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IP, Patent, RPX

Digitude’s New Patent Monetization Plan – Friend Or Foe To Inventors?

From a press release issued this week, Digitude Innovations (a company funded with a $50 M investment from Altitude Capital Partners) is announcing a “new patent monetization model.”  Billing this as exciting news for inventors and small companies, the press release stated:

Digitude will acquire, aggregate, and license key technology areas within the consumer electronics and related technology fields in a patent consortium, offering patent owners a new and innovative way to monetize their intellectual property assets.

(Emphasis mine.)

Unfortunately, the statement above is about as descriptive as the release gets in terms of describing Digitude’s monetization plans.  Aside from being specific to the consumer electronics field, this sounds remarkably similar to other large-scale patent licensing business ventures.  Like Intellectual Ventures and RPX, Digitude is claiming a reserve of investment capital which is it intends to deploy for the purpose of acquiring and licensing patents.  Of course, one obvious difference is Digitude’s marketing efforts focusing on encouraging inventors and small businesses to submit IP, rather than on convincing large entities to sign up for RPX’s “protection.”  Needless to say, I’m a bit skeptical that Digitude will actually bring anything new to the table.

Thenagain, this venture is backed by the same guys that funded Saxon Innovations (which eventually sold out their portfolio to RPX), and successfully financed Deep Nines to obtain a $25 M settlement from McAfee. Long story short, Digitude will merit some attention.  How much attention remains to be seen.  As justification for forming Digitude, the release explains:

A series of recent court decisions has increased the risk and expense of licensing and monetizing intellectual property for all patent holders, especially impacting smaller companies and individual inventors. The new Digitude consortium model enables sellers to combine their IP assets with other sellers, diversify their IP holdings, and gain access to a critical mass of IP that is necessary for a successful licensing program. This approach thus reduces risk for the seller while increasing expected returns. Inventors can sell their IP assets to Digitude for cash, equity, or a combination of the two.

Critically examining this paragraph, a number of questions arise:

A series of recent court decisions has increased the risk and expense of licensing and monetizing intellectual property for all patent holders, especially impacting smaller companies and individual inventors.

Those that have been monitoring patent litigation over the past several years know that one of the biggest developments has dealt with the ability to obtain a post-verdict injunction.  However, the ability to obtain injunctions now primarily depends more on losses due to competition with the patent owner’s own products, rather than the actual size of the patent owner.  Since injunctions were the primary leverage used to obtain significant licensing fees, a smaller company with diminished sales as a result of infringement stands a significantly higher chance of getting an injunction than any patent aggregator.  Unless Digitude plans to manufacture products that practice the patents it’s acquiring, I don’t see its involvement significantly impacting returns to the current patent owners that fall into this category.

The new Digitude consortium model enables sellers to combine their IP assets with other sellers, diversify their IP holdings, and gain access to a critical mass of IP that is necessary for a successful licensing program.

I’m not really sure what a “critical mass of IP that is necessary for a successful licensing program” in the consumer electronics field is, and unfortunately, no one at Digitude could tell me that either.  I’m also not sure how much you need to make to have a “successful licensing program.”  As I pointed out already, RPX’s claims of profitability are tenuous at best, and while Intellectual Ventures has reportedly taken in $2 B in licensing revenue, they likely spent $1.2 B or more to get there.

Further, whatever a “critical mass” is, it’s unknown how close they are to reaching that goal since public assignment records reveal no recorded assignments of patents or published applications to “Digitude.”

This approach thus reduces risk for the seller while increasing expected returns.

This is an interesting claim when contrasted with Digitude’s website, which claims:

In addition, our licensees are able to transact and acquire necessary IP rights with a single sophisticated party, providing for efficiency and economies of scale in an often inefficient marketplace.

These concepts appear to fundamentally conflict.  Providing “economies of scale” seems to suggest that licensees can get a better deal by licensing numerous related patents through a single entity than they would by licensing each patent individually.  However, Digitude is also claiming that individual sellers will see better returns by pooling their patents than they would by licensing them directly.

Presumably, Digitude will save money by eliminating a substantial number of intermediaries involved in the disaggregate licensing efforts, and attempt to bridge the divide by splitting these savings between itself, licensees and inventors.  Of course, this only turns into a good deal for the licensees and inventors if Digitude’s own overhead and profit expectations are kept in check.  The bigger Digitude’s staff, the higher their salary and bonus expectations, the less there is to flow back down to the inventors.

In addition, when Altitude Capital invested in Deep Nines’ lawsuit against McAfee,  Deep Nines was apparently left with somewhere between $800,000 and -$5,000,000, depending on who you ask.

Inventors can sell their IP assets to Digitude for cash, equity, or a combination of the two.

Another unknown is the amount of equity set aside for inventors, if they choose that type of payment option.  Ultimately, how good of an investment that ends up being for inventors will depend heavily on how Digitude manages the portfolio overall.  If the RPX experience has taught us one thing, it’s that spending money to make money is harder than it looks.

Based on Digitude’s marketing, they may turn out to be the “anti-“RPX, by aligning themselves with inventors and small patent owners, rather than “befriending” the industry with claims of “protection” and “insurance.”

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