After losing money for the last seven years, Eastman Kodak (EK) is preparing for a Chapter 11 bankruptcy filing. Kodak has been hoping to get a cash infusion by selling its patent portfolio, which analysts had valued as high as $3 billion for over 1100 patents. A major, recent blow to Kodak has been a delay in an ITC ruling, delaying a likely settlement for $1 billion in licensing fees from Apple (AAPL) and Research In Motion (RIMM) for the use of Kodak’s image preview technology.
The ruling is a death blow to Kodak, which was already tapping credit lines and running out of cash in the third quarter of 2011. Specifically, the ITC is a part of the Department of Commerce, which means it sits in the executive branch. This contrasts with the Federal Courts and the Federal Circuit (known as the dedicated patent circuit) in particular, which sit within the judicial branch and have the authority to award monetary relief and other damage awards. ITC decisions are more quickly handed down (typically in 14 to 18 months) through administrative law judges whom, in this instance, only have the power to stop infringing articles from entering the U.S. Known as a “Section 337” investigation, the ITC literally directs U.S. Customs and Border Protection to seize and sometimes destroy inbound infringing articles at U.S. ports. Of course, when the potential infringer is a company like Apple or Research In Motion, which has plenty of cash and much to lose from blocked imports, the potential infringer will contract around any enforceable claim (or in the case of the Federal Courts, an injunction) to buy their way out of getting their imports blocked. Specifically, one clean way to do this is to obtain a license to make, use and sell what is claimed in the patent and simply pay royalties to the patent holder. In that case, the patent holder, and those royalties add up to big bucks; specifically, $1 billion. Importantly, the claims of Kodak's patent potentially cover the camera-enabled iPhone and Blackberry devices.
The Street stated that the four most likely buyers for the patents are the makers of smart phone technologies including: Apple, RIMM, Google (GOOG]), and HTC (HTCIF.PK). Of course, these are all smart phone hardware makers. Kodak patent 6,292,218 ('218 patent) includes claim 15, which covers “a motion processor for generating from the captured images, a second number of color pixel values provided in a second color pattern having at least three different colors and representative of a series of motion images to be previewed, the second number of color pixel values being less than the first number of color pixel values, and the second color pattern being different from the first color pattern;” at the center of the smart phone camera dispute. The language of a claim goes through interpretation by the commission in what is known as a Markman hearing. However, the ITC has run into complications in interpreting the patent '218's claim 15, having first found the patent invalid, but now pursuing extensions on the case because of the retirement of Paul Luckern, the ALJ who presided over the ITC action.
Speaking more broadly to Kodak's patents for sale, Kodak initiated a competitive bidding process last year that has yet to bear fruit. This “hail Mary” of an approach is certain to attract significant investment dollars, particularly from the smart phone market's players looking to maneuver around other patents defensively. Google and HTC, according to The Street, would benefit from the patents as they look to increase their defensive patents against their competitors. Other major companies that use Kodak’s patents include a who's who of device technology: LG, Panasonic (PC), Nokia (NOK), Olympus (OCPNF.PK), Samsung, Sanyo ]SANYF.PK), Sharp (SHCAF.PK), and Sony Ericsson (SNE).
Whether these licensees might be interested in purchasing Kodak’s patents is unknown, but if they are already paying licensing fees for various configurations of these patents, and they know their competitors are paying the same licensing fees, it makes business sense to consider an outright purchase. The fact that a deal for the patents has not already been consummated suggests a real likelihood that any potential buyers think they can get a better deal when Kodak is in Chapter 11 bankruptcy.
In my opinion, with the explosion of iPads, on top of iPhones, and the now-ubiquitous camera features they include, it is hard to believe Apple isn’t the highest bidder for Kodak's basket of patents. Not only is Apple sitting on an over $80 billion in cash and marketable securities that it could put to use as the owner of Kodak's patent portfolio instead of renters, Apple could also maneuver to actively invalidate patents used by competitors to attack Apple. In other words, a patent is an extra ticket to a lawsuit. Many patentees will think twice about going after this behemoth if they see an increased likelihood of being counter-sued for patent infringement and also potentially seeing their patent invalidated in the face of an increasingly vast patent portfolio at Apple. Of course, this strategic approach could be accomplished by any of the larger players, but in my opinion, Apple has the cash and motivation to do it.
Rather than having its cash earn almost nothing, as owners of Kodak's patents it could collect Kodak’s legacy and forward royalties from others at a very healthy rate, especially when compared to money market rates cash is earning today, as well as position itself well against competitors. Buying out Kodak's portfolio might even give Apple enough time to buy the patents and avoid having to pay its share of royalties down the road to a more wily, well-funded competitor than Kodak.
Apple is sitting on pile of almost $26 billion in cash and short-term marketable securities for potential investments. The full $80 billion figure includes long-term marketable securities on Apple's balance sheet.
Google has been actively pulling the trigger on intellectual property-focused buying decisions. It recently acquired Motorola Mobility (MMI) for its patents and, to some degree, its intellectual property generation capability. Google paid $12.5 billion to Motorola's parent company in order to gain more than 17,000 patents. As recent as last week, IBM and Google have made a deal for an undisclosed amount for IBM (IBM) to sell 188 patents to Google. If Google is poised this aggressively to acquire smart phone and device application patents, it is very likely that it will take a hard look at Kodak’s portfolio to improve its own portfolio as well, for its Android platform.
Google has plenty of cash with which it can part. The company has over $42.5 billion in cash and short-term marketable securities.
RIMM is also likely to contract around any ITC ruling to pay licensing fees if Kodak's '218 patent is found valid (i.e., the initial ITC decision must be reversed), and RIMM can successfully incentivize Kodak or its new owner to contract around it. However, from a practical standpoint, RIMM's smart phones focus less on the camera feature than both Apple and Google Android smart phones, making a wholesale patent portfolio purchase a bit less likely. RIMM is sitting on less cash than the other two mentioned, sitting on a mere $1.31 billion in cash when compared to Apple or Google. These are funds RIMM will be counting on as it remakes itself in light of recent market share losses to competitors.
RIMM is not as flush with cash as other potential Kodak patent buyers, with only $1.3 billion.
While Kodak has many other licensees that one might think would be interested in buying the patents, it is the smart phone makers that will be more interested potentially than the camera makers because of recent sales trends. A company like Olympus or Sanyo will be less willing to pay as high a premium as a manufacturer of smart phones whose sales are strong and rising. Kodak, once the tech giant of its time, will in the end be a lesson for others. Kodak missed the changes in technology trends and is being leapfrogged.