Upon two days' reflection, the settlement to me looks like this:
In a stare-down as trial date approached, IDCC brass blinked…and winked. As I first ventured on Monday morning, IDCC chose to give away the past--completely--potentially millions upon millions (think one billion) of Ericsson liability which would have taken a resounding win on multiple points at trial to ever achieve. Such a win against an unrepentant Ericd management must have been a low percentage possibility and probably was never contemplated by F & J and IDCC, I conclude. I think this scenario existed only at the top of some IDCC shareholders' wish list. Further, a lesser, more realistic win of a few hundred million for past infringement may have been thought doable, perhaps even likely, but subject to delay due to appeals.
The motivator of this settlement was clearly to enable the company to license and prosper in 3G, and to begin doing so now. Further delay in the resolution, as has been noted, would have long-reaching ramifications alluded to by Howard Goldberg in the CC:
HG: "…we took the clear decision to resolve the issues that were under litigation. Which we had a mandate, we had certain pressures to do that, and we wanted to be able to resolve that issue first."
I conclude that the use of the word "mandate" may have been rhetorical, with the phrase "certain pressures" being a re-stating of that thought. Or…it may have referred to a mandate to the negotiating team from the Board, alluded to in the phrase "clear decision". In any case, the "pressures" are noted in the quote which follows immediately below:
HG: "We have a group, our licensing group, that has been diligently pursuing opportunities. They have -- they've been in discussions with multiple companies. You know, sometimes you push against the tide and it's real hard to swim against the tide and the tide that we've been pushing against for the last year and a half or so was a very unstable marketplace in telecom, as well as a sort of deadlock in your freezing effect of the Ericsson litigation."
Though this speaks largely to the financial malaise that has infected the telecom sector over the last 18 months (by HG's count) it also makes direct reference to the Ericd deadlock as a blocker of licensing progress.
Rich Fagan: "I'd like to emphasize the point that our board and management have focused on building a business that creates value by generating substantial cash flow over time. We believe we have taken a major step forward in that regard, with the signing of these agreements with Ericsson and Sony-Ericsson."
Cash flow has always been a forefront concern of the company. Officers and management who have been with IDCC for the duration certainly understand IDCC's huge loss of cash flow for 2G, now set in stone, which is directly due to their inability to license (with the MOT decision as the direct cause). This agreement is seen as an enabler of the future, more so than a capitulation of the past.
IDCC chose to accept that their company will never be "restored," as it were, to the industry position that should have been theirs in 2G, and instead turned fully toward enabling themselves in 3G licensing. This was the "blink," which gave the financial win to Ericsson in 2G royalty liabilities to IDCC. To the shareholders this meant there would be no instant transformation of the company (and its share price) to a large-cap force in telecom. The trade-off is made clear:
HG: "…we've accomplished a number of things. They include: removing the uncertainty and eliminating the potential risks associated with the jury trial, defining the payment allocations of two other of the industry's leading wireless producers and starting a process to trigger the payment of those royalty obligations, affirming the market (future) of our technology and re-affirming the global essentiality of InterDigital's patents."
The timing of this move, as observed by Loop and others, is a puzzle. The modest figures for past infringement certainly imply that this could have been resolved sooner, resulting in a quicker start on 3G licensing and resultant rewards for IDCC. Loop's point about the likelihood of arbitration with Nokia and Samsung due to the effective date of recurring royalties (01-03 vs. 01-02 for Nok and Sam) is a very valid concern. These are two matters about which we have no details.
As a side note, the reasons for their inability to license 2G (already understood by most on these message boards), and how circumstances will now be different with 3G, is also discussed in the CC:
HG: "…3G is where we have momentum. We're developing patents and increasing rates of invention, which is very important to understand.
"And I think a very critical differentiator is that in the 2G marketplace, InterDigital…(was) not a strong organization at that point in time. We were a small organization, we weren't participating in the standards bodies outside of the U.S. direction, and we kind of watched from the sidelines at the beginning of the 2G rollout. As we approach 3G, we're getting stronger in every important respect, financially, participation in the standards as an architect of the standards, the size of the patent portfolio is growing and growing at an increasing rate and increasingly we're getting validation as a holder and licensor of technology.
"So there's clearly points of differentiation. The compare and contrast is almost different in every respect and better in every respect when you look at InterDigital in the 3G -- the beginnings of the 3G environment, as opposed to the beginnings of the 2G environment."
HG: "We looked at all the good reasons to do this agreement. We certainly saw that the dynamics of settling with Ericsson would be a marketplace accelerator. There is a recognition of the importance of InterDigital's inventions that are associated with this."
HG: "There is certainly a recognition that InterDigital is becoming an ever increasing (player) in the marketplace, both from a licensing point of view and a technology point of view. There is a momentum shift and certainly a recognition …that we have to be dealt with in terms of licensing."
The "wink" of 2G came with the setting of a royalty rate for handsets, or terminals as they are also called. (At $6m/annum for base "station" or stations from an infrastructure-strong company like Ericsson speaks volumes of the weakness at trial of our foundation base station(s) patents. This amount for infrastructure was meager indeed.)
Using figures arrived at by other posters on this message board, the apparent establishment of a forward, non-discounted rate on handsets of about .45-.5%, and a 20% discounted pre-payment rate of about .36-.42%, may be a bit higher than Nokia or Samsung had anticipated. This generates higher 2G royalties for IDCC in the next few years than perhaps we might have otherwise expected, given the miniscule settlement amounts that each 2G license agreement has provided (perhaps around 0.1-0.2%?) This is, I believe, what Data meant by implying that part of the settlement money was buried in Nokia and Samsung.
I have to think that, of the alleged $100-120m 2002 obligation of Nokia, at least 95% is for 2G royalties. Not bad, provided it survives arbitration. (This also implies what a huge bonanza 3G will be to IDCC if Nokia pays at least 0.5% and the others pay at least 1%--with inclusion of WTDD--for 3G.)
The view of the company, and HG, is made clear in this exchange with a questioner:
ROBERT VESMAN (ph): "Let me ask you a follow up on that. Is this a watershed event in the sense that this is a number of companies who potentially have been waiting back to see what was going to happen with Ericsson to make any agreement to see whether they could possibly get out of it. And now, the credibility that you've gained through this Ericsson agreement will now wipe that away and create a totally different bargaining environment."
HG: "I think you've encapsulated the dynamics. I believe that some period in the future we're going to look back on this and say with certainty that it's a watershed event. As we sit here today we can only, it's only conjecture but it's the right dynamics. It certainly feels to us like it'll be a watershed event."
Good luck to us all. We have been thwarted in any hopes to overnight awaken to a ten-bagger, but the potential is clearly there for this investment to become one over the next very few years.
in peace,
dagrinch
AI
