Not a day passes without a technology company getting involved with another technology company over patents. Technological tools have became so complex that it is nearly impossible for a company to design one without infringing patents owned by another company. Last week, Apple (AAPL) was able to get Samsung's Galaxy Nexus banned from being sold in the US, and this week the story unfolds between Nokia (NOK) and Google (GOOG).
It's been less than 10 days since Google introduced its Nexus 7 tablet to the market, and Nokia already claims that Google's product infringes on some of Nokia's patents. The good news is that Nokia is not as aggressive as Apple and it is not looking to get the tablet banned in the country; rather it is looking to receive a license fee for usage of its patented technology.
Nokia has 'kindly' asked Google and Asus to approach it for a license agreement. This makes sense to me as Nokia needs quick cash more than it needs enemies as the company is on the brink of bankruptcy. The whole process of going to the courts against Google might last longer than Nokia itself, and the company doesn't really want to take its time.
As of now, we don't know which of Nokia's patents are in question and we don't know how serious the violation is. It is likely that the issue revolves around some WiFi technology. Many WiFi technologies are licensed under Frand (fair reasonable and non-discriminatory) terms. What this means is that other companies are able to use these technologies after paying a fee.
On the contrary, most of Apple's patented technologies are not licensed under Frand, meaning that no other company can actually use those technologies on their products regardless of whether they agree to pay a fee or not.
As a stockholder in both companies, I would rather a quick resolution to the issue wherein Google agrees to pay royalty fees to Nokia. Because Nokia doesn't have its own tablet, the company probably won't care about starting a legal battle with Google and Asus, unless of course, Microsoft (MSFT) has anything to do with it.
Last month, Google claimed that Nokia and Microsoft are forming patent troll companies in order to sabotage phone makers building phones that run on Android operating systems. Both Nokia and Microsoft denied this strongly as both companies didn't want to make enemies.
Currently, Nokia receives royalty payments from 40 companies, including Apple. The annual royalty payments received by Nokia are said to total near $600 million. Until recently, Nokia hasn't been very aggressive about pursing companies infringing its patents, but now the company is desperate to get every penny it can.
I believe that if Nokia succeeds in collecting royalty fees from every company that uses some of its patented technology, it could easily double the royalty payments it receives. Nokia has been building its patent portfolio consisting of 30,000 patents in the last 20 years, and the company spent more than $50 billion in research that resulted in the patented technology during this time.
Considering the big role Nokia played in the mobile device industry, it is incredibly difficult for a company to build a mobile phone without using at least several of Nokia's patented technologies. The patent laws can be very complex though. For example, if Google buys a chip from Samsung to use in its tablet and Samsung already paid license fees to Nokia for the production of the chip, then Google will not necessarily have to pay license fees to Nokia, as it was already paid for by Samsung.
If Google/Asus partnership ends up paying license or royalty fees to Nokia, the payer will be probably Asus rather than Google, as Asus is the producer and Google will probably sell the product at a loss. On a contrary side note, Nexus 7 is not the first Google or Asus product that uses WiFi, which means Nokia might be a little late in asking these companies to license the technology for Nexus 7. The move might very well be motivated by Microsoft.
It looks like the patent wars will get at least as complex as the technological devices that may or may not infringe the patents in question. As every company sues every other company that may use its patented technology, the issue gets more and more difficult to solve in a court. Most courts simply don't have the manpower, technical expertise and/or time to deal with these issues. I believe that courts will start throwing some of these cases out and asking companies to deal with the problem by themselves.
I think if Nokia eventually faces bankruptcy, the company could potentially spin-off its patent portfolio as a separate company and continue to collect royalties for years to come. This could at least protect Nokia investors from having their Nokia shares worth $0.
If the spin-off company was able to earn $1 billion annually on royalty and license fees, the company would be looking at a $10 billion value with a P/E ratio of 10. This would be a higher value than Nokia's current value, which includes the patent portfolio, mobile device segment, Nokia Maps and Nokia-Siemens Networks. This is the least Nokia could do to its investors in case bankruptcy happens.
While Nokia's phones may or may not sell successfully, Nokia can actually make money off almost any phone sold by almost any company in the world through royalty fees if it plays its cards right. I continue to be long in Nokia due to the company's extremely low valuation. Anything short of bankruptcy will cause this company to rally in the medium term.
Additional disclosure: Apple makes up the largest percentage of my portfolio and Nokia makes up the smallest.
