The Profits in the Attic

How an old technology has turned Ampex into America’s hottest stock.

The hottest tech stock in America hasn’t been surging because of what its products promise to do in the future, but for breakthroughs it made more than a decade ago. Ampex has quietly risen a whopping 2,000 percent in the past six months. It is perhaps the most extreme vindication of Kevin G. Rivette and David Kline’s book Rembrandts in the Attic, which argued that companies’ patent collections could constitute an overlooked treasure trove. In the past year, Ampex has found several Rembrandts in its attic, and maybe even a Renoir or two.

Never heard of Ampex? It has a long and storied history. Founded in 1944 in what is now Silicon Valley, Ampex was a pioneer in audio and video recording. Its equipment was used in the first U.S. tape delay radio broadcast (The Bing Crosby Show in 1948) and recorded the Kitchen Debate between then Vice President Richard Nixon and Soviet Premier Nikita Khrushchev in 1959. In the 1960s, Ampex invented slow-motion instant replay and then focused on developing efforts to store and retrieve digital images. In the early 1990s, it introduced digital compression technology (or DCT), which is used in the industrial-strength recording machines it sells to the government and television stations.

In recent years, however, the 11-time Emmy winner struggled. While Ampex’s manufacturing business was moderately profitable and the company garnered some revenue from licensing patents, it was saddled with a huge debt load. In November 2003, the American Stock Exchange moved to delist the company’s shares. Since then, they’ve been traded on the Over-the-Counter Bulletin Board. (That’s a little like a veteran baseball player getting demoted from a triple-A club to a single-A franchise.) At the end of 2003, the stock traded for a mere 68 cents per share.

As Ampex struggled, the continuing revolution in consumer electronics—in particular the spread of digitization—laid the groundwork for Ampex’s rebirth. Have you visited a Circuit City lately? The aisles are full of DVD players, DVRs, digital cameras, camera-equipped cell phones, and digital camcorders. None of these was a major consumer product 10 years ago. And all of them rely on the storage and retrieval of digital images. And can you guess who held a bunch of patents on the storage and retrieval of digital images? “We were finding that the patents we gained as a result of developing DCT in the 1990s were being used in today’s ‘trendy’ electronics,” says Karen Dexter, director of investor relations at Ampex.

And so the company began to contact consumer electronics giants, an American David twirling a patent slingshot at Japanese giants. First it approached makers of digital-still cameras. In May 2004, Ampex sued Sanyo, the biggest digital-still camera producer, and asked that it be barred from importing cameras and camera-enabled cell phones into the U.S. In July, it sued Sony over the use of patents in digital-still cameras and PDAs. At the same time, it held out the possibility of a truce, offering them a license if they settled.

The suits themselves didn’t garner much attention. But last fall, the Japanese electronics giants began to fold. In October, Sanyo and Canon agreed to pay $25 million to settle claims over past use and to license certain patents for digital-still cameras and cell phones. In November, Sony came to the table with a $40 million settlement. To the electronics firms, these sums were a relatively small price to pay to settle what could have been damaging litigation. To Ampex, the deals were huge. The combined $65 million in cash—a sum far greater than the company’s 2003 sales—dropped almost directly to the bottom line. Sharp investors began to take notice. On Oct. 5, the stock closed at $2.00; in January it briefly touched $55. Yesterday Ampex closed at $39.25. Here’s a stunning six-month chart.

After the settlements, Ampex shifted gears. It used the cash to pay down about $60.2 million in debt, some of which carried interest rates of 20 percent. And instead of merely seeking big one-time payments, it sought to turn the patents—some of which last until 2014—into a source of recurring revenues in the form of license fees. Ampex seems to have latched on to a Holy Grail. Patent royalties are an extremely high-margin business—the investment to create them was made years ago, and Ampex has no production costs.

With the dominant players setting the precedent, other companies began to fall in line. So far this year, Ampex has struck licensing deals over digital-still camera patents with Olympus, Pentax, Matsushita, and Victor, which makes JVC products. These deals call for smaller upfront payments with royalties to be paid out regularly.

Ampex isn’t done yet, though. In October 2004, it sued American camera giant Eastman Kodak. And the digital-still camera industry may be just the beginning. The same compression technology is used in VCRs, camcorders, and camera-enabled cell phones. “We will sue others if we do not get satisfactory results,” says Karen Dexter.

Of course, it would have been far more valuable to readers to have seen this story last October, when Ampex could have been had for less than a Starbucks espresso. But as with patents, sometimes the value of a stock is only apparent in hindsight.