This is a guest post from Gregor Schauer, who has worked in tech in Silicon Valley since 2000. Gregor has also recently spent 2 years in equity research at JMP Securities and Jefferies, covering the Internet sector and enterprise software. You can follow him on Twitter here. Disclosure: Gregor owns Apple and Google shares.
One of the more curious things about the patent infringement lawsuit that Apple filed against HTC is why it didn’t file one against Palm first. There had already been a lot of speculation about Apple suing Palm, but virtually no one saw them taking on HTC first. Interestingly, an unintended consequence of this lawsuit is that it potentially increases the value of Palm’s patent portfolio, and strengthens the case for them to be acquired.
So what is the market valuing Palm at? After the huge smack on the head that the stock got after the company’s recent miserable revenue guidance, it’s $759 million for WebOS + all of Palm’s patents + their existing business. This is the enterprise value of the company, or what the company would cost to an acquirer if it was purchased for its current market value. (Though, a buyer will likely have to pay a premium.)
The issue is how to make sense of that valuation. Here are some mobile heavyweight market caps for context: Apple $205 billion, HTC $8 billion, Research In Motion $42 billion, Nokia $54 billion and Motorola about $16 billion. So roughly chump change in this neighbourhood.
Obviously there is a lot of doubt whether Palm can even survive, but that is exactly why the question should now shift to what WebOS and what the patents are worth, especially if the patents could buy some bad Apple immunity (pun intended). But let’s backup first to see why Palm’s patent portfolio is the likely reason Apple did not go after them first (and why it might then be quite valuable).
Why Palm Was the Obvious First Choice for a Lawsuit
Just a month ago there was an obsession with the reasons why Android devices in the US did not have multi-touch enabled in key apps, such as Google Maps and the Android Browser. Third party apps, such as the Dolphin browser had multi-touch, as did the European version of the Droid (the Milestone). Clearly something funky was going on.
There was some speculation that this was related to an IP issue but everyone kept pointing to the Palm Pre, which has multi-touch at launch, as proof that that this was a bogus claim. If Palm could do multi-touch and not get sued, why couldn’t Google? A popular report was that there was a so-called gentleman’s agreement between Apple and Google, in which Google agreed not to implement multi-touch to not weaken Apple’s patents. This seemed a little odd for a few reasons, but especially since lack of multi-touch was restricted to the U.S.
The biggest thing everyone seemed to overlook was Palm’s patent portfolio. It’s well known that filing patents is part of a defensive Cold War strategy; unless your name is Nathan Myhrvold and you run a company called Intellectual Ventures. It typically plays out along the lines of “you don’t sue me, I won’t sue you”. However, for this strategy to work you need to have patents that are threatening to a potential aggressor. And if you have enough key patents you might start strutting around, beating your chest and threatening those that don’t have comparably good ones. Which is just what Apple has been doing.
Apple Threatens to Wield its Patent Ax (and against Palm in particular)
When Jobs unveiled the iPhone 3 years ago he also said, “We’ve been innovating like crazy for the last few years on this and we’ve filed for over 200 patents for all of the inventions in the iPhone. And we intend to protect them.” My emphasis added.
A year later, we got some more explicit warnings from COO Tim Cook on Apple’s Q1 fiscal year 2009 earnings call, when he said, “We like competition, as long as they don’t rip off our IP, and if they do, we’re going to go after anybody that does.” Everybody knows that Cook was referring to Palm which had just announced the Palm Pre earlier in the month.
So the question then is: Why didn’t Apple take any action against Palm when the Pre launched last year? Clearly there is no love lost between Palm CEO Jon Rubinstein and his old boss Steve Jobs. Rubinstein has rebuilt Palm using the blood, sweat and tears of former Apple employees. And he’s also annoyed Jobs by having the Pre pretend it was worthy of syncing with iTunes. If Jobs is incensed with anyone, it’s Rubinstein and his merry cohort of traitors over at Palm.
Speculating about Good vs. Not-So-Good Patent Portfolios
The only reason that seems fathomable is that in Palm’s 15-plus years of existence as a PDA/smartphone maker, it has acquired a lot of patents that could be used by Palm in a countersuit and Jobs did not want to risk fighting against these. If Apple wanted to fire a shot across the bow against Google, then lashing out at Palm would have been the perfect mechanism for that. They could have done this a long time ago; before Google decided to cross the multi-touch line. Instead, Apple decided to take on HTC instead.
It’s hard to know how valuable the thousands of different patents are; Palm reported having over 1,650 patents and Motorola 23,019 patents in their most recent annual reports. Apple and HTC don’t note their patent counts in their annual reports, but it was separately reported that Apple has 3,000, Google 316 and HTC a measly 58. And of course quantity doesn’t equal quality, but there are some more basic grounds for speculation.
One key difference between them is that Palm, Motorola and Apple have arguably had revolutionary impacts in the cell phone/PDA/smartphone industry (at various points in the last 20 years) and HTC not so much. It seems logical that the depth and quality of a patent portfolio is somewhat correlated to the time a company has been in an industry and the extent to which it has held leadership positions, which is presumably when it might have sewn up some key patents. Companies can also acquire patents through acquisition but to our knowledge HTC has not made any big acquisitions that might have bumped up their patent portfolio.
HTC Is a Relative Newbie in the Mobile Space
In contrast to the others, HTC is a relative newcomer to the mobile scene. It was founded in 1997 and spent the most of its early years making white-label phones for carriers and really made its mark making Windows Mobile phones. HTC has never developed their own OS and it’s only recently with Android that HTC has started to make a significant mark in the software realm with its “Sense” UI which is overlaid on Android.
Given its more recent, and arguably, less revolutionary innovations (when compared with Motorola, Palm and Apple), it seems reasonable to speculate that HTC had the least defensible patent portfolio. It’s also worth noting that Nokia recently filed a lawsuit against Apple claiming the iPhone infringed on 10 patents; not surprisingly, Apple countersued. This supports the notion that big old patent portfolios are very valuable — not many people really think Apple ripped off Nokia’s IP to make the iPhone.
So we still don’t really know what the patents are worth, but if Palm’s patent portfolio does buy bad Apple immunity, then $750 million for the patents + WebOS does seem pretty cheap, especially if another company could leverage WebOS more than Palm can. The current Palm devices are arguably good but not great, but this is more of a hardware issue than a software one (WebOS is well acclaimed as an OS).
The Patents are Likely Valuable But WebOS Still Constitutes the Crown Jewels
Actually, WebOS is likely significantly more valuable than the patents themselves, but this could vary depending upon the potential acquirer (some might be more interested in WebOS than the patents and vice versa).
A company that could really leverage WebOS, for example, is Nokia, which has Amazon-sized distribution channels (this is another post in itself), but suffice it to say that Nokia sells almost a million phones a day and Palm would be thrilled with a few million unit sales in a year. It’s not hard to imagine that Nokia could simply slot the Palm Pre and Pixi into its channels and double or triple their unit sales.
Yes there are branding and other considerations, but even with a Nokia brand on it, it could ramp sales quickly. More importantly, Nokia is messing around with a new, but unfinished OS, recently christened MeeGo. But time to market is a huge issue for Nokia as the iPhone and Android have all the platform momentum (and even Research in Motion, to a lesser extent). Then there is Windows Phone that’s launching later this year.
Simply, Nokia is running out of time to get an OS in the game and the market is not going to support a plethora of smartphone OS’s. With Meego, they’ve also pretty clearly signaled that Symbian won’t cut it for smartphones, regardless of their official comments. With WebOS, Nokia could simply scrap MeeGo and voila, it has a very good new platform that already has some traction, but could be ramped extremely quickly.
And of course, Nokia initiated a patent infringement lawsuit against Apple, so getting the Palm patents could help amp up that battle.
There are many other potential acquirers and this is just one. All the big Android device makers are doing custom Android devices, showing that they can’t kill the appetite for more control of the OS in their devices. The key players here are HTC, Motorola and Samsung. And then there are all the PC OEMs that are looking to get into the Smartphone market, such as Dell, Acer and others.
One thing that is pretty certain is that boardrooms are abuzz right now and one of the things they are likely wondering is what WebOS and the Palm patents are worth. Palm would probably prefer to go it alone — which company really wants to be acquired? — but that is not likely to stop possible bids. (Especially Palm, which has already been through one nightmare acquisition in its history; 3Com.)
But maybe some company was wondering whether to buy Palm for WebOS or not, and this patent quagmire might just seal the deal.
This is a guest post from Gregor Schauer, who has worked in tech in Silicon Valley since 2000. Gregor has also recently spent 2 years in equity research at JMP Securities and Jefferies, covering the Internet sector and enterprise software. You can follow him on Twitter here. Disclosure: Gregor owns Apple and Google shares and contemplating a position in Palm.