“Big day” for Nokia and Qualcomm: hastens new-look QCOM and industry change
Published: Wednesday 23 July, 2008
Qualcomm always knows how to make an impact, and the eleventh hour settlement of its multifaceted, 15-month legal battle with Nokia last night had all the elements of a movie. A key hearing in a Delaware court was abruptly postponed, as was Qualcomm’s quarterly results statement, and it was announced that all the licensing and patent infringement issues between the two giants had now been settled, and Nokia had also withdrawn its antitrust complaint before the European Commission.
Terms are not revealed, though some, notably the new level of royalties, will emerge from future financial filings by the companies. In many ways, this will be the least important aspect – the precedent for the whole industry is the most significant aspect. The Nokia deal is unique and will not be directly replicable by other handset makers, but it will undoubtedly accelerate the rethink of IPR strategies in which Qualcomm is already engaged, well aware that in the next generation of handsets it will not enjoy the patents dominance it had in CDMA, and so will have to adjust its business model accordingly. This could set new expectations across the sector, reduce the power that Qualcomm has over phonemakers, increase the ability of smaller chipmakers to compete, and contribute to the ongoing trend for dramatic price reduction across the cellphone industry as companies target emerging markets and turn to software for differentiation.
Ironically, despite the radical reworking of its business that will be involved, the outcome could be a new-look, more powerful Qualcomm, with which phonemakers – and increasingly, vendors of other devices like laptops or media players – will be happier to do business. There has been increasing feeling that the chip business needed to be separated from the licensing arm in order to be free to promote its unarguably advanced products, without the burden of the hostility to Qualcomm’s IPR practises. It will now be able to stop short of a full spin-off of QTL, the IPR operation, especially if the other EU complainants, including Ericsson and Broadcom, also withdraw their actions (CEO Paul Jacobs had hinted that adverse rulings by the EU would be the most likely trigger to spin off QTL). But it will certainly be rethinking the balance of its business, repositioning its patents strategy, and relying on the IPR more heavily to make its chips unbeatable, rather than for such a high level of direct revenue.
This will lead to short to medium term pain for its licensing arm, which accounts for about one-third of its revenues and half its profit, but it has been working hard to balance such losses by strengthening its core chip business. It overtook Texas Instruments for the number one place in cellphone baseband processors last week and has consolidated that position since, scoring win after win in terms of getting advanced technology into the market at an early stage while driving down cost and power. Most importantly, the settlement may end the effective exclusion of Qualcomm from the Nokia business, which now accounts for 40% of the world’s cellphones. Indeed, it may be that talks about possible sales have been tacitly built into the deal, and any design win with Nokia – likely not to follow until next year, given handset cycles – would be a psychological and financial boost for the US chip designer that would go a good way to outweight loss of future IPR revenues.
Nokia had paid $1bn over the period from 1992 to 2007 for Qualcomm patents, but the US company had already accepted that it was ‘paid up’ for the older technologies, and it was IPR in W-CDMA and some surrounding or emerging systems like OFDM and GPS – all of which will be vital to the current and next generation of handsets – that were at issue. Nokia had put $20m a quarter on the table as the amount it believed to be appropriate once it had cross-traded its own enhanced patent portfolio with Qualcomm’s. Cross-licensing and even exchange of patents are features of the settlement and will help make it sufficiently complex that it cannot be taken as a direct blueprint for Qualcomm settlements with other handset makers, though it will increase their negotiating power. It is highly likely that Nokia will pay more than $20m a quarter, and it has stated that it will make an upfront payment.
It will also assign ownership of a number of its patents to Qualcomm, strengthening the chipmaker’s revenue streams in IPR even as, presumably, it will be agreeing to license these technologies under terms acceptable to Nokia. Some of the patents transferred from Nokia are understood to include OFDM rights – this is an area where Qualcomm is seeking to strengthen its hand, and it already claims, though with no proof offered, that it has the world’s largest OFDM patent collection. This sets out an interesting scenario – Nokia and other vendors reducing their patent holdings, or entrusting them, effectively, to the guardianship of licensing specialists, but in return, imposing a new and more equal licensing policy on these companies. Nokia, unlike Ericsson, uses its patents mainly to improve its bargaining power with suppliers rather than for direct revenue, hence why this aspect of the Qualcomm deal is characteristic and significant. Sharing of IPR could conceivably lead to joint R&D, as it has in the past with TI and STMicro.
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