I kind of feel like people throw the word “bubble” around too loosely, and Richard Waters ought to at least consider the possibility that the sky-high valuations of patent-owning firms reflect the real economic value of the legal authority to extort money out of firms with products:
In the month since an auction of patents from the bankrupt Nortel Networks ended with a shockingly high bid of $4.5bn, or five times the initial offer, the favourite game in tech circles has been to find the next big chest of buried gold. [...] As always in tech bubbles, it is the “pure plays” that have drawn the most interest – in this case, the companies set up mainly to exploit the value of pure IP, rather than actually to build things. Shares in InterDigital, which specialises in mobile communications IP, have soared 75 per cent since it said last week that it was looking at putting itself up for sale: with a market value of $3.2bn even before any auction begins. [...] But even that pales in comparison with VirnetX. Despite having only one licensee for its internet security technology and royalties of just $17,000 in its latest quarter, VirnetX’s 14 US and 16 non-US patents pack a punch: with lawsuits out against Cisco, Apple and Avaya, among others, its stock market value has jumped more than fivefold in the past year, to $1.6bn.
It’s possible that this is a bubble. But smartphone sales have, in fact, soared over the past several years and there’s plenty of remaining room for growth. And it turns out that amassing patents and threatening to sue smartphone makers is a viable line of business. It also turns out that selling your patents to smartphone makers in order to let them sue or countersue competitors is a viable line of business. We’re not experiencing an unsustainable bubble in smartphone sales, so I see no reason to think that skyrocketing valuations of smartphone-related patents reflect anything other than a basic market dynamic. It looks like a bubble to some observers because it sounds insane that you could get rich off smartphones without actually selling smartphones or smartphone components to anyone. But the current state of law and policy really is that bad. What we’re getting here is a market test of a portion of the value of the rents created by the Patent And Trademark Office.