Kodak in Crisis Mines Patents for Cash Copying Texas Instruments

Eastman Kodak Co. (EK), seeking to mine its multibillion-dollar patent portfolio for cash to fund structural changes, is taking a page from strategies used by Texas Instruments Inc. (TXN) and International Business Machines Corp. (IBM)

Texas Instruments, the second-largest U.S. chipmaker, wrote the template decades ago on techniques to exploit patent holdings when a company is struggling, said Joseph Siino, who runs patent-consulting firm Ovidian Group. Losing market share to competitors, Texas Instruments used an aggressive litigation strategy that extracted royalties from those using the Dallas- based company’s technology without permission, he said.

“The TI example was the one that started a number of companies, including IBM, thinking differently about the value of this vault of intellectual property,” said Siino, who is based in Berkeley, California. Texas Instruments “at one point made more from patents than from its ongoing business.”

Kodak said in November that selling patents and refinancing debt will help determine its ability to continue operating in the next 12 months as declines in its traditional photography business hurt sales and cash reserves. Texas Instruments’ patent strategy, also used successfully by Pitney Bowes Inc. (PBI) and Xerox Corp. (XRX), may give Rochester, New York-based Kodak the cash to fund a transition to the more profitable market for digital printing.

The headquarters of Eastman Kodak Co. stands in Rochester, New York on Nov. 2, 2011. Photo: Heather Ainsworth/Bloomberg Close

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The headquarters of Eastman Kodak Co. stands in Rochester, New York on Nov. 2, 2011. Photo: Heather Ainsworth/Bloomberg

IBM, the largest U.S.-based patent owner, makes about $1 billion a year in intellectual-property revenue, said Chris Andrews, a spokesman for the Armonk, New York-based company.

‘Turnaround Moment’

IBM’s strategy has its roots in the 1980s, when after helping pioneer the personal-computer market, the company found itself challenged by competitors. Stung by a money-losing quarter, IBM turned to its patents to ferret licensing deals, taking a unit that had generated less than $100 million in revenue a year to $1 billion annually, said Victor Siber, the company’s chief intellectual property lawyer at the time.

“That was a turnaround moment,” Siber, who left IBM in 1997 and is now a partner at the law firm of Baker & Hostetler LLP in New York, said in an interview. “The company focused on the assets it had, what it could do about it, set it in motion and executed on it. It’s a great story, a great textbook case.”

Kodak, contending it invented many of the basic aspects of digital imaging and deserves to be compensated, has been shopping more than 1,100 patents since July, and is suing Apple Inc. (AAPL), Research In Motion Ltd. (RIM), HTC Corp. (2498) and other companies for royalties. The company generated $40 million in licensing revenue in the first nine months of last year, after getting $838 million in 2010, mainly from legal settlements in cases against Samsung Electronics Co. (005930) and LG Electronics Inc. (066570)

‘Crisis Stage’

Kodak’s licensing programs have generated more than $3 billion in revenue since 2004, Christopher Veronda, a company spokesman, said in an e-mail. Chief Executive Officer Antonio Perez estimated last year that based on the Samsung and LG cases, Kodak may get $1 billion in additional revenue were it to settle with Apple and RIM.

“A monetization policy can be quite successful, but it’s hard to implement it when you’re in a crisis stage,” Siber said. “Time is a very significant factor and if a company waits too long and really doesn’t have the runway, you run out of time. You really have to be alert and start early and make decisions quickly.”

Moody’s Investors Service on Jan. 5 cut ratings on about $1 billion of Kodak debt with a negative outlook, and cited “a heightened probability of a bankruptcy over the near-term” as liquidity deteriorates.

Microsoft, Ericsson

Kodak is predicted to report an adjusted fourth-quarter loss of 2 cents a share, the average of three analysts’ estimates in a Bloomberg survey. Kodak’s earnings before interest, taxes, depreciation and amortization -- a measure of cash flow -- are estimated to have been negative last year. Ebitda was a loss of $855 million for the trailing 12 months ended in September, according to data compiled by Bloomberg.

Microsoft Corp. (MSFT), the world’s largest software maker, set up a team to strike licensing deals with companies that make devices that run on Google Inc. (GOOG)’s Android operating system. Yesterday the Redmond, Washington-based company announced an agreement with LG, and said more than 70 percent of all Android devices sold in the U.S. have Microsoft licenses.

Openwave Systems Inc. (OPWV), a maker of software for mobile devices with shares that dropped 25 percent last year, said yesterday it’s pursuing a sale of its products business to focus on patent licensing. Stockholm-based Ericsson AB, the world’s biggest maker of wireless equipment, said it’s reorganizing its patent department to make more money from its 27,000 patents.

Xerox’s Example

Pitney Bowes, a Stamford, Connecticut-based maker of postal meters, dusted off a patent a decade ago from an abandoned foray into the printer business and extracted $400 million from Hewlett-Packard Co., and a later settlement from Xerox. HP in turn established a program to more actively license its patents as well.

Xerox, the Norwalk, Connecticut-based provider of printers and business services, has seen it from both sides. The company was the founder of Xerox Parc, a research institute in Palo Alto, California, that is credited with creating laser printing, the graphical user interface and other features of the modern computer. Apple and other companies were able to use the inventions without paying Xerox.

The trick is to ensure that the company is paying attention to its intellectual property, making sure the patents adequately protect the innovations, Siino said.

“If a company has neglected its IP or hasn’t been paying attention to IP all along and had someone watching the store, it can find itself in a position where it’s unable to capture the value of their IP,” Siino said. “Kodak will soon find out whether it was careful or not.”

To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net;

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net

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