World's Inc: The next big patent play Worlds Inc. (WDDD.OB) is suing Activision Blizzard (ATVI) for patent infringement in the U.S. District Court for the District of Massachusetts. The lawsuit alleges that two of Blizzard Inc.'s massively multiplayer online role-playing games (MMORPG), World of Warcraft and Call of Duty, are directly infringing on a suite of patents (6,219,045; 7,181,690; 7,493,558; 7,945,856; 8,082,501; 8,145,998 & 8,161,385) owned by World Inc.'s collectively known as "System and Method for Enabling Users to Interact in a Virtual Space." These patents describe how to generate a virtual three-dimensional space designed to enable multiple users to interact in real time. Furthermore, the lawsuit claims that these patents describe the exact same virtual architecture utilized by Massive Multi-Player Online Games (MMORPG) in general. Worlds counsel is the renowned Houston-based Lawyer, Max L. Tribble, who agreed to take the case on a staged, contingency basis.
With shares of WDDD set to soar on a positive Markman hearing set for June 27th, 2013, EPE recently sat down with Worlds CEO Thom Kidrin. In this article, I give the key takeaways from this interview, and an assessment of the risks vs. rewards of this speculative tech stock.
One of EPE's primary concerns with Worlds was the company's financial statements, which read as if the company is teetering on bankruptcy. Mr. Kidrin conveyed to us that the Worlds is financially viable going forward, with access to capital from a number of private investors on an "as needed" basis. Even so, Worlds has not needed to access this type of capital, nor has it needed to resort to debt financing. Instead, Mr. Kidrin has put his own money into the company when needed. Overall, Worlds should thus have adequate capital to see the lawsuit through to fruition, although it may require some form of dilution.
In regards to the logistics of the lawsuit, we asked Mr. Kidrin about the District of Massachusetts scheduling process, especially in regards to a trial, if needed. He thought the case would likely see trial, if needed, within 8 months after the Markman hearing, based on the Court's history with patent infringement cases. This would place the trial date somewhere around the 1st Quarter of 2014. That said, a positive Markman hearing would probably doom any chance for an Activision Blizzard win at trial due to the large number of claims being brought in the suit. For investors new to the patent infringement scene, a plaintiff only needs to show infringement on a single claim. As such, the odds clearly favor plaintiffs that claim infringement on a large number of claims across several patents. Worlds is claiming infringement on a total of seven patents, giving them an excellent chance of winning at trial.
While the expert damage reports are a long way off, Mr. Kidrin did inform us that they are seeking an award that would compensate them for both past and future damages based on the U.S. revenues for the two infringing gaming systems. Moreover, future damages would likely come in the form of a Running Royalty. Another important point is that Worlds is seeking treble damages for willful infringement, as they claim to have substantial evidence that Activision Blizzard was fully aware of these patents during the creation and marketing of these two gaming systems. Unfortunately, Activision Blizzard has made it extremely difficult to get a handle on the U.S. revenues for these two gaming systems, so even a rough estimate of the damages cannot be given at this time. Nevertheless, the number of virtual worlds users in the broad sense continues to nearly double year after year (see figure below); so it's hard to imagine that a base award for damages wouldn't be at least in the hundreds of millions.
Given that these patents clearly describe literally any variation on multi-user interaction in virtual space, we were interested in the possibility of other future patent infringement suits in sectors other than gaming. Mr. Kidrin was forthcoming about this issue, and stated that he believes the major social networking sites are also infringing on some or all of these patents. Simply put, more lawsuits are coming down the road, adding further value to WDDD.
Our take on Worlds Inc is that the stock is a strong speculative buy. Mr. Kidrin has access to enough capital to keep the company afloat through the duration of the Activision Blizzard suit, and the suit appears to have merit in my lay opinion. Indeed, I highly doubt Mr. Tribble would be taking the case on a staged contingency basis if it wasn't a strong case. Overall, there are too many claims for Activision Blizzard to dodge them all in my opinion, and the patents appear to outline the exact same virtual architecture used by these two gaming systems. Moreover, unlike the Vringo (VRNG) vs. Google (GOOG) case where treble damages weren't initially claimed, Worlds is claiming willful infringement, and is a practicing entity in the online gaming space. So Worlds would be entitled to an injunction against the infringing systems if they prevailed at trial, thus increasing the risks of a trial for Activision Blizzard.
In addition to a settlement or a win at trial, Worlds offers a third opportunity for investors to walk away with substantial gains. With a paltry market cap of only $17M, I would imagine that a positive Markman hearing should spark buyout interest in Worlds by other patent holding companies (PHC's). I believe this scenario is likely because these patents clearly extend beyond gaming systems, and therefore offer opportunities for licensing deals or other lawsuits against major social networking sites such as Facebook (FB), LinkedIn (LNKD), amongst others. Indeed, EPE has already received "unconfirmed" info that the PHC Vringo is interested in the Worlds' patent portfolio, pending a positive Markman hearing. Interestingly enough, when we attempted to confirm this lead, we were informed that it cannot be discussed at the current time. Overall, Worlds tiny market cap could present an interesting buying opportunity for another PHC looking to increase their own patent portfolios.
In sum, our take on WDDD is that it is a strong speculative buy at current levels, and offers investors numerous avenues to win with limited downside risk. The biggest risk with Worlds' would appear to be its ability to remain financially solvent, and the worst case scenario appears to be a rapid acquisition by another patent holding company.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WDDD.OB over the next 72 hours.
Sentiment: Strong Buy
Pretty good article-I like that no big money should be needed until maybe after the Markman. Need to get edva back focused on this though. When he was pimping it it almost reached .30 (which I had a sell order in at hoping to do a wash and rinse and wash again). No matter, this stocvk going up in time.