After Apple (NASDAQ:AAPL) and Samsung (PINK:SSNLF) took each other on, it is Nokia’s (NYSE:NOK) turn to engage in patent wars. Emboldened by the initial strong demand for the Lumia WP8, a resurgent Nokia is seeking to delay Research In Motion’s (NASDAQ:RIMM) comeback by banning BlackBerry sales in the U.S., U.K. and Canada. This came after a Swedish arbitration tribunal judged that RIM’s phones are in breach of some of Nokia’s WLAN patents and the company can therefore not sell any more BlackBerry devices without first licensing the patents in question.  The ruling comes at a crucial juncture for both the companies as they try to negotiate tricky platform transitions at a time when Apple and Samsung are running away with the smartphone market.
With RIM’s hopes of surviving in this hotly contested market hinging on the new BB10 platform it will be launching on January 30, this development could prove to be highly damaging. The company will therefore look to resolve its dispute through a royalty agreement with Nokia and get back to focusing on a glitch-free BB10 launch as soon as possible.
Nokia, on the other hand, will be pleased with the strong reception that the recently launched Lumia Windows Phone 8 smartphones have seen. However, what is not certain is if the high demand is a result of a supply crunch or how long the demand will last, and it won’t be until Nokia reveals actual sales figures. With a lot hanging on the long-term success of the Windows Phone platform, Nokia’s increasing focus on monetizing its strong patent portfolio could help mitigate the impact of what could be a long and painful Windows Phone transition process.
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We have a $4.50 price estimate for Nokia’s stock, about 35% ahead of the current market price.
Nokia flexes its patent muscle
As a result of the high R&D spend Nokia incurred over the last decade, the company now has a very strong patent portfolio, comprised of close to 16,000 issued patents and 4500 pending patent applications in the U.S. Outside the U.S., the company has over 20,000 patents (both issued and pending combined) with a majority of them being in Europe.  Even in terms of quality, Nokia’s patents stand out. In a 2011 review of the 3000+ patents considered essential to the LTE technology that is quickly emerging as the preferred 4G standard, Thomson Reuters and Article-one found that Nokia held close to 19% of the standard essential LTE patents and was the LTE leader by a big margin.  Qualcomm, the dominant mobile chipset manufacturer, trailed Nokia with a share of about 12.5% of the LTE patents deemed essential.
What makes Nokia’s patent strength even more more intimidating is that Nokia and Qualcomm had entered into a 15-year patent licensing agreement in 2008, which basically gave Nokia access to all of Qualcomm’s patents for use in its mobile phones. This essentially translates to an unrivaled access to more than 30% of the essential LTE patents – a position of strength that not only insulates Nokia from litigation in the ongoing patent war but also gives it enough ammunition (with its 19% LTE patent share) to go after rivals and generate cash through licensing deals.
Nokia gave an ample demonstration of the power of its patent portfolio when it sued Apple in 2009 for violating 46 of its patents. The suit was settled two years later in mid-2011, with Apple agreeing to pay an undisclosed one-time sum and recurring royalties. With its smartphone business losing money, Nokia has continued its newfound strategy of using patents to generate cash by suing HTC, RIM and ViewSonic this year.
As a result, the company is now earning a steady royalty income from its patents at a current annual run rate of over $600 million. If we assume this to hold over the average remaining term of its U.S. patents, which is 13.8 years, discounted cash flows (12% discount rate) show that the patents would be worth at least $4 billion in value. This alone would comprise about a third of its current market capitalization – not to mention the company’s substantial cash position, which we estimate comprises nearly 27% of Nokia’s fair value. With Nokia getting aggressive with patent litigations, licensing revenues would only increase going forward and add even more value to Nokia’s stock.Notes:
- BLACKBERRY BAN LOOMS FOLLOWING LOSS IN NOKIA SUIT, BGR.com [↩]
- Nokia Has a Valuable and Relatively Young US Patent Portfolio, EnvisionIP, July 19th, 2012 [↩]
- LTE Standard Essential Patents Now and in the Future [↩]