What does Nortel mean for the winners and losers?

by Andrew Watson on 20 July 2011

Try these two tables. Who individually wanted it the most, that is, semi-speculatively, who put up the most individual money?

Amounts committed, or who wanted it most?

Company Amount
Google $2.5bn
Apple $2bn*
RPX consortium $1.5bn
Intel $1.5bn
RIM $770mn
MSFT (est) $500mn
Sony (est) $500mn
EMC $400mn
Ericsson $340mn

 * reported in Business Insider on 21st July to have been $2.6bn–not totally material in the context of what follows–what’s $500mn between friends?

As a proportion of cash reserves, or who needed it most though, the story is quite different. We accept that this is a highly rudimentary analysis but telling nonetheless:

Company Proportion of Cash Reserves
Intel 37.5%
RIM 26.6%
EMC 7.5%
Ericsson  7.4%
Google 6.4%
Sony 3.9%
Apple 3%
MSFT 1.4%
RPX Consortium  N/A we think, special bid situation

 

We can only idly speculate about the others in the auction. Huawei seemingly joined up with RPX (odd combo though RPX’s larger members are listed above). Nothing much known or reported about ZTE, Qualcomm, IV and others. We’ll have to hack a few phones (joke I promise) or keep our noses close to the ground to find out.

In summary, Google, in terms of gross cash, probably wanted it most badly but couldn’t find enough friends to play with. Apple wanted it second most but allied even with old foes to be able to win.

Intel and RIM were prepared to commit the largest proportion of their cash reserves to win it suggesting that both needed it most.

Intel ended up choosing what looked like the wrong partner, but when viewed against the ability to negotiate the IP rights it needed in a consortium of what would have been seven, probably took the right decision to partner with Google.

RIM is a standout for us. With a meagre (relatively) $2.9 bn of cash reserves and a rapidly declining market share and (so they say) future, this is a staggering amount of money to commit. RIM really really needed it, and we wonder whether this would have been authorised but for a rather rapid ROI in the form of relief from license out-payments.

And, equally interestingly, who do we think is most affected by having to renegotiate its cross license agreements? We believe that Nokia and Qualcomm should be expecting knocks on the door in the coming weeks from Apple and RIM seeking to renegotiate their current cross license terms. Nokia is likely the largest loser unless and until it can benefit from a license to the Nortel portfolio from, most likely being acquired by, new best friend Microsoft.

In short, lots and lots of behind the scenes dynamics, both direct and indirect.

Winners

Company  & Executive Summary of Auction Performance Benefits
A very smart move. Played the auction very cleverly. Was not willing to bid as much as Google on its own but won by finding friends and foes with similar motivations or maybe a common motivation to stop Google winning.Is there any truth in the rumour that Bill Gates personally holds a large share in Apple? A bigger and more influential seat at the Standards tables.The opportunity to renegotiate its current cross license deals with (probably and immediately) Nokia and others.The opportunity to redefine the way that Standards bodies operate. Less cartel, more collaborative.The opportunity to increase its cash pile, should it desire by seeking out its own license deals for the Nortel portfolio, to the extent that it is currently unlicensed.
Another very smart IP move by MSFT. Knows that product revenues alone will likely not maintain its market position. Has made the shift to high margin IP contribution inside a technology generation by hiring some of the best IP minds. Its first seat at the Standards tables.The hedge of knowing that whichever way the markets go, it will be a net IP winner. From all product revenues to partly and growing IP revenues, MSFT will be a net winner. It has learned very very fast.The ability, unless constrained by the private agreements, to sub-license to its mates, including new friend and M&A target Nokia.
Under extreme product pressure and risks becoming another Psion, loved by a few but not loved enough by the masses. We believe that its primary motivation was financial and immediate, to relieve some of the out-payments it makes under cross licenses.  An immediate ROI in terms of its ability to renegotiate several of its cross license deals.We also believe an increased seat and influence on the Standards bodies.

Seems to have got what it wanted. We would be surprised if Ericsson didn’t get a defensive license to the Nortel portfolio through its acquisition of the Nortel business units. If so, this was strategic and value-adding
A larger seat at the 3G, 4G and LTE Standards tables. Moving it away from the over-dependence on the now becoming legacy 2G essential patents.
Seems to have been a combination of IP strategic and product strategic. IP strategic like its investment in Intertrust with Philips. Product strategic as known to be due to release a folding tablet device, its first 3 &4G enabled tablet, in Q1 of 2012. Product defence from being subject to new cross licenses when its folding tablet comes out.IP strategic in giving it a first time seat at the Standards tables.
With EMC, we can only take the reports on faith that EMC has acquired a part of the Nortel portfolio dedicated to data storage. Not a known IP aggressor but has committed a sizeable amount of cash to being part of the victory parade. More to follow. Really not known.

For intrigue, we also wondered if the consortium has thought about how it will use its new and respective Standards seats collectively? Or indeed if this is allowed?

And the losers?

Company  & Executive Summary of Auction Performance Benefits lost
Could not find enough friends. Wanted it badly, probably the most, but its terms of joining together were either unattractive or it is not trusted enough. Once in a business cycle lifetime opportunity to join the IP grown ups by acquiring a portfolio. We do wonder though whether, doing the maths, Google simply maxed out the benefits it could see from the portfolio and carried out a simple cost-benefit analysis to calculate that it simply wasn’t worth it. Does anyone know by the way if Google indemnifies Android adopters against IP risk in using the platform as part of the license terms? We doubt it but it is fascinating to know. 
Not enough of a cash heavyweight to win solo despite really wanting it, and probably really needing it as the world migrates from Intel chip-enabled devices such as PCs. Not able to negotiate what it really needed with the Rockstar consortium so took its chances with Google. A credible effort and well played. Taking Eduardo Sanchez on faith, really wanted it and probably really needed it. But not weighty enough to get it.
The Chinese didn’t appear to take this opportunity seriously enough. Huawei and RPX appear to have combined but Huawei should have combined with ZTE and the Chinese government to bid.  An opportunity lost. Will now find RIM, Ericsson and even Apple knocking on their doors to negotiate old or new licenses. Should have bid seriously. Maybe did but the truth is yet to come out.
A loser despite not even being a player in the auction. Does this add even greater motivation to find itself a new home within MSFT?  Either immediately or over time will be the recipient of calls and approaches to renegotiate license deals.

 

Of the patent aggregation funds, we don’t see RPX as either a winner or loser. It played and played seriously enough but its members had larger strategic interests than in backing a co-bid via RPX.

And, finally, what of IV? Strangely mute throughout. Is this heavyweight losing its sparkle?  A rare opportunity to bid for Standards essential patents seems to have gone begging without a thought or even a bid. Very odd.

To reiterate a question, one I’ll post on Twitter too:

Does anyone know by the way if Google indemnifies Android adopters against IP risk in using the platform as part of the license terms? We doubt it but it is fascinating to know.

{ 1 comment… read it below or add one }

Eduardo 07.23.11 at 7:58 pm

Thank you for the note. Events have overtaken us again, as Apple and Google have Interdigital on their sights. They may not be the only ones.

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