This is an example of an effective company because RPX not only identified a strong customer need but also devised a novel approach to addressing that need and then capturing some that value for itself.
Since the late ’90s, there has been a proliferation in patent litigation, most of which was initiated with the primary intent of extracting value from the defendant rather than litigating a valid IP dispute (also known as nuisance suits). The plantiffs were oftentimes non-practicing entities (NPEs) or patent trolls, companies or entities that leveraged the patents they own to sue as a means to turn a profit. Historically, companies had to pour millions of dollars and hundreds of hours into defending against and settling with these trolls, diverting resources away from core business functions. Sources have estimated that patent litigation has cost defendants $29B in direct costs and has caused over $60B in damages indirectly (1). Other than being a drain on economic resources, NPEs have stifled technological advances as most of these suits have been brought against technology companies.
This was the status quo until John Amster effectively identified this market inefficiency and founded RPX in 2008. RPX seeks out and buys patents in order to use them defensively against patent trolls to protect its client base. It puts itself directly between NPEs and its clients as a first line of defensive. The company saves its customers the costs incurred from defending against litigation directly (by using its pool of patents to counter patents held by NPEs during litigation or preempt litigation by defensively buying patents) so its customers can focus on innovation and creation of new tech and products. In return, RPX captures a portion of those cost savings for itself by charging customers an annual subscription fee for its services.
RPX was the first and remains the only defensive patent aggregator in this space and has created a monopoly in protecting companies from patent trolls. As its position in the market suggests, this is an incredibly novel business model and the company has structured an operating model to support it.
In order to create value, RPX has created several internal teams and processes to support its business model:
Direct Sales: RPX has assembled a highly technical sales team that is capable of a highly consultative sell. Salespeople are taught to target companies that are currently embroiled in litigation to offer RPX services. In addition, the sales pitch is highly quantitative. Salespeople come in with models to demonstrate RPX’s value proposition through projecting specific dollar savings based on a prospective customer’s record with nuisance suits.
Patent Acquisition Team: Given that RPX derives most of the value it provides its customer through owning patents, it dedicates significant resources to procuring the right set of patents to continue defending its clients. The team is comprised of financial, technical, and legal experts to assess the value and attractiveness of any individual patent. The team spends over $100M every year and now sits on a pool of more than 10,000 patents. RPX allows its subscription customers to help determine the direction of future patent spending. The company has since leveraged this pool of patents to create another small revenue stream to further diversify its business model. There are a certain number of prospective clients that are too small to pay the subscription and therefore are offered the newer insurance product, which protects clients for a smaller fee and precludes them from influencing direction of spend on patent acquisition.
Business Development Team: Beyond just looking at individual patents, RPX also evaluates large portfolios of patents for its clients. However, the company lacks the resources to buy these portfolios by itself. So the business development team looks to coordinate multiple clients to collectively raise money (separate from the annual subscription) to buy the portfolio. Initially this practice as a one-off, but given that RPX was successful, this has become a smaller piece of the larger subscription-based business model, further diversifying the business model.
Conversations with corporate customers, former employees, and litigation experts for perspective on the operating model.
(1) Bessen, James. “The Evidence Is In: Patent Trolls Do Hurt Innovation.” HBR. Harvard Business Review, 25 July 2014. Web. 07 Dec. 2015.
(2) Masnick, Mike. “Venture Capital Trade Association Hires Patent Troll Lawyers, Fights Against Patent Reform… Even As Most VCs Want Patent Reform | Techdirt.” Techdirt. N.p., 9 July 2015. Web. 07 Dec. 2015.
(3) RPX Corporation (2014). 10-K Report. Retrieved from http://ir.rpxcorp.com.
(4) RPX Coporation (Q3 2015). Investor Presentation. Retrieved from http://ir.rpxcorp.com.
(5) Blumberg, Alex, Ira Glass, and Laura Sydell. “When Patents Attack! | This American Life.” This American Life. N.p., 22 July 2011. Web. 07 Dec. 2015.