RPX's Plan: Make a Fortune by Fixing the Patent Mess

Despite the negative talk, the U.S. is still a dominant leader in innovation and technology. From 1991 to 2000, 303,220 patents were filed. Then from 2001 to 2010, this increased to 682,086. Consider that over 250,000 active patents exist just for smartphones, which are constantly adding new features and technologies. The U.S. patent system is clearly getting ever more complicated and expensive -- trends that aren't likely to end anytime soon.

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.

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Realizing that the status quo will continue for some time, RPX has developed a business model that helps minimize the risk. It's called "defensive patent aggregation," and it requires monitoring developments in intellectual property.

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.