Effect of Zombie Portfolio on LTE Royalties?

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 |  Includes: ERIC, IDCC, NOK, QCOM
by: Joel West

The WSJ reports that the liquidation of Nortel is moving on to its portfolio of 4,000 telecommunications patents, worth as much as $1 billion.

The most strategically valuable are those related to long term evolution, or LTE, given that the Canadian firm was aggressively developing 4G technology before it went bankrupt two years ago.

The WSJ listed four telecom firms as likely bidders — Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Huawei and ZTE — all firms relatively light on 3G and 4G patents.

However, the article mentions as a possible bidder only one of the four major 3G patent holders: Nokia (NYSE:NOK), Ericsson (NASDAQ:ERIC), Qualcomm (NASDAQ:QCOM) and InterDigital (NASDAQ:IDCC). The latter is mentioned in the same breath as Intellectual Ventures, Nathan Myhrvold’s well known Silicon Valley patent troll:

Closely-held Intellectual Ventures and InterDigital use patents for offensive purposes, licensing them as broadly as possible and asserting them in infringement suits against companies that refuse to take a license.

A possible rival bidder is RPX, a “defensive patent aggregator” that lists Google, HTC, Huawei, Nokia, RIMM and Samsung (OTC:SSNLF) as members. For obvious reasons, Qualcomm is not a client of the company.

Without knowing where the patents will end up, it’s impossible to predict their impact on Qualcomm’s QTL division and its IP-based business model.

However, with two rare exceptions — Broadcom and Nokia — large patent portfolios in the hands of other telecom companies have had no significant impact on the QTL business. Qualcomm has managed to cross-license patents with its customers (including more than 15 years with Nortel) without jeopardizing its royalty rate.

If the patents go to Apple, Google or one of the Asian makers, I don’t think it will impact Qualcomm‘s royalty rate. (Instead, Qualcomm’s pricing power will depend on the relative strength of its LTE portfolio vs. its 3G or cmdaOne holdings.)

I think the story is different if the patents are acquired by IV or InterDigital. Either might choose to sue Qualcomm’s LTE chips for infringement, and — unlike Nortel, Samsung or even Broadcom — they lack their own hostages that QTL can threaten with its patent portfolio. Still, I think Intellectual Ventures is a far more serious threat to QCOM than InterDigital.

In 1993, InterDigital sued Qualcomm (and was countersued) over 2G CDMA patents. The upshot was that Qualcomm paid InterDigital a flat $5.5 million settlement while InterDigital customers paid royalties for use of Qualcomm’s patents. InterDigital’s has been settling with smaller firms, but lost a major case against Nokia in 2009.

InterDigital stock has doubled in less than five months, but is still trading an discount to Qualcomm’s. They have an incentive to rebuild their patent portfolio to strengthen their hand in 4G licensing.

Given it cut R&D back by 30% in 2009 — and 2010 quarterlies suggest that R&D remains cut — I don’t see how InterDigital could afford to buy even one of the six portfolios. It’s also not like the company to partner — it doesn't need a license to patents but the right to assert — but perhaps it could presell rights to the patents it bus to existing customers to help pay for the cost.