November 15, 2012

Potential Long-Term Value Of Vringo Is $100 A Share

191 comments  |  about: GOOG, includes: AAPLFBMSFTVRNG Eric Giles

 

In my opinion, there is much more to Vringo’s (VRNG) potential value than the lawsuit against Google (GOOG) or even other lawsuits associated with the Nokia (NOK) patents, and the idea that Vringo is just a patent collection agency is also wrong. In fact, the Google lawsuit may just be the beginning of a much larger story.

 

Have you wondered why Innovate/Protect merged with a small company that specializes in ringtones? If Lang, Stout, and the others merely wished to collect some past damages and future revenues on the search patents, what would they need Vringo for? Why dilute the value of the patent suit? I think they intend to obtain an injunction against Google, stop them from using the Lang patents in mobile search, and then compete with Google in this rapidly growing market.

 

Let’s start with a quick recap of the value of the lawsuit. As we know, the estimated value of past damages is estimated at approximately $550 million, counting all defendants. Value of future royalties will be set by the judge, assuming Vringo prevails. If we use the current valuation of 3.5% of 20% of domestic revenues, future revenues would be worth slightly more than the past damages, possibly another $650 million or so. This number could be very different depending on what the jury decides, what the judge decides, and what non-infringing search alternatives that Google might build to avoid royalties.

 

But I think more could come of this – much more. As explained in Mr. Ravicher’s preview of the case, if Vringo prevails they will probably ask the judge for injunctive relief. The value of such an injunction against Google, and the associated impacts on the fast growing mobile search segment, and Google’s market share and revenues, are worth far more than the lawsuit damages and royalties.

 

Let me remind all of you that I am not a lawyer. Recent legal developments show that injunctive relief for NPEs (non-practicing entities, or patent holders who do not utilize the patent themselves in the marketplace; also sometimes called patent trolls) is becoming more difficult to obtain. Courts no longer automatically issue injunctions, but rather, they use specific criteria to determine whether it should be issued. One of these criteria is whether the plaintiff will suffer irreparable harm in absence of an injunction. This has become more difficult for NPEs. According to matthewspatentlaw.com, this can be considered an‘Achilles heel’ for NPEs.

But I think the merger with Vringo effectively created a practicing entity. They are capable of delivering content to mobile devices through its ringtone and Facetones businesses, so they could do the same in search. If you’d like some further insight on this theory, see this article about Ken Lang and Vringo, where he mentions his ‘major new project’.

 

The possibility of injunctive relief for a practicing entity dramatically changes the entire value proposition for Vringo and damage prospects faced by Google. Vringo could start a new mobile search engine, which has the competitive advantage of the Lang patents, while in turn it could deprive use of those patents by their top competitor, Google. Furthermore, though the injunction would not affect Google’s search results outside of the US market, Vringo could emerge as a competitor there as well.

 

How important might this be? Very important, as mobile search is experiencing the kind of explosive growth that reminds me of the dot.com heydays. According to businessinsider.com, Google’s mobile revenue for 2012 is on pace to reach about $8 billion. Though the exact numbers for all categories of mobile revenue are not available, Google executives have said most of this revenue was from advertising. This equals about 20% of Google’s projected total 2012 revenue, and mobile is growing fast.

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