The Race to Build a Better Business Class

Six feet six inches long and almost two feet wide, the V concept is the German carrier’s latest weapon in the fierce competition among global airlines. It is designed to withstand shocks 16 times the force of gravity and comes with a cozy padded footrest. It is a new business-class seat, and if you are traveling round trip from Frankfurt to New York, it can be yours for about $5,000.

“Business class is where competition really is serious,” says Björn Bosler, the airline’s manager for passenger experience design, business and premium, who led Lufthansa’s team of dozens of seat designers and engineers. Bob Lange, senior vice president, head of market and product strategy at Airbus, the European plane maker, agrees: “There’s an arms race going on among carriers.”

Billions are being spent on research and development, architects, industrial designers and even yacht designers to pack seats with engineering innovations and fancy features. Just fabricating a single business-class seat can cost up to $80,000; custom-made first-class models run $250,000 to $500,000.

Those who fly coach may have had a glimpse of these expenditures as they shuffled past the elaborate reclining, angled, semiprivate accommodations in business and first class on their way to the knee-scraping spaces and overstuffed overhead compartments in the main cabin. Travelers in business and first class may represent 10 to 15 percent of long-haul seats globally, but they account for up to half of the revenue of airlines like Lufthansa or British Airways, says Samuel Engel, a vice president at ICF SH&E, an aviation consulting firm. Carriers vying for the attention of these passengers, who have money or corporate accounts that pay for their travel, are counting on good design to escape the grinding commodity nature of their business.

But there is only so much space inside a plane. As the more lucrative seats expand, the coach section often contracts, with more seats jammed into the same cabin space and more discomfort for coach passengers.

“The seat is one of the few elements that an airline can actually make its own,” says Patricia Bastard, an architect and designer who has worked with Air France on its first-class cabin. “There are very few elements like it inside an airplane. There’s customer service, of course. Maybe there’s a bar. But seats are unique to the airline. Seats are critical.”

Lufthansa, Europe’s largest airline and the world’s fourth largest in terms of passengers, is investing $4 billion to improve its cabins, offer satellite-based Internet and upgrade its onboard entertainment system. But the new business-class seat, which first appeared last year on the company’s new Boeing 747-8 planes, is perhaps the boldest attempt to lure the high-value passenger. The seat research, design, manufacture and installation accounts for roughly a third of that $4 billion investment, says Mr. Bosler — more than a billion dollars. Eleven planes are now outfitted with the new seats, and Lufthansa is expected to install about 7,000 of them on 100 wide-body airplanes by 2015.

Lufthansa’s task — like that of all the big airlines — was to create a special environment for those big-spending travelers within the inflexible boundaries of an aircraft fuselage.

“The challenge was finding a solution that provides all customer benefits but also tries to save as much space as possible and get as many passengers on board as possible,” Mr. Bosler says. “There’s only one way for Lufthansa to make money. It’s with passengers on board.”

THE first airplane business-class sections date to the 1970s, when the seats were like oversize, padded armchairs that could recline about 40 degrees. More comfortable seats for frequent business travelers came with the arrival in the 1990s of planes that could fly nonstop almost anywhere in the world. This new generation of ultralong-range airplanes that could fly for 10 to 14 hours — like the Boeing 777 — meant passengers wanted to be able to get real sleep, not just a fitful, head-snapping catnap.

Airport Exposes Class Divisions in Silicon Valley

Google, which is responsible for many of the jets that will use the new $82 million center, is helping bring badly needed cash to Mineta San Jose International Airport, just as the tech industry is creating jobs and wealth in Silicon Valley. But the tech boom is also sharpening income inequality and fueling a housing boom that is squeezing families out of many Silicon Valley communities.

Whether it is the possibility of private jets’ disturbing the sleep of San Jose homeowners, or the transformation of Palo Alto’s last mobile home park into luxury apartments, local developments throughout Silicon Valley highlight how the tech boom is leaving many behind. Local officials worry about the trend, which experts say will only accelerate, and its effects on the valley’s work force and diversity.

“We’re very focused on being a progressive and fair community in terms of those issues,” Gregory Scharff, mayor of Palo Alto, said of efforts to provide affordable housing while recognizing the “national treasure” that is Silicon Valley. “We actually innovate and create huge wealth for the United States. If you look at the companies that have just come out of Palo Alto, I would make you a bet that it would be one of the largest G.N.P.’s — it could be a country.”

In the past, the tech industry created middle-class jobs and lifted the overall economy of Silicon Valley. But as tech companies have shifted manufacturing and midlevel jobs overseas over the years, highly paid workers have increasingly clustered here. Per-capita incomes have been rising even as median incomes have decreased for five years in a row, according to Joint Venture Silicon Valley, a private organization that co-publishes an annual report on the region.

“We’re getting more high earners, and they’re skewing the averages completely off,” said Russell Hancock, chief executive of Joint Venture. “We are becoming a community where our teachers, our police, our firefighters, our nurses, they can’t live with us. They have to come in from other places. Healthy communities have all these people living together.”

Sales figures for single-family homes in Santa Clara and San Mateo, the two main counties in Silicon Valley, show median prices have risen about 30 percent in the past year while the inventory of available homes has fallen by roughly half, according to an analysis of local multiple listing service data by the Silicon Valley Association of Realtors. The median prices for March — $735,000 in Santa Clara and $925,000 in San Mateo — only hint at the current market’s frenzy.

Each property now typically attracts between 10 and 30 offers, eventually selling from 5 percent to 25 percent above the asking price, said Moise Nahouraii, the owner of Referral Realty in Cupertino. Jeff Barnett, a former president of the association and a regional vice president at Alain Pinel Realtors, said 30 percent to 40 percent of sales were paid in cash.

“Last year, the market came up,” Mr. Barnett said. “This year, it’s on fire; it’s just unreal.”

In Palo Alto, one of the hottest markets, the longtime owner of the Buena Vista Mobile Home Park has moved to sell the property to a developer planning to build a complex with amenities that include a pool, a spa, a business center, a chef’s demonstration kitchen and a pet grooming station. A local ordinance would guarantee the park’s 400 residents — more than a quarter of whom are children and 85 percent are Hispanic — some compensation and possible relocation within Palo Alto.

But the Law Foundation of Silicon Valley, a private group that provides free legal services on housing and other issues, is pressing the city to reject the conversion. With the waiting lists for affordable housing getting longer by the day, the group argues, the park’s residents will be forced to leave Palo Alto, away from jobs and schools.

One resident, Mary Kear, 55, grew up in Mountain View, where her father owned a hardware store and was a farmer, and where Google has its headquarters. Ms. Kear, who worked in sales for more than three decades and is now a part-time school custodian, said she had to move a dozen times over the years because of rising rents, eventually gravitating to the park eight years ago. She hoped the city would reject the conversion.

“But I’m also going to try to talk to the guy at Facebook,” she said in the living room of her tidy two-room trailer, adding that she had read that the company’s chief executive, Mark Zuckerberg, had recently established a political action committee for immigration reform. “He’s trying to help immigrants, and immigrants are here.”

DealBook: With Smartphone Deals, Patents Become a New Asset Class

Daniel Borris for The New York TimesTRADING IDEAS Steven Steger, left, and David Berten, co-founders of Global IP Law Group, a firm specializing in patent legal and advisory work. It can be hard to keep up with the pace of change in the industry: “In patent law, you’re at the cutting edge of everything, and that’s shifting all the time,” Mr. Berten said.

David Berten has spent his legal career as a mercenary student of technological change. He has educated himself in one field after another: chemical coatings, genetics, navigation systems, semiconductors and digital communications software.

Keeping up is a constant challenge. This month, the 48-year-old lawyer was in his Chicago office, discussing past cases while scanning news Web sites and technology blogs for details on Apple’s iPhone 5, which was being introduced in San Francisco that day.

“We have to know what’s in it,” Mr. Berten said. “In patent law, you’re at the cutting edge of everything, and that’s shifting all the time.”

His firm, the Global IP Law Group, is a sign of the fast-emerging patent marketplace. Global IP, founded in 2009, is one of several boutique firms specializing in patent legal and advisory work that have cropped up recently. Silicon Valley is home to a cluster of them, including Inflexion Point Strategy, Epicenter IP Group and 3LP Advisors.

Though created by lawyers, these companies are hybrids: more merchant banks than law firms. They have legal expertise, but focus on valuing and selling patents and giving strategic advice.

Global IP made its name as an adviser to Nortel Networks, a bankrupt Canadian telecommunications maker that sold its 6,000 patents for $4.5 billion to a group of six companies led by Apple.

The high price paid for the Nortel portfolio set off a bull market in patents that can claim some snippet of smartphone technology. By one estimate, as many as 250,000 patents may touch a modern smartphone. So patents have become defensive and offensive weapons in the smartphone wars, with the major companies suing one another in courtrooms around the world.

A few months after the sale, the big loser in the Nortel auction made its move. Google agreed to buy Motorola Mobility for $12.5 billion, and about $5.5 billion of that was the value of Motorola’s patents, Google said in a government filing this year. Smartphones made by Samsung and other companies are powered by Google’s Android software, making Google and Apple archrivals in smartphone technology.

The smartphone patent megadeals may be over now that the two main adversaries have armed themselves. An attempt by the bankrupt Eastman Kodak to sell 1,000 digital imaging patents stumbled recently, as bids from potential buyers like Apple and Google came in far below the $2.2 billion to $2.6 billion Kodak had said the patents were worth.

But the huge deals, while exceptional, were made possible by a broader trend: patents have become a new asset class.

Traditionally, patents sat on corporate shelves and were occasionally used as bargaining chips in cross-licensing deals with competitors. But that began to change in the 1990s, when technology companies like Texas Instruments and I.B.M. started to regard their patent portfolios as sources of revenue, licensing their intellectual property for fees.

Today, companies routinely buy and sell patents, mostly in deals that draw little attention, for millions of dollars instead of billions. The question, experts say, is how big the market will become.

“Patents are a tricky asset to trade,” said Josh Lerner, an economist at the Harvard Business School. “But there is clearly a huge amount of value in intellectual property. And I think what we’re seeing is the beginning of a lot more monetization and trading of intellectual property rights.”

A sizable specialist industry has developed to build the marketplace for trading ideas. The players include patent aggregators like Intellectual Ventures and RPX, patent brokers like Ocean Tomo and ICAP, hedge funds, investment banks and law firms.

Yet boutique firms like Global IP play an important role, offering specialized expertise and an entrepreneurial approach. “We take patents and try to make money from them in all ways known to man — sales, licensing and litigating, if necessary,” Mr. Berten said.

Global IP opened in 2009 with two lawyers, Mr. Berten and Steven Steger. The firm now has 10 lawyers. About two-thirds of its business is selling patents, and it is working on more than two dozen portfolios. Most work is done on a contingency basis, with a sliding scale of fees that can reach 40 percent on projects that involve litigation, Mr. Steger said.

In the Nortel project, Mr. Berten and his team built a vast database of the Nortel patents, tracking the history of each through the government patent office, citations in other patent applications, uses in license agreements and filings in other countries. “It was a boatload of work,” said George Riedel, former chief strategy officer at Nortel.

Mr. Berten and Mr. Riedel, along with Nortel’s bankers from Lazard, made presentations to companies in Silicon Valley and Europe. Mr. Riedel said Mr. Berten showed an impressive grasp of detail, down to individual patents and claims, when challenged by lawyers at the major technology companies.

His job, Mr. Berten said, was to “identify the value of patents and then demonstrate that value to potential buyers.”

The auction was run by Nortel’s bankruptcy lawyers at Cleary Gottlieb Steen & Hamilton. The winning bid of $4.5 billion was well above the $2 billion to $3 billion projected. “Sure, I was surprised,” Mr. Riedel said. “We were fortunate to be in the midst of an ecosystem battle in smartphones.”

In the Kodak bankruptcy, Global IP was brought on in a very different role: as an outside adviser to the unsecured creditors, including Wal-Mart Stores and Sony Pictures Entertainment. Its job was to determine if the proposed auction was undervaluing the patents, and to advise the creditors if they might be better off taking another approach, like licensing the patents.

The very different experiences of Nortel and Kodak point to the many factors that go into pricing patents. Timing, competitive forces, regulation and court rulings all have an effect, said Ronald S. Laurie, managing director of Inflexion Point Strategy.

“Patents are a volatile, spot market,” he said. “This is a market, but a market that is more like art than stocks or oil.”

Ron Epstein, chief executive of Epicenter IP Group, agreed that pricing patents, especially large portfolios, was difficult. But he said he thought corporate trading in patents would become more commonplace, and pricing more routine. Someday, he predicted, patent acquisition costs may be a standard line item in corporate earnings statements.

“By fits and starts, we are moving to a more efficient marketplace for innovation,” Mr. Epstein said.

Calling patents an asset class is shortsighted, said Kevin Rivette, a founder of 3LP Advisors. The larger value of a portfolio, he said, can be as a strategic tool to negotiate lower costs from a supplier or to alter a rival’s product plans.

“You can use patents to change the competitive landscape,” he said.