Replies to post #175895 on InterDigital Inc (IDCC)

[mschere]

14 November 2005
3G IPR: The Holy War Begins

Brett Simpson, Richard Kramer

IPR disputes are like arguing over religious beliefs: everyone thinks they know the truth. Recent events suggest WCDMA patent holders are seeking the road to heaven in "fair, reasonable and non-discriminatory" by sharing their religion (IPR) with non-believers. Nokia, Ericsson, et al. have called for an "industry jihad" against Qualcomm, claiming the latter has over-stepped the nature of past covenants. In our last note (3G IPR: A Great Mobile Mystery, Jan. '05). we suggested Qualcomm's belligerent stance on IPR would get tested in court, not by market forces. Many were sceptical. Few are now. In light of recent filings, we lay out our thinking on the key issues to consider. We cannot see an early resolution to the Holy War over IPR.


The Holy Grail
We highlight below our 3G forecast (shipments and wholesale ASPs) to 2009, seeing 835m units and $175bn in total handset sales. Any IPR holder claiming even a fraction of a percent has much to gain. Qualcomm is positioning itself for a windfall, claiming it will receive a royalty rate similar to CDMA 1X from all 3G handset vendors (which we see at 4.5%). This translates to a combined $8bn of IPR revenues for Qualcomm.


Christian Crusaders
Given this potential windfall, it is no surprise Qualcomm opposed any industry effort to change the current royalty regime, pointing to its many signed agreements in place. Yet, there are few choices in licensing technology. Qualcomm had the foresight to agree favourable terms with some handset OEMs (including a portion with "indefinite" agreements). The test case as to whether these are "excessive" lies in wait.


Bible Bashers
This is a far more serious issue than many admit: while filings and patent agreements are shrouded in a mist of NDAs - a "mobile mystery" - we believe many observers are missing the point. The EU will be compelled to investigate this issue given the commercial ramifications and companies involved. This is likely to shed some light on the mystery, even if agreements remain confidential. We expect more protests to arise in due course: we think major operators joined the six announced complainants to the EU. Many other OEMs still sit on the sidelines. NTT DoCoMo - a major IPR holder which Qualcomm has not licensed - has yet to lay out its views, despite raising concerns over excessive 3G royalty rates.


Make Love, Not War
Any EU investigation will seek views of operators and other wireless players; while this will take time, we wonder if Qualcomm can stand alone, protected solely by its legal position. We believe the weight of opinion is unlikely to back Qualcomm. A recent meeting with Ericsson revealed that years of planning preceded this move: complainants have a long list of supporters to draw on.


© 2006 Arete Research Services LLP. All Rights Reserved.

[bulldzr]

mschere... you work very hard here, and I and many of us appreciate it! Most of us at least...

But since Data_rox and Ed seem to be missing in action... maybe you should take this argument to the QCOM board and really put your debating abilities to the test. It would be worth the read... go for it, LOL!

"Question.. Nokia is by far the Largest vendor of 3G handsets, with a SIGNIFICANT portion of Essential Patents in those standards..why would they not be entitled to AT LEAST the same rate that Qualcomm has licensed every two bit Chinese Vendor? In fact Nokia , Ericsson, NEC and Panasonic have also cross licensed Patents to Qualcomm and still are being unfairly discriminated as per their E.U. complaint!!!"

[Learning2vest]

mschere - re ref question. My hunch is that Nokia has TWO very significant issues on the table with QCOM right now.

The first well publicized issue is to have QCOM accept Nokia's argument that 5% is a reasonable royalty cap for all IPR not available through cross-license and also that a firm's IPR licensing rates should be in proportion to their relative contribution within each wireless standard.

In other words, IMO Nokia's W-CDMA rate position vs QCOM is something along the lines of "5% is the total royalty we think is fair and reasonable and since you contributed less than let's say 1/2 of the total IPR in W-CDMA, you should be happy with half of the total royalty or 2 1/2%.(i.e., like you agreed in China.)"

In addition, my guess is that Nokia also has a second, less publicized issue regarding QCOM's business practice of passing through patent rights to wireless manufacturers who buy their semiconductor products. As I understand that practice, QCOM negotiated cross-license agreements with most of the major wireless manufacturers which to my amazement includes the right for QCOM to pass those IPR usage rights on to customers who buy semiconductor products from QCOM.(What were those manufacturers thinking back when they agreed to grant that? Duh!)

While that is a mighty sweet deal for QCOM and it's customers, it has to be causing a serious heart burn at Nokia and the other manufacturers who signed those "cross-license with pass through rights" agreements. Why would anybody negotiate directly with Nokia for Nokia's IPR rights when they already get them thrown in for free with the products they buy from QCOM?

That thought process leads me to think that there is good chance Nokia also wants to limit, and then to shut down, QCOM's business practice of passing through cross-licensed IPR. IMO Nokia wants to set a lower rate AND to strike that pass-through rights clause before signing a new W-CDMA license agreement with QCOM. That fight could go the distance and we have ring side seats!