RPX's Plan: Make a Fortune by Fixing the Patent Mess
This has created an open for an opportunistic group of firms called "nonpracticing entities," or NPEs. A more common moniker is "patent trolls" or even "patent pirates." These companies buy patents and then try to get licensing fees from companies through litigation. No doubt, this can be a heavy cost for tech companies that are trying to compete.
That has led a company called RPX to work on a solution to this big problem. As a sign of its success, it has filed for an IPO, even though it was founded only in 2008. The lead underwriters include Goldman Sachs (GS) and Barclays Capital (BCS). The main investors are Index Ventures, Charles River Ventures and Kleiner Perkins Caufield & Byers.
Enter "Defensive Patent Aggregation"
The patent marketplace is enormous, but it lacks many features that would make it efficient. There's no central exchange or standardized terms for making transactions. Basically, pricing is often based on litigation.
When certain patents look strategic, RPX will buy them. So far, it has spent over $250 million on these investments.
But RPX's policy isn't to litigate over these patents. Instead, it gets annual subscriptions from clients in exchange for access to the information and the right to further develop protection strategies. A key attraction is that RPX caps its fee based on a client's revenue and operating income, with adjustments based on the consumer price index. This helps to align the interests of the clients with RPX.
So far, the system is working well. In 2008, RPX added five clients. But by 2010, it had 47 additions. Among its clients are Cisco (CSCO), Google (GOOG), Samsung Electronics, Verizon (VZ) and Panasonic.
Lots of Interest
So, it's no surprise that RPX has been growing at a torrid rate. In 2008, it generated $800,000 in revenues. As of the first nine months of 2010, revenues soared to $65.2 million and net income came to $10 million.
While the RPX offering may not be as big as a Facebook IPO, it's likely to get lots of investor interest. And with the proceeds, it'll be able to greatly improve its patent portfolio, raising the barriers to entry for would-be rivals.