Analysis: Patent-suit loss batters Rambus business model

Analysis: Patent-suit loss batters Rambus business model
By Will Wade, EE Times
May 14, 2001 (8:15 a.m. EST)
URL: http://www.eetimes.com/story/OEG20010511S0054

SAN MATEO, Calif. — A court decision this past week casts doubt on whether Rambus Inc. can continue charging royalties on synchronous and double-data-rate DRAMs, threatening the company's largest revenue stream and business model and raising broad questions about how technology companies handle intellectual property.

Judge Robert Payne, of the U.S. District Court in Richmond, Va., dismissed all 57 patent infringement claims Rambus made last August against Infineon Technologies AG for allegedly violating four patents covering SDRAM and DDR.

Also, on Thursday (May 10) a jury in the case ruled, after one day of deliberation, that Rambus must pay Infineon $3.5 million in punitive damages to settle a counterclaim of fraud. The Infineon countersuit alleged that Rambus filed patents on material shared by various parties within the Joint Electron Device Engineering Council (Jedec) standards meetings.

The case against Infineon (Munich, Germany) was the first of three pending legal actions brought by Rambus to defend claims that it holds fundamental patents spanning Rambus DRAM, SDRAM and DDR memories. Micron Technology Inc. and Hynix Semiconductor Inc. (the former Hyundai Electronics Industries Co.) have also refused to pay Rambus royalties and face court action, with the Micron case set to begin in a Delaware court on May 31.

"We are very happy with the [Richmond court's] decision," said Jan du Preez, president of Infineon's North American operations. "It is significant not just for Infineon as a company, but also for the industry."

Rambus executives, unavailable for comment at press time, vowed to appeal the decision. "Rambus will continue to fight to protect its intellectual property," said chief executive officer Geoff Tate in a written statement, adding that the verdict, "if allowed to stand, poses a serious threat to all technology companies that try to protect their inventions through our intellectual property laws."

In the wak e of the decision analysts questioned the outlook for Rambus, which is expected to face difficulty maintaining its hefty revenue stream from other DRAM makers that are paying royalties on SDRAM and DDR. Rambus (Los Altos, Calif.) disclosed last month that it derives more than half of its total revenue from SDRAM royalties. Eight major DRAM companies have agreed to pay royalties to Rambus on SDRAM designs, including Samsung Semiconductor Inc., the largest DRAM vendor and the leading RDRAM provider.

Companies now paying Rambus royalties made no immediate changes in the wake of Thursday's decision, but analysts expect the court ruling could ultimately impact those relationships. Dan Niles, chief semiconductor analyst for investment-banking firm Lehman Brothers in San Francisco, said his company dropped its coverage of Rambus last May, because the analysts no longer believed Rambus shares were a good bet.

"I think these lawsuits were based upon desperation," Niles said. "I'm sure that Samsung and the ot her companies that are paying royalties are going to see that their products are at a cost disadvantage compared to Infineon, and they will start to wonder why they are paying royalties."

Sherry Garber, memory analyst for market research firm Semico Research Corp. (Phoenix), said memory makers paying SDRAM royalties to Rambus may now be reevaluating those agreements. "I'm sure there are a lot of interesting discussions going on at those companies," she said. "This does not bode well for Rambus. I would think that the SDRAM royalties are significant to them."

Entanglements continue

Geoff Hughes, director of marketing for Samsung, said his company has are no plans to modify or cancel its agreements with Rambus. He pointed out that, while the judge may have ruled that Infineon is not infringing upon the Rambus patents, the patents themselves are still valid and other companies may still be found to be in violation of Rambus' intellectual property rights. With several concurrent legal case s, as well as an appeals process, these legal entanglements could continue for several more years.

"It's not over until the fat lady sings, and I don't think we've heard from her yet," Hughes said.

A spokeswoman for Elpida Memory Inc., a joint venture formed by the merge of NEC Corp.'s and Hitachi Ltd.'s DRAM operations, confirmed that there have been numerous high-level discussions in recent days regarding the impact of the ruling. However, she said Elpida has no current plans to revisit its royalty agreement with Rambus.

If Rambus cannot sustain its SDRAM and DDR royalties, analysts questioned whether it can survive on royalties for Rambus memories alone.

Advantage ending

RDRAM shipments have risen in the past quarter, primarily because of the ramp of Intel Corp.'s Pentium 4 microprocessor, which current supports only RDRAM memory chips. But in the second half of this year, chip sets that support the use of DDR memories with Pentium 4 may cut into that advantage.

Linley Gwennap, principal analyst at The Linley Group, said RDRAM shipments have been increasing quickly in recent weeks. Intel's Pentium 4 processor has a front-side bus capable of bringing 3.2 Gbytes/second to the processor, and the dual-channel RDRAM technology is able to keep the P4 satisfied.

The P4, with its new microarchitecture and much faster bus, is catching on in the marketplace much faster than the Pentium Pro did, Gwennap said. Systems based on the P4 and Rambus memories are selling in the $1,000 price range, he noted. For the time being, Rambus is being pulled along by the fact that the only available chip set for the Pentium 4 supports only Rambus memories.

"The interesting question is what will happen in the second half when DDR chip sets for the P4 start shipping," he said. "RDRAM, at the end of the year could account for 30 percent of all PCs shipped, and that is a big chunk of the market. I'm sure Rambus would be happy with 30 percent, the big question being, can they hold on to it?"

The main problem with RDRAM technology has never been its performance, but its price tag. Analyst Garber said that current prices for a 144-Mbit RDRAM chip running at 800 MHz are in the $22 range, a big premium over the $5 price tag of a 128-Mbit SDRAM chip running at 133 MHz. "It's still very, very expensive," she said.

And the PC market is very sensitive to price, added Niles. "Rambus offers high performance, but without lower costs it won't take off."

Samsung's Hughes said that the prices for RDRAM will be dropping significantly throughout the rest of the year. "By the end of 2001, there will be no price differential between RDRAM and DDR DRAM," he said. "We are really interested in moving both technologies into the mainstream." At the moment he said that Samsung is shipping between five and 10 times as many RDRAM chips as DDR DRAMs, although that figure fluctuates monthly.

Motives questioned

In the wake of the court decision this past week, industry watchers are speculating on the underlying motives behind Rambus' legal strategy. Although the company has repeatedly stated that the purpose was to protect its patent rights, some analysts paint a different picture.

"We have always thought that the goal was the pursuit of revenue," said Garber of Semico. She noted that the original business plan for Rambus was to garner royalties for its RDRAM products, a strategy that depends on high RDRAM shipment volumes. However, with Semico forecasting RDRAM shipments at just 3 percent of the DRAM market this year, those volumes have not translated into enough revenue to support a company.

"This had nothing to do with protecting intellectual property. Rambus was using these allegations of patent infringement as a stick," said Richard Gordon, principal analyst for Gartner Dataquest (San Jose, Calif.). "They were trying to make it uneconomic to use SDRAM and DDR DRAM, so people would shift over to RDRAM." Rambus charges higher royalties for SDRAMs and DDR DRAMs than for Rambus DRAMs.

Legal experts predicted the Rambus-Infineon patent fight would have wide-ranging implications for how technology companies handle their patents in the future and whether they will participate in the standards process.

"The jury verdict sends a strong message that firms must reassess the level of care they expend in engaging in standard-setting bodies," said David Balto, former director of the Federal Trade Commission's Bureau of Competition. "If they end up engaging in 'IP ambush,' asserting rights after the standard has been disclosed, they can face significant liability, both under the antitrust and other laws."

The message sent by the Richmond trial is, "If you have patent applications, then stay away from standards groups" like Jedec, an industry source said. "I think Jedec's got a hollow victory here."

The Richmond verdict "is just the tip of the iceberg," one observer said. The patent cases are also being closely watched by federal antitrust authorities looking for anti-competitive behavior that could squelch innovation. Still, not everyone thinks that is happening. "I don't think [the patent lawsuits] will stifle innovation," an industry source said. "It will stifle Rambus-like IP companies."

Rambus is best known for its high-speed RDRAM technology, but the company asserted last year that fundamental elements of both SDRAM and DDR DRAM are based on patented technology developed for RDRAM, and demanded that other memory makers begin paying royalties on their SDRAM and DDR DRAM designs.

Judge Payne severely limited the scope of the Rambus claims in the Richmond trial by finding that the company's bus architecture — the heart of its patented technology — was fundamentally new and different from the bus used in SDRAM designs.

The next round in the ongoing legal wrangles is about to start. Rambus and Infineon will meet next in a German court to settle the same issues that were just resolved in Virginia.