of BlackBerry devices has seen its stock fortunes slide as it has failed to keep pace with Android devices and Apple's iPhone. But its trove of patents and a market capitalization of $14.1 billion make the company a prime acquisition candidate. That's why its shares jumped 10 percent on yesterday's news to $27.11.
Google's proposed acquisition of Motorola caught many by surprise. But with so few huge patent portfolios left, the next big intellectual property deals that will inevitably come shouldn't catch anyone off guard.