When Apple Inc. (AAPL:US)’s next iPhone hits store shelves, Technicolor SA (TCH)’s engineers will rush to get the handset -- not to make calls or play games, but to rip it apart.
Technicolor, an unprofitable French company that invented the process for color movies used in “The Wizard of Oz” and countless other classics, plans to cash in on its 40,000 video, audio and optics patents to turn its fortunes around. The company has a team of 220 people dissecting every new smartphone and tablet from industry goliaths such as Apple, Samsung Electronics Co. (005930) and HTC Corp. (2498) for patent infringements.
“We usually send manufacturers a big file, with photos of the guts of their products, pointing to where they’ve been using our technology without paying for it,” said Beatrix de Russe, a lawyer and executive vice president of intellectual property at Technicolor. “Once those images have sunk in, we can start negotiating.”
Patents have become a technology industry battleground as mobile-phone, tablet and computer makers try to lure consumers with constant improvements to their video and sound. Technicolor, which made the first color movie 90 years ago, holds key patents in digital audio and video.
“Smartphones have become the focal point for lawsuits and licensing talks,” said Yves Gassot, who heads consulting firm Idate Digiworld. “It’s because the market is so huge and is growing so quickly. At the same time, the smartphone is where you’ll find all the cutting-edge technology jammed into one place.”
Google Inc. (GOOG:US), creator of the market-leading Android mobile- phone technology, this month completed the $12.5 billion takeover of Motorola Mobility Holdings Inc.’s mobile-phone business and its 17,000 patents. Equipment vendor Ericsson AB expects to increase revenue from its 27,000 patents, while rival Alcatel-Lucent SA (ALU) says it plans to generate several hundred million euros this year alone from its 29,000 rights.
Prompted by surging demand for patents that regulate functions such as sliding gestures on touchscreens or the rendering of graphics for games and applications, lawsuits over smartphone and tablet technology have been filed worldwide. Samsung and Apple have sued each other in the past year on four continents over patent-infringement claims related to mobile technology and design.
Though Technicolor signed its first licensing deal in the 1950’s, de Russe said, ‘it feels like the rest of the world has just woken up to why patents are interesting.’’
Technicolor has agreements with “all major manufacturers” and has also started talks with multiple vendors over new devices, she said, declining to give details on who the licensees are and who infringed patents in the past.
Patent licensing is the most profitable business of the company. The licensing division had a 76 percent operating profit margin last year, helped by 1,200 contracts with television, computer and handset makers. The company’s overall operating profit margin, based on continuing operations, stood at 14 percent. Licensing sales totaled 451 million euros, about 13 percent of total revenue.
Technicolor, which has been shifting business from outdated film processes to digital techniques and software for movie- making, helped with special effects for the Harry Potter film series. The Paris-based company has refinanced its debt, sold assets in declining movie-equipment units, closed factories and cut jobs during the past two years. For 2011, it posted a net loss of 323 million euros on sales of 3.5 billion euros, its fifth consecutive annual loss.
Third Point LLC and Apollo Management Holdings, which together own 13.4 percent of Technicolor according to data compiled by Bloomberg, have been pushing for a sale of the company’s patent portfolio, Le Figaro newspaper reported April 19. Third Point and Apollo representatives declined to comment.
“If we start selling our patents, revenues will dry out,” de Russe said. “It’s a very short-term vision.”
In February, the company unveiled a three-year plan with a focus on expanding licensing programs to more devices and entering China, India and Brazil.
The market has started to react positively to Technicolor’s revamp. While Technicolor shares are down 68 percent in Paris trading from a year ago, they have risen 31 percent since January.
The stock yesterday surged 8.9 percent after investor Vector Capital Corp. offered to boost its holding from 0.6 percent to as much as 30 percent through a capital increase, competing with a similar May 3 offer from JPMorgan Chase & Co. (JPM:US) Shareholders are scheduled to choose one of the two deals on the June 20 annual general meeting.
JPMorgan has said it supports management’s patent strategy, which it calls “investing for growth.” Vector Capital said it would be a “committed partner in helping Technicolor execute its strategy.”
Technicolor added 0.1 percent to 1.53 euros in Paris today, giving the company a market value of 341 million euros.
While the patent licensing business is lucrative, it often takes time before a company can cash in. Patent negotiations often last between one and four years, de Russe said.
The company is currently fighting in U.S. courts with Taiwanese manufacturers over patents used in LCD computer monitors, after it filed a complaint with the International Trade Commission. The process was started after several years of failed discussions.
“We’ve got a reputation for charging reasonable licensing fees and preferring friendly negotiations,” de Russe said. “That doesn’t mean we don’t drag people to court from time to time.”
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