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Patent scare hits streaming industry

Some decide it's better to license than fight, adding weight to broad claims over on-demand audio and video technology.

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Michael Roe, proprietor of the small RadioIO Webcasting station, got a surprise FedEx package this week, containing a notification that he was violating patents owned by a company he'd never heard of.

That's not uncommon in the technology world--the surprise was the scope of the claims. The sender, a company called Acacia Media Technologies, said it owned patents on the process of transmitting compressed audio or video online, one of the most basic multimedia technologies on the Net.

Roe, who recently finished fighting an expensive legislative battle over copyright fees for the music his station plays, was flabbergasted. Acacia only wanted three-quarters of a percent of his revenue, but every bit hurts at this point, he said.

"It's extortion," Roe said. "It's just another example of someone seeking to extend patents for an old technology to...cover completely new technology. It's absurd."

This week's letter to RadioIO is just a small part of an expanding licensing campaign by Acacia, which confidently says it holds sweeping patents likely to cover the activities of a huge swath of Internet multimedia companies, ranging from Microsoft to America Online. They could even cover pay-per-view movies on cable TV and in hotel rooms. On Wednesday, the company signed up its latest licensee, Mexican satellite telecommunications company Grupo Pegaso.

Bold patent claims on seemingly generic software ideas or business practices are an increasingly common part of the technology landscape. But there is reason to take Acacia seriously. Radio Free Virgin, the online music division of Richard Branson's Virgin corporation, said it agreed to license the technology late last year after a careful legal review.

Zack Zalon, general manager of Virgin's Net radio site, says he gets wheelbarrows full of patent claims on a routine basis. This was the first one he and his attorneys took seriously enough to sign a license.

"We did research on the claims and found that they were pretty clear--somewhat broad, but specific enough to cover us," Zalon said. "We realized that they were tight enough that a license would be substantially less expensive in the long run than litigation."

Indeed, patent experts say, those are the ground rules for a game that is being played with increasing frequency online and elsewhere, as more companies attempt to turn intellectual property into royalties in a time of economic malaise.

A rash of instances in which seemingly basic Web technologies and practices have been subject to patent claims has come up over the past year. Telecommunications giant SBC Communications is claiming rights to Web site "frames." Another company says it has rights to the e-commerce site staple known as the shopping cart. And a myriad of Web streaming and multimedia patents have surfaced in recent years, ranging from SightSound Technology's claim to hold rights in the process of selling downloadable music to Intouch Group's claim to patents on putting snippets of music on Web sites as samples.

"I'm seeing a lot more of it," said Rich Belgard, an independent patent consultant. "With the economy the way it is, you see a lot more people trying to leverage their intellectual property. It's one of the few ways left that people can actually make money."

With a well-funded legal team, years of experience and research, and an apparently solid set of patents, Acacia appears to be making one of the most daunting of these recent efforts.

Up the stream without a paddle
Acacia Media Technologies is part of a larger corporation called Acacia Research, which holds intellectual property in several areas. One of its subsidiaries owns critical technology used in the television content-blocking V-Chip and last year alone earned close to $25 million in royalties from that side of the business.

The company's digital media strategy began in earnest several years ago. It had determined that it owned about a third of the patents it needed to mount a licensing strategy for Web streaming, and its attorneys spent considerable time researching the rights held by another set of companies that Acacia ultimately purchased in 2001. By the time Acacia finished, it owned five U.S. patents and 17 international patents dating back to 1991.

"We spent an enormous amount of time doing prior art searches in the U.S., Europe and Japan," said Robert Berman, Acacia's general counsel. Prior art is a patent term that means someone else has already invented the process, barring another party from winning or enforcing a patent. "We did a tremendous amount of research on these patents' enforceability."

Once the company felt certain it had its legal ducks in a row, it started writing letters. According to Berman, the patents could affect virtually anyone involved in the business of providing on-demand digital audio or video, from software companies to network service providers to the actual content companies. However, Acacia initially decided to contact solely content providers, reasoning that they were the ones with end-customer billing relationships, and would provide recurring revenue streams.

Its first targets, beginning late last year, were adult Web sites. It sent letters similar to the one RadioIO received this week to 27 pornography-related sites, asking companies to take out licenses worth 1 percent to 2 percent of the streaming-related revenue. The adult companies were shocked and banded together to find strategies to combat Acacia's claims.

Berman said a few of the companies have signed licenses, but others are holding out. The company is about to initiate patent infringement suits against several of these holdouts, he said.

The next step was Web companies. Radio Free Virgin was one of the first. That company signed a license Dec. 20. RadioIO got its letter this week. Berman said other letters have gone out to companies large and small, although he would neither confirm nor deny whether Acacia has tried to tap larger players such as America Online, RealNetworks or Microsoft.

Berman said the company is about to approach cable companies that provide digital or digitized pay-per-view services.

RealNetworks, one of the earliest companies associated with streaming, declined to comment specifically on Acacia's claims.

From this point on, much will depend on the courts. A patent lawsuit could cost millions of dollars in litigation fees, and many companies--like Virgin--may find it simpler to pay Acacia than to challenge its claims. Acacia says it provides all the information it can to ensure that people can make that choice rationally.

"This it what it is, and we're willing to tell people what we have, so they can make a decision," Berman said. "This is not a scam. We're not holding people up."

Outside observers say Acacia's strategy of taking adult sites to court first is deliberate. Those sites are likely to fight the claim, but don't have the resources of Microsoft or RealNetworks to pour into patent litigation. Should Acacia win, a court judgment will make it easier for it to persuade the larger, more profitable companies to sign their own licenses.

An attorney for Helio.net, a company helping to organize the adult sites, did not return calls for comment.

Nevertheless, a court strategy is always risky. Judges and juries have been known to throw out overbroad patents before, and legal teams on the defense often spend considerably more time than the overworked United States Patent and Trademark Office in researching possible previous inventions that would invalidate a patent.

"All patents can be challenged," Belgard said. "I think there are many Internet patents that can and should be challenged and invalidated."