With its handset business crumbling and subscribers fleeing, many analysts believe BlackBerry’s (TSX: BB) (NASDAQ: BBRY) patent portfolio is the company’s most important asset. But what if the company’s intellectual property isn’t worth nearly as much as generally assumed?
New problems emerging
Last week, AllThingsD’s John Paczkowski wrote an excellent piece questioning the value of BlackBerry’s patent portfolio. Paczkowski cited a report from Pacific Crest equity analyst James Faucette, who notes that the value of BlackBerry’s patent portfolio could’ve been drained over time through licensing deals made with other wireless carriers. As Faucette writes, “[BlackBerry] clearly has a large patent portfolio, but we suspect that much of that portfolio has already been cross-licensed to other wireless companies.”
If true, then the normal list of patent buyers — Google, Microsoft, and Apple –– may already have access to BlackBerry’s intellectual property rights. A cross-licensed patent could still have some value, Paczkowski concludes, but “its usefulness might be more limited to certain buyers looking to more aggressively monetize them. And that could undercut their dollar value.”
Given that BlackBerry’s intellectual property accounts for much of the stock’s market capitalization, this is a serious concern for investors. Yet more troubling, the concerns raised by AllThingsD come amidst a negative backdrop for the value of patents industry-wide.
In April, a U.S. judge ruled in favour of Microsoft during the first round of an ongoing licence dispute with Motorola Mobility. The case centres on how much Microsoft should pay Google’s mobile division for licensing its H.264 video and networking essential patents; these are appropriately named because they are critical to the functioning of Microsoft’s Windows software and the Xbox gaming console. Google originally demanded to be paid $4 billion per year for the violation of these patents, but in the decision, the courts ruled that Microsoft owed Google only $1.8 million.
The string of settlements against Google seems to suggest that the company overpaid for Motorola Mobility. Assume Google paid between $8 billion and $10 billion for these IP rights. The difference between the company’s $4 billion asking price and the court’s $1.8 million settlement values Motorola’s licences well below where they were likely appraised at the time of the acquisition. Investors should weigh this when estimating the value of other industry patent portfolios.
But Microsoft v. Motorola is just one skirmish in the growing technology litigation war. As Time magazine reported in June, “In 2011, Apple and Google spent more money on patent litigation and defensive patent acquisitions than on research and development.” This is bad for innovation — and it’s attracting the attention of Washington.
In June, President Barack Obama introduced a proposal to crack down on so-called patent trolls — firms whose main goal is to extract licensing fees from other companies and are therefore responsible for most of the patent disputes in Silicon Valley. Pres. Obama is asking Congress to make it easier for judges to grant litigation fees to defendants who win in frivolous cases, restrict lawsuits against businesses that use technology, and make it tougher for corporations to restrict or ban the import of products that use disputed patents.
But while these reforms may be good for innovation, it could reduce the need for litigation protection — thereby reducing the value of patent portfolios industry-wide.
Foolish bottom line
Industry analysts value BlackBerry’s intellectual property between $2 billion and $3 billion, according to AllThingsD. These estimates are generally provided by comparing the company’s portfolio to previous patent transactions, such as Nortel Networks and Motorola Mobility. But given that the legal and political environment has changed since those transactions took place, those comparables may no longer be appropriate.
And all of the above factors illustrate one clear theme: BlackBerry’s patent portfolio might not be as valuable as investors expect.
Robert Baillieul does not own shares of any companies mentioned.
David Gardner owns shares of Google. Tom Gardner owns shares of Google. The Motley Fool owns shares of Google and Microsoft.