Back in November 2010, I wrote an article here at Seeking Alpha titled "Top 4 Mobile Acquisition Picks for 2011." Three of these stocks - Augme Technologies (AUGT.OB), Glu Mobile (NASDAQ:GLUU) and VirnetX (NYSEMKT:VHC) have all greatly outperformed the general indexes.
In it, I discussed how 2010 had been termed the “Year of Mobile." A year in which the proliferation and adoption of the smart phone has given rise to staggering industry growth projections.
Right in front of our eyes, a powerful technological revolution is taking place which will not only forever transform the way in which we communicate with others, but how major companies and their brands communicate with us. In fact, the rate at which new technology is emerging in the mobile phone field has even overtaken that of personal computers. Whether it’s me telling you this or Mary Meeker, the mobile revolution is upon us.
Mobile phones are the new "final frontier." Mobile phone growth has exceeded even the most optimistic penetration predictions. In the United States alone, 84% of the population owns a mobile phone. Worldwide, mobile phone access is growing by about 30% a year. The mobile phone is a lot more personal than, say, a desktop computer or a laptop. A phone owner will go everywhere with his/her phone. This provides a unique advertising opportunity for businesses. Ads can be targeted with an unprecedented level of accuracy and users who view the ads are more likely to interact with them when compared to traditional media. Furthermore, ads can be location specific or tailored based on other criteria such as behavioral, geographic or demographic criteria, allowing for the targeting of one, the holy grail of marketing.
When I looked for 2011’s big potential stock winners, there was no doubt what space to look at. So far, year to date, I’ve been proven exactly right. In the article, I wrote about the four companies and how each uniquely represented a specific mobile area that I thought would experience tremendous growth, not only over the next year but over the next few years. As in most high growth technology evolutions, I anticipate one of its phases will be an aggressive period of consolidation where larger players aggressively seek out smaller mobile emerging leaders focused on niche markets and verticals, specifically focusing on those players who will complement and enhance their existing mobile strategy or positioning. Although we’ve seen some early M&A activity in the space lead by Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) and a few others, I think there is a giant wave of mobile acquisitions currently building which could soon sweep up companies like those mentioned.
The companies featured were Augme Technologies (at $2.44, now $3.85), VirnetX (at $15.09, now $27.50), Glu Mobile (at $2.32, now $4.16) and Motricity (MOTR) (at $28.70, now $14.63.) During the first three months of the year while the DOW, NASDAQ and S&P 500 have struggled to gain 5%, three of these stocks are on average up over approximately 70%, clearly a very strong testament of the strength of the mobile movement.
The most recent mover of the three has been VirnetX. Over the past two weeks the stock has more than doubled from the $13 range. What is driving this movement in part is the company's recent announcement that it has submitted a Statement of Patent Holder with the Alliance for Telecommunications Industry Standards (ATIS) and European Telecommunications Standards Institute (ETSI), supplementing its prior statement of December 1, 2009, identifying patents and patent applications that may be relevant to the following specifications in the 3GPP LTE, SAE project. The 3GPP LTE project is responsible for setting standards for the next Generation 4G networks. VirnetX contention is its patents may be essential for some of the 4G LTE security specifications without which you will be unable to implement 4G. This is exactly what Qualcomm (NASDAQ:QCOM) did many years ago and it obviously was very successful. Their claim of foundational IP could result in billions of dollars of licensing over the next 10 years, clearly making the company a highly attractive acquisition target. VirnetX also recently announced the award of a new patent which it is including in its current litigation and this includes Apple's series of products: iPhone, iPhone 3G, iPhone 3GS, iPhone 4, iPod Touch, iPad, and iPad 2.
Another company I have mentioned previously that may have foundational patents is Augme Technologies. The Augme patents cover a two-code module system that enables any networked, delivered content to be customized based on end-user criteria. These patents will allow a single web page to have an infinite number of tailored service responses that allow individuals to receive content that is customized to their own computing environment, connectivity, bandwidth level, geographic location, gender, age, or any other targeting criteria such as behavioral marketing data.
Their original patent filed for in 1999 and issued in 2003 has had three additional patents issued based on the original. Augme's patents have been cited on at least six occasions in third party filings with the U.S. Patent Office, including by Oracle (NASDAQ:ORCL), IBM (NYSE:IBM), Sun Micro Systems and Hewlett Packard (NYSE:HPQ). Augme believes that the methods and systems taught by its patents are being widely used in various Internet-based (including the mobile Web) industries and business verticals, including but not limited to “behavioral targeted advertising." Behavioral targeted advertising is the fastest-growing segment of Internet advertising, with expected growth from $575 million in 2007 to $3.8 billion in 2011. Internet advertising as a whole is expected to more than double from $21.7 billion in 2007 to $50.3 billion in 2011.
In February 2011, the company announced that it had retained Goodwin Procter, a leading national law firm. This on the heels of the company having added top intellectual property expert Don Stout to its board of directors, best known as the co-founder of NTP Holdings, which won a $612 million case against Research In Motion, Ltd. (RIMM) a few years ago. Stout and Goodwin Procter are together identifying possible additional violations of Augme's intellectual property rights and initiating legal proceedings as appropriate. Any positive progress in current litigation would appear to have the potential of seeing Augme shares follow in the footsteps of VirnetX’s, which ironically once traded for the same price.
Another good indication that the mobile space is heating up would be Google’s recent bid of $900 million for the patent portfolio of Nortel Networks, the Canadian telecom equipment maker, as part of a strategy to defend itself against patent litigation. Google’s bid also highlights the growing importance of its mobile business. Nortel’s patents are in wireless and telecommunications technologies, as well as other areas important to Google like Internet search and social networking.
As Google’s bid highlights, Intellectual Property is going to be essential for successful mobile strategies going forward. The battle is just starting and foundational IP can be a company maker. Whether it is the fortification of a company’s own technology and business plan or the calculated alleviation of risk associated with competitors possibly leveraging a patent against you, mobile companies owning foundational and enforceable patents might offer investors a best of both worlds scenario. With all technology revolutions, competition is fierce as multi-billion dollar corporations seek to not only establish leadership positions, but to protect it once there. A strong patent portfolio can do exactly that by cementing a company’s dominant position, while a lack thereof may do the exact opposite leaving a company susceptible and vulnerable to competition.
Disclosure: I am long AUGT.OB, GLUU.