Is This a Market Leader or a Patent Troll?

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I'm sure you've seen those anti-cash commercials from Visa (NYSE: V  ) . You know, the ones where life runs smoothly as long as you use a Visa card, but grinds to a halt when someone dares to pull out dollar bills at the register. "Life takes Visa," and anything less makes you a Luddite barbarian.

That's old news now. The next revolution in retail payments is almost here, and it doesn't include opening your wallet at all. Based on near field communications technology, or NFC, a plethora of tech and banking players are introducing their takes on how to pay for your milk and cookies with a swipe of your smartphone. Even if you forgot your wallet in the car, the digital leash is never far away, right?

A handful of Android and Research In Motion (Nasdaq: RIMM  ) BlackBerry phones support NFC today. Nokia (NYSE: NOK  ) just launched its first, and possibly only, MeeGo phone, complete with NFC chips and software. That trickle of NFC-enabled phones will become an avalanche in 2012 as RIM has committed to including it on "many, if not most" BlackBerrys in 2011 and the Android gang keeps marching on. If Apple (Nasdaq: AAPL  ) doesn't include NFC support in the soon-to-launch iPhone 5, it's nearly a lock for next year's model.

How do I invest in that?
Conventional wisdom has long pointed to chip designer NXP Semiconductors (Nasdaq: NXPI  ) as the easiest way to invest in the NFC trend. The company is an early leader in NFC chip technology and has landed most of the smartphone contracts so far.

But there's a change in the weather. Semiconductor generalist Broadcom (Nasdaq: BRCM  ) just rolled out a line of NFC chips of its own, and tech titan Samsung also has an alternative solution on hand. The first consumer-level products with Broadcom's NFC chips should hit store shelves in about nine months.

With competitive juices on the rise, it would be easy to turn your NFC-centric investor attention back to the credit card companies, which play a key role in handling NFC payments. But I wouldn't go there, personally.

To my mind, NXP remains the best way to ride the NFC wave. Sure, Broadcom's chips are poised to steal some market share -- but the market itself is absolutely exploding. There's plenty of room for several providers to grow as handset builders ramp up their NFC efforts. Not only that, but NXP also owns a lot of the technology that makes NFC work. So when Broadcom ships these chips (say that three times fast!) in volume, the company will start sending checks to NXP or else set itself up for one of those painful patent infringement battles.

Hey! Isn't that a patent troll?
Longtime readers might accuse me of doublespeak here, as I often criticize companies for exploring the patent-suit road to easy riches at the expense of real innovation. In particular, VirnetX (AMEX: VHC  ) makes claims to 4G wireless security technologies that compare to NXP's leadership position in NFC security. Why do I love one but pour scorn over the other?

That's a complex question, but it all boils down to these two things:

  • NXP actually builds and sells products based on its own patented technologies, and it takes an active part in promoting the use of NFC. VirnetX and its ilk don't do any of that, aiming instead for easy paychecks when others turn their supposedly essential patents into a retail success. That's the difference between a real business and a nonpracticing entity, or patent troll.
  • VirnetX often claims to be essential to 4G security, but standards bodies have yet to actually endorse those calls for attention. On the other hand, NXP is a sponsor member of the NFC Forum and can back up its supposed importance.

Don't just take my word for it: NXP is also a four-star CAPS stock and a recent Rule Breakers pick, underscoring both broad and high-powered support for my line of thinking. VirnetX? One CAPS star and a stock selling for more than 20,000 times trailing sales. Ouch.

So I'm doing a couple of things I should have done a long time ago: putting my Foolish reputation where my mouth is. I believe that NXP is a crucial player in the NFC hypergrowth story with the technical chutzpah to match, while VirnetX is a speculative gamble without substance. I just rated one as a long-term outperformer in our CAPS system, and the other got a big, red thumb pointing down. Can you guess which one is which? Follow in my All-Star footsteps by rating NXP here or VirnetX right here, whether you agree with me or not.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. The Motley Fool owns shares of Apple and Research In Motion. Motley Fool newsletter services have recommended buying shares of NXP Semiconductors, Apple, and Visa; and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio, follow him on Twitter or Google+, or peruse our Foolish disclosure policy.

Read/Post Comments (6) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 27, 2011, at 2:24 PM, prginww wrote:

    Well your consistent anyway... bashing VHC when the mood strikes you. Somehow I just don't think you're smarter that the MSFT lawyers. Why don't you bash them for throwing away 200 million dollars to VHC?

  • Report this Comment On September 27, 2011, at 3:52 PM, prginww wrote:

    @eldoctoro, thanks for your loyal attention. As for the MSFT settlement, it's exactly the kind of nonsense that our patent system has encouraged: sue at will and hope that someone throws you a multi-million-dollar bone to make the nuisance stop. It's a masterful way to exploit a badly broken system. If you love VHC and its fellow NPEs, I hope you at least consider it a sin stock on par with Big Tobacco or porn.


  • Report this Comment On September 27, 2011, at 5:10 PM, prginww wrote:

    "hope that someone throws you a multi-million-dollar bone to make the nuisance stop".

    I believe the nuisance was actually a jury trial in which MSFT lost and was told to pay $106MM. VHC filed a second suit for the Windows 7 infringements and MSFT wrote a check for $200MM. In that trial it was revealed that MSFT tried to patent the technology themselves, but were told VHC beat them to it (willful violation). There is a huge difference between filing a harrassing lawsuit and vigorously defending your IP.

    "I often criticize companies for exploring the patent-suit road to easy riches at the expense of real innovation."

    VHC's patent applications were filed long before MSFT had viable, yet infringing, software on the market. Did these ingenious fellows say to each other, "hey lets patent this idea and wait for MSFT, AAPL, et. al. to write code that infringes, we'll get rich"? The gentlemen whose names are on the patents are officers of VHC, they are trying to make money on their own patents? Does it make them trolls?

    And lastly, If you love MSFT and its fellow infringing until ordered to do otherwise, and then we're going to drag you through the legal system because we have enough money to do it and we don't care what is right or wrong megaliths, I hope you at least consider it a sin stock on par with Big Tobacco or porn.

    P.S. "@eldoctoro, thanks for your loyal attention", my guess is the only time he reads your writing is when you bash VHC.

  • Report this Comment On September 28, 2011, at 12:16 AM, prginww wrote:

    Well Bylund.... clearly you cannot comprehend that the development of superior communication processes is as legitimate an endeavour as engineering a faster more reliable assembly line. Following your logic, all communication 'assembly lines' including those little phones and pads should have their patents revoked. Communication between entities is the product...everything else is just manipulating the bits and bytes...right?

  • Report this Comment On September 28, 2011, at 2:38 PM, prginww wrote:

    From his latest post, it doesn't appear Bylund understands workings of ETSI and ATSI. The following comment is a very short synopsis of his apples and oranges comments re: VHC and NXP.


    AB says "VirnetX often claims to be essential to 4G security, but standards bodies have yet to actually endorse those calls for attention."

    It is not the role of telecommunications standards bodies, and in particular ETSI, to endorse a company's declared essential patents. The author clearly does not understand the process or the mechanism involved with getting intellectual property included in wireless standards.

    AB says "On the other hand, NXP is a sponsor member of the NFC Forum and can back up its supposed importance."

    First, you can't accurately compare the NFC Forum to ETSI or the 3GPP. It's apples and oranges -- as they are structured differently, cover different aspects of standardization as well as different technologies. Second, and more importantly, being a sponsor to an organization doesn't validate one's patents and inventions. Being a sponsor to a standards setting organization actually creates an appearance of bias and/or a conflict of interest.

    Although ETSI does allow certain events to be sponsored, they don't have a $50,000 year sponsor option that allows companies to buy themselves a seat, overall voting rights, and a neat little advertisement on the main website (as well as elsewhere). Instead, companies can choose to become Members or Observers.

    In summary, we have another author talking about things he knows very little about. God bless the internet.


    And this update from April

    SCOTTS VALLEY, Calif. – April 28, 2011 – VirnetX Holding Corporation (NYSE Amex: VHC), an Internet security software and technology company, today announced that at the request of the European Telecommunications Standards Institute (ETSI), it has agreed to update its licensing declaration to ETSI under ETSI’s Intellectual Property Rights (IPR) policy. This is in response to VirnetX’s March 15, 2011, Statement of Patent Holder identifying a group of its patents and patent applications that VirnetX believes are or may become essential to certain developing specifications in the 3GPP LTE, SAE project.

    Read that again Bylund. "At the request of ETSI..."

    Also, please enlighten us on the negotiations that occurred between VHC and ETSI re: FRAND rates that VHC agreed to.

    ETSI Security Specification 33 has only one company listed as claiming their patents essential. OK, Anders. You get one guess. Go for it.

  • Report this Comment On September 28, 2011, at 5:03 PM, prginww wrote:

    Can I guess?

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