Nortel's patents are wildcard in Friday auction
Posted on July 23, 2009 at 1:06 PM
Filed under: Acquisitions | Corporate Strategy | Divesting and Restructuring
Tagged: Ericsson , InterDigital , Nokia Siemens Networks , nortel networks , Qualcomm , Research in Motion
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On the eve of a heated auction for the wireless infrastructure assets of bankrupt telecom equipment maker Nortel Networks Corp. -- scheduled for Friday -- the company's portfolio of wireless communications patents looks like something of a wildcard.
Given the way that licensing negotiations in this huge, patent-intensive industry can resemble a high-stakes poker game, maybe that's not so surprising.
There are three bidders for the assets: Nokia Siemens Networks BV, financial player MatlinPatterson Global Advisers LLC and (as of Thursday morning) Ericsson AB. A fourth, BlackBerry maker Research In Motion Ltd. (NYSE:RIM), has expressed interest but complained about the limits Nortel is placing on it.
Let's consider the state of play, drawing on The Deal Pipeline (subscription required) and other sources:
On June 22, Nortel accepted a $650 million stalking-horse bid for its wireless infrastructure business from Nokia Siemens. That bid did not include Nortel's portfolio of so-called LTE patents, which any equipment maker wishing to implement the wireless industry's long-term-evolution standard will need to license.
Soon thereafter J.P. Morgan Chase & Co. (NYSE:JPM) analyst Ehud Gelblum published a report that tried to get a bead on the potential value of those LTE patents, picked up in Light Reading, among other places. Based on Nortel's estimate that the patents could command a 1% royalty on every relevant LTE device sale in the years to come, Gelblum reckoned that the patents could be worth over $2.9 billion. He added, however, that a more realistic projection was that the patents could bring in $950 million in royalties over a 15-year period.
News reports, most of which cited the $2.9 billion number, welcomed the explanation of why Nortel (and its creditors) would want to sell the patents separately. What they glossed over -- and what conversations with some intellectual property professionals help bring into focus -- is the multidimensional problem of valuing these patents.
The challenge starts with the fact that to a large extent we're talking about royalties on sales of products that don't exist yet. As Raymond Van Dyke, a partner at IP law boutique Merchant & Gould in Alexandria, Va., points out, a wide array of consumer electronic products may go wireless under the LTE standard.
A more fundamental point is made by Lewis Zaretski of ThinkFire Services USA Ltd. in Warren, N.J. Zaretski, who advises large tech companies and investors on IP matters, explains that the value of Nortel's LTE patents, and the way that value is realized, depends very much on who owns them.
Indeed, that's the key to understanding the $1.1 billion that RIM says it would like to offer for Nortel's wireless infrastructure assets. It's highly unlikely that the maker of BlackBerry handsets really wants to plunge into the very different (and very challenging) infrastructure business. What it does need are the patents, which would enable it to participate in the LTE standard on a more equal footing with the likes of, say, Nokia Corp. (NYSE:NOK) and Qualcomm Inc. (NASDAQ:QCOM), who, unlike RIM, do have arsenals of LTE patents.
Making products that meet the LTE standard will require access to hundreds of patents, and no one company controls them all. Companies with a war chest of patents have something to trade in cross-licensing deals and can avoid paying royalties or at least minimize them. But once you have enough patents to deal from a position of strength, says Zaretski, there's no point in spending money to acquire more.
Thus, Nokia Siemens and presumably Ericsson (which bid $730 million for the Nortel assets) don't find it worthwhile to pay more and get the patents. Where MatlinPatterson stands is less clear. It bid $725 million and wants to keep Nortel intact.
At any rate there appears to be a good chance that the Nortel LTE patent portfolio will, indeed, be sold separately. In that case, who (besides RIM) might want it? Zaretski says there are many companies who might benefit. One rough and ready way to get a sense of them is to look at the Web site of the European Telecommunication Standards Institute, which offers a window on how collaboration and competition combine to shape the industry.
Companies patenting inventions they've made to implement elements of the standard are required to tell their counterparts about them. Zaretski cautions that there's a big motivation for companies to overdeclare, so the numbers must be taken with several grains of salt. But the list of 21 companies who have made LTE declarations does give a sense of who is present in the space and who (because they're absent, but active in wireless) might be interested in Nortel's portfolio.
Most of the names you'd expect (for example, China's Huawei Technologies, No. 3 with 147 patents) are on the list. Nortel declares 45 LTE patents, while Nokia Siemens weighs in with 31.
As for intriguing absences, one of them is RIM. Another is Apple Inc. (NASDAQ:AAPL), maker of the iPhone. A third is a lesser-known company that Van Dyke says he's heard mentioned as another potential buyer of the patents: Taiwanese handset maker HTC Corp.
If any of these companies were interested, it would be for cross-licensing purposes. But there are firms out there who mainly live on licensing income, and who might be interested in the patents for the royalties they could generate. The one to watch here is InterDigital Inc. (NASDAQ:IDCC), also mentioned by Van Dyke as a possible buyer. As it happens, InterDigital tops the ETSI list of LTE patent declarations, with 249.
As Qualcomm showed in CDMA technology, if you have a commanding patent portfolio, you can make everyone pay you much richer royalties. Could InterDigital (or for that matter Qualcomm, number two on the ETSI list with 187) aspire to such a position in the LTE world?
InterDigital spokesman Jack Indekeu says he thinks not. In today's world, he says, wireless patents are spread out among many more companies. As for whether InterDigital is interested in bidding on the Nortel patents, he says the company doesn't comment on possible deals. - Kenneth Klee
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