Interdigital Can Force the Future to Pay for the Past

| About: InterDigital, Inc. (IDCC)

The purpose of patents is to give small innovators a chance in the market.

It doesn't work that way in tech any more. Tech moves so quickly that the 17 year run of a patent leaves the future open to taxation by the past for obsolete technologies.

An example is Interdigital (NASDAQ:IDCC). Once it was a contender. Once Interdigital was in a close race with Qualcomm (NASDAQ:QCOM) to set global mobile standards. Qualcomm won. Interdigital languished.

But along the way it ran to the patent office many, many times. That was the business model, to set standards and to license them. As Ben Strubel noted last month the company is a “non-practicing entity.” All it does is patent stuff.

As he notes:

InterDigital owns more than 8,600 patents and has an additional 10,000 on application. The patents cover a broad variety of wireless and wire line communication, including 2G, 3G, 4G, and LTE, as well as IEEE 802.

Now, like Kodak (EK) and Nortel, Interdigital wants to cash out. Interdigital shareholders are in for a huge payday, as Google (NASDAQ:GOOG) fights with Apple (NASDAQ:AAPL) for the rights to the past, rights that could determine the future.

Having lost Nortel, this is a fight Google has to win. The current Interdigital market cap is $3.1 billion, but the 1,300 patents now on offer are said to be worth even more than those of Nortel, because they're more central to the way modern networks work. Apple took the Nortel prize, in concert with Microsoft (NASDAQ:MSFT) and others, for $4.5 billion. And after this auction Interdigital will continue to have patents for sale.

Google could create a coalition with its largest OEMs, like Samsung (OTC:SSNLF) and HTC, companies under current legal attack, to gain the patents and then make patent peace. Or it could go it alone. Either way, it has to go for it. Forget the price. If Apple bests Google to the line this time, it's very, very likely that company could squash any efforts by Google in mobile, killing Android with lawyers, killing all its competitors with someone else's work.

This is not the way the patent system was designed to work. But Interdigital shareholders are mighty glad it does work that way now. It has the Roberts Court to thank for its refusal to make a firm ruling in Bilski vs. Kappos.

But those are political arguments. Since it became obvious this was how things would play out, IDCC has gained nearly 100% in value. You can call it unfair, but that's a political argument. IDCC is a screaming buy at these levels.

Disclosure: I am long GOOG.