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During the boom of the late 1990s, technology was quickly evolving. One of the biggest changes that occurred was in the way people communicated and shared information. An important technology that helped to facilitate this was Power over Ethernet, or PoE.

PoE allows electricity and data to be safely transmitted together over a single Ethernet cable. It saves money and hassle by eliminating the need for separate data and power cords for all equipment. In 2003, the IEEE organization created the 802.3af PoE Standard, which laid out specific criteria for building Ethernet equipment. This standard was crucial to the success of Ethernet and led to the widespread implementation of PoE.

Today, it is widely used to power devices such as VoIP telephones, wireless access points, and webcams. It is one of the most widely used technologies in modern data communication. One little known company, Network-1 Security Solutions Inc. (NSSI.OB), holds a key patent in this space and is quickly emerging as a player in the sector.

Network-1 currently holds six patents in its portfolio covering innovations in networking, including PoE. The most important of these patents is the "Remote Power Patent," U.S. Patent No. 6,218,930. The Remote Power Patent covers a method for detecting the amount of electricity needed to power specific devices in an Ethernet network. It accomplishes this by sending a low-level current to a device. From the resulting current, it can be determined if the object meets the requirements of a compatible Powered Device (PD). This is crucial, because the method allows electricity to be delivered safely to devices without blindly under-powering or over-powering them.

What makes this patent so unique is that the methods and technologies described within the Remote Power Patent are incorporated into the IEEE 802.3af PoE Standard itself. The patent was even referenced by IEEE in connection to the standard. Thus, 802.3af-compliant products must utilize the detection methods covered by this patent. Network-1 is now focused on licensing this intellectual property to companies that use this technology in their PoE network devices.

Although many companies utilize the innovation behind the Remote Power Patent, few pay for that right -- and most will fight fiercely to avoid doing so. However, Network-1 has proven it can successfully license to these companies. In July 2010, Network-1 settled a case over the Remote Power Patent with several companies, including Cisco Systems (NASDAQ:CSCO), Extreme Networks (NASDAQ:EXTR) and 3Com. The case resulted in an aggregate of $32 million in upfront payments to Network-1. Cisco alone shelled out $26 million and agreed to pay royalties up to $8 million a year through 2015 and $9 million a year through 2020. This will likely translate into $80 million in total royalties from that company alone.

Network-1 now has 11 companies licensing its Remote Power Patent, but there is a lengthy list of even more companies exploiting the technology. In fact, there are hundreds of companies selling IEEE 802.3af-compliant products. A look at companies in this space brings up the likes of IBM (NYSE:IBM), Juniper Networks (NYSE:JNPR), Avaya, and Nortel Networks (OTCPK:NRTLQ). Clearly, there are lots of potential customers out there with attractive hoards of cash; Network-1 must simply license them as it has done so effectively in the past.

The odds of success look promising for Network-1. The Remote Power Patent is solid and is clearly utilized in all products adhering to the IEEE standard. The patent has been through intense scrutiny from numerous technology companies, judges, and a jury, and has been confirmed valid and enforceable every time.

The next target for Network-1 to license may be Hewlett-Packard (NYSE:HPQ). Fortunately for Network-1, HP agreed to take the case to the eastern district of Texas, should litigation become necessary. This is significant because it is the same plaintiff-friendly district in which Network-1 previously emerged victorious.

Leveraging intellectual property can be quite profitable if done correctly. Qualcomm (NASDAQ:QCOM) and Rambus (NASDAQ:RMBS) have been among the most successful. VirnetX (NYSEMKT:VHC), a company licensing its virtual private network (or VPN) patents for secure communication over the Internet, soared over 400% last year. In May, VirnetX secured a license from Microsoft (NASDAQ:MSFT) following a victory in the eastern district of Texas. The company has since filed a new lawsuit against four other companies, including Cisco and Apple (NASDAQ:AAPL).

Like other intellectual property holding companies, Network-1 is uniquely positioned with an all-but-guaranteed revenue stream from royalties. The company owns a patent-covering technology that must be used in IEEE compliant products. Furthermore, this revenue stream will multiply as the PoE sector grows and more companies license the technology.

Network-1 is led by CEO Corey Horowitz. Facing at times reluctant multi-billion dollar companies, Horowitz has shown the ability to wrangle with such technology powerhouses as Cisco — and successfully license them as customers. The company is run with an extremely low overhead, and services are outsourced to top-notch talent. The company has never even paid taxes on settlements. Thus, almost all revenue goes straight to the bottom line.

In spite of this, Network-1 is only trading at about $1.60 per share. This translates to a market cap of approximately $40 million. And yet the company has over $24 million in cash alone. The undervalued share price fails to incorporate future royalties from current customers, much less reflect the potential revenue from the hundreds of companies yet to license.

Network-1 has a key monopoly in the rapidly growing PoE space. It is not going away any time soon. The technology is embedded within the IEEE standard and is ubiquitous in millions of dollars' worth of PoE infrastructure already built. Because of this, Network-1 is sitting on almost guaranteed profits and has no competitors. The company possesses this very valuable intellectual property and is successfully monetizing it with an impressive list of licensees.

But there are many more companies using the technology. They too will eventually take out a license from Network-1. The question is not if, but when.

Source: Network-1's Key PoE Patent Should Lead to Great Things