By Daniel Roberts, reporter
FORTUNE -- The following transcript is edited from a phone conversation with Nathan Myhrvold, founder and CEO of Intellectual Ventures, often cited as the biggest firm among a group of so-called non-practicing entities or NPEs. Such companies frequently buy up patents without necessarily intending to innovate new products but, instead, extract licensing fees out of larger companies. (Intellectual Ventures is one of the U.S.'s top patent holders.)
Tell us about Intellectual Ventures, for the unfamiliar.
Our company is founded on the basic idea that we invest in invention. It's similar to VCs but different, in that they invest in companies and want to see a business plan. We create our own stuff, but we also invest in inventors.
We believe that if there's a flow of capital to inventors, then we get more inventions, and that's good for the world. We had always hoped that patents would become very important to technology companies, and damned if I wasn't right about that.
How do you respond to those who call you, or Intellectual Ventures, a "patent troll?"
You didn't always need patents. They were only a nuisance because occasionally someone would come up to you and say "Excuse me, sir, you're using my invention." So there was a culture of complaining about "patent trolls" and patents being negative.
But we file 500 patents a year, roughly, and that makes us the 25th-largest inventing organization in the U.S. So we're one of the top filers of new patents of our own inventions in the world. Now, on top of that, yes, we do buy patents. It is easier to buy than it is to build. So primarily, our patents come more from acquisition than from our own invention.
The goal of our company isn't to create technology. Our theory is that it makes sense to separate invention from other things. If people who are good inventors aren't necessarily good businessmen or marketers of their product, they still deserve to be paid for their invention.>
What do you see going on with patents in the mobile space?
Patents are growing at every high-tech company. In the past 12 months, they've filed as many patent applications as they have in their entire history.
For most of the last 20 or 30 years, patents were not that important to most Silicon Valley companies, and that's because most of the new technology markets are what I call "winner-take-most." So a company like Oracle, eBay, or Amazon, those are all winners who "took most" in their particular market.
What we're seeing now is all of a sudden, in cell phones, you have a handful of winners, each one of which is trying to take most in the market. If you look at wireless, this war didn't just start. Wireless companies have been licensing patents and suing over them for the last 20 years. If you look at the corporate history of, say, Qualcomm, they're a fantastically innovative company; they make the majority of profits from their patent licensing.
What has changed, then?
All of a sudden, instead of Qualcomm (QCOMM) and Nokia (NOK) in a tiff, it's Apple and Microsoft being very active. So that's a set of companies you don't think of as wireless companies that have suddenly gotten very active. I don't think you'd find any significant name in wireless that is not both collecting [patents] and paying [licensing fees] simultaneously. And as far as I can tell, this will go on forever in wireless.
Might companies come to some sort of agreement, to stop suing each other?
I doubt it. Take this Nortel thing [Apple (AAPL) and RIM's (RIMM) purchase of Nortel's 4G, LTE, and wireless patents]. It's mostly about 4G patents. Guess what, there's going to be a 5G.
Microsoft (MSFT), Apple and Google (GOOG) have all rushed in, with varying degrees of success and varying business models. Part of Google's business model is to make Android available free in order to get a preferred position on the maps and local mobile advertising features. Apple has a different strategy.
For the next round of patent lawsuits, companies that have a software-centric value to add will be the biggest players.
How does all this affect the consumer?
In the long run, the idea that companies can invest in any technology and see the benefits of that technology is very positive for everyone. Not just by buying patents. If you told Apple, "Look, do all the cool R&D that you want, but the other companies will copy it tomorrow," would Apple be in the business? I think the answer is no. They are in business because they think that when they come up with a wicked cool feature in iPhone 10, their shareholders will get the profit. In Google's case, Google wants to have a monopoly link back to its Google maps.
The competition in this clash of the titans gives us all very cool features. But there have to be some rules of the road, because if a company innovates and makes new inventions, and the rest of the world can copy them freely, I don't think that's fair.
So, when does a company like yours "cash out," so to speak?
Well. I love the idea that patents are more valuable than before. The world is recognizing their inherent value. What's interesting about our portfolio is we're very strong in UI and software, and we have a whole bunch of radio patents, so with respect to cellular, we're in a good position.
How does Intellectual Ventures seek out and select patents to buy?
You need to make sure that the patent is relevant. The hit-range on inventions is not high. A lot of inventions were a good idea at the time, but as the path of mainstream technology went forward, it goes in a different direction. So of course we look to see if it's relevant, is it being used now. We often buy patents that are not used now, but will be used in the future. Plus, of course, the guy who is selling the patent has every incentive in the world to point it out to me. That's no different than a real estate developer buying land in a part of town that looks like it's booming or might be booming soon.
Is it correct that lawsuits from NPEs like Intellectual Ventures are now less damaging than they were in the past?
They never were damaging. The idea that they were damaging came from companies that said, "Hey, we stole that technology fair and square, how dare the inventor ask for money because we're using it!"
The competitor stakes are higher. Apple is trying to completely force people out of the market. Which is absolutely their right—there's nothing wrong with that—but if the guy that holds the patent comes to them, what he wants is usually a tiny fraction, whereas what Apple is asking for is 100%, you don't get to be in the business at all. There's a difference between someone asking to get paid some money to recompense their invention and someone who wants to put you 100% out of business.
Patents have the ability to level the playing field. And big companies don't like a level playing field; they want it to be as uneven as possible, in their favor. The patent system levels all of that.
But the patent system now has these companies in so much litigation that it's looking like a mess.
The reason it's a mess is that these companies did steal each other's ideas like crazy. I predicted this would become a major issue in 2000. I was ranting away like some crazy person, and now all of a sudden, in the last few months, it has come together. The reason I predicted it wasn't because I was some genius, it was because this was already happening in other markets.
These companies were not sophisticated about patents, and now they're scrambling.
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