Thursday, April 14, 2005

More on Ampex, in a word, US 4,821,121

from Business Week:

Acouple of years ago, Ampex Corp. (AEXCA ) looked like a long-fading technology pioneer finally slipping into oblivion. The Redwood City (Calif.) company, founded in 1944, proved itself one of Silicon Valley's greatest innovators in its early days. Among other things, it invented the commercial video recorder in 1956 [note: Sony and Ampex cross-licensed technology] and developed the first U.S. tape recorder in 1948. But Ampex lost its magic touch decades ago. A string of new ventures flopped. After losing money for years, Ampex was dumped from the American Stock Exchange at the end of 2003, with its stock at 68 cents.

Surprise, surprise -- Ampex is back. The forgotten innovator has one of the hottest stocks on earth, with the share price skyrocketing in the past year from $1 to $40. What happened? In a word, patents. Ampex dusted off a number of its patents and began filing lawsuits against a Who's Who of consumer-electronics giants, including Sony (SNE ), Sanyo Electric (SANYY ), and Eastman Kodak (EK ). Ampex' claim: It holds the intellectual-property rights to how digital images are displayed in nearly every digital camera, camcorder, and camera phone on the market.

Ampex' flurry of lawsuits is one example of the intensifying debate over intellectual-property rights in the U.S. As patent-infringement lawsuits have soared in recent years, critics have railed against what they call "patent terrorists" and "patent trolls," and complained that the litigation is a tax on innovation. "There's no socially useful purpose," says Ron E. Shulman, a lawyer at Palo Alto law firm Wilson Sonsini Goodrich & Rosati. Patent advocates disagree. They say patents are essential to protecting innovation and point out that many respected companies, including IBM, have been cashing in on them for years.

While Ampex has come under fire for its aggressive pursuit of royalties, there's no question its patents have become a gold mine. One patent covers the display of compressed digital images, individually or in a group of up to 16. Nearly every digital camera, and many other devices, let people view such thumbnails to help them navigate through a series of images quickly. Royalties from that broad patent helped Ampex turn a profit of $47.1 million in 2004 on revenues of $101.5 million, according to its preliminary financials, after losing money the five previous years.

A deal with Kodak could mean another rich payday. Kodak, which declined comment, was the top seller of digital cameras in the U.S. last year, with 21.4% of the market. J.M. Dutton & Associates, an El Dorado Hills (Calif.) research firm that charges Ampex and other companies it covers for research, estimates Ampex could bring in $275 million in royalty income over the next four years. Dutton's Richard W. West, the only analyst covering Ampex, has put a 12-month price target of $77 on the stock.

But a close examination of Ampex' financial and legal documents raises questions about how to predict the company's performance accurately. In its court filings, Ampex specifies only one patent that it claims has been infringed: U.S. Patent No. 4,821,121, typically referred to as the 121 patent. This is the patent that covers technology allowing people to view thumbnail images of photos rapidly. But the patent, granted in 1987, expires on Apr. 11, 2006. Bramson said in his presentation that that patent accounts for all the royalties Ampex is getting from digital camera sales.

Ampex says it holds more than 600 other patents, and royalties from those may be substantial in the future. The company says its other patents cover digital image processing, data compression, and image decoding, and those claims expire between 2012 and 2014. But it does not reveal which patents companies are licensing, beyond the 121 patent, and the specific terms of any agreements.

The company's lack of disclosure may run afoul of SEC rules. The commission requires companies to file a summary of commercial agreements at the time a deal is struck and the full agreement with its next quarterly statement, if the agreement is "material." There are exceptions to the rule, including measures to protect trade secrets. But experts are skeptical that something like the Sony deal, accounting for 40% of Ampex' revenues last year, would not have to be explained to investors. "More extensive disclosures may be required," says James R. Doty, a securities lawyer with the firm Baker Botts.

Can Ampex keep its stock soaring? Perhaps. But to do so, the company may have to give investors a closer look at its tightly guarded patent deals.


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