Computer Automation disclosed details Thursday of a patent licensing plan that could allow the small Irvine computer company to reap millions of dollars of profits from sales of IBM personal computers and clones.
The announcement follows months of industry speculation that Computer Automation will profit handsomely from royalties paid by IBM and clone makers to license a patent covering technology used in IBM's new personal computer line, the Personal System/2.
Computer giant IBM licensed the patent from Computer Automation last April after discovering that technology developed for its PS/2 line was similar to a 14-year-old patent held by the Irvine firm. Computer Automation received a $100,000 royalty payment from IBM last year.
Computer Automation, which has been tight-lipped about the patent until now, said Thursday that it believes companies will have to obtain a license to produce legal copies of the PS/2 line or add-on boards for the IBM machines.
"We don't believe either class of potential licensees can produce PS/2 clones or Micro Channel-compatible memory boards without infringing our patent," said George Pratt, Computer Automation's chairman.
Micro Channel is IBM's trade name for a communications pathway inside some of its high-performance PS/2 models.
Shipments of IBM's PS/2 models are expected to be strong this year, and the first wave of clones is expected to hit the market by summer. Analysts believe that clone makers will have to pay Computer Automation royalties for each unit shipped, just as IBM will have to do.
Michael Murphy, editor of the California Technology Stock Letter, estimated that IBM will ship 3 million PS/2 machines in 1988, and clone makers will ship an additional 1 million units. He estimates that royalty payments could boost Computer Automation's pretax profits by $8.5 million to $12 million this year.
Murphy estimated that royalty payments will average between $8 to $10 for each clone machine. He said IBM's royalty fees are probably considerably lower.
A plan that Computer Automation announced Thursday includes significant financial incentives for manufacturers to sign license agreements before April 1. The company said it will require advance royalty payments of between $25,000 and $300,000 for licensees.
Murphy predicted that Computer Automation will sign several licensing deals within the next month because of the incentives.
Douglas F. Cutsforth, Computer Automation's president, wouldn't say Thursday when he expects the first license to be signed. Cutsforth would say only that the firm "has talked to a number of companies."
Those companies are believed to include AST Research of Irvine and Compaq Computer of Houston, two makers of IBM-compatible machines.
"People are already advertising (PS/2) add-on boards in the newspaper," said analyst Murphy. "There are already lots of people infringing the patent."
Analysts said it is possible clone makers could circumvent the patent by designing machines that duplicated functions of IBM's models without being exact replicas. But that would be a technical challenge for any company that tried.
"If it could be done easily, IBM would have done that," said Brian G. Swift, an analyst with Henry F. Swift & Co., a San Francisco investment firm. "IBM wouldn't have licensed the patent if it didn't think it had to."
The patented technology was developed by Computer Automation engineers in 1973. IBM researchers developed similar technology when designing the PS/2 line. IBM later learned of the Computer Automation patent and decided to cross-license the technology.
The patent covers a method by which a personal computer's memory can be expanded and devices such as printers can be added without disassembling the machine and installing a switch to ensure that all the parts work properly.
Computer Automation, a manufacturer of computers and automatic test equipment for electronic components, recorded net income of $1.42 million on revenues of $20.9 million in the fiscal year ended June 30, 1987.
Computer Automation's stock closed at $9, up 62.5 cents, in heavy trading on the over-the-counter market.