Affinity: Patenting Success?
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With venture capital sloshing around, it is not difficult to start a Net business. One method to create a barrier to entry is to get patents on core technologies. This has been the strategy of such companies as Priceline.com and DoubleClick.
On Tuesday, Affinity Technology Group (AFFI) announced it had secured a patent on its e-commerce technology. No doubt, the company's shares shot-up as much as 117 percent. Affinity is a developer of transaction technologies for the financial industry.
According to the company's press release, the technology helps Web users to establish accounts (like a credit card account) that verifies the applicant's identity without the use of human intervention. To me, this is vague. How does this really work? Well, I guess we will find out.
Interestingly enough, Affinity also announced that one of its existing patents -- which is for automated lending -- is under review from the patent office (the patent was issued in February 1999). That is, it could be lost.
This does not mean competitors will be prevented from using the technology. Actually, in many cases, patent holders want other companies to use the technology, so long as a licensing fee is paid. The fee can be a great source of income.
But the big problem is: What if companies do not want to pay the fee? Well, the patent holder must fight the issue in court. Of course, court fights are time-consuming and expensive. Companies like Priceline.com and DoubleClick have the resources to fight these battles. But small companies, like Affinity, have a tough road. For example, this year, Affinity announced that it would slash its workforce by 47 percent. One of the casualties was the Chief Executive Officer Murray Smith.
For the first nine months of 1999, the company had only $2.4 million in revenues. The accumulated deficit is $51.2 million and the company raised $60 million in its IPO. According to the company's financial statements: "Although the Company believes that existing cash, cash equivalents and internally generated funds will be sufficient to fund operations for the remainder of 1999, such resources, together with projected revenues that may be received under existing contracts, will be insufficient to fund the Company's operations in 2000 and beyond."
One customer, Dime Bancorp, had agreed to use Affinity's lending technology but recently announced that it would abandon it. So, even if Affinity's patent is strong and has great value, this may not really matter. Simply put, the company does not have the resources to adequately deploy and protect the patent -- making the stock's recent ascent look vulnerable.