Hoping for a Payoff From 3G Patents
By Marc H. Gerstein
Market Guide, Director of Investment Products
Usually, companies discussed in this column are drawn from the
Market Guide fundamental stocks screens. But INTERDIGITAL
COMMUNICATONS (IDCC) came to my attention a different way,
through a Market Guide user who suggested this firm might serve
as an alternative vendor for wireless firms building W-CDMA
(wideband code-division multiple access) systems that need
technology licenses but don't want to deal with QUALCOMM
(QCOM). After taking a close look at the company, I hesitate to see
it as a full-blown QUALCOMM alternative. But it does seem well positioned to profit from its own intellectual
property portfolio.
All this relates to third generation (3G) cellular, which will feature strong Internet capabilities. Most observers
assume the CDMA standard will emerge as top-dog, but there are some competing sub-standards, the main
ones being CDMA-2000 (championed by QUALCOMM) and W-CDMA, which will probably take longer to be
implemented and may not be as efficient as CDMA-2000. However, W-CDMA is "backward compatible" with
much of the current generation of wireless technology. It's too early to predict the ultimate winner, but that
compatibility issue is huge and right now, W-CDMA is gaining momentum.
In picking technology winners, it's important to understand it's not necessarily QUALCOMM against
so-and-so. To build a fully functioning wireless system, you need to make many implementation decisions
beyond CDMA-2000 vs. W-CDMA and collect lots of technology licenses. And even if it is W-CDMA, you'll
probably need to talk to QUALCOMM since it does hold some essential patents. But you'll also have to talk to
INTERDIGITAL, as it, too, holds essential patents. And beyond the essentials, there are patents all over the
place that are being pushed by their owners as not necessarily essential but "commercially desirable."
INTERDIGITAL is well represented here, too.
You may not have heard of INTERDIGITAL. But all the major 2G wireless manufacturers know it very well, as
does the International Telecommunications Union (a standards-setting body). Investment managers say past
performance doesn't assure future success. That also applies here, as nobody can guarantee that
INTERDIGITAL's stature in 2G will translate into 3G prominence. But everybody's in that same boat. And
INTERDIGITAL garnered an important ally among in-the-know tech folks at NOKIA (NOK). Specifically, NOKIA
and INTERDIGITAL inked a multiyear deal calling for INTERDIGITAL to develop the time-division duplex
component of NOKIA's 3G system, which is part of the air interface protocol.
At present, INTERDIGITAL's financials are apt to confound those who like easily analyzable comparisons. The
company narrowed its business focus to technology licensing and development. The NOKIA arrangement is
supposed to serve as a prototype for development deals that move INTERDIGITAL beyond the position of a
company that just deposits royalty checks. Also, an accounting change now has INTERDIGITAL recognizing
license revenue and expenses gradually as licenses are exhausted, instead of all up front. Ultimately, this
leads to a better quality, more analyzable earnings stream. But until the deals get going, it's hard for analysts
to forecast. This situation should improve toward the end of this year.
And there's one important caveat. Patent litigation is inevitable in the intellectual property arena and the
lawyers will probably get lots of billable hour opportunities out of 3G. But INTERDIGITAL still has a pending 2G
case with ERICSSON (ERICY). Being 2G, it's not central to INTERDIGITAL's future. But investors are
watching it closely and the stock is apt to have sharp short-term swings, one way or the other, as the case
produces news.
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