In this article, we focus on Nokia’s large patent portfolio providing a solid floor price to the stock. The company has spent almost $40 billion in R&B over the last decade in accumulating a huge war chest of patents related to the to the telecommunication industry. The company won a large settlement from Apple last year and has won another big settlement from Research in Motion (RIMM). The settlement details are not available to the general public so we can’t quantitatively value the benefits. However, Nokia has revealed that it will get a large upfront payment with recurring payments from RIMM. In return RIMM will get to license Nokia’s patent portfolio without fear of litigation. The deal is similar to that with Apple with Nokia getting a license fee for every phone that RIMM sells.
Why Nokia is going to war over patents
Nokia was the leader in the mobile market for a long time and complacency had set it. However things have changed dramatically as Nokia was forced to sell its HQ to generate cash. In the past, the company management never really used patents to extract fees from its competitors. But the company is being forced to look at all potential revenue streams as FCF turns negative. Nokia has belatedly realized it can extract hefty fees from its competitors after its win against Apple.
Due to its long term dominance of the telecom market, Nokia has got a large number of valuable telecom patents along with Qualcomm (QCOM), Alcatel Lucent (ALU) and Ericsson (ERIC). Nokia makes almost $650 million each year by licensing its patents. The company is trying to claw back its lost market share from the likes of Apple and Samsung. Patents are going to be Nokia’s biggest weapons against its competitors. The lack of this weapon prompted Google to pay $12.5 billion for the struggling Motorola. Like Nokia, Motorola is one of the pioneers of the mobile phone market and had a large number of crucial patents to its name. Nokia has got a bigger patent portfolio than Motorola and is starting to use it to devastating effect against its rivals. We think that these patents not only provide a solid floor for the stock but can lead to additional upside. The upside could happen as Nokia receives potential settlements from telecom rivals like Samsung, LG and others.
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Nokia’s Patent Fight with Apple
Nokia’s war with Apple was a long drawn and costly one starting on Oct 22, 2009 when Nokia sued Apple over 10 patents. Apple retaliated with a countersuit for Nokia infringing on 13 patents. The war then continued in multiple countries and cases. The war ended with a victory for Nokia as Apple agreed to pay a licensing fee for its phones. Nokia also got access to some of Apple’s path breaking touch screen and design patents. Nokia had probably started the case hoping to win access to some of Apple’s patents. The win turned out to be better as Nokia not only won access to those patents, but also a huge sum of money from Apple.
Nokia’s Patent Fight with HTC
Nokia has lodged a number of patent infringement cases against HTC in US and German courts. HTC has become everyone’s favorite whipping boy due to its small size and lack of a sizable patent portfolio. The company has already been savaged by Apple and now Nokia is determined to extract its pound of flesh. HTC has almost no chance of avoiding a settlement with Nokia. Google has also joined the fight to protect its Android platform. Given the recent wins over Apple and RIMM, Nokia will be even more confident of winning over HTC. While this won’t provide Nokia with too much money, this will lay the foundation of a bigger settlement against the current mobile goliath – Samsung.
Nokia to target Samsung, LG Next?
The Korean giant Samsung is not an easy target like HTC, as the company has got almost 65,000 patents to its name. However, the defeat against Apple shows that Samsung is weak in its telecom and wireless patent portfolio. This gives an opening for Nokia to launch simultaneous attacks against Samsung in multiple geographies. The company lost a billion dollar patent case to Apple last year which hurt the company’s reputation more than its balance sheet. Nokia has already shown its patent prowess by winning against Apple and RIMM. We think Nokia has a great chance of winning against Samsung and LG as well. This will mean that Nokia will be getting royalties for almost every mobile device sold on the plant.
What is the worth of Nokia’s patent portfolio?
Nokia says that it has licensing arrangements with more than 40 companies for its 10,000 patent families. This provides Nokia with a diversified base of customers and derisks the patent royalty model. It is hard to come up with an accurate figure with regard to the worth of Nokia’s patent war chest. However the recent wins indicate that Nokia has every chance of increasing its patent royalties. We conservatively estimate the value of Nokia’s patent portfolio to be $12.46bb. We have used simplistic back of the envelope calculations and made the following assumptions
- $1 billion in payments every year
- 5% discount rate
- Payments received over 20 years.
Summary
Nokia is strongly marketing its Lumia range of phones which seem to have excellent features at a reasonable price. While it is too early to tell how they will match up to Samsung and Nokia, we are getting increasingly positive. Nokia has got a great reputation for the longevity and durability of its mobile phones. In the last couple of years, Nokia has started to appear like a tired brand because of the sameness of its offerings. The company lacked the zing leading to an exodus of its loyal customers towards Samsung’s Android lineup. We think that Nokia’s Windows phones bring freshness to Nokia’s phone lineup and could recoup a large percentage of its market share. The company’s stock is not factoring a turnaround in its fortune. Nokia’s stock has rallied strongly from its all time low. But we think the stock might still be cheap as the management starts to really leverage its undervalued assets.
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