Vringo: Patent Monetization as new Business Model?

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Vringo Inc. (AMEX:VRNG), which deals in mobile technologies and intellectual properties, has announced the filing of a law suit against Microsoft Corporation (NASDAQ:MSFT) for infringement of two patents. I/P Engine, a 100% subsidiary of Vringo filed the suit in New York.

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The company has reported that two of its patents related to frameworks on which a search engine works have been infringed by Microsoft, but they have not named a specific product or service which violates these patents. These patents are the US Patent No. 6,314,420 and 6,775,664. The official complaint said “Microsoft has and continues to infringe the patents-in-suit, and an award past and future compensatory damages amounting to no less than reasonable royalties, prejudgment interest and any other damages based on any form of recoverable economic injury”

Past Lawsuits

Vringo had been filing lawsuits against many companies in the past. In August last year, Vringo sold 9.6 million shares for $31.2 million, to buy more than 500 patents and patents pending from Nokia (NYSE:NOK). Using these patents Vringo filed patent lawsuit against ZTE Corporation.

The company also filed litigation against AOL Inc. (NYSE:AOL) and Google (NASDAQ:GOOG). Google ended up paying $16 million to Vringo. Vringo was awarded a 3.5% running royalty rate off a portion of the defendants’ search-advertising revenue until the patents expire.

 

Patent Monetization as new Business Model

Patent Monetization refers to an attempt to generate revenue by litigation for infringements, licensing agreements, or outright sales of patent portfolios. A number of companies had been using patent monetization in the past, using it as their only source of revenue.

Major income for Vringo comes from the development and distribution of mobile products & video applications. But the company’s actions in the year 2012 suggest that it is trying to diversify its business models.

As the part of this new strategy, Vringo merged with Innovate/Protect, Inc (I/P) in July 2012. Innovate/Protect, Inc brought with it I/P Engine, a fully owned subsidiary holding eight patents that were acquired from Lycos.  After the merger Vringo emerged as a company with competencies in two sectors – Mobile Products and Intellectual Property. I/P legal helped Vringo to build an intellectual property portfolio that can be monetized in several ways.

Challenges

Monetizing intellectual property portfolio requires a company to have specific capabilities to be successful. Some requirements are:

  1. Strong Growth Strategies
  2. Resourceful Legal Team
  3. Investors
  4. Enforceable Assets
  5. Capital for long Legal Battles
  6. Research and Development for new Patents

In order to be successful with the new business model, Vringo will have the challenge to adapt and develop demanding capabilities. Moreover a strong leadership team is required to keep track of long term strategies and implement them. Success is not always guaranteed in a legal battle and a strong team is required for driving the battle. Maintaining the confidence of investors is also very crucial. In order to be successful in the long run, the company must develop intellectual property assets which contain key claims that can be used in infringement cases against other companies. These challenges serve as threats to the very existence of Vringo.

Conclusion

The short term investment perspective for Vringo appears to be risky. The company has just started filing patent litigations and its expertise in this field is yet to be recognised. Failure to get positive results from the Microsoft lawsuit will affect the company badly, and investors will loose confidence in the company. On the other side, the company will get a high growth momentum if the lawsuit is successful.

The long term investment perspective is bright for Vringo, provided it maintains a sustainable business model. The importance of patent assets is increasing at a tremendous rate. Mobile patent licensing is particularly being sought after by a number of companies. The activities suggest that Vringo is focusing on developing a new business model where majority of the company’s revenue share will come from the patent monetization business. These findings suggest that Vringo is providing a favourable long term risk-return opportunity to investors.

Vringo is an emerging company with a new intellectual property portfolio and its original mobile product business. Rising demands for mobile entertainment applications will definitely serve to increase revenues from the company’s traditional business model. Moreover, partnership and strategic alliances developed in this model will support the patent monetization model by fostering additional patent deals. Growth of revenue from patent monetization will mainly depend on the success of current lawsuits and the leadership strategy.

At present, Vringo is trying to leverage on revenues from the mobile entertainment sector and expand into the intellectual property sector. The company has seen success in this new area, but a lot is required to be done. Vringo’s ability to establish a balance between income and expenditure from these two sectors will determine its future.

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