Count re Compelling Reasons to own IDCC
Last night I found and posted my latest version of the Compelling Reasons document, which was last updated on June 13, 2003. Within a couple of weeks after that last update, Nokia officially filed for arbitration on 2G royalties that IDCC claimed Nokia owed as a result of the Ericy settlement. BTW the Ericy settlement in the spring of 2003 for $31m after 10 years of litigation was for much, much less than most everyone anticipated. However, IDCC made the ultra low settlement amount much more palatable by putting out a press release claiming how much royalty both Nokia and Samsung owed IDCC as a result of the Ericy settlement.
I think that this IDCC press release may have started the “royalty war” between Nokia/Samsung and IDCC that is still raging today. Although the 2G royalty dispute with Nokia was resolved almost 3 years later at about half the amount initially claimed by IDCC (the arbitration board evidently gave Nokia a significantly lower royalty rate than Ericy due to factoring in substantial volume discounts for the differential between Nokia and Ericy 2G sales volumes). Of course, the Samsung 2G royalty dispute is still not resolved. However during this time frame, Nokia also began a war against IDCC on 3G, which is still ongoing.
I gave this historical background from the spring and summer of 2003, because this royalty war with Nokia/Samsung, who together have more than 50% of the handset market, caused me to quit updating my compelling reasons document. I have told some in private messages that I doubted that I would ever update this document again until the royalty issues are resolved with Nokia and Samsung, and they become licensed and paying ongoing royalties for 3G. I also refuse to make future royalty projections for IDCC until Nokia and Samsung are licensed for 3G, since they account for such a large portion of the handset market. BTW your simple projections for 2012 certainly appear reasonable and conservative, if IDCC can license Nokia and Samsung at a reasonable royalty rates for 3G.
But it appears that Nokia especially is attacking the 3G claims of IDCC in its attempt to drive down the 3G royalty rate. Nokia began claiming that IDCC greatly exaggerated its 3G position in its declarations of essential patents to ETSI and probably to the general marketplace as well, ie a Latham Act violation of false and misleading advertising. IDCC has thousands of issued and pending patents. IDCC claimed several hundred nonduplicated issued patents were possibly essential to the 3G standards in its ETSI declarations. I even asked IDCC after the Nokia 3G litigation began, how many patents did they truly believe were essential to 3G, and was told that they stood by their ETSI declarations.
However, the 3G UK litigation wound up with only 1 IDCC patent being declared essential by Judge Pumphrey, and possibly 1 more 3G UK essential patent by default, since Nokia did not challenge that particular 3G patent. In the US ITC litigation where IDCC had to indicate specifically which of its 3G patents were being infringed upon by Nokia and Samsung’s 3G handsets, they came up with a final total of 4 patents. These numbers are somewhat disappointing to me in relation to what had been indicated and declared to ETSI. The greater the number of essential and infringed patents, the greater the royalty rate should be and vice-versa. To me the unresolved issue is still all about royalty rates.
This continuing “royalty war” has caused me to lose a lot of my enthusiasm for IDCC as an investment, especially in the short-term. It has introduced a lot more risk and relative uncertainty into my analysis of IDCC. Do I believe that IDCC will ultimately license Nokia and Samsung for 3G? Yes I do, but I have no idea when and for how much. Because I am near retirement, my risk levels and time horizons have greatly diminished from what they once were. Also I no longer have the investment patience that I once did.
