Nokia’s (NYSE:NOK) plan to generate additional cash by monetizing its vast patent portfolio seems to be bearing fruit. The Finnish handset maker recently filed numerous lawsuits against Research In Motion (NASDAQ:RIMM) for infringing on some of its mobile WLAN patents. Since the lawsuits threatened to stifle BlackBerry sales at a time when RIM’s very survival depends on the success of its soon-to-be-launched BB10 platform, RIM decided on an out-of-court settlement that would see Nokia drop all the cases it had filed in various countries. In return, Nokia will receive a one-time sum of about $65 million in addition to recurring royalty payments of an undisclosed amount.
The settlement not only demonstrates the strength and potential profitability of Nokia’s patent portfolio, but is also a sign of the growing efforts on Nokia’s part to buy time for its smartphone business to get back on its feet. Nokia’s investors may be pleased with the strong reception that the recently launched Lumia Windows Phone 8 smartphones have seen. However uncertainty remains over whether the demand is a result of a supply crunch, as well as how long the demand will last – uncertainty that will remain until Nokia reveals its sales figures. With a lot hinging 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 lengthy Windows Phone transition process. We believe that Nokia’s patents could be worth about $4 billion in value (at the current royalty run rate) and contribute about a quarter of our $4.50 price estimate for Nokia’s stock.
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 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 30% 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 litigation, licensing revenues should only increase going forward and add even more value to Nokia’s stock.Notes:
- Nokia Has a Valuable and Relatively Young US Patent Portfolio, EnvisionIP, July 19th, 2012 [↩]
- LTE Standard Essential Patents Now and in the Future [↩]