Analysis of IDCC’s Licenses (revised)
I noticed discussions last week regarding some of IDCC's specific licensees. Therefore I thought I should revise and repost a previous document dealing with all of IDCC's existing licenses. I did add Tantivy and Hop-On, and made significant changes to Samsung. The rest of the revisions were fairly minor.
The IDCC licensee page is confusing and may be somewhat misleading. A person who sees the licensee page, without any qualifying type of language, would reasonably think that all the listed licensees are paying IDCC royalty on an ongoing basis. Most companies’ royalty-bearing contracts are structured with ongoing royalty payments as long as the patented products are being made and sold by the licensee. However, that reasonable assumption is certainly not correct in IDCC’s case. What is true is that each of the listed licensees have paid IDCC some royalty in the past for rights to our IPR. However, who has to pay ongoing/recurring royalty, who has paid-up provisions, and who has upfront advances, which will require future payment when the upfront amounts are used-up, is not clear at all.
There was a question raised as to why Siemens was listed as a WCDMA and CDMA2000 licensee, when we keep saying that Siemens needs an updated 3G license. That same question could be asked about Qcom. Let me try answer that question first before addressing other licensees. Both Siemens and Qcom have paid-up rights to certain of IDCC’s patents, which apply to both WCDMA and CDMA2000. Since they have previously “paid” for certain patents that apply to these standards, they are listed as licensees for these standards. However IDCC does not believe that Siemens or Q can manufacture fully standard–compliant 3G handsets and infrastructure without an updated license. From the latest 10K, “Based on these limitations, the Siemens and the Qualcomm agreements do not provide a license under all the ITC patents which we believe to be essential to 3G”.
The 10Ks only mention Siemens, Qcom, Nokia, and now NEC as companies with paid-up provisions. A brief recap and analysis of these licenses as follows:
1. Siemens paid IDCC $20m over several years, cross-licensed some of their patents to us, and obtained paid-up rights on both TDMA/GSM and CDMA on all of IDCC’s issued or pending patents as of December 1999. Siemens was the first member of the BCDMA alliance in 1995 and they subsequently withdrew from this alliance in early 1999. As part of the withdrawal terms, Siemens is paid-up for 2G GSM/GPRS. However, IDCC believes that Siemens will need an updated royalty-bearing license for the 3G standards. Hopefully the European commercial launch of WCDMA networks, and/or our chip development efforts with Infineon, will cause Siemens to update their license with us.
2. Qcom paid $5.5m in 1994 and obtained paid-up rights to pre-March 1995 CDMA patents, which include narrowband as well as some wideband IPR. Since Q no longer manufactures infrastructure or handsets, it is very doubtful that they will pay any more royalty or license fees to IDCC. The only product that Q currently manufacturers is chips. Since IDCC follows standard industry practice by not licensing at the chip level, I don’t think Q will need to update their license with IDCC. Q would only need to update with IDCC, if they began making handsets and infrastructure again IMO.
3. Nokia's $31.5m gave them paid-up rights to virtually all of IDCC's patents through 2001. Nokia is no longer paid-up as of Jan. 1, 2002, except for certain TDD technology. The $58m of engineering service revenues will give Nokia virtually paid-up rights in our 3G TDD IPR. Nokia needs to agree to a royalty rate, but the royalty calculation will go back to Jan.1 '02 whenever a rate gets finalized. When finalized, the royalty should apply to both 2G and 3G handsets and infrastructure. Nokia sold 152 million handsets in 2002. Nokia’s revenue from networks and infrastructure was 28% of its revenue from handsets in 2002.
4. NEC is now paid-up for 2G PDC and PHS. They are also paid-up on a practical basis for other 2G TDMA-based standards, at least for the time being. NEC paid $27m in 1995 and will pay another $53m settlement for a total of $80m for IDCC’s 2G technology. There is an event, which could happen in the future, that might make NEC obligated for royalty payments on the other 2G TDMA-based standards. Pure speculation has this future event possibly being a Motorola license, whereby Motorola also pays for the TDMA-based 2G standards. NEC also made an upfront advance payment of $19.5m in 2002 for 3G handsets and infrastructure, as well as for narrowband CDMA (CDMAOne and CDMA2000) products.
As of 9/30/02, NEC had used-up over $16m of the upfront advance. I would expect that the remainder of the advance might have gotten used-up during the fourth quarter. Therefore, NEC needs to pay another 3G upfront advance, or pay ongoing 3G recurring royalty on a quarterly basis. The $53m settlement is to be received in four installments of $13m each over a two year period. The first settlement installment was received in April '02, and the second installment due in the fourth quarter was delayed and actually received in January '03. However, the $53m settlement is being recorded as earned royalty revenue over a four-year period at the rate of $3.3m per quarter.
IDCC’s 10Ks and 10Qs are silent as to other licensees, who may have paid-up provisions. This also bothers me. Since paid-up provisions are very material to future earnings and cash flows, I think IDCC needs to disclose all the other 2G paid-up provisions also. I have been trying to research this area to get a better idea of IDCC’s earned royalties on an ongoing basis. The following is other licensees who I think may have some type of 2G paid-up provisions and my opinion as to what the provisions entail.
5. Matsushita first paid $20m in 1994. That license gave Matsushita paid-up rights for PDC/PHS handsets sold in Japan. 2G TDMA-based products sold outside of Japan are royalty bearing. Matsushita updated to a 3G “infringement” license in 2001 with an upfront non-refundable advance of $19.5m. However, IDCC is required to get some key 3G CDMA patents actually issued by the JPO before IDCC can earn any of the 3G advance on Matsushita’s 3G infrastructure and handset sales in Japan. The 3G contract will apply to all worldwide sales including Japan, but Matsushita is still considered paid-up for sales of 2G PDC/PHS products within Japan. I think that if Matsushita sells a dual-mode PDC/3G product in Japan, then IDCC would earn royalty only on the 3G part of the product, but I don’t know how the price can be separated between the two modes?
Matsushita has plans to begin selling 2.5G GPRS i-mode enabled handsets in Europe. These handsets should be royalty-bearing to IDCC. Matsushita is also planning to sell 3G infrastructure and handsets around the world, including China and Europe. These 3G products sold outside Japan should immediately bear royalty to IDCC. When the key 3G CDMA patents get issued in Japan, then IDCC should earn royalty from Matsushita on all 3G products sold in Japan also. It is unclear at this point whether the earned royalty for the 3G products sold in Japan would retroact back to the beginning date of Matsushita’s 3G license in April ’01, when these key 3G patents finally get issued in Japan. Or would the earned royalty begin from the point of patent issuances in Japan and only go forward?
6. Kyocera paid $27m in 1998. They received a paid-up license for PDC/PHS handsets sold in Japan, but the license was royalty-bearing for 2G TDMA-based standards sold outside Japan. Kyocera quit making TDMA-based handsets, although they still make PDC/PHS handsets for the Japanese market. They concentrated on narrowband CDMA handsets instead. Kyocera’s current license with IDCC does not include narrowband CDMA products. IDCC recorded $6m of the prepaid advance still remaining for the TDMA-based standards in the second quarter of this year, because Kyocera no longer makes products to these standards. I believe Kyocera’s prepaid advance in now all used-up.
7. Toshiba paid $15m in 1998. Toshiba got a paid-up license for PDC/PHS in Japan, but the license was royalty-bearing for 2G TDMA-based standards sold outside Japan. Toshiba’s license did not include narrowband CDMA, which they have subsequently focused upon. Therefore as of the middle of last year, Toshiba still had some prepaid advance remaining. However, Toshiba is now selling 3G products inside and outside of Japan, but has not updated their license with IDCC yet.
8. Sanyo made a $3 and a half million payment in 1995 for a royalty bearing license on all 2G TDMA-based standards, including PDC/PHS. Later Sanyo, Denso, and Hitachi/Kokusai made $35m of total payments in the fourth quarter of 1998. Denso was a new licensee, but Sanyo and Hitachi/Kokusai were revising their licenses with IDCC. Sanyo’s part of this total can not be determined exactly from the 10Q information. However based upon an analyst update, it appears that Denso’s part of the $35m total was $20m. Therefore, Sanyo and Hitachi/Kokusai’s portion appears to be $15m. Since the 1995 payment of $7m in total included $3 and a half million each from Sanyo and Hitachi/Kokusai, I will assume that this $15m remainder from 1998 was also an equal amount between Sanyo and Hitachi at $7.5m each. Therefore I estimate that Sanyo’s total royalty payment to IDCC from 1995 and the 1998 revision amounts to $11m.
I have heard that Sanyo was one of the licensees that had the “Japan Clause”, which gave the licensee paid-up rights for certain products sold within Japan. Although the original license had no paid-up provision, the revised contract may have given Sanyo paid-up rights for PDC/PHS handset sales in Japan. But at this point I don’t really know. Sanyo is currently selling 3G products inside and outside of Japan without an updated license from IDCC.
9. Hitachi and its subsidiary Kokusai paid $3 and a half million of royalty to IDCC in 1995 for 2G TDMA-based standards. Hitachi/Kokusai revised their agreement in the fourth quarter of 1998. Total royalty payments of $35m in the fourth quarter of 1998 also included Sanyo and Denso. I had previously estimated that Hitachi/Kokusai’s part was equal with Sanyo at an estimated amount of $7 and a half million. Therefore I estimate that Hitachi/Kokusai total royalty payment to IDCC from 1995 and the 1998 revision amounts to $11m. The additional 1998 royalty payment may have given Hitachi/Kokusai paid-up rights for PDC/PHS in Japan, but that is pure conjecture on my part. I have not heard that Hitachi had the “Japan Clause”. The 1998 additional payment could have also been an upfront advance, which will require future royalty payment when the advance is used-up. Hitachi has done well in 2G, especially in narrowband CDMA. However, Hitachi was not licensed for narrowband CDMA so that the royalty did not apply to those products. Hitachi is currently selling 3G products, but without an updated license from IDCC.
These are all of the other 2G licenses that may have paid-up provisions that I am now aware of. There may be others, I just don’t know at this point. The following is information and opinions regarding some of IDCC’s remaining Japanese licenses.
10. Sharp paid a relatively low upfront advance of $6m in 1998 and agreed to pay recurring royalty when the prepaid advance was used-up. Sharp has been our best source of ongoing recurring royalty. Sharp provided virtually all of IDCC’s $9.5m of recurring royalty in 1999, and about $18m and $16m of recurring royalty in 2000 and 2001 respectively. Sharp is doing extremely well thus far in 2002 with the advent of the very popular camera phones. I estimate that Sharp has already provided IDCC with between $12m to $14m of recurring royalty for the first six months of 2002.
Sharp updated to a 3G “convenience “license in 2001, which also includes narrowband CDMA products, with an upfront advance of $11m. Sharp’s current licenses now include all 2G and 3G standards and any/all products made to these standards. However, the 2G PDC/PHS standard for Sharp is set to expire in the middle of 2003. Some speculate that Sharp’s renegotiation of the 2G PDC/PHS standards might be awaiting an Ericy resolution or a ruling from the Japan High Court. However, the official word from IDCC was that they are confident of being able to successfully renegotiate the 2G PDC/PHS standards with Sharp before the original contract expiration on those standards.
11. Mitsubishi paid an upfront advance of $20m in 1995 covering all 2G TDMA-based standards. Although Mitsubishi has been and continues to be a significant manufacturer of handsets, apparently Mitsubishi received no paid-up provisions. That advance should be used-up by now, and thus Mitsubishi should be paying very significant recurring royalty IMO. They are not, and that causes me to speculate that we are probably in a royalty dispute with Mitsubishi. Also Mitsubishi is currently selling 3G products without an updated license from IDCC. If Mitsubishi is not resolved soon, I expect that they may be the next company that we arbitrate against.
12. Denso signed a royalty-bearing license in 1998 for the 2G TDMA-based standards. Denso, along with Hitachi/Kokusai and Sanyo, paid a total of $35m in royalty in the fourth quarter of 1998. Although I can not exactly determine the amount of their upfront advance royalty payment, it appears to be about $20m based upon a revised analyst report at that time. Denso did not receive any paid-up provisions that I can tell, and they still had some prepaid advance remaining as of the middle of last year. Not sure of their current status, but I don’t believe Denso is a significant handset manufacturer.
13. Japan Radio signed a worldwide royalty-bearing 2G TDMA–based license in 1999. They and another new licensee, Shintom, paid an upfront royalty advance of $3.4m in total. Japan Radio updated to a 3G license, which also included narrowband CDMA, in 2002 with an undisclosed modest upfront payment. However, I don’t believe that Japan Radio is a significant handset manufacturer yet.
Some information and opinions on some of IDCC’s remaining non-Japanese licenses as follows:
14. Samsung entered into the BCDMA alliance with IDCC in 1996, with a total payment of $35m. The license covered BCDMA products, and some of the royalty was an upfront advance on 2G TDMA-based standards. Samsung quit reporting their sales of TDMA-based products to us, and they still had $7m of prepaid advance remaining at the end of ’01. In February of ’02, IDCC entered into arbitration against Samsung, claiming that Samsung could possibly owe us over $100m royalty from unreported sales, if Samsung’s MFL provision did not apply to the Nokia contract. The arbitration did not encompass narrowband CDMA products, because Samsung was not licensed for these standards.
The arbitration panel ruled in Dec. ’02 that Samsung did have an MFL rights in their license to use Nokia’s P1 royalty rate. The arbitrators decided that Samsung owed a half million dollars more for the period through Dec. 31, 2001, which IDCC will record in the fourth quarter of ’02. That leaves Samsung with a prepaid balance of $6.5m beginning Jan. 1, 2002 that will apply to all 2G/2.5G TDMA-based standards, such as GSM/GPRS.
There is now a definite connection between a Nokia royalty rate and a Samsung royalty rate. The arbitration ruling also tied Samsung’s royalty rate to the yet to be determined Nokia P2 royalty rate, which is in turn is probably tied to the Ericy litigation. Both Nokia and Samsung are legally accruing royalty to IDCC as of Jan. 1, 2002 at a rate that will be determined in the future. When the royalty rate is finally determined the calculation of royalty due from both Nokia and Samsung will be calculated retroactively back from the beginning of 2002. Samsung is reported to have sold about 20 million GSM/GPRS handsets in 2002 to which the royalty to IDCC will apply.
15. Alcatel entered the BCDMA alliance in 1998 and paid $5m on an estimated $25m contract. They also withdrew from the alliance in early 1999, and have not paid any additional royalty to IDCC. Alcatel is only listed as a BCDMA licensee. Some think that Alcatel’s BCDMA contract could possibly extend into WCDMA, since many of the patents for BCDMA carry-forward into the WCDMA standards. Alcatel is now manufacturing WCDMA infrastructure without an updated license. However, I can’t get any information on the Alcatel contract and relationship. I don’t know if Alcatel legally owes us anymore from the original $25m estimated contract, and if the BCDMA contract extends to WCDMA.
16. Ubinetics was IDCC’s last new licensee in May 2000, and paid an undisclosed modest upfront advance on 2G TDMA-based standards. Ubinetics made a 2G attachment to the Palm products to which the IDCC royalty applied. Also Ubinetics entered into a contract with Microsoft in late 2001, which involved 2G products on which Ubinetics should owe us royalty. However, Ubinetics is a component supplier to Microsoft, but will not make the final end products. Therefore the royalty from Ubinetics would be based on the component supplied to Microsoft, and not to the higher-priced end product produced.
Ubinetics is currently involved in 3G protocol software products, 3G test equipment, and 3G consulting-type services. There is some doubt as to whether Ubinetics might need a 3G update with IDCC or not. Their 3G software products will probably not require royalty, and there is some doubt as to whether 3G “test” equipment will require royalty either. Part of Ubinetic’s 3G consulting services include advice on 3G patent holders, and how to negotiate and obtain 3G licenses. I’ve heard that Ubinetics still considers IDCC to have a strong patent portfolio in 3G WCDMA.
17. Tantivy signed a multi-faceted strategic agreement with IDCC in Nov. ‘02. First IDCC acquired exclusive rights to over 200 of Tantivy’s CDMA2000 patents, some of which are believed to be “essential” for the manufacture of CDMA2000 products. Secondly IDCC acquired non-exclusive rights to Tantivy’s smart antenna patents for the TDD standard. Third Tantivy signed a royalty-bearing 3G license with IDCC. The last area of the Tantivy agreement dealt with IDCC marketing and licensing Tantivy's technology and products in the Far East. Evidently IDCC will receive some type of fee for this service.
The Tantivy patents appear to establish some good synergy in possibly filling some of IDCC’s technology gaps. IDCC does claim some essential patents for CDMA2000, but this is probably our weakest 3G standard IPR-wise. Perhaps these essential CDMA2000 patents of Tantivy combined with IDCC's own essential CDMA2000 patents will be enough to get the major CDMA2000 producers to license with us. Anything that strengthens our position in CDMA2000 will be extremely beneficial to us, as this standard will achieve commercial mass before WCDMA and TD-SCDMA.
The second technology gap in IDCC's IPR that Tantivy patents may fill is in TD-SCDMA. This standard is now very much in play with the very recent spectrum allocation in China, which greatly encourages the deployment of the TD-SCDMA standard. IDCC has stated that 75 to 80 percent of our TDD IPR also applied to TD-SCDMA. One area that is critical for TD-SCDMA is smart antenna technology. IDCC has some IPR in smart antenna technology. However additional smart antenna IPR from Tantivy, should further enhance our already strong position for the TD-SCDMA standard.
It appears that IDCC obtained all these benefits by paying a very reasonable sum of 1 and a half million dollars, plus some future prorata sharing up to $24m on the exclusive rights to the CDMA2000 essential patents. But prorata sharing is only for any new IDCC licenses, which specifically include the Tantivy patents in the license agreement. We pay Tantivy more, only if their patents are providing additional licensing benefits to us. The Tantivy patents were instrumental in IDCC obtaining its next 3G license with Hop-On in December ’02.
18. Hop-On is a developer of disposable and fully recyclable inexpensive cell phones priced between $30 to $40. Hop-on licensed all standards except IS-95, CDMAOne, which is the only standard that they just started manufacturing handsets for. Hop-On does have plans for inexpensive disposable GSM/GPRS handsets in the near future and to enter foreign markets, especially China, South America, and India. IDCC will not receive any royalty revenue from Hop-On until they start manufacturing to other standards besides CDMAOne. Hop-On does have somewhat of a tainted reputation and image at the present time due to some past problems involving some of its officials.
19. Bosch entered into a 2G TDMA-based license in 1999 with an upfront royalty advance of $8m. However, Bosch was subsequently bought out by Motorola. No one is sure of the current status on this contract, and if Bosch’s contract carried over to Motorola or not.
20. ATT is listed as a licensee by paying IDCC between $2m to $3m in 1994. However, ATT spun off their equipment manufacturer operations into Lucent. Lucent did not honor the ATT contract with IDCC, nor did they license with us for 2G infrastructure. IDCC will receive no more royalty from ATT, unless they begin manufacturing wireless handsets or infrastructure again.
21. GM Hughes is listed only as a TDMA licensee for the IS-54/136 standards. In the early 1990’s, Hughes had entered into a supplier-type partnership with IDCC for the Ultraphone system. There was a disagreement and subsequent lawsuits were filed. The matter was settled. I think Hughes does pay IDCC a minor amount of recurring royalty for IS-54/136 products, but I am not sure.
I didn’t mention the following licensees: Oki Electric, Pacific Communications Sciences Inc (PCSI), Advanced Digital Technologies, Shintom, or Iwatsu, because I just didn’t know anything about them or their licenses with IDCC. I also didn’t mention the 3G chip license with Infineon in this particular document.
AI
