Mark Cuban is a colorful and discriminating investor on Shark Tank, the ABC reality show in which entrepreneurs pitch their ideas. He'll call out a dubious idea but also see the quirky charm in a site called I Want To Draw a Cat for You. So when Cuban made an off-the-air investment last week to become the biggest shareholder of Vringo, a little-known ringtone company, it begged the question, what made him bite?
He wasn't the only one, either. The compay's stock has more than tripled in the last three months. Vringo's stock was trading for less than $1 in January, with less than 100,000 shares changing hands on a typical day. On April 3, more than 22 million shares were traded—the typical volume for Apple.
Why the 200-fold increase in trading? The six-year-old company generated less than $1 million in revenue last year, although it did more than triple its 2010 total thanks to its relationships with telecoms and device makers. Facetones, its most popular product, which displays a slideshow of someone's Facebook photos when he or she calls your cell phone, isn't a household name. Neither is the company's video ringtones app, Vringo. It works just like it sounds, displaying licensed or home-made video clips, which puts a visual twist on a ring tone. Facetones has been downloaded more than a million times so far, mostly outside the U.S. The Vringo service has more than 400,000 monthly subscribers.
What got Cuban and other investors' attention is patents. Not those developed by Vringo, which is headquartered in New York and has an engineering team in Israel, but the patents it's acquiring. In mid-March, Vringo announced a merger agreement with Innovate/Protect, a company that paid Lycos, the one-time search giant, $3.2 million for search-related patents originally developed by former Lycos CTO Ken Lang. It then promptly filed an infringement suit against Google, AOL, and others, seeking "compensatory damages, past and future, amounting to no less than reasonable royalties," according to the complaint filed in September. The patents, Innovate/Protect says, cover "relevance filtering technology" that Google uses to place ads alongside search results, which accounts for the vast majority of its $37.8 billion in annual revenue.
Vringo, through its merger, is potentially sitting on a goldmine, either a generous settlement or a steady stream of licensing fees for technology at the heart of Google's business plan. Or it could strike out on the patents grab and simply gain a top-notch CTO, Lang.
Cuban, who has been an outspoken critic of the patent system, now owns more than a million shares, a 7.4% stake, in a company that's counting on the system to pay off. It's an intriguing hedge against his other investments—he's an investor in Lions Gate Entertainment, for one, which owns a number of websites. And Innovate/Protect claims its intellectual property is foundational to online ads.
When I tracked down Vringo CEO Andrew Perlman yesterday in Dubai, where he's speaking at a major mobile convention, he wouldn't comment on the stock activity or the company's biggest shareholder. Vringo's lawyers, Perlman said, insist that he remain tight-lipped until the merger is finalized, which should be this summer.
Then the real waiting game begins. The trial date for the showdown with Google and others is set for October.
[Images via Vringo; Flickr user eschipul]