The Nortel Six – $4.5 Billion Peace of Mind?

My thanks to Jim Hallenbeck, of Schwegman, Lundberg & Woessner, P.A., for this guest post:

The Nortel Six – $4.5 Billion Peace of Mind?

The recent Nortel Patent Auction has been the buzz in the patent and wireless communities.  Late on June 30, 2011, Nortel announced the $4.5 Billion winning bid made by an industry consortium including Microsoft, Apple, Ericsson, EMC, Sony, and Research in Motion (the “Nortel Six”).  Considering the auction lot included approximately 6,000 patents, the going rate per patent was $750,000.  As about anyone with even trivial patent valuation knowledge can imagine, $750,000 is a considerable amount per patent when the value of the portfolio has been questioned.  See http://gametimeip.com/2011/07/05/how-do-the-nortel-patent-auction-numbers-measure-up-a-look-at-comparable-ip-monetization-efforts/ (); but see http://blog.sunlightresearch.com/?p=85 (The Patent Research Review Blog by Sunlight Research identifies some Nortel portfolio gems).  Nonetheless, there are likely about 60 patents in the portfolio that are “real diamonds” according to Joff Wild of IAM Magazine.  $4.5 Billion is a large number for a patent portfolio, but the Nortel Six are quite sophisticated and certainly have a good handle on the Nortel portfolio value.

Determining the value of patents and patent portfolios is a black science.  There are various models that accountant-types use to determine values including cost, market, and income models.  The cost model identifies the cost of replacing the patented technology with other technologies.  The market model is akin to valuation of real estate based on comparable sales.  The income model bases value on projections of future income.  In my opinion, the income model approach is the most illustrative of true business value as dollars in the door are what most reasonably results in value.

Under the income model, potential revenue streams are evaluated.  With regard to patents in the telecommunication and electronic fields, a patent that is essential for implementation of an industry standard is quite helpful in generating revenue.  According to a Reuters article dated December 9, 2010, Nortel owns seven of the 105 patent families likely to be essential to 4G wireless technologies, such as LTE.  Add into this equation that on June 1, 2011, Infonetics Research projected that $245 Billion will be spent on mobile infrastructure between 2011 and 2015, most of which is likely to be 4G infrastructure.  Although I can’t predict what portion of that revenue will be paid in patent license fees or what portion of the patent license fees will be attributable to the Nortel portfolio patents, the Nortel portfolio is likely to generate some serious revenue.

Thus, from an income model perspective, the $4.5 Billion winning bid for the Nortel portfolio does not seem quite as unreasonable.  $4.5 Billion is under two-percent of the projected five-year, $245 Billion market.  Despite some of the Nortel portfolio patents having limited patent term remaining, some will certainly extend for years thereby extending the revenue stream beyond 2015.

But in arriving at the $4.5 Billion bid, the Nortel Six likely had more in mind than just revenue.  The Nortel Six almost certainly considered many other factors.  The easy factors to identify are the prevent Non-Practicing Entities from gorging the wireless industry, ensuring their access to the patented technologies, and removing infringement litigation exposure.  These are factors which are resolved for the Nortel Six by acquiring the Nortel Portfolio.  There is value in certainty and predictability, or stated otherwise, there is value in peace of mind.

The not so apparent consideration is patent pooling.  While industry standards are an important step in moving the wireless industry in a new direction, patent pools can encourage more rapid adoption of a technology.  Patent pools operate as agreements between patent holders to provide industry access to essential patents on standardized terms.  In a fragmented patent landscape, such as with 4G wireless, patent pools simplify license availability and cost-competitiveness between competitors.  In a technology industry dominated by standards, patent pools simplify freedom-to-operate analysis as many of the patent licenses needed to clear a product will be available from the patent pool.  Ease in licensing through a patent pool encourages companies to bring products to market and thereby speeds adoption of the pool technology.

The formation of patent pools with regard to an industry standard is a difficult feat, especially with wireless technologies.  Despite the efforts of many, a patent pool was not formed for 3G wireless technologies.  With 4G wireless technologies, there are three groups attempting to form patent pools.  These groups include Sisvel, MPEGLA, and Via Licensing.  For a patent pooling effort to be successful, agreement must be reached by the patent holders that are to contribute patents to the pool.  If a party holding standard essential patents decides to forego a pool targeted at a standard, the pool is less useful and is more likely to fail in formation.  Consolidating the Nortel portfolio with the Nortel Six, which includes holders of patents essential to 4G wireless standards, some boundaries to forming a patent pool are removed and others are certainly prevented thereby enhancing the likelihood of patent pool formation.  Thus, patent pooling may well have been another Nortel Six consideration.

While revenue was certainly a factor in setting the $4.5 Billion bid, there were undoubtedly other considerations by the Nortel Six.  At the very least, the Nortel Six has removed exposure and has added some degree and certainty to their business operations.  Is $4.5 Billion too much to pay for peace of mind?  Or is this a play to help form a patent pool and accelerate adoption of 4G technologies?  Regardless of the factors, $4.5 Billion is a bold statement about the importance of patents to the overall value of a corporation.

 

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