Investor's Business Daily
Tech Firms Keep Eye On Acacia
Friday July 30, 7:00 pm ET
Pete Barlas
Could there be a troll under the bridge of the Internet?
That's the question surrounding Acacia Technologies Group (NasdaqNM:ACTG - News), a unit of the holding company Acacia Research. The little-known firm says it owns the patent rights for sending video signals of prerecorded programs over the Net and cable TV systems. And like a toll collector, the company wants Internet, cable TV and other companies to pay up.
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In the last year, Acacia has filed patent infringement suits against several companies to get them to pay for licenses to send video to consumers. Some companies -- including Walt Disney (NYSE:DIS - News) and CinemaNow, an online movie service -- have avoided the courtroom by signing license agreements with Acacia.
But Acacia's also faced setbacks. A judge last month ruled he needed to hear expert testimony to verify some of Acacia's patent claims in a case involving sending video over the Net. That ruling sent the stock into a tailspin, falling nearly 40% in one day.
And Acacia's critics, who feel the patents are too basic to be valid, are rallying against the company. They say Acacia is just trying to shake down other businesses.
"They are going around trying to extract a tax on anyone who transmits audio or video on the Web," said Jason Schultz, staff attorney for the Electronic Frontier Foundation, an online civil liberties group. "They think they own it all."
To date, Acacia has 151 license agreements with companies. Each requires the licensee pay a sum -- typically 50 cents to $1 per subscriber per year for using its technology.
That might not sound like much. But cable TV companies collectively have more than 70 million subscribers. And there are millions of consumers who watch videos of sports, movies and other programs on the Internet and satellite TV.
If Acacia has its way, the company could become a multimillion-dollar power on the Internet in the next few years, says Paul Sethi, analyst for Iroquois Capital, an investment fund that owns a stake in Acacia. "This could be a company that is generating $25 million, $50 million or $100 million annually just from that $1 per subscriber," he said.
In June, Acacia filed suit against nine cable and satellite companies including Comcast (NasdaqNM:CMCSA - News), Cox Communications (NYSE:COX - News), Charter Communications (NasdaqNM:CHTR - News), DirecTV Group (NYSE:DTV - News) and EchoStar Communications (NasdaqNM:DISH - News). One company named in the suit, Central Valley Cable TV, settled with Acacia in early July.
Acacia owns 36 patents that cover the global distribution of taped digital media over any kind of network -- from cable to fiber-optic lines used by phone companies. Soundview Technologies, another unit of Acacia Research, also holds a patent for the V-chip technology used in TV sets.
Acacia's collection of patents means the company has an open field to solicit licensees, says Acacia CEO Paul Ryan. "The licensing opportunities for us include cable TV, satellite TV, fiber optics, wireless technology and the Internet -- all five means of distribution of on-demand video into the home," he said.
Hurt By Ruling
Acacia began its legal hunt against alleged patent violators last year. It filed suit against 39 online adult companies. Soon after, 30 settled and agreed to take licenses. Since then Acacia added eight more companies to the suit.
But Acacia hit a stumbling block with last month's ruling. The judge demanded to hear expert testimony to verify Acacia's patent infringement claims. That means the company won't get a free pass in making its case.
Acacia, though, isn't too concerned about the ruling. There are other infringement issues that the ruling doesn't cover, says Robert Berman, the company's vice president of business development and general counsel. The case relates only to sending video over the Net.
"To win a patent infringement case you only need one claim to be infringed," he said.
Still, news of the ruling has battered the stock. And it has yet to recover. "People overreact with any uncertainty in the marketplace," said Acacia's Ryan. "Investors typically have a difficult time with intellectual property issues."
But a protracted legal battle wouldn't be good for Acacia, Ryan admits. He'd prefer to settle the lawsuits, which could bring a big windfall to the company. Acacia isn't yet profitable.
"If you add up all of the subscribers of the companies that we have sued, it would be approximately 50 million subscribers," he said.
Acacia has set rates for different services such as transmitting video over the Net or via cable TV lines. But it's considering jacking up the rates for cable companies that it's forced to sue, says Berman. "We are going to seek back damages and we are going to seek much higher royalty rates as the law permits," he said.
Most of the financial livelihood for Acacia Research comes from its biotechnology company, CombiMatrix Group (NasdaqNM:CBMX - News). Adding more license revenue could quickly pump up Acacia's fortunes, says Iroquois' Sethi.
"Their operating costs are pretty well set, and as they sign more licensees that loss per share will eventually come down and the company will become profitable," he said. "Getting a large cable or satellite provider would take them immediately into the black."
Are Patents Valid?
But Acacia's role as gatekeeper of video transmission technology is in question. The Electronic Frontier Foundation has blasted Acacia's patent claims. It sees the company as one of the biggest threats to the advancement of digital information.
Acacia's patents involve simple, pre-existing technology, says EFF's Schultz. Companies were experimenting with sending video images over networks as early as the 1960s, he says. "Maybe some of these companies didn't file patents on it because they thought it was so basic that it wasn't worth getting a patent," Schultz said.
Acacia filed its first video transmission patents in 1991. Acacia Research then went public in 1995. In late 2002, it spun off Acacia Technologies and CombiMatrix as separate companies.
Others experts say that Acacia's patents appear valid. "The likelihood that they are legally enforceable is high," said Jonathan Barney, chief executive of PatentRatings, a service that provides assessments of patents. |
