Could Vringo Be Apple's 'Thermonuclear' Option Against Google?
In my opinion, Vringo's (VRNG) turnaround story from ringtone to a probably-acquired short-lived merger company goes full steam ahead because of the Nokia (NOK) relationship, promise of future 3G patent litigation and the need for Apple (AAPL) to acquire stronger patent presence in the 3G and 4G space, due to the Samsung (SSNLF.PK) 4G lawsuit. If Google (GOOG) doesn't acquire Vringo in short order to preclude a trial, I think Apple does, but for a different end game. I think Apple's well-publicized patent meeting discussions with Google were in direct response to Samsung's case and Google's timeline with Vringo's lawsuit. I also think Vringo's purchase of the Nokia patents may have been a chess move envied by Bobby Fischer, who, if what I say plays out, has nothing on Vringo's management.
(To read some of the Vringo v. Google, et al case background of the Vringo case for newcomers, check out James Altucher's comments on Vringo here. Other discussions are here. And even more discussions about the patent war escalation can be found here.)
The question in the current timeline to be pondered is why did Google meet with Apple this past week? With the mysterious patent meeting between Apple and Google, I think Apple put Google on notice this week that it intends to approach Vringo and that if Google doesn't acquire Vringo, along with a "Why can't we all get along" doctrine in place against patent infringement suits between related parties (ie, Samsung), then Apple may go "thermonuclear," as Steve Jobs promised.
With an Apple acquisition of Vringo, Apple would be the claimant and, therefore, beneficiary behind the case against Google's core business model via Vringo. Even if Vringo/Apple doesn't prevail in court or even if the acquisition happens after an initial loss in court, Apple would ultimately be the client and the court room fodder of intellectual property I believe would be available and invaluable to Apple if in all out war against Google.
Remember, Steve Jobs wanted to go thermonuclear on Google since he viewed Android as a product stolen from Apple. Because of this, I found it peculiar that as Apple prevailed against Samsung that Apple and Google would meet this past week in patent discussions. Google and Apple are supposed to be enemies, which is now coming to a head due to their respective futures in the mobile market, but the old saying that "the enemy of my enemy is my friend" comes to mind. So if Apple and Google are meeting, who is the common enemy?
While Apple throws out welcomed product designs through a narrow channel, some could argue that its products are lacking in adequate patent support regarding the 3G and 4G space. And while Google may have friends in HTC, LG and Samsung's 3G and 4G patent space, Google, LG, HTC and Samsung may lack in product design originality, evidenced by Samsung's loss to Apple. But, again, who is the common enemy?
The announcement that Samsung is now suing Apple over 4G LTE patent infringement as the impetus for their meeting hit me: neither Apple or Google may not have appropriate patent protection for their most important products. They have common ground, but they also have certain roadblocks ahead where they may need each. In short, they are not controllers of their own destinies since they have the money but may lack the patents and relationships to get them there.
To answer the question, I think the common enemy is the lack of sufficient patent protection. I also think only Apple has this one perfect moment to get what it needs but will offer a truce for a co-existence of Google and Android in the process and let the market decide in the long-run.
The path to this truce, however, may have had to be disclosed in that meeting to prevent further unintended escalation of the patent war. Apple may have figured out the cure to both ills, but the path for Apple may be through Vringo as Apple seeks to get a seat closer to center stage in Apple's quest for patents. Center stage for Apple, I think, is Nokia and I am not the only one who thinks this.
But I haven't heard anyone speculate that Apple would want Vringo. And regarding Vringo, all the talk is about Google. For Apple, I think Nokia and Vringo go hand in hand. Here's why:
While Apple v. Samsung is a Goliath versus Goliath story, Vringo's case against Google is probably one of the largest David versus Goliath stories in recent history. But that suit just may be the side dish for Apple (for now): the real meal may be in what the Nokia patents mean for Apple's end game. Apple already went through its own Goliath v. Goliath story when it lost a patent infringement case with Nokia last year.
Remember, Apple lost to Nokia a 3G patent infringement case, had to pay a meager $500 million one-time, and has to pay royalties estimated by some sources to run upwards of $8 Billion over several years to Nokia, based on a certain amount per phone that is sold. An ironic twist to the recent win against Samsung is that Samsung may have infringed on Nokia's patents in the process of copying Apple's products. Future suit? Nokia is currently in a Windows software turnaround effort that is little more than a bug in Apple's ear for competition - for now.
This has destroyed Nokia's market cap to a paltry $11+ Billion - chump change to Apple's $623 Billion market cap. Nokia previously had the largest market share of cell phones in the world and suffered primarily due to the operating system choice. That is partially solved -- maybe. It depends on how well Microsoft's system is received. It took only a couple of years for Nokia's lead to change hands to Apple but the iPhone 5 is rumored to be Steve Job's last baby. Does Apple also want the R&D from Nokia?
Nokia's R&D is among the best in the world (except the Symbian software choice). Nokia has one of if not THE largest 4G LTE patent portfolios in the world. Their product development had a tablet design 10 years ago that simply lacked an adequate operating system. Their phones are works of art. Their software stunk. But almost ALL of it gets patented before production. Apple and others have a thing or two to learn about their process of getting so many patents and so much of this into production.
What gets used by competitors sometimes more than Nokia itself, sometimes turns into lawsuits: that is why Nokia turned some of the 3G rights over to Vringo -- Nokia has secured two very good legal teams with whom they have a track record in the patent infringement space. As the article explains, Nokia has substantial potential revenues off from Patent Infringement cases and royalties if handled properly. The relationship with Vringo, based on the purchase price of the patent portfolio, appears to be of value to Nokia. Is the relationship also of value to Apple?
Apple has $28 Billion in cash and no debt. Both Apple and Google have stock prices in the $660 to $680/share range, though Apple is about 2.5 times the market cap of Google at $623 Billion. Apple could acquire Vringo as a blip on the radar and result in having major leverage against a key competitor. Throw in Vringo's relationship bridging the gap between Apple and Nokia and the threat of opening up a patent war against Google's designs and both historical and pending 3G and 4G products with Nokia's portfolio in the mix, and Vringo could be a prime target for Apple. It also creates a conflict of interest to prevent Stout & Co from going after Apple. My speculation is that the Google suit is an unintended consequence to Apple's current focus but would be an important component to its public image in terms of aggressiveness. Apple wants and needs Nokia's legacy 3G and 4G portfolios but Nokia may have messed Apple up by giving the legacy 3G portfolio rights to Vringo. Now, if Apple acquires Vringo, it would be viewed as all out war on Google's core business. I keep asking myself: Did Apple put Google on notice about their intent at the meeting last week?
As Nokia rebuilds itself with an accepted operating system and as Nokia's massive 4G LTE patent portfolio and strategic partnerships (with Qualcomm, QCOM) loom over the industry, I believe, regardless of the status of Vringo v. Google's case, which I don't think will make it to trial, that Vringo is in the position to be acquired by either Google or Apple in short order and Apple wants to strike while Nokia is down in market cap. Apple can't since it doesn't know the terms of the 3G agreement with Vringo concerning Apple's royalties owed to Nokia, but may not want to overpay and give the appearance of thermonuclear war. I think the only way Apple truly gets a leg up and over the 4G and 3G patent war and to eliminate the up to $8 Billion in royalties owed or owing to Nokia is to buyout Nokia and Vringo.
If Apple goes after Nokia first, the 3G rights to Vringo are probably not clear to Apple in relation to their royalties. Again, probably part of the discussions between Apple and Google this past week. Apple may have also recognized that they need Vringo's evident relationship with Nokia, which Apple probably lacks based on their past run-ins with Nokia, but why there may be a great match to be made with Vringo, Nokia and Apple working together.
Let's face it: Samsung will unlikely offer Apple its patent use unless Apple undoes what it just spent millions to procure in its lawsuit. HTC, LG and Samsung are both proponents for Google's operating system, so Google seems to have greater protection in the 3G and 4G space. When the simple question is asked as to who's left in the 3G legacy and 4G patent space that would entertain offers from Apple, a simple glaringly apparent answer is Nokia and Apple can't get all the 3G without Vringo. If, and this "If" is probably dependent on the tone of the meeting, Apple wants to go thermonuclear, then it backs Vringo's case in appeal as the claimant against Google, whether Vringo wins or loses. Apple would then be going after Google manufacturers for tablet designs and 3G and 4G infringement. It will get uglier if the meeting did not go well. I think Apple wants Google to get Samsung to back-off in exchange for the Nokia and Vringo acquisitions to go unmolested.
At $650 million for Vringo for the Nokia 3G rights and the leverage of the future 3G claims against likely offenders as well as the Google lawsuit leverage, Apple could acquire Vringo at a price per share of roughly $6 to $7 per share at approximately 1 share of Apple for 100 shares of Vringo. Then, for 30 million shares or possibly some blend of cash and 30 million shares of Apple to Nokia, Nokia would be at an estimated 80 to 100% premium from current levels. I think the meeting between Apple and Google was for Apple to tell Google to get Samsung off our backs and pay damages, we'll set aside design concerns going forward and, in exchange, we'll make the Vringo core business suit go away.
Now, this is just one scenario: nothing may happen or it could also play out if Apple acquired Nokia and Google acquires Vringo, then Google extinguishes the patent claim from both the Vringo suit and Nokia 3G space and Apple could hash out the details of the quid pro quo regarding the 4G space to leverage Samsung and they all start playing nice. Either way, Apple knows the enemy of my enemy may still be my enemy and Vringo seems to be a logical path for leverage for Apple to choose its friends as Apple is going to do what is good for Apple, not Google. Whether right or wrong as to the suitor, based on the timing of the Apple and Google patent meeting, Vringo may find itself making friends instead of enemies very shortly. I don't think Apple can wait until the outcome of a Vringo settlement or trial when they can control their own destiny now at a fraction of the cost. But does Apple want the image of going thermonuclear on Google?
Disclosure: I am long VRNG. I may be establishing a long position in NOK in the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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