Kodak’s Patent Portfolio Valuation May Be Slightly Below Kodak’s Own Estimates
According to a debtor’s motion (DIP Motion) filed by Eastmak Kodak Company before a United States Bankruptcy court on January 19, 2012, Kodak estimates its Digital Capture (DC) and Kodak Imaging Systems & Services (KISS) patent portfolio to be valued between $2.21 to $2.57 billion. The valuation range was determined by 284 Partners LLC at the request of Kodak.
In order to come to this valuation, 284 Partners, according to the DIP Motion, had access to Kodak’s internal licensing team, Kodak’s outside counsel, as well as information regarding potential licensing deals in negotiation.
Envision IP, Inc. reviewed the DC and KISS patent portfolios to determine if the 284 Partners valuation is reasonable. To begin, we determined that the average remaining term of the DC and KISS patents is 8.18 years, weighted by the fact that 53% of these patents have a remaining term of 6-10 years.
Next, we identified a discount rate of between 10% -15%, based on costs that could potentially be incurred to manage the patent portfolio (i.e., maintenance fees), litigation expenses, and enforcement and collection costs. The discount rate also takes into the following:
-a premium if Kodak is successful in its pending patent litigation cases against Apple and HTC that were filed earlier this year;
-a premium for the expected growth of the smartphone/tablet industry in the next 5-10 years; and
-a premium for potential licensing/royalties in the increasingly contentious social networking space.
Conversely, the discount rate range also factors the opposite of each of the above scenarios.
We estimate Kodak’s yearly licensing revenue to be approximately $250 million to $350 million per year going forward. We came to this range by reviewing the DIP Motion, Kodak’s Public Lender Presentation dated January 23, 2012, as well as publicly reported licensing figures published by Kodak in recent years.
Interestingly, Kodak sold its online photo services business to Shutterfly Inc. this week for $23.8 million. It is not clear how many, if any, of the KISS patents related to social networking and online image distribution are included in the Shutterfly deal.
We estimate the net present value of the DC and KISS patent portfolios to be between $2.08 billion and $2.21 billion, assuming that Kodak’s forecast of $250 million to $350 million in annual recurring licensing revenue is accurate.
That being said, the DC and KISS patent portfolios could reasonably be valued anywhere between $1.74 billion and $2.58 billion. The lower end of this valuation assumes many factors, such as Kodak being unsuccessful in its pending cases against Apple and HTC, while the upper end of this range assumes factors such as Kodak successfully monetizing portions of its KISS patent portfolio against the likes of Facebook.
Finally, we believe the DC and KISS patent portfolios are worth at a minimum, at least $654 million, assuming a significant discount rate, and future recurring annual licensing revenues of $100 million, which is approximately what Kodak earned via negotiated licensing agreements in 2011.
While the DC and KISS patents do not include wireless standards-essential patents, we believe that Kodak’s patents still have tremendous value due to the adoption of image capture technologies into a majority of smartphones and tablet devices, a market that is expected to have significant growth in the next decade.