Good Morning

The blog linked to below, which appeared on the WWW site of Intellectual Asset Magazine (IAM), provides interesting perspectives on WiLAN and the patent market.

http://www.iam-magazine.com/blog/detail.aspx?g=6904e240-3514-473f-a084-7b21c083c3b0

For your convenience I have also provided the content of the post below.

For those of you that may not be aware of IAM Magazine, it is very useful source of information, opinion and insights into the patent market and the licensing of patents.

Regards,

Tyler Burns
Director, Investor Relations

tburns@wilan.com
T 613.688.4330 | C 613.697.0367

IP Licensing | Acquisition | Development | Partnership
Wi-LAN Inc. 303 Terry Fox Drive, Suite 300, Ottawa, ON, K2K 3J1
T 613.688.4900 | F 613.688.4894
www.wilan.com

WiLAN confirms acquisition approaches and puts up to 2,000 patents on sale

If you want an insight into the changed dynamics in the patent market, particularly as they apply to listed companies, then take a listen to the WiLAN investor call from yesterday. Preaching the new mantra that less is more – which means fewer patents and less litigation - CEO Jim Skippen revealed that the company had received a number of expressions of interest over an outright sale and that up to 2,000 of its patents were now on the auction block.

The call with investors took place as the Canadian PIPCO revealed the results of a strategic review which it launched last October. That review came after the firm announced that it didn’t feel that its share price adequately reflected the strength of its business. A fall in its value had been sparked, in part, by an adverse ruling in a long-running patent dispute with Apple. Here’s our take on the original announcement.

As part of the review WiLAN considered a number of options, including an outright sale, before deciding to refocus its business on fewer patents, entering into deals with companies seeking a licensing partner, lowering its outside legal spend and reducing the amount of litigation it engages in. You can see the firm’s announcement here.

In disclosing that WiLAN had been approached about a sale, Skippen said: “We did receive a number of expressions of interest but in the end the board did not feel that any of the offers satisfactorily valued the company.” That means that the business will continue to operate as an independent entity with, ultimately, a slimmed down patent portfolio (currently the WiLAN owns around 4,500, many focused on wireless and TV technology).

Here’s what Skippen had to say about the plans to reduce the patent stockpile: “We’re carrying a lot of patents… and what makes sense is probably to divest of a lot of those patents or possibly abandon them if they’re not adding value to our company. That’s a process we’re starting now but we’re maybe interested in selling as many as 2,000 patents.” Though that does raise the question of who would be willing to buy patents that an NPE – whose business model is based on raising licensing revenues through patents - had decided were not worth keeping.

Later in the call he went on to add: “There are a lot of patents that people want to sell. Well, we don’t want patents that people want to sell, we want patents that people want to keep and share in the licensing proceeds from them. Whether it’s a very large portfolio or a small one the thing we’re interested in is very high-quality patents.” That looks very much like a pitch for more privateering style work along the lines of the deal recently agreed with Panasonic.

This is part of quite a sea change in the patent market. Gone are the days of NPEs buying up thousands of patents. As we have seen with recent announcements from the likes of Marathon, the message more and more from management teams is patent quality, patent quality and patent quality. That makes for an interesting contrast with operating companies where many still seem to view patents as a numbers game. Just consider the deals announced so far this year by Lenovo such as its acquisition of more than 3,800 patents from NEC. But that’s done, more often than not, to help a company move into new markets or to provide some level of protection from litigation. For a PIPCO, pursuing a steady revenue stream from licensing, the dynamic is very different – especially given recent judicial developments in the US and Congressional moves to reform litigation practices.

The other interesting thing to note from WiLAN’s announcement and call is its changed attitude to litigation. Skippen insisted that the company was still prepared to litigate where necessary, before adding: “Overall we’re going to focus a bit more on good faith negotiations and be a little slower off the mark to litigate. It’s our policy that we try to negotiate first and reach a reasonable licensing agreement before we litigate.”

This is an incredibly delicate balance for WiLAN to strike. If you’re an operating company against whom WiLAN is trying to assert a patent you now know that you can engage in delaying tactics and wait for your day in court.

Skippen pointed out that of the $750 million in revenues that WiLAN has generated so far, more than half of that has come without litigation, so it is possible to keep the lawyers out of it. On the flip side, the company is also sitting on a pretty healthy cash pile (around $90 million), which means it can handle most things that a particularly adversarial licensing target throws at the firm.

Plus, WiLAN is also looking to bring down its legal costs having negotiated a revised fee deal with its main licensing law firm McKool Smith. That means that the firm is paid a fixed monthly amount, subject to a cap, with a success fee kicking in when a licensing deal with another party is agreed.

The initial response to WiLAN’s announcement from the markets was not positive as the company opened down and the share price had fallen 7.7% by just before midday (Eastern US time) on Thursday. When the company announced its review its market capitalisation was just under $400 million, as of today it’s around $360 million.

Despite the market’s reaction, there were several encouraging points to come out of the call. Skippen revealed that the company is currently working on several deals right now over possible licensing partnerships. It has already signed the Panasonic agreement and on the pure licensing side it has entered into deals with HTC, Sierra Wireless, Toshiba and Hon Hai. It has also had a judge overturn a jury decision that the patent it was enforcing against Apple was invalid.

Much of the logic behind WiLAN’s announcement is clearly sensible and is indicative of where the market is moving. But how do you convince investors in a patent company that’s still worth several hundred million dollars, that the future lies in fewer patent assets and a litigation stick that looks more like a twig than a baseball bat? Whatever market you’re in, that could be a tough sell.

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