Mattersight: Amazon Entering The Fray

| About: Mattersight Corporation (MATR)

Summary

A report just surfaced that Amazon will be bolstering its Amazon Web Services suite with cloud-based tools to help enterprises manage their call centers.

Mattersight's technology may be crucial to Amazon being able to integrate this offering into its suite of tools.

Even if Amazon does not acquire MATR, its business has reached an inflection point and is poised to generate substantial cash flow.

Yesterday, I published an article entitled "Mattersight: Positioned For Takeoff," and discussed the confluence of factors which led me to conclude that Mattersight (NASDAQ:MATR) is poised to generate substantial returns.

One of those factors related to Trump's protectionist policies driving up the cost of call centers. Businesses will turn to MATR to drive efficiencies and mitigate against this increased cost. A number of Fortune 500 companies have already employed MATR's software, including: Progressive Insurance, UnitedHealth Group (NYSE:UNH), Wells Fargo (NYSE:WFC), Allstate (NYSE:ALL), AT&T (NYSE:T), Hilton (NYSE:HLT), among others. With call center costs most likely rising, expect more demand from other large companies. Here is a snippet from my article explaining why the costs will rise:

Furthermore, I believe that the cost of operating call centers will increase, due to the Trump administration's protectionist policies. It appears the Trump administration is focused on protectionist policies, and one such tax reform policy would limit the tax deductibility of expenses incurred in foreign countries.

I am not here to discuss politics, but will simply say that, if implemented, that will likely drive up the cost of call centers. Many U.S.-based companies will either not deduct costs of call centers abroad, or will choose to open call centers in the U.S., with more expensive workers. In either case, the cost of call centers will rise and companies will search for products that will drive efficiencies to mitigate the increased cost. Mattersight's products are uniquely positioned to solve this problem.

Source: Imperial & Global Forum

Amazon Entering The Call Center Industry

It appears that Amazon (NASDAQ:AMZN) agrees that the call center industry presents a compelling opportunity. According to a report that just came out, Amazon Web Services is developing a suite of cloud-based tools to sell to enterprises that would help them manage their call centers. The report claims that these programs will incorporate Amazon's digital assistant, Alexa, to answer questions on the phone, as well as through text messages.

The idea is to allow customers to build their own customer service programs using bots and voice control with the ability to learn and adapt to industry specific uses. The original report, from The Information, which is behind a paywall, said that the new products could be announced as soon as mid-March.

Amazon has disrupted many industries, so some may fear that MATR will lose its customers to AMZN. However, MATR has a number of patents that can thwart AMZN's competitive threat, and may lead to AMZN purchasing MATR outright, or licensing MATR's software.

AMZN has already bolstered its Amazon Web Services (AWS) offering this year through an acquisition of harvest.ai, which was done to increase the security of its cloud offering for its customers. Harvest.ai's flagship, patent-pending AI product is called MACIE Analytics. This product uses AI to monitor how a customer's intellectual property is being accessed in real-time, in order to identify suspicious patterns of behavior, which could prevent data breaches before they've taken place.

Amazon is clearly trying to invest in AWS and expand this business segment. In the most recent quarter, that segment reported 47% y/y growth, which was down from 69% in the same period a year ago. This segment is incredibly valuable for AMZN, with revenue of $3.53 billion in Q4 2016, which accounted for 8% of its total revenue in that quarter. Moreover, with $926 million in operating income for Q4, AWS accounted for more than 71% of its $1.3 billion in operating income. With competition heating up in this industry, AMZN has to invest in new offerings and ways to differentiate its product for the influx of competitors' offerings.

Mattersight's technology is impactful in this industry, and with such an important segment at risk, Amazon may seek to acquire MATR's vault of patents. In my latest article, I discussed how Mattersight's patents could be valuable to a technology company that is trying to personalize computer assistants:

Mattersight now holds numerous patents for analyzing personality and behavioral characteristics during phone calls, social media, emails, and video interactions (Here is a link to all of Mattersight's patents). Its latest patent "Method and system for generating a responsive communication based on behavioral assessment data" can be extremely valuable to companies that are trying to personalize computer assistants such as Apple's (NASDAQ:AAPL) Siri, Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Now, Microsoft's (NASDAQ:MSFT) Cortana, or Amazon [AMZN] Echo's Alexa. There is no real differentiating factor between these various computer assistants, but having one that can be personalized to you can be one such distinguishing factor. This technology can potentially be very valuable to one of these technology giants.

It is worth mentioning that Amazon may not be infringing upon this patent, or a court may declare that it isn't valid. Following the Supreme Court's decision in Alice Corp. v. CLS Black Int'l in June 2014, there has been more scrutiny over software-related patents for business methods.

In one of my law school classes, one of my professors explained that this has led to a number of software-related patents being found invalid. Nonetheless, my professor, who is a general counsel for a major corporation, instructed that in many cases, it may be more cost effective to simply work out a licensing deal. In this case, it may be easier for AMZN to acquire MATR or to work out a licensing deal.

Nevertheless, I still believe MATR's patent can be found valid. In Alice, the Supreme Court articulated a two-step process to assess patent-eligible subject matter in the computer-related invention context. There is a prohibition on patenting abstract ideas, so the first step is to see whether the claim at issue is directed at an abstract idea. If so, the court will consider whether the claim elements individually, or in combination, transform the claim into a patent-eligible invention. The Supreme Court explained that a "mere recitation of a generic computer cannot transform a patent-eligible abstract idea into a patent-eligible invention."

As an example, in OIP Technologies v. Amazon.com, OIP asserted a patent claiming a "method of pricing a product for sale" comprising several steps, including generating statistics concerning test prices, estimating likely outcomes for various potential prices based on the statistics, and selecting a price based on the estimated outcomes. The Federal Circuit decided that "the claims are directed to the concept of offer-based price optimization."

After describing the underlying concept broadly, the court reasoned that "[b]eyond the abstract idea of offer-based price optimization, the claims merely recite... conventional computer activities or routine data-gathering steps." Hence, the court held the asserted patent invalid because it did not claim patent-eligible subject matter.

Although I am not a patent attorney, it doesn't appear that this patent falls within the contours of the abstract idea concept, which led to OIP's claim failing. Moreover, it may be more cost-effective and efficient for AMZN to simply acquire or purchase a license from MATR.

Conclusion

Mattersight is positioned to generate substantial returns for investors and appears to be an acquisition candidate, not only for its patents, but also because it has recently reached a positive EBITDA level. With Amazon entering the call center industry, to bolster its AWS offering, it appears that MATR has another possible suitor. Even if MATR is not acquired, I believe that it has reached an inflection point and is poised to outperform.

Disclosure: I am/we are long MATR.

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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