Rambus, Inc.
The Rambus Conundrum

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By dcroberts131
September 22, 2005

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Under the heading "Re-Thinking RMBS", thoreau99 concluded that the prospects for RMBS were no better than $25-30/share price and that might be 3-5 years away. "Why no 10 or 20 bagger? Great technology, poor business model" (as a pure IP company).

He sees the value of intellectual property eroding in the US. He notes: "If RMBS were a manufacturer, then the matter could be settled by cross-licensing, with little or no cash changing hands - but it is an almost pure IP (with a little contract R & D) company, so this is not an option. The semis will keep piling on to avoid large royalty payments but would be willing to agree to a modest industry wide settlement/"

I don't know whether throeau99 is right or wrong in his prediction, but he raises by implication some critical issues, the most important being the values and incentives for R&D in the memory industry. As we know, this story started back in the late 80's or early 90's when Intel got increasingly concerned that processing speed was increasingly way outstripping memory access speed. The memory manufacturers offered almost nothing to solve the problem so a Stanford professor figured out some things that would help and with others founded Rambus. Why didn't the MM's produce anything? Why didn't the professor go to one of them with his ideas? I think the answers lies in the fact that memory manufacture is a low profit, highly cyclical business where the payoff to R&D is extremely low. They get small incremental gains in manufacturing that dissipate quickly as inventions get shared around on cross-licensing "with little or no cash changing hands" as throeau99 says. Big changes like RDRAM upset all kinds of things in the manufacturing process and increase the risks of losing money with no increase in profit margins. If the professor had gone to one of them, they probably would have paid him a nominal sum because it would have been nice to placate Intel by saying, "See, we have some ideas to speed up memory."

Another aspect is that the MM's don't make enough money and their stocks don't appreciate enough to draw and support the kind of engineering talent Rambus has. My guess is that if Rambus was bought by one them, the effort would die very quickly because that company would to have share the technology around for almost nothing just like they are trying to force Rambus to do. Equally bad, Rambus itself will die if the stock price is stuck long term working its way to $30 and the company stays as a small interesting company that will "likely remain profitable and be able to grow profits by > 10% year (post-litigation)" as thoreau99 says later in the thread.

The reality is that the overall electronics industry (Intel, IBM, Sony, etc.) needs Rambus and that is why all the stolen ideas have been incorporated into product (DDR etc.). But Rambus may be in an almost impossible position relative to the MM's who face risks and no rewards in using their ideas. In other words, if the business model is wrong, how can the model be made right, so the powerful work Rambus does can go ahead and the engineers can get rewarded with sufficient equity and income to stay at it. One possibility would be to fashion an industry-wide settlement around expanding the Rambus share base by some big number like 50% or even 100% and selling the equity to the MM's fairly cheaply in some proportional way to give them a direct equity stake in the royalty stream. Then, a uniform royalty rate could be created such as 1.25, 1.50, 1.75 or some bigger or smaller number across all the memory technology. Intel would be freed to put the best technology in their road map. The graphics, game, and TV companies and all the others would not be at risk getting trapped in legal entanglements.


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