Friday, March 28, 2008

Challenge to a Duel

Nobody’s honor is at stake…exactly...but Microsoft (MSFT: Nasdaq) has effectively challenged tiny Avistar Communications (AVSR: Nasdaq) to a face-off over unified communications technology. Microsoft is using the U.S. Patent and Trade Office’s “re-examination” process to question a big chunk of Avistar’s patent portfolio - twenty-nine U.S. patents.

What is at stake is the technology that underpins Avistar’s product line for video-enabled applications for content publishing, video-on-demand and video conferencing. The technology provides for some interesting and highly marketable features such as “click-to-connect” to initiate video-phone calls and “find-me, follow-me” to quickly locate users on a network. All of Avistar’s applications are integrated into one user interface, making Avistar’s products easy to use during video calls that are often punctuated with additional callers or video clips on the video conference call agenda.

It does not take an industry expert to see the commercial potential in video conferencing products, especially the technology for the single-click desktop video conferencing Avistar says is protected by their patents.

Avistar is not only producing its own products, it has been successful in getting a couple of its competitors to pay license fees. Avistar entered into patent cross-license agreements with Polycom (PLCM: Nasdaq) and Tandberg (TAA.OL: OSLO).

However, Microsoft wants into this business too and apparently does not intend to knuckle under to any little upstart like Avistar. Microsoft may not even need to prove anything in court, if they drag out the battle. Avistar had $4.9 million in the bank at the end of December 2007 but has since completed a convertible preferred offering for $7.0 million. Nonetheless, the U.S. Patent Office will take up to six months for the reexamination and that will probably not be the end of the story. Regardless of the result, there is likely to be an appeal by whichever side loses following the Patent Office’s re-examination. The company has already announced layoffs and a suspension of its China initiative to conserve financial resources.

Avistar management made it clear in a recent announcement that its patent portfolio is worth defending. Recent PR from Avistar touts the potential market for unified communications as near $16 billion in the next four years and Avistar’s share near a half billion. Even if those very large numbers are not entirely credible, this will be a face-off worth watching.

In the meantime, Polycom and Tandberg could easily eat the lunches of both Microsoft and Avistar. Polycom is particularly impressive with 16% sales growth and 14% net income margin. PLCM shares are trading at a forward PE multiple of 17.1 times.

The author of the Small Cap Copy web log has a long position in MSFT.

1 comment:

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