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.
Before you buy stock, it is important to keep in mind that a patent is not
a cure-all. Rather, it is a right granted by the government to a person or
company. The patent gives the holder the right to exclude others from
making, using, or selling the invention — for about 18 years.
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.