InterDigital Inc (IDCC)

[Arazihk]

It doesn't have a sexy brand name, and its headquarters are far from Silicon Valley. But InterDigital Inc. might be a winner in the cellular-telephone industry's move to multimedia phones.

The King of Prussia, Pa., company owns an array of patents on wireless technology that it contends are essential to making the high-speed-data phones that let people watch videos and surf the Web. Among companies to license its patents are iPhone maker Apple Inc. and BlackBerry maker Research In Motion Ltd. But industry giants Nokia Corp. and Samsung Electronics Co. have resisted.

From this month through November, the U.S. International Trade Commission is set to issue a series of opinions and rulings on whether Nokia and Samsung have infringed InterDigital's patents. If InterDigital wins -- and a court decision in the United Kingdom augurs in its favor -- Nokia and Samsung would come under new pressure to sign licensing deals.

Fees from those deals might double InterDigital's revenue over the next few years.

And that would likely give a jumpstart to its stock price, which lately has languished near its 52-week low of $16.47. The shares fell 18 cents, or 1.1%, to $16.96 on Nasdaq yesterday.

Some on Wall Street are betting InterDigital will win. Glenmede Investment Management LP, which has owned InterDigital stock since 2003, doubled its holdings this past fall.

"People want to be able to watch videos and do teleconferencing from their cellphones and [Samsung and Nokia] would only be putting themselves at a disadvantage if they didn't ultimately settle," said Chris Colarik, portfolio manager at Glenmede, which held 124,000 shares at the end of December.

The dispute is the latest in a series of wireless-patent lawsuits in recent years, with little-known patent holders frequently prevailing against larger makers. NTP Inc., for instance, won a $612 million settlement from Research In Motion in 2006, while chip maker Qualcomm Inc. last year lost a case before the ITC involving Broadcom Corp. Qualcomm is fighting the case, though some U.S. carriers that use Qualcomm chips have agreed to pay royalties to patent-holder Broadcom.

InterDigital's case comes as multimedia phones have become the fastest-growing segment of the $150 billion cellphone market. About 10% of the 1.1 billion cellphones sold world-wide last year were 3G, the technology that powers multimedia or "smart phones."

The market is expected to more than double to 240 million units this year, research firm Strategy Analytics estimates.

Nokia and Samsung accounted for about half the cellphones sold last year, including half of the 3G phones. Both hope to expand in the U.S., where leader Motorola Inc.'s market share is eroding. The patent dispute with InterDigital might hinder those hopes. The ITC can ban imports of handsets containing infringing technology, as it did last year to phones using Qualcomm chips. An adverse ruling from the ITC would likely force Samsung and Nokia to negotiate licensing deals with InterDigital.

Nokia asked a federal court in New York last month to prevent InterDigital from proceeding with its claim at the ITC and to require arbitration or decide the dispute itself. The ITC hasn't altered its schedule.

A United Kingdom court decision in December bodes well for InterDigital's case against Nokia. The Finnish phone behemoth had sued InterDigital in the English High Court of Justice, asking a judge to rule that a group of InterDigital's patents wasn't essential to the European 3G standard. Instead, the judge ruled that one was essential, and Nokia withdrew its challenge to another. Because the ITC is reviewing the patents InterDigital selected and considers the strongest, InterDigital is expected to have a greater chance of winning.

A Nokia spokeswoman said the U.K. decision "establishes that most of the patents that Nokia challenged were found not to be essential."

But even one essential patent can be valuable. In the case of Broadcom, a U.S. district judge in Santa Ana, Calif., ordered Qualcomm to pay a royalty rate of 6% of its per-phone revenue for the use of one patent, and 4.5% for a second. The ITC is considering five InterDigital patents in its case against Samsung and four in the case against Nokia.

Based partly on the London decision, Tom Carpenter, a telecom analyst at Hilliard Lyons in Louisville, Ky., in January raised his rating on InterDigital to "buy." He said he believes the ITC's early rulings will be in InterDigital's favor and pressure Nokia and Samsung to negotiate.

While InterDigital never became a player in telecommunications equipment, its patent portfolio has generated $1.5 billion in licensing fees since 2000. Much of that was for patents for roaming and other technologies used in basic digital cellphones.

Nokia and Samsung have for years fought InterDigital in court over an earlier technology known as 2G. InterDigital won a $253 million payment from Nokia in 2006 and forced Samsung to post a $167 million bond in December, pending appeal of an arbitration.

If InterDigital wins the 3G case at the ITC, it could earn licensing fees of $1 or more per phone, bringing in $1 billion over the next five years.

Still, there is a big risk. If InterDigital loses at the ITC, its stock could fall another $5 or $10, Hilliard's Mr. Carpenter estimates, as its long-term royalty prospects decline.



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