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Executives

Bruce Davis – CEO

Mike McConnell - CFO

Analysts

Bill Gibson – Anderson Strudwick

Andy Hargreaves – Pacific Crest

Paul Sonz – Sonz Partners

Walter Schenker – MAZ Partners

Kevin Hanrahan – KMH Capital Advisors

Andrew Weinger – Burnham Asset Management

Digimarc Corp (DMRC) Q3 2010 Earnings Call October 20, 2010 8:30 AM ET

Operator

Good morning, and thank you for participating in today’s conference call to discuss Digimarc’s Third Quarter Financial Results.

Now, I would now like to turn today’s call over to Chairman and CEO of Digimarc, Mr. Bruce Davis, Sir, please proceed.

Bruce Davis

Thank you. Thank you, and good morning, everyone. Welcome to our quarterly conference call. Mike McConnell, our CFO, is with me. We are pleased to discuss our third quarter 2010 results, which were issued in a press release this morning.

The objectives of this call are to summarize and comment on these results, review significant business developments and market conditions and provide an update on strategy and operations.

This webcast will be archived in the Investor Relations section of our website. We expect to file our 10-Q with the SEC soon to provide more details on our financial results.

Please note that during the course of this call, we’ll be making certain forward-looking statements. These statements are subject to many assumptions, risks, uncertainties and changes in circumstances. Any assumptions we offer about future performance represent a point-in-time estimate and actual results may vary materially from those expressed or implied by such statements.

We express disclaim any obligation to revise or update any assumptions, projections or other forward-looking statements to reflect events or circumstances that may arise after the date of this conference call.

For more detailed information about risk factors that may cause actual results to differ from expectations, please see the company’s filings with the SEC, including our latest Form 10-Q and our earnings release posted on our website this morning.

Mike will summarize and comment on the financial results for the quarter. Following Mike’s presentation, I’ll return to discuss some of the important events and achievements during the quarter and provide an update on strategy execution. Then we’ll open our call to questions. Mike.

Mike McConnell

Thanks, Bruce, and good morning, everyone. Thanks for joining us for discussing our third quarter operating results.

Our revenues in the quarter increased 10% to 5.2 million from 4.8 million for the same quarter a year ago, and this increase reflects 27% higher royalties from our licensee, and the consistent turn of revenues from our service customer build in accordance with contractual schedules.

More specifically, the quarter reflects record revenues from Civolution, a leading supplier of digital watermarking-base security for digital cinemas and other technology and solutions for identifying, managing, and monetizing media content. Also, deferral of some federal services revenues that we anticipate will be reflected in our Q4 results, and failure to pay quarterly revenues by one of our larger licensee due to a contractual dispute.

Our gross margins grew to 72% from 68% in Q3 of ‘09. This reflects a higher mix of license revenue to the total, as well as benefits realized from improving operating leverage in providing our services.

Operating expenses increased 23% to $4.6 million from 3.7 million in the third quarter of 2009. And the increase primarily reflects increased investment in marketing and R&D personnel and consulting for our mobile product initiatives. And professional’s fee associated with the company’s recently completed transaction, with intellectual ventures.

Our operating loss totaled $800,000 compared to 500,000 in Q3 of 2009, and reflect the impact of the higher revenues offset by the investments we’ve discussed to grow our business. Our net loss was 1.5 million or $0.21 per diluted share compared with a net loss of 700,000 or $0.10 per diluted share in Q3 of 2009.

$600,000 of current loss reflects our share of operating results from our joint venture investments with The Nielsen Company, as compared to $300,000 in the prior year. And the net loss also reflects a tax revision of $150,000 for AMT based upon evaluation of our tax reserves and minimum taxes due to government.

Operating cash flow was about break even, an improvement of approximately $300,000 over the 2009 quarter. And we ended the quarter with more than $45 million in cash and marketable securities, up about $2.7 million from year end.

Our results, reflect a prudent investment in our growth, including $700,000 investment in our early stage joint ventures with Nielsen, and that’s expensed as it’s incurred.

Increase spending on marketing and R&D initiatives in the mobile area, and incremental spending in IV marketing activities to expand our licensing program which has produced numerous new licensees so far this year including intellectual adventures, Arbitron, Catalent, and AlpVision.

Further discussion of our results and our businesses financial models and risk and prospect for our business, will be included in our third quarter form 10-Q that we expect to file later this month.

And now, Bruce will provide his comments on our outlook and execution of our strategy. Bruce.

Bruce Davis

Thanks, Mike. It’s been quite a year for strategic and financial progress so far. With the Arbitron license in Q1, strong growth by current licensee, the new partnerships Mike referred to a moment ago, the first glimpse of the fruits of our joint ventures with Nielsen, and most recently, announced over the long-term collaboration with Intellectual Ventures.

Intellectual Ventures is the global leader in the business of invention, funded with billions of dollars of committed capital. IV collaborates with leading inventers, partners of pioneering companies and invest both expertise and capital, in the process of invention.

Their mission is to energize and streamline the events in the economy that will drive innovation around the world. We are honored to be working with them on our shared vision.

The latest accomplishment sets stage for large-scale licensing, which we hope will accelerate broad adoption of our proprietary technologies and various product markets.

A key goal of the collaboration is to seek network effects, where in freedom to operate the ID licensing for some large companies will foster demands for our software and services, create competitive advantage for early adopters that disadvantage competitors who in turn will seek licenses from IV, services and support from Digimarc to remain competitive.

Our strategy is to create a virtuous cycle of licensing and software and services demand creation.

Other the course of many conversations with investors since the announcement, I have distilled a distinct and clear explanation of the financial aspects of the relationship. We licensed 600 patents prior to the end of March 2010, and 300 related applications to Intellectual Ventures.

Intellectual Ventures is guaranteeing a minimum $36 million return on investment to Digimarc over the first three years in return for the exclusive right to sublicense license licensed assets.

They are also obliged to pay at least $4 million to Digimarc over five years for helping to maintain in the further development of licensed assets.

IV is taking responsibility for third-party cost for prosecution and the maintenance of the license assets, which will reduce our annual cost by approximately $1 million per year.

Thus, over the first five years of the relationship, the minimum financial returns to Digimarc is approximately $45 million. If this is all we get, the collaboration will have been a failure. IV is putting its capital at risk to make profits. Digimarc will receive 20% of any profits from the IV licensing program. This profit sharing kicks in after IV recovers all the cost associated with the licensed asset, including the amount paid to Digimarc and third parties that I just summarized.

We and they are very focused on making this a successful venture. And with IVs investors, we’ll make a superior return on their investment and the license patents, and we will add profit to the guaranteed returns.

The relationship focuses on monetizing the unexploited potential of the license assetd. Digimarc has a grant-back license in which it retains all the revenue streams that it enjoyed prior to the transaction, including maintaining and renewing existing patent licenses, and providing software and services to existing and new customers.

Given the profit participation, and the virtuous cycle strategy described above, we will work very hard to support the IV licensing program, including, increasing our R&D marketing investments in areas covered by the licensed assets.

Consistent with our legacy business model, this commitment to support of our partner is intended to increase direct financial return via the profit share, plus the broader adoption of our technologies, and increase the rate of growth of our software and services businesses.

These are the primarily substances of economic aspects of the relationship. Please keep in mind that we’re still considering the appropriate financial statement treatment of the various revenues and expenses as described above.

In my view, this is the perfect relationship, at this stage of Digimarc’s evolution. As I’ve noted with many investors, we are a young company, only 15 years old. With continued success, we will likely look like successful IP-centered public companies, such as Goldi, Qualcomm, and [inaudible], who have operated for 25 to 45 years.

I believe that IV will accelerate progress towards utilization of our vision and mission, by expanding the scope of our license program, improving financial performance by more effectively monetizing the license patent assets, and encouraging large-scale adoption of Digimarc technology by industry leaders. All of this will accelerate growth of our Software Services Business, and lay a foundation for continuing innovation in IP development at Digimarc.

We continue to see significant potential in our target markets and are executing very well on our strategy. The mobile device market is on fire. As I noted at our last quarterly call, much of our R&D is focused on improving the discovery capability of mobile devices, particularly in digital search.

We anticipate making more of our work in this area public in the fourth quarter and the first quarter of next year. It has been a momentous year so far. Our growth strategy is on track, it has many facets, all organized around a coherent vision; teach computers to see, hear, and understand the world around them, simplifying access to computer technology, and contributing to a future of more ubiquitous and intuitive computing.

In closing, I’d like to thank our partners, clients, employees, and shareholders for their continued support and commitment to Digimarc’s progress towards making this vision a reality.

Now, we’ll open the call to questions.

Operator

(Operator Instructions) Your first question comes from the line of Bill Gibson with Anderson Strudwick.

Bill Gibson – Anderson Strudwick

Could you go into a little bit on not the IV relationship, but the Nielsen JV2 partnership?

Bruce Davis

Sure, Bill, what would you like to know about it?

Bill Gibson – Anderson Strudwick

Well, I saw something recently with the Apple iPad, and just wanted to know if we’ve already got some business there, and are playing there?

Bruce Davis

For those who are interested in the work of that joint venture, there was a public disclosure – the first public disclosure of the nature of the work that we’re doing together. And the application is known as Media Sync and there’s a short video on YouTube that was created by ABC, which can be found by typing in the words ABC My Generation iPad. And there’ll you’ll see a glimpse of the future, the first implementation here is pretty basic. But what we saw in the trade press was everybody sort of got where we’re going, which is really the revolution as a television viewing experience.

And so, that’s a joint venture that we own 49% of, and Nielsen is taking the laboring war on the business. They have the relationships with the programmers and the advertisers, and we are doing all we can to support them with our technological expertise. They have quite a strong R&D department themselves in this area. And they’re very familiar with the basic signaling technology.

And so our ambition here is to create a platform, which will allow for new kind of viewing experience that has many different refreshing attributes to it; some of which relate to overcoming ambitions to a broad-scale adoption of interactive television. From another perspective, creating an opportunity for a much higher level of engagement between the sponsors of television programming and audiences, and team programmers in audiences. And really creating an audience that has both the physical parameters as well as virtual in the social networking space.

So it’s a progressive notion that’s kind of a 21st Century view of TV. It’s targeted towards GenX, GenY, and we are pretty convinced that’s the future, and that it will have a major impact on television industry and the advertizing industry that supports it.

Bill Gibson – Anderson Strudwick

Thanks.

Operator

Your next question comes from the line of Andy Hargreaves with Pacific Crest.

Andy Hargreaves – Pacific Crest

Hey, you guys. So I’m following up on that, have you released any details yet on JV1?

Bruce Davis

Not much. What we’ve talked about in the past is still true, which is that we are working in that joint venture on improving the management of digital media in the new distribution channels, largely in the internet. And we had thought we’d perhaps known a bit earlier, but the media industry transformations that are going on are running at a slower pace than the mobile market. I noticed this whenever I talked to investors.

Our current income from the transformation media industry is much higher than our current income from the mobile space, but the pace of growth in that area is such that it will continue to grow at, I think, a fairly high rate, and steady rate, for many years. And the mobile industry is just kind of exploding. So it’s kind of a steady war in the water on the media transformation and then the explosive growth opportunities in mobile.

So in the two JDs actually, Media Sync is in the mobile space, and JD1 is in the media transformation space. So I think we’re seeing kind of consistent developments there and that it’s taking longer for us to figure out how to position these technologies within that transformation than I had hoped, but I think we’re still optimistic that we’re on the right track here to provide good value and growth opportunities for us and Nielsen.

Andy Hargreaves – Pacific Crest

Okay, and then just a couple of technical things. Did you say how big the costs were, the one-time cost for the IV deal in Q3?

Mike McConnell

It’s like, Andy, we did not but the increase of the expenses over last year were almost $300,000 and so a pretty large portion of that related to that legal and accounting cost.

Andy Hargreaves – Pacific Crest

Okay. And I’m assuming, is the government revenue that was deferred spilt between licenses and services?

Mike McConnell

There’s no licenses, its more services product related.

Andy Hargreaves – Pacific Crest

Okay, do you know, do you have any sense for what kind of the time line we should expect for variance, or at least the sequence of events?

Bruce Davis

The complaint has been filed; I don’t believe it’s been served yet. It’s at their discretion to serve it, and then we’d have time to answer. So it’s really up to them on the next step. Until we’re served, there’s no official response from us. We are attempting to begin communication with them, to see where they want to end up, what the goals are.

Andy Hargreaves – Pacific Crest

Have they – did they do this once before?

Bruce Davis

Yeah, it seems to be a style with them.

Andy Hargreaves – Pacific Crest

Okay. And then my last question is on the IV deal, any idea when we’ll have clarity on the accounting there?

Bruce Davis

No. The transaction doesn’t fit neatly into a category and has the number of parts to it, and so we’re – as you know, we live in the rural-space accounting world so we’re trying to conform while still providing a sensible and informative and accurate characterization of the economics. That’s why I was trying very hard here to make it quite clear what the economics are, and obviously the accounting will be what it will be. But I think everyone’s got a good understanding now of the nature of the transaction and the various flows of revenues and expenses and margins.

Andy Hargreaves – Pacific Crest

But are they selling and marketing the patents at this point?

Bruce Davis

Yeah, well, everything’s cooking. We’re out of the starting gates here. We’re all – both teams are working quite hard and quite well together. We’re very busy.

Andy Hargreaves – Pacific Crest

Okay, thank you.

Operator

Your next question comes from the line of Paul Sonz, with Sonz Partners.

Paul Sonz – Sonz Partners

Good morning. On the progress that you are making with IV, how much of this will become public if they deal – if they’re a private company – how much should we expect, Bruce, to see public announcements of any deals that are made with IV on the licensing?

Bruce Davis

I think it will vary, Paul. It actually is mostly a function of the licensee’s desires. Both of us will respect, I mean, desire for confidentiality that anyone wants to have; that’s customary in our business.

Obviously, if someone begins a major implementation that appears to use or stuff, it will be a situation where people are asking them what’s going on. I think some will say, you know, that we’ve embraced the technology because they consider it to be a marketable attribute of their business.

So I think it will be a mixed bag.

Paul Sonz – Sonz Partners

Okay. Any plans that you can talk about in terms of further experimentation with the Media Sync or the My Generation experiments?

Bruce Davis

Well, the pilot that we did – any of you can go on the web, you know, it’s the new world here of information flow, and see lots of commentary about the pilot. It was just a couple of shows and the My Generation show got canceled for rating.

Everybody seemed to like it. I actually didn’t see anybody saying that they thought it wasn’t a good idea. So I think that our purpose in doing the pilot was to test drive the technology and it worked, and to get a sense of how the market might view this general innovation which appeared to range from positive to extremely positive.

So I think it was – I think it was a very good and bold national test and so we’re continuing to build a platform, and whether we do one more test or not, you know, I’ll leave to later discussion when and if they arise.

Paul Sonz – Sonz Partners

Okay. Google has recently, I guess, taken Google Goggles to a new level. And I wondered how Google Goggles relates to what you’re doing in terms of digital search?

Bruce Davis

It’s in the same general field that we operate in. I like what they’re doing. I think it’s impressive R&D and it’s driving the vision we want to drive. So we like what they’re doing. We think that our technology would be an excellent complement to theirs, rounding out the experience and improving the reliability of object identification. They use scene analysis. They do things quite differently right now in terms of the basic identification approach. But the experience they’re trying to create is the one we’re trying to create, which is the new world of intuitive computing.

Paul Sonz – Sonz Partners

Okay. There is a magazine group that does –that’s used water markings to enhance their experience. I believe it’s a Spanish magazine group, mostly cars. I know that there was some plans on bring it to this country. Is there anything you can tell us about how that’s coming?

Bruce Davis

Yeah. We’re working on it. That was part of what I alluding to in the – in the script. We’ll bring it to market when we’re ready. We want to do a really good job. Our plans in Europe have been quite entrepreneurial and has been teaching the market a lot and doing a lot of good work.

Our approach here is more conservative and we’re addressing significant market opportunities and we want to make sure that we’ve got everything buttoned up when we get ready to roll, and we’re comfortable in the timeline that we’re on, which would be, you know, no later than during next year. And we’re addressing the newspaper industry and the magazine industry, and the packaging industry, all roughly simultaneously. So that’s why you see the R&D spending going up. There’s a lot of work going on in that area.

Paul Sonz – Sonz Partners

One last question. The – a lot of technology, I think, has been taken and looked at by the government, especially, I think in terms of taking images from our unmanned flying machine and correlating it. And I wondered how that program is going in the sense of uptake? Is there any recognition from the government that this could be broadly applied across many platforms?

Bruce Davis

Well, in that area of our business, I always readily confess my inabilities to know exactly what’s going on because of the nature of the market. So we know the government likes our work, likes our technology. We have some technology available for sale. The way those things work is that, you know, bigger player deal with the customer. The customer sort of recommends us to the bigger players. The bigger players can back around with whatever agenda they have and they buy whatever they want to buy whenever they want to buy it. So there may be a real nice opportunity there and there may not. It’s just hard to tell, so I never like to put much of a bet on the line.

We have been paid by the government for all the work we’ve done thus far, so it’s been good business for us and we are patriotic and concerned about national defense and want to help where we can. And there may be upside, and if it comes we’ll enjoy it. You know, it’s not an area that I have the capability of understanding very well because of our small size in relation to the partners that we deal with.

Paul Sonz – Sonz Partners

All right. Thank you very much.

Bruce Davis

You’re welcome.

Operator

Your next question comes from the line of Walter Schenker with MAZ Partners.

Walter Schenker – MAZ Partners

Hi, Bruce.

Bruce Davis

Hey, Walter.

Walter Schenker – MAZ Partners

The IV joint venture has multiple, but two major opportunities as you described; the licensing revenue you will get, or the percent of their income they get from licensing it and your ability to sell software to the people who license the technology. As you look at this three to five years out, which component do you think is bigger?

Bruce Davis

It’s hard to tell. It’s hard to tell. You know, if the whole thing works, everything will be great. You know, the – the software and services piece of it makes a lot of conceptual sense, but we’ve got to prove it out, you know, that the big guys would rather contract with us and try to build themselves. We think that that’s the way it’s likely to go. If it does, then the software services business that we have will get a big boost in growth and if our theory about demand creation is correct, then the licenses will be a big boost.

It kind of goes back and forth and that’s the idea here. Over the course of the 20-year life of the relationship, we’d like to keep sort of spinning that cycle of demand creation through all innovation in the portfolio. You know, it’s 900 patent assets you know, it’s probably 20,000, 15,000 to 20,000 claims of remarkable range of innovation, not just digital watermarking. And we’re going to work together to explain the full potential of all of that in both of those venues – both the licensing and the software venues.

It’s really exciting, but it’s – we’re just getting going so we’ve got to prove out what we can do.

Walter Schenker – MAZ Partners

And as you look at software services, that is services and they’re different margins than when I think about just selling software. You would expect this to be a high gross margin business closer to software or more like a service’s business which would have a lower margin?

Bruce Davis

Well, I mean, getting more into the nuances of the uncertainty here. I don’t know. You’re right about the margin assumptions generally, but I don’t know what – both what the mix is between licensing and software services, and the between software and services.

Today, most of our software and services are services. Our margins run around 50% but obviously, you know, a good software business will have margins that approach licenses margins. So you know, the margins should be nice, but the mix is, you know, indeterminable. It’s just too early for us to be able to get much about that.

Walter Schenker – MAZ Partners

Okay, thanks.

Operator

Your next question comes from the line of Kevin Hanrahan with KMH Capital Advisors

Kevin Hanrahan – KMH Capital Advisors

Good morning, Bruce. Congratulations again on the IV partnership, I guess it’s not a joint venture. You’ve got to watch your terms here.

My questions all surround the patents. Can you just go through that with us again? I think you’ve transferred all your patents except four and any patents that might be pending for Digimarc. And then I have some more questions to follow up on the patents.

Bruce Davis

Okay. Well, as you are correcting correctly, it’s not a joint venture, but not I’ll correct you. It’s not a transfer of patents. It’s an exclusive license and we [inaudible] to the patents.

So in the exclusive license, we’ve licensed exclusive patents and 300 applications, which represents our intellectual property developments prior to the date that I described earlier. All of the R&D and the fruits of the R&D out to that date are retained by us and without any options by R&D on that property. And as of the date that we did the announcement, obviously everything changes every day in terms of the growth of the portfolio, but as of the time we made our last announcement, we had hour issued patents and about 130 applications and that will mature into a second wave of IV. That will be quite large, we expect.

And because of the nature of the innovation captured in the second wave, and because of the 15 years of experience that we now have with the team that has been unchanged during that period, you might expect we’re going to do a pretty good job then.

So we have the young IP that has matured into a licensable portfolio and they have the exclusive rights to license the mature IP. So that’s the nature of the deal, the split.

Kevin Hanrahan – KMH Capital Advisors

Okay. So the mature IP, that’s where I’m going, that’s what I’m driving at. Can you give us a feel for the – I know you told me recently that as patents mature they cost more to maintain and now you’re going to get some help on the maintenance. But you know, can you give us a feel for the maturity in the portfolio? In other words, can you give us a rough weighted-average life of the patents that IV now has access to?

Bruce Davis

I actually don’t – I don’t have handy the weighted-average age of the patents. That would be, you know, a measure we could calculate. None of the patients have expired thus far. The first expiration will be several years in the future. The value of the portfolio will be determined by the marketplace over its life, the maximum life of the licensed asset is 20 years. You know, and so as I’ve said to everybody all the time previously, patents tend to have their most robust profit potential in the latest stages of their lives, generally the last quartile of the 20-year life. So we have some patents that have just moved into that space and that’s part of the enthusiasm that Intellectual Ventures and we have.

But there’s a lot younger patents in the portfolio too, which we think will continue to create profit opportunities for the full term of the relationship. So I’m not sure if I’m answering your question or not.

Kevin Hanrahan – KMH Capital Advisors

I appreciate that. Would that information, you know, you said you could probably calculate that, would have been in a previous 10-K?

Bruce Davis

No, it’s not fairly useful. That’s why I say, you can calculate it but it’s commonly not calculated. It sort of misses the point – and this goes to, you know, just the subtleties of intellectual properties marketing. Once a particular patent or family of patent has been well established as critical to a certain industry-wide practice, then you know that family has a lot of value. Where your early stages of adoption is more speculative. So the age of the portfolio is not terribly relevant until you figure out where the value is.

Kevin Hanrahan – KMH Capital Advisors

Right, right. And some could be worth more than others.

Bruce Davis

[Inaudible], you can calculate it, but it’s not terribly useful.

Kevin Hanrahan – KMH Capital Advisors

Right. And I’m sure some are worth more than others. And you know, can you talk about the potential for IV to put your patents that you still deem, that they have access to, together with other patents that they might have?

Bruce Davis

Well, the – they have the discursion to package our license to assets with other assets that they have to increase leverage in [inaudible]. We’re find with that and there’s a formula for splitting up the proceeds in those situations, so we anticipate that they may want to do that and we’ll be happy to support them in doing that.

Kevin Hanrahan – KMH Capital Advisors

Okay. Thanks, Bruce. Thanks a lot.

Bruce Davis

All right, thanks, Kevin.

Operator

Your next question comes from the line of Andrew Weiner with Burnham Asset Management.

Andrew Weinger – Burnham Asset Management

Good morning, Bruce. So a little bit of a follow up to the prior questioner. Earlier in the year you had talked about sort of four or five different areas that you were pursuing that you thought could be potentially substantial license opportunities It seems like over the course of the year the opportunity that has sort of stood out from the pack related to both market development, sort of meeting with our capability is this mobile space, particularly around object and content identification and enabling sort of more rapid and more accurate search in commerce. One, I guess maybe the question is, you know, is that a fair assessment of where the focus is? And two, given the pace of innovation in the mobile space, you know, does that mesh with your prior comments about the need to get it in the hands of someone like Intellectual Ventures, plus the near-term opportunity around the size of the business opportunity is so great that you sort of perceive a sort of window within the next couple of years to monetize that?

Bruce Davis

Yep. Yep, that’s a fair summary Andrew. Yep, that’s how I feel. You know, I think there’s a huge opportunity in the marketplace, operating on our own, I struggled with how to foster adoption and get paid and I think IV is uniquely qualified to help us to do both simultaneously which will be wonderful for our business and for the society and the county. This change is going on very fast and it’s all big players. There are no little guys out there, you know, like us . So we were kind of like a little flea in the mist of the elephant’s hair.

So now we have a big player on our team who shares our vision [inaudible] in Intellectual Properties particularly in the licensing area. And you know it’s well known to all the people that we would like to have conversations with. So yeah, that’s why I say, it’s perfect. I can’t think of a better relationship to put in place than what we have right now.

Andrew Weinger – Burnham Asset Management

And related to the idea of sort of a focus on age of the portfolio, is it your assumption that given the pace of Smartphone or multi-media mobile device adoption, that sort of the overwhelming economics it sort of captures within that marketplace will occur in the next two, three, four years? And whoever has perhaps the best or most-elegant solution is likely to capture sort of a significant share of that market similar to the way Apple has commanded an overwhelming share of the media player, mobile media player market by having the most sort of elegant solution and the first generation. And that as a result, regardless of whether the patents having 5, or 10, or 15 year life, having access to those patents over the next few years will be critical to someone's market development?

Bruce Davis

Well, maybe a little bit of different way of saying that. I think I generally agree, but what we believe will be true is that the change in the – I’ll it my personal vision. I quite strongly believe that whereas Apple pioneered the application orientation of mobile devices here over the last few years, that the next move really is this move towards intuitive computing and I think that we have technology that can be very helpful to the realization of that generational change in the meaning of the device and in the lives of the users. But once that catches on, if it does, not only do we get the early licensing in the next few years, but the portfolio al relates to that kind of stuff. So I think we get really long legs as well as getting early. So I don’t – I think that your characterization was there’s a window and the window goes away. I disagree. But I do agree that there’s a window.

Really, part of the strategy of our business here from the time that I got started was that we need to build a base of adoption of the single indians, you know, the digital watermarking from which then we can continue to innovate and continue to generate substantial licensing come in software and services business.

Operator

(Operator Instructions) Your next question comes from the line of Paul Sonz with Sonz Partners.

Paul Sonz – Sonz Partners

Hi, two things. Bruce, you said Shazam and did you say Pandora as in P as in Paul?

Bruce Davis

Yes.

Paul Sonz – Sonz Partners

That is the Internet radio station?

Bruce Davis

It is. They are going, you know, Pandora has just taken off like a rocket in the last year. If you talk to their founder, three years ago he was wondering whether he was going to be able to stay in business, but they figured out the formula. That’s my point. They kind of poked around for a while they found a formula and that has proven to be a decent market and development approach in the new world in the last decade.

Paul Sonz – Sonz Partners

Right. I got it. The second thing is, and this – and unfortunately you are going to have to go back to teaching school because I don't understand this. You said you licensed 600 patents and 300 applications. What is the – could you explain that? I don't understand – I mean, I understand what a patent is, but I don't understand licensing applications. How does that work?

Bruce Davis

It is as little bit technical. The applications that we licensed with the patents are called children of the patents. They’re part of the same family, which means they have a reference back in the application to the disclosure that’s in the issued patent. So it’s more inventors from the stuff that yielded the patents and that’s why they’re all kept together. They’re all part of the same family. So we license the family. There’s actually several – there’s many families. We license the families.

Paul Sonz – Sonz Partners

I understand. Would there be some things out of that 600 patents, some applications that weren't – that are still available to you to license to other people?

Bruce Davis

All of them are. For the continuation of existing patent licenses and renewals and extensions.

Paul Sonz – Sonz Partners

But there would be no applications from the 600 patents that you could license on your own to new customers?

Bruce Davis

Not without permission from Intellectual Ventures.

Paul Sonz – Sonz Partners

Okay. All right. So when you say the 600 patents and the 300 applications, it is just that – does that represent all of the applications? Because I think that when you talked about the 600 patents, you said that there was something like thousands and thousands of – oh, I see – claims. There were thousands and --.

Bruce Davis

Yeah, claims. In our world the 900 total would be called patent assets. That’s the lingo that us guys use. We license 900 patent assets and we kept 130 patent assets would be the way we talk about it.

They’re – the license assets are mostly issued patents. The unlicensed assets are mostly applications.

Paul Sonz – Sonz Partners

I got it. Okay. All right, good. Thank you very much.

Bruce Davis

You’re welcome, Paul.

Operator

At this time there are no further questions. Mr. Davis, are there any closing remarks?

Bruce Davis

Well, I want to thank everyone for your continued support and confidence in us and we’re obviously working as hard as we can to continue the extraordinary success we’ve enjoyed thus far this year, and we have plenty of exciting things to work on.

So we’ll look forward to talking to you again soon. Thank you, everyone.

Operator

Ladies and Gentlemen, this concludes today’s conference. You may now disconnect.

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