Raising the intellectual shield

Patents are nigh invaluable in the litigation-heavy realm of technology, and the semiconductor industry is proving no exception. With the speed of innovation accelerating constantly, the risk of a competitor gaining a legal foothold with superior technology is a relentless risk not even the best funded R&D department can hope to match.

With this broader background in mind let’s take a look at NVIDIA’s (NASDAQ:NVDA) latest move. The deal boils down to a joint purchase between NVDA and Intellectual Ventures (IV) of a portfolio consisting of 500 patents, half of which NVDA will license from IV and the remainders they will hold full ownership of. The set of patents were developed, owned, and sold by IP Wireless and generally fall within the realm 3G/4G and LTE technologies. It is interesting to note that the parent company of IP Wireless, IPW Holdings Inc., is currently being acquired by General Dynamics.

Let’s take a deeper look at what the strategies and implications might be behind this move for the interested parties, with a particular focus on NVDA:

NVDA – As a well known company within the gaming industry for their impressive graphic card portfolio (not to mention originating the GPU), a patent acquisition in wireless technologies of this scale implies a vertical integration strategy (or essentially providing a more comprehensive product). Due to the nature of the smartphone/tablet market, providing a fully integrated chip set is imperative to staying competitive and NVDA’s strategy acknowledges this. It also confirms NVDA’s dedication to growing their mobile segment (Tegra) and supports their Q2 acquisition of Icera, an innovator in 3G/4G that allowed for NVDA to sell a complete chip set. In many ways the Icera acquisition could be viewed as the foundation for this IP purchase, as the patents involved should essentially protect the newly integrated processes as they develop.

Considering stagnant stock performance over the past year and minimal PC segment growth, focusing on expanding the Tegra products to integrate all necessary processes has significant value when competing with the movers and shakers like Qualcomm, Samsung, and MediaTek. The ease of assimilation between the patents acquired and their current value chain will be critical going forward, and represents an important focal point for NVDA’s derived profitability from this move. Even assuming a smooth transition and a fully integrated product comparable to the competition, NVDA will need to display some differentiation in order to capture market share in this competitive segment, perhaps in the realm of the niche tablet gaming market and graphics technology.

In addition to the market potential created through this integration, it should also be noted that just three months ago NVDA and Rambus reached an agreement regarding the licensing of intellectual property, which was a result of a long and costly legal confrontation. Rambus, after winning some claims and dropping others, eventually signed a 5 year licensing agreement to put end to the hostilities. NVDA’s more recent patent acquisition deal, when viewed in this light, may also be a result of a more careful legal risk aversion strategy.

IP Wireless – IP Wireless is currently amidst significant changes. With the parent company being acquired and this recent patent purchase it looks to be something of a balancing act between capitalizing on previously successful research and transitioning into a new strategic focus under General Dynamics. The terms of the deal dictate that IP Wireless retains the right to utilize the technologies from the IP sold, implying the only downside is increasing the strength of their competition. Additionally, under General Dynamics, the demographics involved are substantially different than those of NVDA. While NVDA’s technologies are generally used in a consumer entertainment market, General Dynamics’ business-to-business focus towards militaries might underline some of the logic behind the patent sale to a competitor with a different consumer base.

IV – For IV this is business as usual, assessing the legal landscape for patenting potential and licensing opportunities appears to be a crucial focus for this somewhat evasive business model. Finding data on IV is notoriously difficult, and therefore ascertaining the strategy behind their prerogatives tends to be guesswork at best. However, a few articles have outlined the potential advantages in tying strings to companies through effective licensing management, and there are critiques aplenty of a business model that leverages litigation avoidance as a profit-generating strategy. It’s an understatement to say that differentiating between profiteering and protection of intellectual property is difficult, but at least on the surface it seems to be a win/win/win for NVDA, IV, and IP Wireless (though arguably not for smaller incumbents).

Bottom Line

From a purely business standpoint this does appear to derive potential value for the involved parties, with NVDA procuring a valuable shortcut in integrating towards a more competitive Tegra chip set and a shield against lawsuits as they employ them, IV leveraging their apparently profitable licensing strategy on a reasonably large scale, and IP Wireless/General Dynamics pocketing a tidy sum without incurring substantial competitive drawbacks. It remains to be seen how effectively NVDA can transfer its focus towards the wireless market segment however, and finding a niche in which to develop a competitive advantage is still crucial to their success.