Rockstar – Falling star

Desperate tactics indicate all is not well at Rockstar.

• It looks very much as if Rockstar has been having a hard time earning a decent return on the $4.5bn that it spent to acquire 6,000 patents in 2011.
• So much so that its tactics appear to be getting dirtier causing more and more commentators to label it with the ignominious title: “patent troll”.
• Investing in patents and earning a return on them is a perfectly acceptable business model.
• The problem is that patent licensing is such a grey area that it invites abuse from those with questionable business ethics or those that are in financial trouble.
• I suspect that Rockstar’s biggest problem is not even of its own making but was caused by its owners.
• In 2011 a confluence of events led to a mad scramble for patents that drove valuations to crazy levels.
• Rockstar bought right at the top and I suspect it has been struggling to earn a return on that investment ever since.
• Taking out the patents that Apple took for itself, I have estimated that Rockstar has around 4,000 patents with a combined purchase price of $3.7bn. (see here)
• The situation has now unravelled to a point where the cable industry has banded together and launched a suit against Rockstar accusing it of underhand licencing practises.
• This complaint makes interesting reading as one can draw conclusions about what is going on inside Rockstar from it.
• This is not because the complaints necessarily have any merit but because there is likely to be at least an element of truth to them.
  • First: The cable industry claims that Rockstar refuses to discuss licensing terms and instead simply demands royalties on its entire portfolio.
  • Lisencing an entire portfolio is common in the industry but this usually occurs after each side has had a close look at the patents in question.
  • Failure to allow examination of patents is very unusual indeed.
  • In fact, it looks like a tactic to hide the fact that the patent portfolio is both ageing and weak.
  • Many of the fundamental patents are nearly 20 years and will soon be expiring.
  • If Rockstar can win licences for its entire portfolio then the age of some patents won’t matter as there are plenty of new ones still in force.
  • In effect the younger weaker patents will be helping to continue revenues from strong but expiring patents.
  • This is a strong indication that Rockstar massively overpaid for the portfolio and failed to do its due diligence properly.
  • This tactic will backfire because if it comes to litigation, Rockstar will have to assert some patents which will then be examined in exhaustive detail.
  • Second: The cable industry claims that Rockstar is moving standard essential patents (SEPs) through subsidiaries in order to avoid its obligations under FRAND (see here).
  • This looks like a baseless accusation as a SEP is bound by FRAND no matter who owns it.
  • Furthermore, FRAND has become much more powerful now that it has the backing of the White House. (see here)
  • I suspect that Rockstar is actually trying to sell off bits and pieces of the portfolio in order to claw back some of the cash it blew in its headlong rush into patent investment.
• The end result is that Rockstar is in a very difficult position.
• It is meeting far more resistance than expected when it comes to licencing its patents and the real value of those patents is way below what it paid.
• At the same time it will be under enormous pressure from its owners to show a decent return which is something it will probably be unable to do.
• It is this pressure, that I suspect has forced it to use increasingly exotic methods of patent licensing.
• The best solution is for Rockstar’s shareholders to allow it to write down the purchase price to a more realistic level.
• This will reduce the pressure allowing Rockstar to show positive returns on much lower levels of revenue.
• To me this is only fair as it was its shareholders that bid the crazy price in the first place.