KODAK BACK: Plugging Leaks in the Marketplace for Digital Photos

Kodak recently announced the release of KODAKOne and KODAKCoin.  KOKDAKOne is essentially a licensing and tracking platform for digital photographs.  Kodak states:  

Utilizing blockchain technology, the KODAKOne platform provides continual web crawling to monitor and protect the IP of the images registered in the KODAKOne system. Where unlicensed usage of images is detected, the KODAKOne platform can efficiently manage the post-licensing process to reward photographers.

Kodak also states that “KODAKCoin allows participating photographers to take part in a new economy for photography, receive payment for licensing their work immediately upon sale, and sell their work confidently on a secure blockchain platform.”  We may be moving closer to a system of “pay first use later” instead of a “use first pay later” system with changes in technology and regulation.  Additionally, the prospect of less “leakage” in the system of intellectual property that may actually benefit innovation and other values such as free speech may be at risk.  It will be interesting to see if less leakage and perhaps more payment to some creators will lead to more creativity and innovation.  That's the goal, right?  Kodak’s stock tripled on the announcement of the programs. 

Facebook to Scoop (?) New Ideas in Partnership with Leading Research Universities

In an intriguing post, co-Blogger Neil Wilkof recently discussed how essentially elite firms may be beating the competition.  In a recent article on Reuters titled “Facebook Forges Agreement with 17 Universities to Streamline Research,” Dustin Volz discusses how Facebook has entered into partnerships (which includes unstated funding) with 17 major research institutions, including Harvard, Stanford and MIT, for the opportunity to work together on forthcoming research.  The article is a little light on details concerning the agreements.  As I described Steve Blank's discussion in an earlier post, some firms have placed outposts in technology innovation hotbeds to track new cutting edge developments and companies.  For sure, the nimble survive and those who are not do not—see Kodak.  However, Facebook may be strategically moving one step forward by starting at the source of some of the new major developments.  This arguably gives Facebook the “first” opportunity to scoop up new research and ideas as they develop in leading research universities.  Is this a good thing or a bad thing for innovation and importantly competition? 

The Reuters article states that:

The agreement between Facebook's Building 8 and the universities comes as the social media company seeks to find new revenue streams in virtual reality and artificial intelligence, after the company signaled last month it had begun to hit some advertising growth limits on its network of 1.8 billion monthly active users.

Research partnerships between universities and companies typically take nine to 12 months to facilitate, but the new agreement will allow for collaboration on new ideas within weeks, said Regina Dugan, who joined the company in April to run the new Building 8 unit.

Dugan did not provide specifics to explain how the partnership will promote a quicker pace of research, but traditional negotiations between universities and companies can often take several months.

Revisiting the fall of Kodak: are we any smarter about the "what" and "why"?

Four or so years ago, perhaps the most poignant story of a technology leader gone bad was the fall of Kodak. The saga played out on several levels: Kodak versus Fuji, traditional film versus digital technologies, the free-standing camera device versus the embedded camera in a smartphone, and the rise and fall of the value of Kodak's patent portfolio. Much was written about these issues at the time, including by this blogger, but as the several years have passed, the Kodak tale has gradually receded from hi-tech discourse.

Scott Anthony, a frequent contributor to Harvard Business Review on-line, has sought to revisit the Kodak tale in a piece published last month, “Kodak’s Downfall Wasn’t About Technology”. The focus: how did Kodak fail the move from film to digital to cellular? He suggests but rejects the following arguments:

1.The company was so much into the traditional film business that it missed seeing the digital revolution—Anthony says this is wrong, because it was Kodak itself that developed the first prototype of a digital camera, back in 1975.

2. Kodak did not invest in the digital camera business—Anthony claims that not only was the company involved early on in the invention of the digital, but it invested billions to develop digital cameras, albeit with little success.

3. Kodak mismanaged its investment in digital cameras—Yes, Anthony says, the company stumbled a bit at the beginning, but it ultimately developed elegant technologies that enabled one to move from the camera to the computer.

4, Kodak’s big miss was not seeing the move to the smartphone and the role of picture-sharing in social media—Not exactly, says Anthony. In fact, Kodak acquired a photo sharing site—Ofoto—in 2001, but it sought to leverage Ofoto to encourage customers to print more digital images, rather than to focus on file-sharing.

Having raised and shot down all these explanations, how does Anthony explain why Kodak stumbled so badly? He writes:

“The right lessons from Kodak are subtle. Companies often see the disruptive forces affecting their industry. They frequently divert sufficient resources to participate in emerging markets. Their failure is usually an inability to truly embrace the new business models the disruptive change opens up. Kodak created a digital camera, invested in the technology, and even understood that photos would be shared online. Where they failed was in realizing that online photo sharing was the new business, not just a way to expand the printing business.”

This blogger finds Anthony's use of the term “subtle” a bit odd. If Kodak's management failed to perceive that its accumulated technology was pointing towards a new business, not an extension of the current one, such a miscalculation was anything but subtle. Be that as it may-- how did IP fit into this web of corporate myopia? Not for the first time in the corporate world, there was a disconnect between a company's patent prowess, at the technological level, and the utilization of this IP to advance the company’s long-term product goals, at the management level. Add to this the wildly overstated estimates of the company’s patent portfolio in 2011 and early 2012 (amounts up to $2.5 billion or more were earnestly suggested, only to witness the actual sale of the portfolio at slightly over $500 million dollars).

As such, internal management alone was not to blame; the penumbra of supposed expertise brought to bear on understanding the IP value of the company was also heavily flawed. All of this suggests, yet again, that management training still has not figured out how to prepare its students to understand how IP functions within an organization and what is its value and valuation. The fall of Kodak is merely a symptom of the problem, but not the problem itself.

Is IP the Answer for Kodak’s Comeback?

In a March 20, 2015 New York Times article titled, “At Kodak, Clinging to a Future Beyond Film,” Quentin Hardy authors a fascinating account of Kodak’s past and attempt to rebound from bankruptcy through leveraging its research and intellectual property.  This blog previously has discussed the deal involving the sale of a large amount of Kodak patents, here.  Interestingly, the article notes that:

Spend much time around Kodak, and the company’s faded glory is apparent. Mr. Clarke[, the new CEO,] emphasizes the power that history still gives the Kodak brand. But the odds are stacked against his salvage job.

“The question isn’t tech-related, it’s competition,” said Amer Tiwana, an analyst at CRT Capital Group. “Kodak’s intellectual property seems to be slightly better, but the hazard is that their competitors, eight or 10 strong ones in each market, kill them on pricing. They might never get to profitability on the new stuff.”

In 2013, Kodak sold 1,100 patents related to digital image capture to a group of 12 companies, including Apple, Samsung and Facebook, for $527 million. Kodak retained the same access to the patents as the bidders, should it wish to compete in, say, photography once again. And it kept about 7,000 other patents, largely connected to the chemistry and physics of creating images, which the market sees as having relatively little value.

I wonder about the brand and the nimbleness of Kodak.  As we know, Kodak was slow to change its business model to adapt to digital photography.  Has it emerged as a company able to react to the market quickly?  That is not so clear from the article.

From Barbarians to Beggers at the Gate: Revisiting the Kodak Patent Sale Debacle

I have on various occasions discussed the saga of the Kodak patent portfolio and how a valuation of $4.5 billion for only part of the portfolio ended up in a sale and licensing of just above $500 million. Explanations have been sought to explain this colossal drop from the multibillion dollar estimate in late 2011 to a payout of only a fraction thereof within less than a year. An interesting attempt to provide answers has been offered by Mark Harris, a journalism fellow at MIT. Entitled “The Lowballing of Kodak’s Patent Portfolio”, here, and brought to my attention by the ever-helpful Patents Analytics group on LinkedIn, the piece is well worth a full read. Permit me to provide the highpoints of the article.

Even as Kodak sank deeper and deeper in its competition with Fuji and others, it continued to engage in innovation, spending nearly $500 million yearly. In so doing, it came up with inventions such as the megapixel camera. By 2012, Kodak had assembled a portfolio of 22,000 patents in 160 countries and earned more than $3 billion in licence fees between 2003 and 2011. As bankruptcy loomed, the company saw the sale of some of its patents as the way back to reinventing the company as a commercial packaging and printing enterprise.

The anticipation that its patent portfolio would fetch a reasonable sum seemed reasonable in light of the sale of the Nortel portfolio for $4.5 billion and Google’s expenditure of over $12 billion for acquisition of the Motorola Mobility business and patents. Consultants chimed in with estimates ranging from between $1.8 billion and $4.5 billion for the Kodak portfolio, against the backdrop of what should appear obvious—“patents are unique and idiosyncratic assets.” In particular, in July 2011 Kodak hired 284 Partners, here, who had been the consultants in the Nortel transaction, to advise Kodak. Focusing on 1,730 patents, the company employed a discounted cash-flow analysis, here, to estimate their value via licensing and litigation, if required. Based on this analysis, it came up with a cash flow of $3.07 billion from 2010 to 2020, with a net present value of between $2.2 billion to $2.6 billion.

Kodak relied on that estimate and proceeded to seek purchasers for the patents via an auction against the back drop of ongoing multiple litigation. Unfortunately, two weeks before the auction was set to commence, the US International Trade Commission ruled invalidated a key patent that led to a reduction in the estimated value of its portfolio to around $1.4 billion. This downward trajectory became much more pronounced when only two bids were made, the higher of which was only $250 million dollars. This amount was less than the company needed to secure loans that it had arranged for the company.

Harris goes on to explain thus:

"The potential bidders, it turned out, had organized into two camps. In one, Adobe, Apple, Facebook, and Microsoft formed a consortium led by Intellectual Ventures. In the other, RPX mustered Amazon, Google, HTC, Samsung, and the photo-printing website Shutterfly. Each participant in such a consortium gets to keep a share of the patents and a license for the rest. The cost to each is relatively low, and all gain the protective power of the entire portfolio".

At the point, as the court allowed the auction to continue, Intellectual Ventures, here, and RPX, here, perhaps the two most prominent patent aggregators (although each with a quite different business model), put together what Harris called “a superconsortium”. The two existing consortia merged and added three additional members-- Fujifilm, Huawei and RIM, with a combined market capitalization at the time of $1.5 billion (more or less the GDP of Australia). It was November 2012 and the parties reached their High Noon, here, moment. Kodak needed more money than what was being offered to secure financing of $793 million, namely such financing being contingent on Kodak raising at least $500 million from its patent portfolio. The result—the superconsortium offered $527 million in exchange for payment of $94 million for the patents under negotiation plus $433 million in licensing fees for tens of thousands of Kodak patents that had not previously been on the negotiating table (plus the mutual dropping of legal cases against each other). To put the $94 million amount in perspective: it was 4% of the initial valuation given by 284 Partners. As Harris notes, the deal was monopsony (monopoly power by the buyer) gone wild.

The reader is invited to read the Harris piece in its entirely but, even after a careful perusal, two comments remain. First, there is the question is the role of investment banks, especially in connection with the early estimates that proved to be delusionally oversized as a matter of market dynamics (though there is some question whether this particular market was distorted by anti-competition law forces). Did the banks contribute to an environment that was conducive to bubble-like estimates in the value of the portfolio? Second, is the discounted cash-flow analysis still defensible or have we reached a stage where top financial minds need to come together with IP types to develop a more valid and reliable measure of patent portfolio valuation?

Finally, for those of you too young to remember Barbarians at the Gate, see here.

Kodak, Patents and the Deal That You Can't Refuse?

Let's start from the end: No, I am not going to let this subject disappear quietly.

Several months ago I wrote about "Patent Valuation, T.S. Eliot and the Theatre of the Absurd" here, where I commented on the steadily decreasing valuation of the Kodak patent portfolio. The saga continues. Last week it was reported by Joe Mullin on arstechnica.com here that Kodak has entered into a credit line of $793 million dollars with its bondholders, provided that the company can raise at least $500 million from the sale of its portfolio of patents. The arrangement still needs approval of the bankruptcy court, it is reported.

The names of potential purchasers remain a combination of smartphone companies--such as Apple, Google and Samsung-- on the one hand, and patent aggregators, such as Intellectual Ventures here and RPX Corp. here, on the other. The article goes on to make a number of points that are not entirely clear to me:

1. "Because such a wide range of entities is working together to buy these Kodak patents, it is unlikely that they would fall into the hands of patent trolls or be used for other types of patent attacks."--I don't quite follow this. What does it mean that these entities are "working together"? Are they allocating the patents between them? If not, what is the nature of this coordination? Moreover, depending upon on how you define a patent troll, both Intellectual Ventures and even RPX Corp can be seen as having troll-like characteristics.

2. "This deal would allow Kodak to get one big lump-sum payment rather than eke out its patent cash in court."--This seems to be a bit of false dichotomy. Did anyone really believe that Kodak's patent folio was going to earn the company aggregate recovery in the amount of many hundreds of millions of dollars? Is sale of the patent portfolio really a commercial alternative to continuing to slog it out in courts?

3. "But the endgame will remain the same: competing companies--and, indirectly, consumers--will still have to pay a hefty tax to buy out a dying, but patent-rich, business"--This is not clear to me at all. Who are the competing companies and why are they paying "a hefty tax" for the patents?

4. I do not understand the pricing dynamic that it taking place here. In particular,
what are the pressures that are being brought to bear on these potential purchasers so that they agree to pay an amount greater than if there was a free auction of the portfolio? What comes to mind is that the bondholders want to pressure the perspective purchasers to fork over at least a half-billion dollars or take the risk that the patents fall into the "wrong" hands. Maybe that is the "hefty tax" that is referred to in the article.

More generally, I would really love someone to dig into how it came to pass that the same patent portfolio was given a valuation of over two billion dollars last year. Who had in interest in championing this over-estimate? How was this supposed to translate into fees or other income for interested parties? Is there an IP equivalent here to the tawdry conduct of several major investment houses a half decade ago, who were flogging investments of the same bundles of assets that they were shorting (i.e., betting on their price decline)?

Stated otherwise, it seems to me that the time has come for at least certain elements of the patent valuation business to come clean on what happened. Greed, misjudgment, or something more sinister?

Patent Valuation, T.S. Eliot and the Theatre of the Absurd

It is one of the most famous stanzas of modern English language poetry. Thus T.S. Eliot
concluded his poem-- "The Hollow Men":

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

And so it seems to being going with the Eastman Kodak patent portfolio and, more generally, pace the recent jury award to Apple in its lawsuit against Samsung, the patent valuation bubble that we have been witnessing. We have several times over during the past year questioned (here, here and here) the basis for the oversized valuations that have been ascribed to various patent portfolios, including Motorola Mobility and AOL. But at least these valuations were connected with real transactions, where a willing buyer and a willing seller agreed on price.

But what about the most curious of these jumbo valuations, namely the amount ascribed to the portfolio of Kodak Eastman patents--up to $2.6 billion dollars-- as the company is in throes of Chapter 11 bankruptcy proceedings in the U.S. and is itself was being valued at only at a fraction of the proposed valuation of its patent portfolio? It just did not seem to make sense to this commentator.

Well, it seems that, when all is said and done, T.S. Eliot's observation may prove to have been a more accurate assessment of the Kodak portfolio than that of all the investment bankers, IP asset valuators and the like. An article by Mike Spector and Dana Mattioli, which appeared in the September 14, 2012 edition of wsj.com here (a hardcopy version appeared in the September 15th U.S. edition of the newspaper), says it all—"Kodak Patent Auction Fails." Announcing with great fanfare that the portfolio would be put to auction in order to fetch an amount equal to the portfolio valuation estimates, the reality has told a different tale.

As observed in the article, the bids came in, but each for a different "shape, size and combination" of the portfolio. More importantly, while participants in the bidding appear to have include companies such as Apple and Google and patent aggregators Intellectual Ventures here and RPX Corporation here, the amounts actually offered look at first blush to be a rounding error, ranging from $150 million to $250 million. As a result, the company has revisited the feasibility of the auction process. Instead of providing the bankruptcy court with "serial" extensions for the conclusion of the patent auction, Kodak has notified the court that is simply "adjourning the sale hearing until further notice." This means that if the company reaches a deal, it will notify the court. However, the auction is no longer part of the case docket. The article ascribes the troubles besetting the auction to the concern felt by the bidders "that Kodak already squeezed much of the value from the portfolio with repeated litigation and licensing." If so, and if that is the underlying reason for the disappointing bids, then the question is: Weren't the data points not clear at the time when the $2 billion plus valuations were being made? If the answer is "yes", then how we account for the chasmic difference in valuations? If the answer is "no", what does this tell us about the valuation process?

Let me be clear: I am aware that patent valuation (and IP valuation more generally) is a difficult and often inexact exercise. If the IP under scrutiny does not have a current income stream or some other ready metric to determine valuation, there are few if any other clear market indicators to assist in the evaluation process. As such, any such effort is at best merely an estimate, even a rough estimate, no matter how skilled the person making the valuation.

That said, the discrepancy in connection with the Kodak portfolio raises questions beyond those that are connected with any patent valuation. It strains credulity to believe that anyone can conduct a reliable valuation of a portfolio of 1000 or more patents within the time frame in which most valuations are meant to be carried out. If that is true, then what exactly were the parameters being considered in doing the valuation under the circumstances? Perhaps more importantly, what was the input of the investment bankers in determining the valuation of the Kodak (and other patent portfolios)? Are the interests of the bankers aligned with the valuation specialists; are either or both fully aligned with the company? If not, why not? And where was the mainstream media in doing more critical reporting of the issue?

I have been arguing for some time that the recent spate of oversized patent portfolios provides great theatre, but little more, for those who want to show "how valuable patents can be." I agree that patents can be valuable, even very valuable, but in most industries, that value is seen far from the spotlight of the media. Maybe it is time for the curtain to be dropped on this theatre of the absurd.

South Korea's Deficit in Patent Royalty Payments

The Korean firm of C&S Patent has just sent around its regular newsletter which included a reference to a report by The Bank of Korea in which , the amount of royalties that S. Korean companies paid as fees to "access intellectual property rights" (presumably as royalties) in 2010 was a total of 5.8 billion dollars. This was apparently an increase of approximately 2 billion dollars as compared to the figure of 3.9 billion dollars paid out in 2009 and compares to 2.6 billion dollars paid as royalties in 2006.

C&S Patent report this in the context of a licensing payment of 550 million dollars from  Samsung Electronics to Kodak and 400 million dollars from LG Electronics for the use of a patent relating to mobile phone imaging technologies (reported here). This patent has now been held by the US International Trade Commission as being invalid (although Kodak announced that they are appealing the case).

Whatever the merits of the Kodak patent, the case shows the effect that royalty payments can have on the balance of payments of a country. It's no wonder that many national governments in Asia are encouraging their domestic companies to become more active in formulating standards and also to patent aspects of those standards.