Wednesday, April 13, 2005

THE BRAVE NEW WORLD OF AMPEX: (Business Week) Just a couple of years ago, Ampex Corp. looked like a long-fading technology pioneer finally slipping into oblivion. The Redwood City (Calif.) company, founded in 1944, proved itself one of Silicon Valley's greatest innovators in its early days. Among other things, it invented the commercial video recorder in 1956 and developed the first U.S. tape recorder in 1948. But Ampex lost its magic touch decades ago. A string of new ventures flopped. After losing money for years, Ampex was dumped from the American Stock Exchange at the end of 2003, with its stock at 68 cents.

Surprise, surprise -- Ampex is back. The forgotten innovator has one of the hottest stocks on earth, with the share price skyrocketing in the past year from $1 to $40. What happened? In a word, patents. Ampex dusted off a number of its patents and began filing lawsuits against a Who's Who of consumer-electronics giants, including Sony, Sanyo Electric, and Eastman Kodak. Ampex' claim: It holds the intellectual-property rights to how digital images are displayed in nearly every digital camera, camcorder, and camera phone on the market.

It's no empty bluff. Since last fall a string of Asian companies have cut licensing deals with Ampex, agreeing to pay a total of $77 million. Sony alone is spending $40 million for the right to use Ampex' patents through April, 2006, and then will pay ongoing royalties. The largest outstanding claim may be that against Kodak, which so far has refused to cut a deal. Ampex' prospects have improved to the point that the company says it will apply for a listing on NASDAQ by the end of April.

While Ampex has come under fire for its aggressive pursuit of royalties, there's no question its patents have become a gold mine. One patent covers the display of compressed digital images, individually or in a group of up to 16. Nearly every digital camera, and many other devices, let people view such thumbnails to help them navigate through a series of images quickly. Royalties from that broad patent helped Ampex turn a profit of $47.1 million in 2004 on revenues of $101.5 million, according to its preliminary financials, after losing money the five previous years.

- An impressive feat, indeed. One problem though, is that almost all of Ampex's royalties are stemming from US Patent 4,821,121, which was granted in 1989. Doing the math, the patent will expire on April 11, 2006. While Ampex claims to hold 600 other patents, there is almost no information on the potential value of these patents, and Ampex is refusing to disclose who (if anyone) is taking licenses on any of these patents, and under what terms. Some are starting to speculate that the lack of disclosure by Ampex may be running afoul of SEC rules. The commission requires companies to file a summary of commercial agreements at the time a deal is struck and the full agreement with its next quarterly statement, if the agreement is "material." So far, Ampex has said virtually nothing to its investors regarding their major deals.

Now this could simply be a matter of a holding company (which Ampex has essentially become) tightly guarding information with regard to it's patent portfolio. However, I've been always suspicious of companies that become excessively secretive regarding their patent portfolio. In such cases, one can't help but think that there's a skeleton lurking in that closet somewhere. It'll be interesting to see if anyone will manage to drag one out over the next year . . .

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