Effect of zombie portfolio on LTE royalties?

The WSJ reports that the liquidation of Nortel is moving on to its portfolio of 4,000 telecommunications patents, worth as much as $1 billion.

The most strategically valuable are those related to LTE, given that the Canadian firm was aggressively developing 4G technology before it went bankrupt two years ago.

The WSJ listed four telecom firms as likely bidders — Apple, Google, Huawei and ZTE — all firms relatively light on 3G and 4G patents.

However, the article mentions as a possible bidder only one of the four major 3G patent holders: Nokia, Ericsson, Qualcomm and InterDigital. The latter is mentioned in the same breath as Intellectual Ventures, Nathan Myhrvold’s well known Silicon Valley patent troll:

Closely-held Intellectual Ventures and InterDigital use patents for offensive purposes, licensing them as broadly as possible and asserting them in infringement suits against companies that refuse to take a license.

A possible rival bidder is RPX, a “defensive patent aggregator” that lists Google, HTC, Huawei, Nokia, RIM and Samsung as members. For obvious reasons, Qualcomm is not a client of the company.

Without knowing where the patents will end up, it’s impossible to predict their impact on Qualcomm’s QTL division and its IP-based business model.

However, with two rare exceptions — Broadcom and Nokia — large patent portfolios in the hands of other telecom companies have had no significant impact on the QTL business. Qualcomm has managed to cross-license patents with its customers (including more than 15 years with Nortel) without jeopardizing its royalty rate.

If the patents go to Apple, Google or one of the Asian makers, I don’t think it will impact Qualcomm‘s royalty rate. (Instead, Qualcomm’s pricing power will depend on the relative strength of its LTE portfolio vs. its 3G or cmdaOne holdings.)

I think the story is different if the patents are acquired by IV or InterDigital. Either might choose to sue Qualcomm’s LTE chips for infringement, and — unlike Nortel, Samsung or even Broadcom — they lack their own hostages that QTL can threaten with its patent portfolio. Still, I think Intellectual Ventures is a far more serious threat to QCOM than InterDigital.

In 1993, InterDigital sued Qualcomm (and was countersued) over 2G CDMA patents. The upshot was that Qualcomm paid InterDigital a flat $5.5 million settlement while InterDigital customers paid royalties for use of Qualcomm’s patents. InterDigital’s has been settling with smaller firms, but lost a major case against Nokia in 2009.

InterDigital stock has doubled in less than five months, but is still trading an discount to Qualcomm’s. They have an incentive to rebuild their patent portfolio to strengthen their hand in 4G licensing.

Given they cut their R&D back by 30% in 2009 — and their 2010 quarterlies suggest that R&D remains cut — I don’t see how InterDigital could afford to buy even one of the six portfolios. It’s also not like them to partner — the don’t need a license to patents but the right to assert — but perhaps they could presell rights to the patents they buy to existing customers to help pay for the cost.

InterDigital loses key patent case

On Friday, InterDigital lost an effort to enforce four key 3G patents on Nokia’s cellphones.

Of course, IDCC will appeal. Company supporters hope IDCC can win a favorable settlement — as it did with Samsung.

I don’t see a settlement in the cards. As the world’s largest cellphone maker — and thus the largest royalty target — Nokia has been playing hardball all the way. Of course, in 2008 Nokia settled its war with Qualcomm, on very favorable terms.

My sense is that Nokia places a much greater value on the Qualcomm patent portfolio — or at least considers it impossible to work around all their IP without getting some sort of license.

In the face of a precedent that (if sustained) could begin to destroy its business model, IDCC shares lost 23% of their value on Monday and were essentially flat Tuesday. This seems a little optimistic.

Barron’s reports:

Hilliard Lyons analyst Tom Carpenter maintains his bullish stance on InterDigital despite the setback at the ITC. Carpenter notes that Nokia could still lose on appeal, which could trigger a licensing deal between the two companies. He thinks Nokia could still end up paying IDCC 35 cents per handset, or as much as $300 million over five years.

Even if the company fails to win on appeal, Carpenter contends IDCC’s patent portfolio could make it a potential acquisition target for Research in Motion (RIMM), Cisco (CSCO) or even Nokia. The potential appeal: IDCC holds a large number of patents on LTE, the 4G transmission technology that has been adopted by most wireless carriers.

While I understand the large pool of IDCC bulls, I don’t get this, either. I guess it all depends whether you consider this court case a fluke, or representative of the quality of the rest of its patent portfolio.

TI and InterDigital ally against Qualcomm

In connection with GSM Mobile World Congress, TI and InterDigital have made announcements reflecting an alliance between them. The new development is helping InterDigital make its transition from being an IP licensing company (that a few rivals have called a patent troll) to a firm that makes 3G chips to subsume its IP.

Not surprisingly, InterDigital is more enthusiastic about the alliance than TI is. (It’s fun to read these tea leaves — as someone who ran a little company that did joint press releases with big companies — the message is pretty clear). InterDigital issued a press release trumpeting its W-CDMA (i.e. HSPA) modem option and how it works with the the TI OMAP 3 and OMAP 4 processors:

"We are pleased to be the wireless modem supplier for TI's advanced OMAP 3 platform. Our high performance HSPA modem offers instant mobile broadband connectivity, accelerating the development of compelling new applications," stated Mark Lemmo, Executive Vice President, Business Development for InterDigital. "Available as a 3G modem option, InterDigital's SlimChip MID Module has been pre-integrated with the Zoom OMAP34x-II MDP, allowing mobile application developers and OEMs to fully exploit the rich capabilities of this platform."

The press release goes on to quote Bill Crean, Strategic Marketing Manager, as praising “ The flexible architecture of the OMAP 3 platform allows it to easily connect to InterDigital's SlimChip MID Module.”

Meanwhile, the TI press release allows InterDigital space with other vendors who praise themselves and the OMAP 3. The only mention of InterDigital comes from InterDigital itself:

"We are pleased to be a wireless modem supplier for TI's advanced Zoom II mobile development platform. Our high performance HSPA modem offers instant mobile broadband connectivity, accelerating the development of compelling new applications," stated Mark Lemmo, Executive Vice President, Business Development for InterDigital. "Available as a 3G modem option, InterDigital's SlimChip MID Module has been pre-integrated with the OMAP34x-II MDP, allowing mobile application developers to fully exploit the rich capabilities of this platform."

Eleven months ago, blogger Vijay Nagarajan predicted on his own blog (and later on Seeking Alpha) that an alliance with InterDigital would help TI:

TI is the market leader for 3G application processors with its OMAP product-line. But it does not currently have a standard 3G baseband solution. The company’s OMAP roadmap merely has placeholders for future merchant ICs with 3G baseband. Its mammoth market share comes from custom chips it develops for Nokia and Motorola among others. This position is, however, challenged by the multiple sourcing trend that the handset vendors are now adopting. Left behind in the 3G baseband race, not only by Qualcomm but also by Broadcom, Infineon, InterDigital etc, TI is finding itself losing mobile share. The aggressive strategy and the niche product positioning by the competition is not helping its cause either.

So although Qualcomm has a unique combination of technologies, its rivals are able to ally to produce a competing combination. (We call this “open innovation.”) I don’t know how this will impact Qualcomm’s profitability in the long term, but it seems as though the increased competition isn’t going to help.

British standards for essential 3G patents

As decided last December, the ruling by the High Court of Justice for England and Wales on Nokia v Interdigital Technology Corp (2007) will have a major impact on how patents are licensed (and enforced) in mobile phone standards. Although the ruling is technically only binding in the UK, I believe the findings will impact the various patent lawsuits involving InterDigital (IDCC), Qualcomm (QCOM), Nokia (NOK), Broadcom (BCOM) and others holding (or seeking to avoid paying royalties on) mobile phone patents.

InterDigital declared to ETSI that various patents were essential for implementing the W-CDMA standard, but (as with all ETSI declarations) this self-determined essentiality was not independently verified. My interest here is not the SD telecom book, but a series of papers I’m doing with Rudi Bekkers on W-CDMA (aka UMTS) patents.

In this case, Nokia sued to have 29 InterDigital patents declared not-essential to W-CDMA. Nokia had previously won in English courts in an earlier case involving InterDigital’s GSM patents. This is all part of a larger strategy by Nokia to get out of paying any royalties to InterDigital.

Of the 29 “essential” patents, Nokia dropped its challenge to one patent, InterDigital conceded that 21 were not essential, did not defend three more, leaving four patents contested at trial. The judge, Sir Nicholas Pumfrey, ultimately ruled that only one patent was partially essential.

When the ruling by Sir Nicholas Pumfrey was released Dec. 21, 2007, InterDigital spun the ruling as a victory, but clearly InterDigital ended up telling the world (including current and potential licensees) that 27 of 28 patents patents declared essential to W-CDMA actually aren’t.

The findings are all covered in the ruling by Lord Justice Pumfrey, but I learned what it really meant from a forthcoming law review article:

Myles Jelf and Michael Stevenson, “Nokia v IDC: an essentially English judgment,” Journal of Intellectual Property Law & Practice, 2008, Vol. 3, No. 7, pp. 457-460. doi: 10.1093/jiplp/jpn084

The authors are not a party to the case, but attorneys at Bristows in London; they do a commendable job of explaining the findings in a style accessible to an IP-knowledgeable engineer or businessperson. A preprint copy of their article was posted May 21 to the journal website.

The article notes the contribution of the decision in deciding essentiality, providing a process for its evaluation, and even procedural precedents about to run such litigation. To quote the authors:

The overall approach adopted by the Courts appears to be as follows:

• Start out with the patent in one hand and the relevant standards in the other.
• Consider the correct construction of the patent, entirely independently of the standards, through the eyes of the skilled person.
• ...
• Consider to what extent the claim construction put forward corresponds with what is specified in the standards ...
• ...[D]ecide whether what is properly required by the standards falls within the language of the claim, as understood by the skilled person.

But (the authors argue) the contribution of the ruling goes beyond the process of determining essentiality to setting a standard for essentiality and providing procedural precedents about to run such litigation. I defer to the article for a more complete discussion of the ruling’s interpretation and implications.

Before he was promoted to become Lord Justice of Appeal last November, Pumfrey gained a reputation for handling complex patent cases. He drew from degrees in both physics and law that he earned before becoming a barrister in 1975, as well as three years as junior counsel in the UK patent office. But he was known more broadly for his expertise in IP law, ruling (for example) last year on a trademark case involving a transvestite beauty pageant.

Tragically, Pumfrey died three days after the ruling was published of a massive stroke he suffered on Christmas Eve. The judge, aged 56, apparently had a weight problem. Pumfrey was well-regarded for his specialized expertise and will be missed by his peers.

Photo credit: Sir Nicholas Pumfrey, from the Times of London January 3, 2008 obituary.

InterDigital sells Apple a 3G license

Apple has licensed InterDigital’s patent portfolio for a rumored $20 million plus royalties. One estimate (reported by Reuters) estimates the deal being worth $56 million ($2 million/quarter) over 7 years.

Of course, Apple’s US iPhone is limited by the Cingular’s 2G (aka “2.5G”) slow EDGE network, so even at the new cheaper price many US buyers are hoping for a HSDPA version. But analysts agree that a European iPhone will require a 3G phone.

Presumably Apple will need a license from Qualcomm’s larger patent portfolio. One way would be to use Qualcomm’s 3G chipset. The existing iPhone has an Infineon GSM/EDGE chip, but thus far Infineon has not been a factor in HSDPA/USDPA RF chips. Other than Qualcomm, thus far the main suppliers of WCDMA chips are Nokia and Ericsson — but it’s not clear how either side of the deal would feel about selling using such chips for a competing product.

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