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He says, he says Pure-play vs. in-house R&D
By Roman Zakaluzny, Ottawa Business Journal Staff
Wed, Sep 26, 2007 4:00 PM EST

Are IP licensing firms opportunistic patent trolls, or do they offer valuable services?

Wi-LAN and MOSAID Technologies are two IP-centric companies coexisting in Ottawa's high tech sector, but with sharply different business models.

Wi-LAN uses a pure-play licensing model, employing litigation (or the threat of litigation) to earn its revenues after strategically buying patents. MOSAID, while moving more in Wi-LAN's direction, still has its own research and development wing.

Which of the two models is better?

Both methods can be time-consuming and expensive, and both can also prove profitable in the end, said Ottawa intellectual property (IP) lawyer Mike Andrews of Andrews Robichaud.

The differences lie in the judges.

"For a product company . . . the product is judged by the court of public opinion. But in the case of Wi-LAN, the product is judged by the courts, with the product being the patents," said Mr. Andrews.

His boutique intellectual law practice approaches its clients from a "hard core" business perspective, but does not necessarily recommend one model over the other. Both have their advantages, he said, but Wi-LAN's pure-play licensing model is still rarer, and gets more critics.

"Wi-LAN is on the outer perimeter," said Mr. Andrews. "I know that there's been a lot of criticism, (and) there's a lot more lawyers involved. But the bulk of companies are involved in in-house R&D and the development of revenue by taking products to market."

Having said that, Wi-LAN's model can be profitable, he added, both for the pure-play licensor and those leasing the patents from Wi-LAN.

"Pure play has a lot of business advantages," he said. "You can really focus on areas of your technological expertise. You can really save (other firms) a lot of time and money by giving access to already protected technology, so they don't have to engage in the actual R&D. In this field, securing patent rights, while expensive, is just a fraction of the cost in actually engaging and enforcing these rights. In the case of Wi-LAN, where you have a strategy where you offer potential licensees access to technology they would have to spend a lot of money developing, then enforcing them, there's a lot of value there.

"Obviously, Wi-LAN's got a strategy that's working," he said, listing Nokia, Fujitsu, Cisco, March Networks and others that have signed agreements with the Ottawa firm to use its patents.

John Ogilvie, a local tech entrepreneur and now a Green party candidate in Carleton-Mississippi Mills, is a long-time critic of the pure-play licensing model. He said under current regulations, the model has some definite built-in advantages – among them, zero overhead.

"Wi-LAN should be more profitable, since it a purely legal and financial play," he said.

"As a pure IP licensing firm, they could run it out of a desk drawer." He pointed to the example of Eolas, which settled a patent case with Microsoft for $581 million – and was apparently a one-man firm.

"MOSAID . . . suffers under the financial burden of maintaining R&D, manufacturing and tech support staff. Having actual employees doing real work imposes an additional burden in the form of HR people to manage this workforce, a building to house them, furniture for them to sit at – you see why Wi-LAN is visionary," Mr. Ogilvie said, somewhat tongue in cheek.

On the same token, Wi-LAN's model can be more vulnerable to changing markets. After huge jumps in first quarter profits this year, the company then reported a net loss in its second quarter, meanwhile predicting future payoffs. Finding, buying and keeping patents takes a lot of time and research, and the results aren't always immediate.

Wi-LAN's model is dependent on it always having a stable of current technologies that the market is going to want to embrace, said Mr. Andrews. And the wording of individual license agreements can mean the difference between success and failure.

"The thing about license agreements, depending on the parties that are negotiating, the language in a licence agreement will dictate the business terms that have nothing to do with IP," he said.

But Wi-LAN is also providing a service to other companies, Mr. Andrews added, by consolidating related patents under one roof. The business model involves IT- and IP-savvy people able to canvass incubators and universities. Emerging companies fearing a legal problem down the road are wise to look them up.

"Look what happened to (Research in Motion) – the cloud over RIM's stock was such that it was better off to settle," he pointed out.

"The Wi-LAN model (removes) the additional equation of setting up the manufacturing process and distributing products, then having to market these products," he said. Wi-LAN essentially performs all those tasks. "It's a fluid industry, it can have conversations quickly with any number of manufacturers. And it basically involves paper: paper in the form of licensing, or paper in the form of litigation."

But companies that develop their own products, then brand them and take them to market, still garner more respect.

"I like the MOSAID business model personally, because when you're actually engaged in the end-to-end product development and delivery, (you're) going beyond what Wi-LAN is doing," Mr. Andrews said.

There's a lot of R&D going on in town, but Ottawa, in general, is not that good at taking the next step, he said. Most firms supply products to others that end up taking them to market. "The reality is a lot of the local companies are run by engineers rather than branders with a consumer approach."

While others are run by lawyers.

"Unfortunately with IP, this is where the bad rep comes," he continued. "In litigation, it's known as the deep-pocket strategy. It's not necessarily who has the better strategy, but who has the will to fight."

Mr. Ogilvie said legislative changes are coming, especially in the U.S., where the patent system is "rotten to the core."

"There will be sweeping reform, probably sooner rather than later," he said, perhaps simply settlement caps. "When that happens, pure-IP firms will find themselves in a very poor position, indeed. Which is fine by me. There is nothing honourable about this business." n

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