Now that the Vringo (NASDAQ:VRNG) case is over, investors have one basic question: how much will we make? From Vringo's point of view, this is a question with three sub-questions.
How much did we get in past damages?
How much will we get in the future?
How much will we make by using this verdict against other potential infringers?
Questions 1 and 2 have been done to death in many articles. You can check out Steve Kim's work. In this article, let me focus on question 3.
This is a qualitative, subjective question and does not have a real answer. Vringo has won the biggest lawsuit in its history, and one of the biggest in the whole history of IP litigation. That is a lot of clout. If it plays this ball right, it will blaze its way through the patent landscape until there's nobody left to sue, settle with, or license to.
Google (NASDAQ:GOOG) was its largest infringer, but not to be allegedly left behind are Yahoo (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB) and others. Unlike Target (NYSE:TGT) and other co-defendants in the Google case, these three companies will probably not be sued as alleged indirect infringers. If Vringo goes after them, it will be for direct infringement, just like with Google. Vringo may be able to show that the same patent claims that Google infringed are also infringed in the search engines and ad placement systems of these three companies. If that happens, the same sort of damages and royalties calculation will probably apply.
We need to divide these companies into two groups - those that generate a very large part of their revenues through search engine ads, and those for whom that is a developing, minor revenue source. In the former, we can put Google, Facebook, Yahoo; in the latter, Microsoft, perhaps Amazon (NASDAQ:AMZN), Ebay (NASDAQ:EBAY), and others. Note that for these large companies, the amounts in question might still be substantial, but they may only be a small percentage of their total revenues.
Let us now look at some revenue figures for some of these companies through September 2011, till date. This is the date from when the laches ruling takes effect.
Sept. 30, 2011
Dec. 31, 2011
March 31, 2012
June 30, 2012
Sept. 30, 2012
Yahoo has a more or less similar business model to Google's so far as internet advertising is concerned, so I believe a 3.5% of 20% model - like with Google - might safely be applied here. Facebook is a little different; it also makes money from apps etc beside advertising. For Microsoft, Bing is apparently not much of a revenue producer as of now, so Microsoft will not amount to much for Vringo. As for both Amazon and Ebay, they do have ad placements and search engine technologies that mimic Google's in some respect. I am not able to give exact figures for either.
For Yahoo, then, given that the same calculation parameters apply, $43 million is the past damages figure that I arrive at. Facebook should be quite a bit lower than that; Microsoft's will be miniscule. Cumulatively, though, and taking every infringer into account, a $100 million in past damages seems like a conservative estimate of a ballpark figure. I admit this is very speculative; my goal is not to give you an exact figure, but to show that it is substantial.
Add to this running royalties, and we have a good thing going for Vringo over the next few years.
Lets look at it another way, by market share. Google has 47.6% of the total online advertising US market share, Yahoo has 10.8%, Facebook 8.8%, and Microsoft 6% of the total online ad market. Roughly another 25% is held by other companies. So, the "x" amount of total online ad market is the pie that Vringo is trying to get; if Google, which owns about half that pie, pays around $600 million in running royalties and a corrected damages figure of about $150 million, then the total pie will be roughly double that amount, assuming Google's market share remains relatively constant in the next 4-5 years. So, we have a running royalty of $1.2B, and past damages of $300M. Yahoo's share will be a tenth of these figures, or roughly $120M for royalties, $30M for past damages. Note the figure I got in the other calculation was $43M for past damages.
My calculations above aim to establish only one thing: that the windfall for Vringo from this win can be counted in hundreds of millions of dollars over the next few years. My figures are rough, exceedingly so. Until a lot more is known about the revenue models of each company, it is difficult to do a real estimation.
For anyone willing to give this a shot, here are some steps:
List every company that you think Vringo can sue for alleged infringement of the Lang-Kosak technology. (the harder part)
Find out their revenue resulting from the infringing technology.(The hard part)
See how many of them Vringo can realistically sue.
Calculate the potential windfall based on the jury award model in this case.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.