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IP, Patent, RPX

RPX’s View Of ‘Rational’ Patent Pricing

RPX published its third quarter results earlier this month, and provided a sneak-peak look into its patent pricing model.  Specifically, CEO John Amester reiterated his statement from the second quarter press conference that a patent pricing ‘bubble’ has yet to materialize, despite above market bids for portfolios like Nortel.  In fact, Amester specifically commented that the company continues to see the patent marketplace becoming “more rational.”

However, RPX previously offered very little real insight into quantifying what constitutes a ‘rational’ patent market.  During the November press conference, however, Amester offered the following statement:

Since inception, we’ve deployed nearly $350 M to purchase patents and patent rights.  In the process, we’ve addressed 27 litigations resulting in over 170 dismissals for our clients and prospects.

The sales pitch for joining RPX is that, as subscribers, the companies who sign up will see a reduction in patent litigation and related expenses.  Their homepage specifically claims that “we significantly reduce patent assertions directed at our client network.”  In other words, companies that purchase membership into RPX’s defensive aggregation service should end up being involved in fewer lawsuits.  While 170 dismissals since RPX’s 2008 inception might seem like a lot, accounting firm PWC reported about 20 times as many patent lawsuits filed in each of the past 3 years.

In addition, the amount of money spent by RPX is remarkable.  By Amester’s own statement, their $350 M patent spend has netted 170 dismissals, which boils down to a stunning $2 M per dismissal.  Admittedly, part of RPX’s goal was to reduce patent litigation initiation in the first place, but even assuming for every dismissal, another potential patent/defendant combination went un-filed, they still paid $1 M each on average.  A seven figure settlement represents a generally meritorious enforcement threat with significant exposure.  While this may be a sign that RPX pursues predominantly high value patents, it could as easily suggest that RPX invested in a large patent collection with few real licensing prospects (ala Intellectual Ventures).  Granted, this is probably something RPX needed to do in its early days in order to be taken seriously, as potential targets were bound to misunderstand the business model.

RPX recently passed the 100 member mark, indicating that the dismissals obtained to date amount to less than 2 per member.  While paying $2 M per settlement and collecting $3 M per year (or more) from your members sounds like a recipe for printing money, obtaining fewer than 2 settlements per member over a three year period hardly demonstrates value for the paying customers.  Again, part of RPX’s stated goal is to reduce patent assertions against its member companies, but for a reduction in patent litigation to make up the difference for a billion dollar company, RPX’s defensive acquisition service would need to account for 2-3 high value patent assertions avoided or dismissed, per year.

Speaking of reducing litigation, how has RPX done in that category?  A few years ago, an RPX press release identified 8 of its 11 earliest members that began enrolling as early as 2008.  As indicated by the PWC data above, total patent litigation decreased overall between 2008 and 2010.  To get an indication of how RPX’s earliest members fared, I compared PACER data over this time period and found a significant increase in patent litigation over the same period.  Specifically, I examined patent litigation filings where each of these 8 companies (Cisco, Epson, IBM, Panasonic, Philips, LG, Samsung and TiVo) were classified as “Defendants” for calendar years 2008-2010 and found that the number rose dramatically each year, despite the fact that patent litigation in general slowed down.

In addition, PWC computed a compound annual growth rate (CAGR) for patent litigation over the past 20 years.  Personally, I fail to see much relevant insight from a CAGR for patent litigation growth, but I decided to see how the litigation data for these RPX members compared.  While this figure should naturally be subject to some variance over a small dataset and a short time period, the CAGR for the RPX member subset represented more than a 6x increase over the overall CAGR (32% vs 4.9% overall).

These numbers should be taken with a grain of salt.  First, counting case participation by “defendant” classification is likely to contain at least a few errors.  Second, the data only compares a very small slice of the overall number of companies dealing with patent enforcement issues.  Third, patent litigation for this subset is on pace to decrease for calendar year 2011 versus 2010.  That said, as of mid-November, 2011 patent litigation has already exceeded patent litigation totals for 2009 (again for the eight company subset).

However, the spike in 2010 patent litigation, and the possibility that 2011 will at least keep pace represents good news for investors of the patent aggregator.  Amester told his audience that “NPE [patent] assertions are a key driver for the growth of our core defensive buying service.”  Driving growth of core services, however, does not mean the same thing as profiting from patent assertions which is something RPX, apparently, does not do.

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Discussion

2 thoughts on “RPX’s View Of ‘Rational’ Patent Pricing

  1. Interesting discussion.
    It might be useful to present the Earliest Eight data in a manner that shows how each of those eight contribute to the whole. That is, does 1 or do 2 of those Eight constitute the overwhelming percentage of filed suits over the period? Or is defendant activity spread evenly among them?

    Posted by Debtpocalypse | November 29, 2011, 3:06 pm

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  1. Pingback: Renewed Interest In Patent Investment Affects RPX Valuation « Gametime IP - January 11, 2012

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