Nokia’s (NYSE:NOK) focus on monetizing its vast patent portfolio seems to be bearing fruit. In a preliminary ruling issued recently, a U.S. judge found HTC’s mobile devices to have infringed on two of Nokia’s wireless patents. Nokia had filed the complaint with the ITC, a U.S. trade body that has the power to issue import bans, last year in a bid to block HTC’s products in the U.S. market. The final decision on the matter will be made on January 23rd next year, which gives HTC some time to re-engineer its products and avoid a potential U.S. ban. Whether Nokia manages to secure a ban on HTC’s products remains to be seen but its aggressive posturing as a patent litigator is likely to continue in the coming years as the IP business emerges as one of its core businesses following the pending sale of the handset business to Microsoft (NASDAQ:MSFT).
The ruling is Nokia’s second such win in less than a month, and demonstrates the strength and potential profitability of its patent portfolio. Last month, a German court rejected one of HTC’s patent infringement claims against Nokia. Prior to that in December, Nokia had managed to sign BlackBerry (NASDAQ:BBRY) as a patent licensee after filing numerous lawsuits against it in various countries. In an out-of-court settlement, BlackBerry agreed to pay Nokia a one-time sum of about $65 million in addition to recurring royalty payments of an undisclosed amount. While the value of that settlement is likely to have diminished considerably over the past year with BlackBerry’s device sales dropping precipitously, Nokia has bigger patent licensees such as Apple that should more than make up for any loss in royalties from BlackBerry. Even with HTC, Nokia will be more eager to add it as a licensee than try to impose a ban on its devices given that they will cease to be smartphone rivals soon. We estimate that at the current royalty run rate, Nokia’s IP business is worth about $4 billion in value – about 16% of the company’s current market capitalization.
Nokia flexes its patent muscle
As a result of the high R&D spend incurred over the past decade, Nokia has a very strong patent portfolio comprising close to 16,000 issued patents and 4,500 pending patent applications in the U.S. Outside the U.S., the company has over 20,000 patents (both issued and pending) with a majority of them in Europe.  Even in terms of quality, Nokia’s patents stand out. In a 2011 review of the 3000+ patents considered essential to 4G LTE technology, 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 the most essential.
What makes Nokia’s patent strength even more more intimidating is that Nokia and Qualcomm 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 translated to an unrivaled access to more than 30% of the essential LTE patents. While that is unlikely to be of much value to Nokia now that it has decided to offload its handset business, it would have played a major role in helping it negotiate a $2.2 billion upfront cash payment for licensing all its patents to Microsoft. Another demonstration of the strength of Nokia’s patent portfolio came in mid-2011, when Apple agreed to pay Nokia an undisclosed one-time sum and recurring royalties for violating 46 of its patents.
$4 billion floor on patent value
At the current run rate, Nokia’s IP licensing arm generates about 500 million Euros in steady royalty income every year. 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, or $1 per share. We estimate that this is a floor on the value that Nokia’s shareholders should be attaching to its patent portfolio. Considering that Nokia will now have no phones to sell and therefore faces less danger of being countersued, it would have greater bargaining power in setting patent licensing terms going forward. Additionally, its 4G LTE patents are likely to get even more valuable with time as carriers around the world transition to the new wireless standard and a greater number of handsets support 4G. This could actually bring further upside to our IP valuation.
Assuming that most of Nokia’s current royalty revenue comes from Apple and using our 150 million estimate for iPhone sales this year, we estimate that Apple is paying around $4 for every handset sold. Considering that HTC has a much smaller patent portfolio to defend itself effectively against Nokia, it is likely to pay a higher royalty per handset. However, HTC’s standing in the smartphone market is somewhat tenuous, with its market share slumping from around 9% in 2011 to about 2.5% this year. If its sales performance so far this year holds going forward, HTC will sell about 20-25 million handsets in 2013. This could net Nokia upwards of $80 million in annual royalties should it manage to sign HTC as a patent licensee, and add about 12% to its IP valuation. However, such legal battles can take a long time to settle and with HTC’s sales declining, any value to Nokia from pursuing HTC reduces with each passing month.Notes:
- Nokia Has a Valuable and Relatively Young US Patent Portfolio, EnvisionIP, July 19th, 2012 [↩]
- LTE Standard Essential Patents Now and in the Future [↩]