Nortel Patents Still Have Legs

It seemed that the last time I wrote about Nortel and their wireless patents that I'd never again have reason to mention that company. They are after all in the process of being dismembered and disbursed to others. I saw little reason to think that the patents would still have any independent life apart from being parcelled off with the business lines. I was not the only one to think that.

Now I see that the situation was not quite as simple as I thought. If this article is correct, Ericsson agreed to short-term rights on a patent portfolio that would appear to impact on their business assets purchase.

"According to sources, wireless giants such as Nokia Corp. and Telefon AB LM Ericsson have privately expressed interest in acquiring the patents to protect their purchases last year of various Nortel wireless assets. It is believed that the new owners have short-term licensing rights to the patents."

On the surface, this situation would appear to confound the calculation of the price Ericsson paid since it would be uncertain how much they would have to separately pay over the long run for those patents to get the value out of the products they now own. I can only conclude that I simply do not know enough about the dynamics that are playing out in this never-ending saga. However, I can make a guess.

When there is carrier business on the table, vendors with the requisite technology and products jockey for position to win the business. The wireless sector is hot so there is a lot of money at stake, so every vendor wants the lion's share of the business. The carriers, all of which are pretty sharp at this game, do all they can to avoid single-sourcing, either by explicitly demanding a multi-vendor solution or citing standards compliance in the RFP, and often both; keeping two or more vendors on the hook is used as leverage to negotiate lower prices and more features.

This is a game that has played out many times in the telecommunications business, and I've been a part of it more than I care to remember. When there is no urgency to roll out services, this game can go on for years. When there is urgency -- when the carriers feel compelled, for whatever reason, to roll out services quickly -- the game proceeds much faster since vendors avoid spending time and resources fighting each other when there's big money on the table. How it all plays out generally looks something like what follows:

1. Each vendor has its own unique technology and patent base that it promotes as the best. They try to have the carriers write their RFPs in such a way as to favour their own technology.
2. The carrier points to an industry forum or standards body to hash out a common technology base and feature set, which they would then reference in their RFP. Carriers with similar interests will typically cooperate under the auspices of that forum or standards body to the extent that they all push vendors in the desired direction.
3. Vendors work hard to skew the standard to incorporate their own technology's features, hoping to slow their competitors' ability to bring their own products into compliance. If they are successful, they can also hope to reap patent licensing royalties from other vendors, either directly (if those vendors successfully win bids) or indirectly (by making their competitors' products too expensive to win bids).
4. Vendors and carriers block adoption of standards -- they're typically consensus bodies -- until the company holding relevant patents agrees to sensible royalty rates or waives them entirely. Many standards bodies make it a condition of participation -- legally binding, usually -- that this must be done.

In the case of wireless infrastructure equipment, including LTE, relevant patents are held by all of the largest vendors. Since these same companies often enter into global or sector-specific bilateral cross-licensing agreements among themselves, there may not be a serious issue with which of these vendors ultimately buys this batch of Nortel patents. Even if Nortel were to stay in business as an NPE (non-practicing entity) -- licensing patents as its primary business -- there may not be an issue; however this latter scenario is unlikely since creditors rarely agree to take an equity position in the bankrupt company, preferring to sell and put the proceeds towards the debts. Where the matter gets interesting is if the patent portfolio is sold to a company that is not one of the cabal of wireless infrastructure vendors.

For example, if the patents go to RIM, since they are not in that infrastructure business today, they have no incentive to cross-license and would most likely choose to build a royalty business or litigate against LTE vendors. From, say, Ericsson's point of view, they may not value the portfolio highly if it were to go to Alcatel-Lucent -- where by high value I mean make a higher-priced bid for the portfolio -- but they might do so if RIM were to bid. Either way, I doubt that the federal government will get involved if a non-Canadian company bids on the patents.

While I have no idea if this is the way it will play out, it seems to me a likely outcome in comparison to some others. The situation is interesting enough that I'll pay some attention to see if I've gotten it right.