Nortel Post Mortem

by Andrew Watson on 19 July 2011

Allowing a couple of weeks to go by after the end of the Nortel auction has given time to think and to add a few insights beyond the facts. Plus a week’s camping holiday in incredibly sunny Cornwall which it would be hard to beat.  Three themes have been intriguing us at ipVA:

  • How have the winners divided the spoils between them?
  • What the auction result means for the winners, and the losers or non-bidders?
  • What the business prominence of the auction could mean for the future of IP in the mainstream business world, rather than the quirky and legally focused micro world in which the IP community now lives and works?

In this first post, we wanted to deal with the shares of the spoils.

In our view, one large item missing from the posts and insights so far is an assessment of the likely private arrangements between the six winners as to how the Nortel patent assets could have been shared.  We do I believe know that the $4.5bn pot was contributed something like this:

  •       Apple $2bn
  •       Microsoft and Sony $1bn between them
  •       RIM $770mn
  •       EMC $400mn
  •       Ericsson $340mn.

This seems to establish some sort of hierarchy between the players, Apple leading and, according to some reports, getting first dibs at the Nortel 4G and LTE assets. But, looking behind the scenes we wondered if the Cringely on Technology post is entirely accurate, and whether the private arrangements between the bidders needed a second speculative glance. There are likely a series of highly complex contracts in place between the new owners, details of which will not surface for a long time, if ever. These arrangements would likely have to deal with terms including:

  • Who owns what outright? Reports indicate that Apple would own all of the 4G/LTE assets outright as the largest contributor, but we’re not so sure that the terms will be as absolute as this.
  • Who owns what on a shared basis? We think that this is the missing link in the success of the consortium, the factor that drove the price up so high, as the new owners were able to obtain equivalent offensive and defensive benefits from common ownership of the same assets.
  • Who obtained a license to what? It’s likely that anyone in the consortium who didn’t obtain outright ownership of any of the portfolio would have been granted a license by those who took ownership. Don’t under-estimate the value of a defensive license to these assets in persuading consortium members like RIM to increase their stake in the auction pot that was ultimately successful.

Looking at the second issue of co or shared ownership is the most intriguing to us. Co-ownership of IP and patents is a little hard to comprehend as it doesn’t operate much or anything like other assets. In a nutshell co-ownership rules and principles are determined by the country in which the patents concerned are to be “commercialised”.  And there is no global common framework. In the UK for example, co-owners can only commercialise patents with the consent of both owners. Contrast the US where both co-owners can freely commercialise without consent from the other (s). And then contrast again Germany and (I think) China where either party can commercialise as long as it pays a reasonable royalty to the other party.

Now all of these local country-specific rules can be overridden by a contract between the co-owning parties. When I was General Counsel of Thirdspace, Oracle invested in the company and transferred ownership of a half share in their IPTV patent portfolio to Thirdspace and nCUBE in “equal and undivided shares”. In February 2002 a co-ownership agreement allowed both companies to freely exploit the portfolio without the consent of the other and without having to account for royalties. As Thirdspace ownership and patent portfolio went to Alcatel in 2003, so did the benefit and the obligations under the co-ownership contract. Ditto with nCUBE, transferred along with its co-ownership share of the patents to C-Cor and then to Arris Corporation.

We think something similar may have played into Rockstar Bidco’s structure. It would make little sense, we think, for RIM to contribute over one third of their slow-growing cash reserves (compared to Apple who, according to our calculations donated just over 3% of their rapidly escalating cash pile) unless the auction success would give them not only short term relief from out-payments under cross licenses but also long term strategic benefit from having some offensive rights in the 4G and LTE assets. We’re pretty sure that RIM would have an immediate relief ROI from its current cross license agreements with the likes of Nokia, Qualcomm or Motorola, maybe even Ericsson, but we also believe for that amount that they should have negotiated joint-ownership of part of the portfolio. Ditto Ericsson, who likely took a license to the Nortel portfolio when acquiring some of the Nortel trading divisions. Why then donate three hundred million dollars more without a tangible and positive benefit?

If right, this puts a different perspective on the motivations of the bidders and what the victory may mean for Rockstar BidCo and for the losing Ranger consortium. Again we’re not so sure that this is all or even mainly an anti-Android strategy. That’s not the way the IP world is learning to operate. To us, it is far more about gaining from the success of other’s products in the market, not preventing them from operating but, a la Microsoft with HTC, making sure that a slice of the successful pie comes in the patent holder’s direction even if the market is turning away from Microsoft’s products.

All of course speculation, but we’re of the view that, as all of this is eminently legally possible, why would it not play into the thinking of the very sophisticated players who make up the Rockstar Bidco consortium.

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