Disruptive Tendencies

IP Licensing – Gut Check Time!

So you’re now thinking that licensing makes sense as a means of accelerating the time-to-market and monetizing your leading-edge technology. You’ve identified the gorilla as well as the chimps in your space, and managed to get the attention of at least one of them. They’ve probably begun posturing and now they’re coming to the table to discuss terms. For most companies, this is a classic “Oh shit!” moment.

As I blogged previously, before you agree to sit down, it is imperative that you have established clear guiding principles. Your internal stakeholders must understand, talk through and agree to a position on the major issues. These are the “non-negotiables”, and can help prevent bad decisions from being made in the heat of a negotiation. Each of these must be taken seriously, as getting them wrong can have a huge impact on valuation and even exit potential.

Issues to lose sleep over

·         Exclusivity vs. non-exclusivity

·         Derivative works

·         Field of Use, Territory

·         Indemnification

·         Consideration (cash flow, NPV, etc.)

Each of these merits its own discussion. As my plane is now on final approach, I’ll have to get to these in future blogs.

That’s my .02!

Martin Suter

 

Before Taking the Licensing Plunge, Consider These 3 Things

If I had to impart any words of advice to a company that is seriously looking at licensing as a go-to-market model, it would be the following three things:

1.       Understand all of the implications of a licensing strategy, including its impact on valuation and potential liquidity events for the shareholders;

2.       Develop guiding principles outside of the deal;

3.       Assess every deal through a strategic filter.

The first of these is critically important and requires the full buy-in from the Board and investors. Don’t assume that they automatically appreciate what these are. Licensing has implications for valuation and exit potential, and while the benefits are many (focuses scarce resources on core technology development, time to market, leverages existing channels to market, non-dilutitive cash inflow, etc.), the risks are also real. But many of these risks can be partially or wholly mitigated by a rational approach to the deal, and it is incumbent on you to show them how.

Which leads us to the second imperative: Develop guiding principles outside of the deal. Get the Board to sign off on these and empower you to negotiate the deal within the deal framework that’s been discussed. The last thing you want is the Board “helping” you to negotiate a deal in real-time or proffering opinions at the eleventh hour. Given the implications of a bad deal, there are certain things that will not be negotiable. These may be dealbreakers, but it’s far better to know going in where you have the support of the Board and often, this makes for easier negotiations. At worst, you can cut bait.

Lastly, every deal should be looked at in a strategic context. Does it make sense to grant any rights, even non-exclusive, in the Field of Use that is likely going to be the driver for a liquidity event? Granting rights in niche markets is very different than granting rights in a core market.

In future blogs, I’ll discuss some of the issues that are worth losing sleep over.

That’s my .02!

Martin Suter

 

IP Licensing for the Technology Entrepreneur

Intellectual Property licensing is a complex subject with many moving parts. Unfortunately, it is rarely covered in modern business school curricula. The net result is that managers, C-level execs and Board members seldom approach IP licensing strategically, either in terms of monetisation or in the connection between license terms, and their potential impact on valuation and exit opportunities.

This set of slides attempts to simplify many of these issues for the business strategist - Board members, C-level execs, and senior managers. I have used subsets of this presentation to groups of Executive MBA students, corporate counsel and IP professionals and generally use them as a launching pad for a broader discussion. (To discuss speaking opportunities, please contact martin.suter at iplicensing.net).

These slides draw on my experience, as I have been fortunate to have been mentored by some very capable attorneys over the years (such as Cliff Chillemi, in-house counsel at MeshNetworks, and Jill Riola, Co-Chair, IP Group at Carlton Fields), and worked with top IAM strategists (people like John Cronin from ipCapital Group and Paul Germeraad from Intellectual Assets, Inc.). I have also sat across the table from many very capable negotiators representing companies like Dow Chemical, Microsoft and Motorola and had to justify IP licensing recommendations to VC investors across North America.

 

Feel free to share and comment.

That's my .02!

Martin Suter

(martin.suter at iplicensing.net)

Wi-Fi: Moving the Dial

(Originally posted at http://www.von.com/blogs/guest/2009/11/wi-fi-moving-the-dial.aspx

One of the most common questions I get when talking with wireless and wireline operators around the world, is how to monetize Wi-Fi services. Indeed, as subscribers are coming to expect Wi-Fi services for free, whether at Starbucks or with their iPhones, it is a complicated question.

In fact, many were skeptical when Cablevision, a BelAir Networks customer, announced its plans to launch “Optimum Wi-Fi” and to give away the service to its residential broadband subscribers as subscriber-retention play.

A key difference, over previous models, is that Cablevision focused its Optimum Wi-Fi deployments in “shopping centers, on main streets and train platforms, in parks, marinas, and at sports fields - the places you go everyday.” They’re delivering the service where their customers eat, shop and congregate – not striving for ubiquitous coverage.

And has this strategy been successful?

When Cablevision reported its numbers earlier this month, Q3 profit tripled, revenues grew 5 percent, ARPU is up 6 percent, net new adds were up 4 percent for broadband, and the stock jumped 3.2 percent on the results.

Craig Moffett, senior analyst at Sanford Bernstein, said free Wi-Fi is one reason why Cablevision customers haven't switched to Verizon. "Perhaps it's time to start giving Cablevision's free Wi-Fi network some of the credit," Moffett said in a research note. "For all of its vaunted capabilities in wireless, free wireless broadband is something that Verizon Wireless simply can't match."

Can you build a business case on free Wi-Fi? I’d say let the numbers speak for themselves.

That’s my .02!

Martin Suter is vice president of business development at BelAir Networks, a provider of broadband mesh solutions for Wi-Fi, WiMAX, 4.9 GHz Public Safety and 5.9 GHz ITS networks. Previously, Martin was the CEO at Cohda Wireless, where he raised the company’s profile and negotiated a licensing deal with a Fortune 100 vendor in its core franchise. Prior to Cohda, he was vice president of business development at MeshNetworks Inc., a classic tech transfer/disruptive technology success story that achieved a major liquidity event for its investors in Q4/2004 with its acquisition by Motorola. Martin also was responsible for building several high profile alliances with and for leading technology companies, including Fujitsu, Microsoft, Netscape, Sun Microsystems, and Teradata. Additionally, Martin has successfully negotiated technology transfer, distribution and/or licensing deals with companies like 3Com, BioChem Pharma, Dow Chemical, Exodus, Fujitsu, IBM, Microsoft, Motorola, Netscape and Sun.

 

Skype - Joltid Licensing Dispute: Epic M&A Screw-up?

eBay must be ruing the day that it signed the M&A deal to buy Skype for $2.6b, in addition to an additional $530m as part of the earn-out provisions. Its original vision of incorporating Skype functionality into its auctions never happened. Despite that, Skype has proven itself to be quite interesting as a standalone entity, with some value potentially to be recouped via a spin-out IPO. However based on an eBay 10-Q form filed with the SEC on 7/30/2009, this is now at risk over a dispute over a license.

It seems that some of the core functionality within Skype is based on peer-to-peer software licensed from Joltid, a company also controlled by the founders of Skype, Niklas Zennstrom and Janus Friis. So if I get this right, Joltid entered into a non-arm’s length license with Skype (pre-acquisition), a company that Zennstrom and Friis also controlled. When eBay acquired Skype, it would have known that while it was “buying” Skype, it wasn’t buying Skype source code, it was licensing it from Joltid. Given the amount of money involved in the deal, and the fact that the principals were the same, insisting on a perpetual, fully paid up license, in some Field of Use (voice, IM and video applications) with rights to derivatives would seem to have been very do-able.

Instead, it appears that Zennstrom and Friis pocketed a boatload of eBay cash, and retained control of Skype’s destiny via a licensing agreement. Now with the M&A (and liquidity) at risk, eBay is now over a barrel. Negotiate and pay for that fully paid up license, re-write everything, or write it all off as the worst deal of the century. OK, maybe that’s overstating it, the Time Warner-AOL deal sucked pretty badly too.

I’ve been involved with transactions that have nearly fallen apart at the eleventh hour because of legacy tech transfer licenses. “What do you mean we’ll have to pay 4% royalties ad infinitum? We’re buying the company!” When it gets to this stage and a deal’s at risk, the original licensor has all of the leverage, and will often be “bought off”, at the expense of the shareholders, to make the issue go away so the deal can get done.

Having negotiated multiple technology transfer and M&A deals, I have learned that it is imperative to construct the tech transfer deal with M&A in mind. Exclusivity in a well-defined Field, rights to Derivative Works, Non-Assertion of IP rights, a built-in cap or royalty buy-out to convert to a license in perpetuity, are all essential. Of course, in a non-arm’s length licensing agreement, like that between Joltid and Skype, the license terms would have been very different, but in this case it is incumbent on the acquirer to recognise this and force the issue while they have the leverage.

In hindsight, many would agree, this acquisition missed the mark strategically, resulting in a $1.43b writedown. But it’s hard to fault big, bold plays with the potential to break new ground. I have a deep admiration for those involved in transactions like that. But a key takeaway is the tactical execution by eBay’s M&A team appears to have missed the inherent conflicts of interest and let slide the licensing agreement with Joltid. Now, with no leverage, it’s biting them hard. Caveat emptor!

That’s my .02!

Martin Suter

(martin.suter at iplicensing.net)

Nortel’s Devolution to Non-Practicing Entity?

As someone who once wore a Nortel employee badge, and who counts many ex-Nortel employees among friends and family, watching Nortel’s descent from the peak has been hard to watch. Those, with better visibility into the decision-making than I, will ultimately dissect all of the wrong turns. 

Financial mismanagement, ill-conceived M&A deals, and strategic missteps have, unfortunately, landed Nortel where it is today – in bankruptcy protection and actively divesting entire businesses; its enterprise business possibly to Avaya, its wireless business to Ericsson. But like the Black Knight in Monty Python’s “The Holy Grail”, they’re “not dead yet”, despite hacking off multiple limbs.

When Nokia Siemens Networks’ bid was announced for Nortel’s remaining wireless business (CDMA and LTE roadmap), the decision to exclude wireless-related patents was a very strong indicator of intent. Under the terms of the announced transaction, NSN received a license to Nortel wireless IP, while Nortel retained ownership of said IP. According to reports, the Ericsson deal construct is very similar, with ownership of Nortel patents remaining with Nortel.

Once NSN’s stalking horse bid was announced, others emerged as suitors for the wireless business, including most notably RIM and the eventual winner of the auction, Ericsson.

Why would RIM pursue Nortel’s wireless business at the 11^th hour? Is it because it aspires to get into the CDMA/LTE base station business? I’m guessing not. Could it be that RIM saw Nortel’s moves signaling a fundamental shift in its future business model? Rather than remaining in the messy business of actually producing and selling product, why not sell off the operating businesses for a bunch of cash, throw in non-exclusive licenses to Nortel’s IP, and re-emerge as Nortel, the Non-Practicing Entity (aka Patent Troll)?

Few companies have been as badly burned recently, by NPEs, as has RIM. With its $612.5m settlement with NTP, for what ultimately amounted to the assertion of just a couple of claims (the validity of which was being seriously challenged), and more recently, its settlement with Visto for $267.5m, I’m sure RIM can see a day when Nortel, the NPE, asserts claims against RIM’s LTE products, at a cost to RIM that makes its $1b pseudo-offer seem reasonable. No doubt this is why RIM is rumoured, already, to be pursuing licensing discussions with Nortel for LTE patents.

A key here is that Nortel, as an NPE, would no longer be constrained by the usual rules of engagement that make the assertion of claims, by practicing entities (PEs), so rare. As a going concern, and even with an impressive patent portfolio (reportedly 5,500 patents), it would be highly unlikely for Nortel to assert its patent position against its main competitors. A kind of détente exists with patent holders, who understand that an assertion here will bring a counter-assertion there. The worst fear of PEs, however, is the NPE (or Troll), for which this détente is irrelevant, and where the business model is uniquely about asserting and monetising IP rights.

So Ericsson gets a pass on LTE patent assertion by Nortel, a key US customer committed to LTE, and a team capable of enhancing the CDMA to LTE migration story. Not a bad deal for $1.13b. And while one is tempted to feel sorry for NSN, its original bid of $650m turned out to be woefully miscalculated. One can only guess at what losing the deal with Nortel will end up costing NSN; in legal costs, eventual royalties and market share. Conversely, Ericsson will have gained in all of these areas. Kudos to its management team for realising this.

So what of Nortel? Can it make the transition from multi-billion dollar equipment vendor to NPE/licensing company? There certainly are precedents, even in Nortel’s backyard. Wi-LAN and Mosaid are two companies that have gone done this path, each of which has developed IP licensing as a core competency. Keep an eye on key Wi-LAN or Mosaid employees. If they start to leave, perhaps it’ll be to take on the challenge of monetizing Nortel’s patent portfolio. And if I’m Jim Balsillie, I’d be super pissed.

That’s my .02!

Martin Suter

(martin.suter at iplicensing.net)