Profits aren’t the only thing lacking at Twitter ahead of its planned initial public offering. It’s got a dearth of patents, too.
The microblogging service said in its prospectus this week that it has nine issued U.S. patents. That compares with 774 cited by Facebook Inc. before its initial public offering in May 2012 and International Business Machine Corp.’s 6,478 patents accrued last year alone. Twitter’s smaller patent trove reflects its philosophy of letting engineers and designers own their inventions.
While Twitter’s policy is an effort to limit patent litigation, some investors and analysts are concerned it could backfire. Evidence shows that intellectual property can help companies raise more funds in their offerings, as patents enable investors to quantify the value of technological breakthroughs. Those safeguards are important for potential Twitter investors, amid the company’s widening losses and a lack of other financial metrics to go by.
“The lack of a large number of issued patents is a little concerning,” Maulin Shah, managing director at Envision IP LLC, an advisory and research firm in New York, said by phone. “If Twitter does deal with patent-infringement lawsuits, they don’t have too many patents to lean on to countersue. That does put Twitter at a disadvantage.”
Twitter says in its prospectus that many competitors have “substantially larger patent” portfolios, which could make it a target for litigation.
At the same time, Twitter has said that too many patents may hinder innovation. In May, the San Francisco-based company implemented the Innovator’s Patent Agreement, or IPA, to keep ownership of inventions in the hands of the people who created them. As part of the policy, Twitter can’t pursue offensive litigation without the inventor’s permission. The IPA ensures that the patents “will be used only as a shield rather than as a weapon,” according to Twitter’s website.
The IPA will help the company lure and retain more talented engineers, said Robert Clarkson, a partner in the capital markets practice at corporate law firm Jones Day. More than 5,000 patent actions were filed last year, the highest number ever recorded, according to a 2013 study by PricewaterhouseCoopers LLP.
“Twitter has taken a somewhat different approach in that agreement,” Clarkson said in a phone interview from San Francisco. “This helps them attract leading individuals. They get more by attracting the best and brightest.”
The policy’s biggest risk is that employees will take their inventions with them, posing a competitive threat if they leave, according to Jeff Sica, president and chief investment officer of Sica Wealth Management.
“This is a radical way of dealing with patents, which is far different than anything investors have seen before,” said Sica, who oversees about $1 billion under management. “People may appreciate the openness and invitation of competition.”
Sica, who’s considering buying shares of Twitter, said that the company has developed a strong enough brand to withstand the competition.
Jim Prosser, a spokesman for Twitter, declined to comment.
Twitter is seeking to raise more than $1 billion in its IPO, people familiar with the situation said last week, and will probably start a roadshow to market the offering in the last week of October. The company pegged the fair value of its common stock at $20.62 a share in August.
Twitter’s potential, as it lures advertising with more than 230 million monthly active users, means it could fetch $50 a share by the end of 2014, according to Robert Peck, an analyst at SunTrust Robinson Humphrey Inc. That user base is also critical to defending Twitter from competitors, he said.
“Investors are asking if Twitter’s not protecting their business,” Peck said by phone. “I think there’s a business risk there, but at this point, the network effect protects Twitter.”