It may not be long before
dream of market dominance becomes just another remembrance of Wall Street past.
The Los Altos, Calif.-based semiconductor design and intellectual property company
lost a major patent battle this month against German competitor
when a federal court denied Rambus' patent infringement claims and a found it committed fraud during meetings on memory standards during the 1990s.
Now the company's future revenue is at risk. Losing the lawsuit may cost it revenue that other companies have agreed to pay based on the validity of those patents. And there are still a handful of related patent cases scheduled for this year, starting today with another Infineon case in Germany. To complicate matters, an exclusive link between
and Rambus' RDRAM will end soon. RDRAM, or Rambus dynamic access memory, already is a question mark because it hasn't caught on as expected.
Wall Street, meantime, has all but bailed on the company. After sticking by the company for years, Rambus bull Mark Edelstone at
, which brought Rambus public, has dropped his rating to neutral from buy and backed off his $80 price target.
Rambus Chief Financial Officer Gary Harmon declined to comment on how losing the Infineon case could affect revenue, but he denies that it could kill existing contracts. Rambus is appealing the Infineon case. Harmon also said Rambus hasn't changed its guidance, which it announced on April 12, for revenue to decline 20% in the fiscal third quarter ending in June from $31 million in the second quarter.
All this represents a dramatic shift for Rambus. The company once was a rising star among tech stocks. With its idea of designing instead of making chips, it seemed to have a perfect plan to create an ongoing and growing revenue stream. It had its own fancy technology, RDRAM, which companies would license. Then came the limitless potential plan. Rambus claimed that essentially all DRAM in production was based on its patents, meaning every maker of the memory would have to pay it. Several gave in.
Investors piled into the volatile stock, pushing it to an all-time closing high of $117 on June 26, 2000.
Today Rambus' stock sits at less than $12, and it has two major issues to deal with, one involving its claims that DRAM makers owe it royalties and the other involving the push to get companies to use its RDRAM.
Last year, Rambus began asserting that its patents cover SDRAM, or synchronous DRAM, and DDR DRAM, or double data rate DRAM. It was able to get eight DRAM makers representing more than 40% of the DRAM market to agree to pay royalties rather than battle it out in court, the path Infineon,
, formerly Hyundei Electronics, chose.
Rambus collects a royalty of about 0.75% on SDRAM and 3.5% on DDR from
. Most of the DRAM being produced is currently SDRAM, while production of DDR -- seen as a competitor to RDRAM -- is expected to pick up later this year.
But the federal judge in the Infineon case found that Rambus' patents don't cover the process for making SDRAM and DDR. He also found that during meetings of an industry standards group in the 1990s, Rambus committed fraud in its communications on memory design.
Losing the case has put in question Rambus' ability to collect royalty revenue from memory makers in several ways. If the patents are invalid, DRAM makers that already agreed to pay royalties could have the ammunition necessary to renegotiate their contracts.
In addition, DRAM makers could lose the impetus to make Rambus' proprietary memory, RDRAM, if they can make other kinds of DRAM without paying any royalty fee. There will be no revenue from Infineon, one of the largest DRAM makers, unless Rambus wins on appeal, which won't go to court until next year. The loss of this royalty revenue is one reason Edelstone went negative on the stock, saying he had expected DRAM royalty revenue to account for 75% of overall revenue in the long-term. Rambus says it expected this revenue to decline as RDRAM production increases.
"Anyone who has and is continuing to bet on this company for the value of its pending litigation will probably see even further losses," says one analyst at a New York-based hedge fund that has no position in Rambus.
Another way Rambus generates revenue is by licensing the design for its proprietary Rambus DRAM (not at issue in these patent cases) to DRAM manufacturers. Its biggest moneymakers so far are
and computers powered by chipmaker Intel's Pentium 4 microprocessor.
But RDRAM has failed to become a major earner -- in the most recent quarter, it was a minority portion of Rambus' revenue. Instead, the company says royalty revenue from SDRAM and DDR has dominated revenue. Rambus' Harmon declined to break out specific royalty numbers.
One large piece of its RDRAM business surrounds the Pentium 4, Intel's latest version of the popular chip, which uses RDRAM. But Intel will begin offering a cheaper memory alternative with its Pentium 4 by the end of this year. Launching the Pentium 4 with cheaper memory will make it more attractive to end users who have been reluctant to buy the pricier RDRAM version.
If RDRAM revenue is under threat, so is the royalty revenue for SDRAM and DDR. During the Infineon trial, details of Rambus' agreement with Samsung became public for the first time. And those details indicated that if the patents are shown to be invalid, the Samsung agreement to pay royalties on SDRAM and DDR would be void. Analysts expect that clause extends to all the agreements.
"Assuming that this ruling is upheld, and the Hynix Semiconductor and Micron Technology cases reach the same outcome, we can expect to see DRAM vendors like Samsung, currently paying Rambus royalties on SDRAM and DDR DRAM, arguing their contracts are now void," says Richard Gordon, a semiconductor analyst for
, which hasn't done consulting for these companies. "The problem for Rambus is if it tries to hold these companies to the royalties, it risks undermining its relationship with them, and at the moment Rambus needs all the friends it can find in the DRAM industry."
Rambus says the contracts aren't at risk, adding that the court didn't prove the patents were invalid. "There's no question
our contracts are still valid and require people who signed those contracts continue paying royalties," says Harmon, the CFO.
But even if the contracts hold, it's unlikely Rambus will add to those deals, ending yet another Rambus dream.