What The Huawei Patent Licensing Deal Means For Nokia

by Trefis Team
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Nokia (NYSE:NOK) announced that it has signed a multi-year smartphone patent licensing agreement with Huawei, in a move that would give the company royalty agreements with all the major global smartphone vendors. Although Nokia did not break down the financial terms of the deal, it said that revenues from the agreement would begin to be recognized from as early as Q4 2017. Below, we take a look at what the deal could mean for the two companies.

Trefis has a $6 price estimate for Nokia, which is about 20% ahead of the current market price.

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Why Huawei Needs Nokia’s Patents

Chinese smartphone brands have grown rapidly in recent years, driven primarily by demand from price-conscious customers in emerging markets such as China and India. That said, stricter intellectual property laws have made them more circumspect about scaling up sales in more lucrative western markets. However, there have been indicators that Chinese players such as Huawei and Xiaomi are interested in playing a larger role in markets such as the U.S. Huawei already sells some of its smartphones unlocked via various U.S. e-commerce platforms, and Bloomberg recently reported that Huawei and Xiaomi are in talks with U.S. wireless carriers including AT&T and Verizon about selling their flagship devices.

It’s possible that Huawei is entering into this licensing agreement to protect itself from potential litigation as it improves its distribution footprint. Nokia’s deep portfolio of essential patents relating to GSM, 3G radio and 4G LTE technologies – many of which were developed back when the company dominated the mobile handset business – could be valuable to Huawei. Besides this, Nokia’s other noteworthy patents relate to Wi-Fi and video standards as well as technologies that reduce the need for hardware components in a phone, improve radio reception and enhance battery life.

IP Licensing Should Be Lucrative For Nokia

Although patent royalties have accounted for a small portion of Nokia’s overall revenues historically, IP licensing revenues have very high margins, making them important to the company at a time when the broader wireless infrastructure market is going through somewhat of a downturn. The company has recently struck deals with handset makers including Apple, Samsung, LG, and Xiaomi. By closing a deal with Huawei, which is the world’s third-largest smartphone vendor by volumes, Nokia will effectively have licensing agreements with the largest smartphone makers. Research firm Inderes estimates that the licensing agreement with Huawei could stand at somewhere over 100 million euros ($118 million) annually. In comparison, Nokia’s licensing agreement with Apple is estimated to stand at about 250 million euros ($296 million).

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