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15 March 2021
Nick Wallin is a Partner at Withers & Rogers and head of our Electronics, Computing & Physics group. He recently shared his thoughts with Computing about how a lack of IP protection could make Zoom’s success short-lived.
In the space of just a few weeks in the Spring of last year, video conferencing platform Zoom went from being largely unheard of to a staple of the new normal. Despite its rapid take up having a dramatic effect on the company’s value, a lack of intellectual property (IP) protection could mean its success turns out to be short lived.
When Zoom debuted on Nasdaq in April 2019 it was valued at $112 billion, with a share price of $62. By October 2020, due to the surge in the popularity of video conferencing during the pandemic, the platform’s daily active user numbers had risen to around 300 million worldwide and the share price soared to $568, although it has since fallen slightly.
While the massive increase in demand for video conferencing due to the pandemic could not have been predicted, the rapid rise in the valuation of the company has highlighted a potential flaw in Zoom’s business strategy. While there is always something to be said for first mover advantage, most tech companies with a sizeable market capitalisation would also expect to have a robust IP portfolio. Ideally, this should include a significant number of patents protecting their inventions in markets around the world and giving them a period of exclusivity to commercialise their innovations. In the race towards the future, a company with a first mover advantage can use patents to help keep its (often larger and better resourced) competitors behind it. The patents act as significant impediments, preventing competitors from catching up.
Based on the findings of a widely-used global patent database however, it seems that Zoom has far fewer granted patents than might be expected for a company of its market cap. The search results show it has just five granted patents, all filed in the US between 2013 and 2019, and seemingly no patent protection at all in other large global markets, including Europe, China and Japan.
There are of course caveats to the finding. Due to the time lag between patent filings and their publication, which can take a couple of years, we can’t assume we are getting the full picture from this patent search. In a year or so’s time it may well be revealed that Zoom filed a glut of patents in 2020, after the pandemic hit and their share price and cash reserves rocketed. However, the fact is that until these applications are published, they provide little to no commercial protection. It also takes time to ramp up a quality patent portfolio, as suitable inventions usually don’t just arise overnight. It might also be the case that Zoom uses a differently named holding company for its IP – but in that case we wouldn’t expect to find any patents in its name, which isn’t the case.
There are other examples of fast-growing tech companies that grew faster than their IP portfolio was able to keep up. The solution is often to go to the market and buy a portfolio to backfill. The Rockstar consortium of later-to-the-game mobile telecoms companies, which bought the 4,000 patent ex-Nortel portfolio for $4.5 billion in 2011, to help defend against more established incumbents, is a classic example. The problem with such a strategy is that it can be expensive – more than $1 million per patent in the Rockstar case, compared with typical costs to grant a similar volume of US patents of $20,000 to $30,000. Deep pockets are needed for such a game, even assuming the patents come onto the market.
If it hasn’t already started, Zoom should be filing patent applications in its main global markets as quickly as possible. This could help to reassure shareholders that its current market valuation will hold. It is possible that the back-end video conferencing technology is straightforward, which may mean a large volume of patents is not needed, but geographic spread is important. It may also be possible to secure IP rights for innovative features as they are introduced, such as new ways to access the platform, new filters or backgrounds, and new user interface (UI) features, providing an added layer of commercial protection.
Another key area of IP-related risk for fast-growth businesses with a strong customer base is trade mark protection for their brand name and other aspects of their corporate identity. Trade mark registrations can be made retrospectively, which means that even if this hasn’t been thought of before, the company can seek protection for its brand name as long as it can demonstrate commercial use. In some cases, leaving the brand name unprotected could leave it vulnerable to genericisation, for example if consumers start referring to all video conferencing calls as a ‘zoom’.
While we can’t yet see the full picture when it comes to Zoom’s IP portfolio, there is an important lesson here for aspiring tech unicorns. Any first mover advantage could turn out to be short lived unless IP protection is a core element of their business strategy.
Electronics, Computing & Physics group
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Withers & Rogers LLP March 2021