Research In Motion Gets Dealt A Blow

| About: BlackBerry Ltd. (BBRY)

In court Research in Motion (RIMM) was dealt a blow by Nokia (NYSE:NOK). RIMM lost a contract dispute over the use of Nokia's wireless local access network (OTCPK:WLAN) technology patent, whereby "RIM was in breach of contract and is not entitled to manufacture or sell WLAN products without first agreeing royalties with Nokia" per Nokia on Wednesday.

WLAN technologies are typically marketed in the WiFi brand and are used by RIMM in its Blackberry devices. Most other smartphones use this technology as well. While it would be a blow to the Blackberry 10 software platform, most likely RIMM will reach a license agreement with Nokia.

In 2003 RIMM signed a licensing agreement with Nokia that covered "standards-essential" cellular patents. This agreement was then amended in 2008. In March 2011 RIMM attempted to get their license agreement extended to cover WLAN patents. During arbitration, RIMM never contested that it manufactures and sells WLAN based products according to Nokia.

In July, RIMM filed a letter with the ITC and argued in favor of injunctive relief based on standard-essential patents. This letter increases the likelihood of an injunction being ordered against it unless they reach an agreement with Nokia in time.

RIMM faces some serious fundamental problems and this latest ruling just increases the pressure mounting on them. Compared to RIMM, Nokia is in a much stronger position and it appears to be gaining grown in patent litigation, an area that I argued before is just one of a sum of parts that makes Nokia worth significantly more than its current market value. Nokia currently generates roughly $650 Million in patent royalties annually and with its success in the courts it appears that this number will be rising over time.

RIMM has had a history of losing patents and this is just one in a list of many losses it has had. Famously, in 2006 RIMM settled with NTP to the tune of $612.5 Million to settle all the claims against it, and for a full license of NTP's patents. Earlier this year lost another patent case and was instructed to pay $147.2 Million to Mformation Technologies because it violated Mformation's patent related to wireless mobile device management.

The bullish argument for RIMM has recently been that its sum of its parts is worth more than its whole. If you break it down, though, it's easy to see that the stock is overvalued. RIMM currently has about $2 Billion in cash and cash equivalents. However, it is losing money quickly. Look at its net income over the past 5 quarters:

  • Q3 2012 - $(753 Million)
  • Q2 2012 - ($518 Million)
  • Q1 2012 - $1.1 Billion
  • Q4 2011 - $1.3 Billion
  • Q3 2011 - $1.0 Billion

Cash flows are still positive; however, this will most likely dwindle as it continues to get crushed by Apple (NASDAQ:AAPL) and Google's (NASDAQ:GOOG) Android.

The other part that people point to as underappreciated is RIMM's patents. Andrew Long of BMO pointed to their patent portfolio being worth $5.7 per share based on the amount companies paid for Nortel patents and the amount Google paid for the Motorola Mobility acquisition they made. However, as you can see from recent trials, RIMM's patents aren't holding up in court and even if they do hold up in court they will be negated by the patents they're infringing upon.

At this point it appears that RIMM only has a pile of cash and a money losing smartphone division. The value of its patents are highly questionable and smartphone division is quickly becoming obsolete.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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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