Single Touch Systems: The Other Side Of The Coin

| About: SITO Mobile, (SITO)

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The financial boost that patent assertion activities can lend to otherwise-struggling companies is by now well known. Even profitable companies have come to the realization that such patent-based activities can improve their financials. Traditionally, patents (a form of intangible assets) were thought of as defensive mechanisms - and less often used offensively for what they legally are, namely the right to exclude others from practicing the patentee's inventions. Companies such as Vringo (VRNG) and others have begun successfully using patents as a way to generate shareholder value and rising stock prices from what are at bottom depreciating intangible assets. Single Touch Systems Inc. (NASDAQ:SITO) is another company worth monitoring for those excited about the potential of these "patent plays."

SITO is in the business of enabling marketers to reach consumers on all types of connected devices via its multi-channel messaging gateway. Essentially, the focus is on generating per-message revenue for each message that includes an advertisement or sponsorship. Most of the revenues currently earned by SITO are paid through AT&T Services, Inc. which come from notifications sent on behalf of Wal-Mart (NYSE:WMT).

SITO's latest quarterly report draws attention to some positive results: organic growth revenues increased from $1.55 million to $1.81 million from the last quarter (16%) and from $3.14 million to $3.76 million over the six months period (19%); gross margins have steadily increased (56-57%) and messaging volume has increased (56 million to 66 million messages).

The numbers are steadily improving, but the question is -- where is the potential for positive cash flow? An answer lies in SITO's wholly-owned subsidiary, Single Touch Interactive R&D IP, Inc. (SIRDIP). SIRDIP is a holding company for SITO's home grown or acquired intellectual property assets, namely, its patents. SIRDIP was formed in Nevada on October 8, 2012. Our research indicates that the company has a current portfolio of at least 11 issued U.S. patents related to mobile search, commerce, advertising and streaming media:



Transmitting mobile device data



Searching for mobile content



System of providing information to a telephony subscriber



Over the air provisioning of mobile device settings



Searching for mobile content



Method of providing information to a telephony subscriber



Transmitting mobile device data



System and method for streaming media



System and method for streaming media



System and method for streaming media



System and method for streaming media

On June 2, 2009, the last four patents ('729, '307, '706, '244) were acquired from Streamworks Technologies, Inc. which used to be known as World Streaming Network, Inc. SITO acquired the '729, '307, '706 and '244 in exchange for $3.67 million of the common stock and $1.8 million warrants at a strike price of $2.30/share for a period of two years. The transaction also included twelve PCT and U.S. patent applications.

According to the SEC filings, the SIRDIP was formed to "conduct all research, development, patent filings, patent maintenance … [and] will continue to identify, notify, and, where circumstances warrant, enforce against companies we believe may be infringing on the intellectual property protected by our growing patent portfolio." This clearly signals an important shift in the company's strategy to begin monetizing its valuable patent portfolio through active enforcement and licensing.

SITO launched its strategy of monetizing these patents by filing, on February 21, 2012, a complaint against its direct competitor Zoove Corporation in the United States District Court, Northern District of California. The complaint alleges patent infringement, seeking preliminary and permanent injunctive relief as well as damages resulting from Zoove's infringement of the '716 and '341 patents. The filing was initiated to protect SITO's Mobile/Abbreviated Dial Code (MDC/ADC) Platform technology, a tool that allows mobile phone users a simple and easy way to receive information in response to deals and advertisements.

Zoove's competing product is the phone advertising response system, called "StarStar" which allows mobile phone customers to dial a single code (such as "**NFL") and receive coupons, mobile apps, web links, and other information, or to participate in contests, surveys and other events. Zoove is much more successful than SITO, as it won business from the major cellular phone carriers as well as major advertisers such as the NFL, ESPN, ABC and CBS. Clearly, apart from deploying its patent monetization strategy, SITO is eager to gain market share.

SITO did not stop its early forays into patent assertion there. It followed the Zoove complaint with a complaint against Hulu LLC on August 23, 2012 in the Central District of California. SITO's complaint against Hulu asserted one of the patents they had acquired from Streamworks. The '244 patent asserted against Hulu is directed to SITO's streaming and routing media technology, that allows a publisher to stream video content to users and serve advertisements. The complaint sought a preliminary and permanent injunction, compensatory and enhanced damages, as well as attorneys' fees. The Amlaw 100-ranked Polsinelli Shughart, P.C., (the same firm that prosecuted most of SITO's patents) is the law firm that SITO has chosen to act as outside counsel in its patent enforcement actions.

In August of 2011, a "letter of notification" was sent by Single Touch notifying Hulu of SITO's U.S. Patents 7,054,949, 7,191,224, and 7,689,706. SITO apparently filed the Hulu lawsuit after negotiations with Hulu on those patents were unfruitful. On December 21, 2012, SITO filed a dismissal of the lawsuit without prejudice so that it can transfer its related Patents into the recently formed subsidiary Single Touch Systems R&D IP, Inc. The complaint against Hulu will most certainly be re-filed at some point, absent Hulu taking a license beforehand.

SITO has kept up its enforcement activities. Recently, the SIRDIP holding company issued a "Letter of Notification" to Facebook, Inc. (NASDAQ:FB) regarding SITO's issued patents directed to streaming and routing media, including U.S. Patent Nos. 7,054,949, 7,191,244, 7,689,706 and 8,015,307. The letter was sent on behalf of SITO by its attorneys at Polsinelli Shughart, P.C. Absent a settlement, we expect SITO to file a complaint against Facebook later this year.

While SITO's enforcement activities against large targets such as Hulu and Facebook will continue to develop, it's critical to pay attention to the ongoing lawsuit against Zoove Corporation as well. In that case, the Markman hearing was held on February 13, 2013 before Judge Yvonne Gonzalez Rogers. During the hearing, each party presented its arguments in support of its claim constructions for the nine disputed claim terms. As with all Markman hearings, a successful ruling on claim construction can put SITO in a much stronger bargaining position against Zoove while increasing the likelihood of a successful result. Savvy investors pay attention to these hearings since they can serve as a major catalyst to movements in the share price of the company.

The technology of the asserted patents relates to requests which activate the dissemination of information to cellular phones by dialing of a code that is shorter than a normal telephone number. For example, the accused system is related to a delivery service which is activated by cellular phones dialing a code that begins with ** and is followed by a short code corresponding to a particular product or company (e.g., **ESPN).

In particular, the asserted claims, which define the scope of the asserted patents, are directed to systems and methods "for providing information from a fulfillment center through a wireless network to a wireless telecommunications transmitting and receiving device (e.g., cellular phone)." So what does that mean? That means that the manually (by the user) or automatically (programmed into the phone) entered access code is routed from a cell phone through a wireless network to ultimately reach a fulfillment center. Upon reaching the fulfillment center, information corresponding to the information sought by the cell phone is provided back to the cell phone.

The motivation behind the invention was the desire of advertisers to reach prospective customers while those customers were traveling. By having the prospective customer initiate the call, the "cold-call" advertising strategy would be eliminated, thus saving the associated time and cost expenditures.

The dispute between SITO and Zoove comes down to nine claim terms, some of which are more critical than the others to the resolution of this case. In the context of claim construction, one side presents their constructions (definitions) and the other side presents theirs. Generally, a plaintiff seeks to keep its definitions broad enough to cover the accused product, yet narrow enough to avoid the prior art; while a defendant tries to narrow the claims to such a degree as to avoid infringement altogether.

This case is no different. Some of the critical terms were:

Claim Term

SITO's Construction

ZOOVE's Construction

"Access Code" / "Specialized Access Code"

"code to access the fulfillment center"

"abbreviated dialing code to access a fulfillment system such as '*500," but which does not identify to correlate to an advertiser or product."

"Customer Identification" / "Customer Identifier"

"information that specifically identifies only one cellular telephone"

"information used for identification of a caller having a pre-existing relationship with the identifying fulfillment system to thereby enable, for example, verification of a caller and billing of a caller."

"Route" / "Routing"

Route: "a destination"

Routing: "transmitting to a destination"

Route: "(A) converting the access code to a land line 800-number and routing the call to a PSTN central office or (B) routing the call and connecting to a target center using only a wireless network."

Routing: "transmitting via route"

As their limitation-laden constructions make clear, Zoove's heavy reliance on the specification of the patent is somewhat selective since they are picking and choosing between various embodiments of the claimed invention. This strategy is frequently employed by defendants seeking to narrow the claims. In contrast, Single Touch's proposal hew closer to the plain meaning of the terms, and are less result-driven.

For instance, Zoove selectively cites discussions in the specification regarding "secondary" codes that identify advertisers or products. However, that does not preclude the "access code" from also correlating to an advertiser or product. Furthermore, Zoove's definition for "customer identification" presumes that the customer identifier is specific to a particular caller. Of course, that is not what the patents disclose. The patents are not limited to require such level of unique and personal identification nor are they limited to require a "pre-existing relationship" with the fulfillment center. Finally, the "route" term, as defined by Zoove, is unnecessarily too narrow and actually uses the terms themselves within the construction. Obviously, such definition was drafted to avoid infringement since Zoove's service is unlikely to perform conversion and routing of the call.

There were other terms argued in the same vein as the above three with the same general extremely narrowing theme. The arguments, as drafted, favor Single Touch. Should the court agree, we expect the case to march on all the way to trial where a jury would have a final say as to the infringement and invalidity issues.

Until then, we look forward to SITO's continued aggressive patent enforcement strategy, which should add considerable value to its currently undervalued shares. The Markman Order is imminent since the hearing was held three months ago. A favorable decision could serve as a major catalyst to the stock price.

More importantly, however, is that a win at this stage for SITO (i.e., court adopting their broad definitions) establishes the company as the major player in this advertisement messaging industry opening the door to offensive patent enforcement -- potentially resulting in licensing revenues from all of its competitors, including Approlix, innerActive, Millennial Media, ZestADZ, Celltick Technologies, Zoove and others.

Disclosure: I am long SITO, DSS. 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.

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