Magazine article The Spectator

Patently Profitable Ideas

Magazine article The Spectator

Patently Profitable Ideas

Article excerpt

US technology giants are keen to buy British ideas

Here i s some th ing you may have missed if your eyes have been focused on the gyrations in bond and equity markets as euroland crises have come, gone and come again. The S&P 500 telecoms and IT index, the bellwether of digital stocks, has climbed 120 per cent from its 2009 low.

All of us who lived through the exuberance of the tech bubble of 2000, when all you has to do was add '. com' to a company name and watch the fireworks, have a right to be sceptical about this latter-day boom. The rise and rise of Apple to become the most valuable firm in the world, with a market capitalisation of more than $600 billion, has led some analysts to quote the S&P minus Apple to get a better perspective.

However, as a recent traveller to the San Francisco Bay area which takes in Palo Alto and Silicon Valley, I could not but be impressed by the high levels of innovation, the cult of the patent and the constant creation of new value. Firms like Autodesk - pioneers in 3D printing, which can reproduce engine parts in your office - and Salesforce.

com, winners in 'cloud' computing software and storage, dominate the skyline of San Francisco. Further south, social media players such as Facebook and LinkedIn dominate. What all of these companies have in common is a profound belief in research, new applications and patents.

Microsoft, IBM, Hewlett Packard and their ilk, the establishment of the sector, pay dividends to shareholders. But the newer players rarely do so, preferring to reinvest rather than distribute income and to reward investors by issuing shares because that also rewards skilled employees who are largely paid in equity, making them ever richer and more loyal to the cause.

A key manifestation of the rich spoils of R&D can be observed in America's patent wars. Industry leaders have been rushing to court to protect what they see as pirated intellectual property in cases such as Yahoo versus Facebook, Oracle versus Google and Apple versus Motorola. There's a certain irony in the fact that many of these firms live off content, from music to film, books and games, that has been filched by pirates from the creative industries. But the desire to own and nurture intellectual property has also triggered a mini takeover boom.

Rather than returning cash to shareholders, the Microsofts and Googles prefer to sit on multi-billion-dollar war chests. That means that they can make quite large takeovers without causing ripples - though one which attracted attention recently was the purchase of the photo-sharing application Instagram by Facebook for $1 billion.

Just months earlier, when it was refinanced, Instagram had been priced at $20 million. The deal worried investors because it suggested that Facebook, the darling of the IPO sector, might have to dish out further billion-dollar dollops to prevent other players from colonising its turf.

Certainly compared with other deals done in the sector it does not seem the greatest of bargains. Microsoft, for instance, paid $1.1 billion (on the same day) to AOL for 800 patents related to advertising, search, mapping and multimedia. Apple and a number of other firms shelled out $4.5 billion for 6,000 patents owned by Nortel, a telecoms firm which hit hard times. …

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