August 9, 2005
Larry Bouchie:
 Again, hello, everybody, and welcome. I'd like to tell you who is available on the call today. We have consortium spokesperson, Stan Drobac, who is also Vice President, RFID Strategy and Planning for Avery Dennison. And we have two members of the consortium's legal advisors, Christopher Bloom and William Dolan of Dell, Boyd, and Lloyd. And that said, I'd like to turn the call over to Stan, who is going to make some initial comments about our news today. Stan:
Stan Drobac:
 Thank you, Larry, and good day to everybody. I might say day, I'm not quite sure what time zone everyone is in. We have about an hour for this call. I will make a few comments. We'll try to keep it fairly short and then open up the floor for questions. I will assume that most of you have seen the news release that went out on the wires at 8 o'clock Eastern Time today and I won't repeat that in any great detail, but I will bring up some points from it.

I'd like to start with a little bit of background. As you probably know, the level of interest and activity in RFID has accelerated quite a bit over the last five years or so, driven by a bunch of things, one being just improving technology by some of the cooperative work that was done first at the Auto-ID Center, and more recently at EPCglobal and particularly by the supply chain programs that have been announced by several major retailers around the world, and by the US Department of Defense. But the technology itself, RFID, has been around for quite a long time, dating back to at least World War II, and has been used in a lot of different applications. So over the course of that history, which is 50 years or more, there's been a great deal of RFID related development work that has taken place, been done by many companies, and much of that has resulted in patents. The -- because of that, the number of patents that have been issued over those years and the number of patent holders that are involved that hold patents that may be necessary to many types of RFID products has made for a very complex situation in the intellectual property landscape of the RFID business. Some people use the term patent thicket to refer to interlocking patents that can tend to block participants from making products that are useful to consumers.

So with the RFID business place become a much larger one, a number of key industry players who were concerned about the complexity of the patent situation began discussing ways to deal with that complexity, and as it mentions in the release there have been about 20 of us that have been actively involved in it up to this point. We were looking at things like the issue of blocking patents, the patent thickets that I referenced earlier, things that could prevent the industry from developing at the speed or in the direction which we all believe it needs to go. There are -- the focus has been on defining and designing a legally appropriate, proper but customer useful tool to permit one stop shop kind of licensing of the patents that are really essential to complying with the key industry standards, those being the standards that have been developed by EPCglobal and the ones developed by the ISO organization.

We also realized that are quite a few patent holders that have not, at least recently, been active in RFID, but could have important intellectual property in the form of patents that we would like to make accessible to people who need to make products, that take advantage of that intellectual property. So we want to try to involve those people in the process, help them to monetize their investment in their intellectual property, and make things easier for users to deal with them as licensors.

So the consortium that we are announcing today really comes out of the discussions between these 20 companies to, as to how we figure out a good way to deal with these patent issues. So we retained an outside law firm. There are two members of the firm on the phone with us today:

Bill Dolan and Chris Bloom at Bell, Boyd, and Lloyd in Chicago. And we've retained them to help us work through the legal issues, make sure that what we're doing is appropriate from an anti-trust standpoint, to make sure that we are focused on things that will help move the industry forward in a way that facilitates competition and does not hamper it. And to do that really along the lines of models that have been developed in other industries, one of those being in consumer electronics. Probably most of us on the phone here own one or more potentially many DVD players and products that use video compression technology known as MPEG-2. There are precedents in those businesses of the kind of licensing arrangements that we're talking about here where a number of disparate patent holders have combined their patents and licensed them as a group using an administrator to manage that to handle the out-licensing to people who want to build products, and helping manage the collection of royalties and the allocation of that back to the licensors, the patent holders. And those -- that kind of arrangement has been very instrumental as we can all see by the results in the rapid adoption and dissemination of the technologies that are being used for things like DVD players. So that's the kind of model that we're working from.

Now we have a group of significant number of companies involved. Some of them are mentioned on the press release. Others, for various reasons, are not ready to go public yet, but we believe more and more will over time. But we're also actively working to connect with a number of other organizations as well. We have active discussions with additional members who we expect to join the consortium. And then we'll continue to do that. The announcement that we're making today is oriented towards really stepping that up a notch. We want to make our efforts public because we have enough of an outline for how this will work to be talking about it with all of the other necessary patent holders that we can identify. And we want to ensure that we reach the right people, and going public will allow us to do that, and we're in a position now to be more open about what we're -- what we have underway.

So there is quite a bit of detail in the release, which I'm not going to repeat. But I do want to emphasize that this is really a win-win program. It will simplify licensing for both the patent holders and for licensees, resulting in, we believe, a greater revenue sooner for the patent holders, and yet at the same time with lower cost and less uncertainty for the producers of RFID equipment and technology. The reason that can happen is the arrangement will substantially reduce the transaction cost associated with granting and with obtaining licenses to the necessary patents. So the time and money that would otherwise be spent by all the companies on both sides of a transaction in negotiations and in litigation will instead be shared by the patent holders and by their licensees. And I should also mention that as in the case of DVDs that consumers will win big in this because it facilitates rapid, easy adoption by a larger number of companies resulting in greater competition, a larger market, and benefits to really all involved.

So the consortium will be issuing, relatively soon, we don't have a date yet, but we will be issuing a formal call for patents. But this announcement is the first step in that direction to make sure that word gets out about what we're trying to do and to help us to identify and bring into the discussion all the potential holders of necessary patents that should be involved. And in fact, that's the way that I understand that it has worked in previous patent arrangements like this. One example we have is the pool for MPEG-2 video compression technology, which according to the statistics I have, now consists of some 700 patents that are sourced from 24 patent holders. It has about 800 licensees. So it's a very large group of patent holders, a very large group of licensees. It's something that has really facilitated the development of that technology and its dissemination and has made it a technology that's in use on a daily basis around the world by consumers.

So we have in the process of what we're doing, kind of thinking back to what has been done with MPEG-2 with DVD technology, we've tried to put together a set of operating principles that take great care to account for the interests of all the parties that are going to be involved in this going forward. We want to get more involved, and that's part of the reason for going public here, and bring in all of the necessary patent holders that we can to help us finalize the terms under which the consortium will operate and begin to execute on setting up and running this licensing arrangement.

So I think with that I want to make one more point, which is that this effort is intended to be completely complementary to and supportive of the standards that have been developed by EPCglobal. We believe that this arrangement, that this effort, will speed adoption of those standards, will make it much easier for potential product manufacturers to develop their products and move them out to the market rapidly rather than being burdened by the uncertainty of the patent situation, and will dramatically improve the ability of the industry to move forward along the lines of the standards that have been outlined by EPCglobal and that are moving into the ISO standardization process.

And I think with that I will stop and open the floor to questions.
Moderator:
 Thank you. Ladies and gentlemen, the floor is now open for questions. If you have a question or comment, please press the numbers 1 followed by 4 on your touch-tone phone. Pressing 1, 4 a second time will remove you from the queue should your question be answered. Lastly, we do ask while posing your question that you please pick up your handset for optimum sound quality. Please hold while we poll for questions.

Our first question is coming from Phillip Alling. Sir, please state your affiliation, then pose your question.
Phillip Alling:
 Yes. It's Phillip Alling with Bear Stearns. Stan, could you speak to the degree to which efforts have been made to include Intermec in this consortium and how should investors view the moves that Intermec has made to secure royalties from competing vendors in the space for its portfolio of intellectual property in the RFID space, and do you really need to include Intermec in this consortium for it to be a success in your view? And maybe we'll start with that and I have a follow-up afterwards.
Stan Drobac:
 OK. I guess first of all, I should point out that we cannot and will not comment on discussions or the involvement of any companies that are not mentioned in the press release, and that includes Intermec. We have and are in discussions with a large number of relevant people in the industry, the ones that we know of that will be affected and will be interested in this. I will say with respect to Intermec and their Rapid Start Program that this is not intended in any way to try to attack or replace their Rapid Start Program, that this is an attempt to collect necessary intellectual property that reads on the EPC Global standards. It could well include some of the patents that are included by Intermec in its Rapid Start Program, but that the Rapid Start Program has a great deal more to it than just what we -- what may be considered necessary patents.

Now, as I think the press release mentions, the consortium, when it formally gets formed, and it's not a legal corporation yet, it's intended to be set up as a limited liability corporation, when it gets set up with its full operating rules, it will retain outside experts to look at different intellectual -- different patents to determine which ones are necessary and thereby decide which to include in the licensing arrangements. They would determine which of the ones that come from Intermec or from anyone else would be appropriate to include in the arrangement. But this would not prevent, and does not prevent, doesn't change, Intermec's ability or right or probably desire to move forward with Rapid Start. Rapid Start can move on its own separately.
Phillip Alling:
 Did you guys get any input from some of the early adopters in RFID as far as this initiative is concerned, namely the Wal-Mart or the Department of Defense or Homeland Security? And have they weighed in, if you will, on this particular initiative?
Stan Drobac:
 Again, I can't talk about specific discussion with specific parties. We have had discussions with many people in many parts of the value chain of RFID, including both producers and users so we have talked with people of the sort that you are -- that you mentioned. And we certainly have tried to take their interest into consideration, and in fact we believe this is not just a win-win for patent holders and for licensees or for producers of RFID products, but perhaps even more so for consumers and organizations that are trying to adopt RFID and use them in their businesses. So this is -- it's really a win-win all the way around, and certainly reaches out to the kinds of organizations that you mentioned.
Phillip Alling:
 And just final question for me then. Can you give us a sense in terms of timing about when you think that this really may become a legal entity and in terms of like what the initial funding requirements may be and where this would be based and what sort of staffing you think would be necessary to make this run smoothly?
Stan Drobac:
 Yes. I don't have a lot of specifics on that. This -- it will take months not days or weeks, but not years either to pull this together and to get a patent collection that is truly available for licensing. Some have estimated that it would be early '06 that that would happen, but at this point it's just a guess. I will point out that the group of companies that -- some of them are mentioned on the release and some of them not, but the 20 or so companies that have been involved to this point have already put in countless man hours and several hundred thousand dollars of out-of-pocket expenses to get us to the point where we're at. And it will take a significant amount more effort to get the LLC set up and operational. But it will be a very small investment compared to what it would take for the people who would become the consortium members, which are the patent holders, to move forward with licensing programs of their own and to negotiate and litigate individually with each of the licensees that they would otherwise have to deal with.
Phillip Alling:
 Stan, thanks so much. I'll pass it along.
Moderator:
 Thank you. Our next question is coming from Reik Read. Sir, please state your affiliation then pose your question.
Reik Read:
 Hi, it's Robert Baird and Company. Stan, good morning; can you give us a little bit better understanding? You said that there's going to be a formal call here for IP but can you give us a little bit of an understanding of what the legal and IP review process will be from here? And with that, can you tell us how much of the critical IP has already been identified and defined?
Stan Drobac:
 Well, we're not in a position to say how much of it has been identified and defined. We have 20 companies. If you look at the ones, just the ones that are named on the release, you can see that there's a fair amount of understanding of RFID just based on what those companies would know. And so we think we have a reasonably good sense of where the important patents are, but probably not a fully comprehensive one. That's part of the reason for issuing a public patent call. The mechanism by which this will work is really that the LLC, once it gets formally formed, will select a person or a team of independent experts in the technology to go through all of those patents. So companies that believe that they have essential patents will submit those for review. The independent experts will look through those to determine which ones are or are not necessary in a practical sense to operate under the EPCglobal or the ISO standards and then we'll include those in the pool. The expert will also evaluate the patents that have been submitted and that are accepted for relative value as a way of determining how to allocate the revenue that comes in from licensees and get that back to the patent holders.

So, that's the way the mechanism would work. So the experts will be selected after the LLC is formed and the terms of operation are agreed to by the consortium members. We have an initial set of consortium members. We have a term sheet, which is the outline for the rules of operation of the eventual LLC but those terms will not be finalized until the group is formed and fully set up. Does that answer the question?
Reik Read:
 Yes, and can you just -- a follow-up there. How long does that process take? And how different is that from the legal review process that EPCglobal had already undertaken with respect to Gen 2?
Stan Drobac:
 I guess I don't know how long that will take. As I say, people have guessed that it would be sometime in early '06 that we could possibly have an operational licensing arrangement up and running, but I don't have anything more accurate than that and I certainly am not an expert there myself. I don't think that this can or should be compared to the evaluation effort that EPCglobal did sometime back. Their -- they were looking at patents from a different perspective with a different intent. And one thing to keep in mind is that as a standards developing organization, EPCglobal is -- was not in a position and is not able to in a legal way from an anti-trust standpoint, and Bill and Chris, correct me if I'm wrong here, but they are not allowed to get involved in licensing. So EPC -- you're either a standards body or you're a licensing organization. You can't be -- you can't define the standard and then be collecting money from licensees for that. So EPCglobal is approaching it from a pretty different perspective and although they -- I'm sure they looked at many of the same patents, they were approaching it from a different angle with a different set of things that they were trying to accomplish in their evaluation.
Reik Read:
 And what is the mechanism or the process that occurs if a key player or a player with key intellectual property says, "I don't like this consortium. It's not good for me. I'm not going to join." How do you deal with that, then?
Stan Drobac:
 This consortium is 100 percent voluntary. People can join it or not. We think there are very compelling reasons for anyone with essential IP to join it. It will dramatically simplify their life. But if, for whatever reason, somebody with essential IP wishes to -- wishes not to participate, that is their choice. I should also point out that even if that's the case, and we frankly over time we don't think that, that will be the case. As had happened in some of these other pools, patents have migrated into the pools over time to where they are now very comprehensive, but maybe in the early days of the pool they were not. That could happen here. But even in the absence of some players the pool will still have great value in that if there are ten licensors in the pool and three that are not, then a potential licensee will have to go obtain licenses from four entities instead of from 14. So there's still a substantial value in the pool, even with the -- even with just the set of members that the consortium already has. And we expect that number to grow substantially, and we believe that it's in the best interest of essentially all of the essential patent holders to join and eventually that will become more and more clear.
Reik Read:
 OK. Thanks very much for the comments.
Moderator:
 Thank you. Our next question is coming from Ajit Pai. Sir, please state your affiliation, then pose your question.
Ajit Pai:
 Yes, thank you, Thomas Weisel Partners. Two quick questions; the first one would be, and I have compared RFID, especially the licensing that you are planning to adopt with MPEG-2 and with DVD. Could you give some indication if you've studied these somewhat before deciding to model it, the program, based on these two? What kind of -- when you're paying multiple folks for their IP, what kind of royalty ranges would sort of an end user that's a new adopter be paying consolidated to all the parties involved? Could you give us some range of what that varies in these two? And finally, in distributing it, whether there is a precedent of it going disproportionately to fewer players - yes, could you give us some color there?
Stan Drobac:
 Yes. I can't give you specific numbers because the total royalty rate and the allocation of the royalties to the patent owners will be determined by the consortium and the independent experts that it retains. And really that's the answer. The way that these have been set in the past have been not just with respect to the patent owners, but also what it takes to -- what is appropriate in the marketplace, what precedents there are in similar technologies. And in the end, at the end of the day, the consortium is an organization of the patent owners, and it is owned and run by the patent owners and the patent owners only. So, it will be looking out for their best interests as it should and in determining a royalty rate that is -- that provides good and fair compensation to the patent owners, but also is low enough that it doesn't inhibit the development of the market. So, you've seen in the case of DVDs that most of us have seen $29 DVD players at our local superstores. And those can't happen if the royalty rates are egregiously high from a consumer's perspective. So the expert in the consortium will balance the needs to expand the use of the technology quickly and build revenues that way with the need to get a fair return by the owners.
Ajit Pai:
 OK. Thank you.
Moderator:
 Once again, the floor is open for your questions. If you have a question or comment, please press the numbers 1 followed by 4 on your touch-tone phone.

Your next question is coming from Barnaby Feder. Sir, please state your affiliation then pose your question.
Barnaby Feder:
 New York Times. Stan, hi, has anything been said about how you'll go about choosing the experts? And is this going to be a single expert or a committee or firm or what?
Stan Drobac:
 Yes. That again will be determined by the consortium. So as the consortium forms and finishes its legal incorporation, the members of the consortium will need to select an expert or team of experts. And it could be one person, it could be a team, but I can't give you more color because that's really a decision that the consortium members will make at the appropriate time.
Moderator:
 Our next question is coming from Andrew Abrams. Sir, please state your affiliation, then pose your question.
Andrew Abrams:
 Avian Securities. I was wondering if you had worked out the details of how you're going to block the IP licenses similar to the way that Rapid Start does where there's categories, or is this going to be you pick what you want out of this large list and we pro-rate each piece according to what the team assesses that value at?
Stan Drobac:
 You're generally beyond what I know about how these operate. But my understanding is that the pool will try to encompass all of the necessary IP, the necessary patents. We'll group that together and to prevent being completely overwhelmed by complexity, will not try to separate out which license -- which patents get licenses to which users, and which users' royalties get allocated to which patent holders. My understanding is that the allocation of the revenues will take that into account in terms of how a -- how much of the pie a particular patent gets. The number of licensees that are likely to need that patent will be taken into account depending on the value of that patent.
Andrew Abrams:
 So if I'm a licensee, I come in and I buy the package and you guys pro-rate the revenue to the original IP holders, right.
Stan Drobac:
 So, a very important concept here is to try to make it as simple as possible for both the licensee and the licensor.
Andrew Abrams:
 Right. Thank you.
Moderator:
 Thank you. Our next question is coming from Chantal Polsonetti. Please state your affiliation then pose your question.
Chantal Polsonetti:
 Yes. ARC Advisory Group. As far as I can discern, the essential primary value of this program is to the technology providers. I was wondering if there's any value to the buyers of the technology, including in terms of accelerating availability of products.
Stan Drobac:
 Yes, yes, yes. I guess I wasn't clear enough. This is -- there certainly is value to the technology providers, but it is at least -- there is at least as much value to the patent holders and to the consumers of or the users of RFID technology because of what you just said. This will make it much easier for technology providers to provide technology, to do what they're supposed to do. It will make for a much more competitive environment with more suppliers. It will, we believe, result in a lower -- significantly lower royalty burden on all the products that are out there because of the fact that we're taking so much transaction cost out of the system, so things will move faster. They will be less expensive, and more efficient for all involved and all of that will result in substantial benefits to consumers and to users of the RFID technology.
Chantal Polsonetti:
 Will that be true even if Intermec doesn't participate?
Stan Drobac:
 Yes. We certainly hope that Intermec and other holders of necessary IP will participate, and we think that most or all of them will. But even without Intermec, as I said, this will still simplify life for any licensee because it collects a bunch of things that a licensee would otherwise have to go out and contract for separately. So yes, with or without Intermec, this consortium will have a great deal of value.
Chantal Polsonetti:
 Great, thanks.
Moderator:
 Again, if you should have a question or comment, please press the numbers 1 followed by 4 on your touch-tone phone.

We have a follow-up coming from Reik Read.
Reik Read:
 Stan, can you give us -- you mentioned that the 20 original members had been looking at this. Can you give us a quantity of incremental people that are taking a look at potentially joining? And talk a little bit more about the methods of recruitment that you'll employ here over the course of the next couple of months?
Stan Drobac:
 Well, up until now, we've been operating under a group non-disclosure, where all of us are bound to -- basically bound to get approval from the team before we talk to other companies. And we talk regularly about who else we need to invite and different of us have taken assignments to go out and reach out to different organizations. But with 20 companies, we're not out there reaching out on an effectively manual basis to hundreds of other organizations. And that's part of what this announcement is intended to do, to give us a lot more reach a lot more easily. But we have been making calls and connecting with -- through our own networks, connecting with a number of other organizations, particularly ones that we think have a relevant intellectual property, but also as one of our other questions brought up, other people in the industry who are interested or important from other perspectives, not just necessarily patent holders. So there has been and is a lot of activity going on in that space. We expect it to accelerate so we're -- a lot of us are a little bit concerned about how we keep all of these discussions going as things -- as more enquiries come in. But that's a problem that we're pretty happy to have to face.
Reik Read:
 Yes, and understanding that you can't name names, but can you just give us an idea of quantity in terms of total number of people that are looking at it today? Or what you might ultimately expect the membership to look like in terms of numbers?
Stan Drobac:
 It's -- I'd say the number of people that we've made contact with is probably more than 10 less than 50. The ultimate number of organizations that would be in the consortium that hold essential IP is one that I really can't speculate on. I pointed out that the MPEG-2 pool has 24 patent holders. That's probably the right order of magnitude. But we really don't have a feel until the independent experts take a look at this as to how broad the holdings related to RFID are going to be.
Reik Read:
 OK. Thanks you.
Moderator:
 If there will be any final questions or comments, please indicate now by pressing the 1 followed by 4 on your touch-tone pad. Gentlemen, I'm showing no further questions in the queue. Did you have any closing comments?
Stan Drobac:
 I think that from the point of view of the consortium, we just want to make sure that everybody understands what we're doing. We're delighted to be out in the open with this now. We think it is a wonderful thing for the RFID industry and as I said for all, all aspects of the industry; the people who hold essential patents for people who will need to license those patents, and particularly for consumers and users for the technology. We certainly encourage you to watch this as it progresses. We believe that it will move forward at a very rapid rate, and we look forward to providing you with updates as things progress.
Moderator:
 Thank you, gentlemen. Ladies and gentlemen, that does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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