Intellectual property (IP) companies are unique business entities. Theirs is a complex, controversial world characterized by huge capital investments, epic legal battles, rollercoaster stock rides, fanatical investors, and of course, lots of patents.
Why should you care? Because, their technology helps almost all your gadgets work the way they do. And for that privilege, their executives, employees and investors go through hell.
Last month, the share price of Tessera - a public company that develops and licenses miniaturization technology - dropped more than $26, a loss of two thirds of its value, in less than two weeks. That's over a billion dollar drop in market cap.
What KOd the stock? The reexamination of three Tessera patents by the U.S. Patent and Trademark Office, followed by an International Trade Commission judge's stay of Tessera's patent infringement action against Freescale, Motorola, Qualcomm, and others.
Sure, that sounds ominous, but the patents in question had previously been battle-proven in prior litigation against big-name companies. Moreover, there is no immediate, material effect on Tessera's earnings. So why the nuclear fallout? Trigger-happy investors.
Earlier in the week, shares of Rambus - a designer of high-speed chip interface technology - skyrocketed 39 percent on a favorable jury verdict in a patent infringement case against Hynix, Micron, and Nanya. The gain - amounting to over $750 million in market valuation - occurred in just over one hour of trading in which over 20 million shares where traded.
Again, the huge gain was the result of a jury verdict that, while being a critical victory for the Los Altos company, won't have a direct material effect on earnings for some time to come.
Qualcomm, a much bigger fish - in fact, the biggest among IP companies - is certainly more stable with its $65 billion market cap. Still, the company has seen its share of ups and downs relating to high-stakes patent litigation cases with the likes of Nokia and Broadcom.
Don't get the wrong idea; lots of companies litigate. Semiconductor companies, for example, are notorious for suing each other. Software companies too. But the valuations of IP companies are uniquely volatile with respect to patent litigation by virtue of the fact that patents are indeed their business.
That's the life these companies lead. It's not for the faint of heart, to be sure. And certainly not for the squeamish investor, either. Still, long-term investors who stick with it are typically rewarded.
Qualcomm's shares are up about 8000 percent, or a 31 percent compound annual growth rate (CAGR), since its 1991 IPO. Tessera's stock has experienced a 22 percent CAGR since its public offering just over four years ago, that is until its recent fall. Rambus has seen a 13 percent CAGR in its shares since 1997, while ARM - a microprocessor IP company - has seen about a 10.5 percent CAGR since its 1998 IPO.
But many seem to think that inventing and licensing technology is somehow less noble a profession than selling a product or offering a service. That's simply not the case.
Qualcomm, Tessera, Rambus and ARM have all invested heavily in technology that significantly impacts our lives. Most wireless phones, personal computers, video game consoles, HDTVs, and other devices include technology from these and other IP companies. They invested hundreds of millions of dollars (probably billions in Qualcomm's case) in bringing their technology to market, developing the infrastructure, and supporting customers.
But you rarely hear about that.
What you do hear about is that many IP companies are litigious. It's true that they are sometimes forced to litigate to obtain reasonable compensation for the only product or service they sell - intellectual property. If they don't, their business fails. For them, it's a matter of survival.
The bottom line:
Developing and licensing IP is a tough business that's not for the faint of heart. Moreover, share prices experience precipitous drops and hair-raising gains that terrify the most steadfast entrepreneurs and test the intestinal fortitude of hardened investors.
So why do people do it? Because, they're passionate about advancing the technology. In all cases, licensing made sense for business reasons. So they did it. But I bet many of them, if they had a chance to do it again, might choose the product or service route. It's definitely easier on the stomach lining.
Disclosure: I am a former officer of Rambus and Tessera; Tessera is a former customer of my consulting business; and I currently hold shares in Rambus.