Another week, another judicial triumph for Nokia. The victim this time is Research In Motion, ailing maker of Blackberry. This clash of former titans, only the latest in a countless and complex string of legal squabbles initiated by Nokia, could well be interpreted by the casual investor as desperation — as though Nokia, unequal to the challenges brought to its very door by iPhone and Android, is trying to get the civil courts to fight battles more honorably fought on the even playing field of the free market. It might even be tempting to factor in this despair when valuing Nokia’s shares. But this wouldn’t just be wrong — it would be dangerously wrong.
Nokia’s legal activities aren’t about protecting their rapidly deteriorating bit of turf nor are they petty acts of vengeance. These are calculated and massive profit-making exercises founded on Nokia’s tremendously valuable pool of wireless technology patents carefully and expensively fostered over more than a decade of cutting-edge research and development.
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The gargantuan share of the mobile phone market that Nokia held for so long was no accident and if there was an absence of competition it was only because no one could compete. Indeed it could be argued that Nokia’s eventual loss of market share to iPhone and Android was facilitated by Nokia’s own innovation.
According to the authoritative Gartner report of quarterly handset sales, Nokia has only this year been knocked out of its number one spot by Samsung’s stunning 22% (largely Android devices), leaving Nokia with a still admirable 19.9%. Of course, that’s a dramatic drop from the 40% of worldwide sales that Nokia enjoyed at its peak in 2006 and its continued failure to penetrate the all-important US market (where Nokia holds less than 1% market share) would indicate that the gamble on an all-Windows strategy is failing to pay off and things will only get worse.
There is, however, an important distinction to be made between market share and direct market share. Bluntly stated, Nokia’s share of direct handset sales could fall to zero and it would still be a giant in the mobile device space, entirely because of its technology patents.
The actual value of Nokia’s technology patent pool is difficult to estimate with the issue clouded by a lot of cross-technology agreements and, of course, pending civil suits. However Nokia’s patents entitle it to a cut of every single iPhone, Samsung, HTC and Blackberry sold, amounting to an estimated €500 million (US$650 million) a year. This doesn't take into consideration the most recent success against Blackberry and more importantly it fails to reflect the sheer quality of Nokia’s patents, and that’s where the money is now and in the future.
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Technology patents are a daring valuation to make because of the nature of technology — it gets old. Nokia’s most valuable patents, however, are and will remain core to mobile computing for the long-term. Taking the most recent court decision as an example, this precedent recognizes that Nokia owns the unassailable rights to the methodology by which devices connect to WIFI networks. It’s not daring to say that this is something that phones, tablets and, who knows, refrigerators, will be doing for some time to come.
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Nokia also owns the rights to tethering (using your mobile device as a WIFI hotspot — a market niche which is poised to explode) and over the air data synchronization (your Outlook schedule appearing on your phone). It owns push messaging (which is how your Blackberry can tell you that you have a new email), location-based media tagging and a dizzying array of encryption and optimization patents that mean little to the end user but are essential to the delivery of current phones and the development of future devices.
Nokia’s protection of its patents is such an important portion of its revenue stream that the company can be thought of as two parts. The manufacturing part is doing poorly, largely because its devotion to battery-life and memory-management left Nokia deaf to the growing calls for usability. Apple heard the call and responded and Google was quick to follow but they both have to pay their dues. Never-the-less the manufacturing arm has exposed a weakness that may very soon evolve into some exciting times for investors watching technology stocks.
Christmas, the final quarter and Gartner’s inevitable report are all coming and either Nokia’s gamble on Windows phones will pay off, in which case Nokia’s shares are going to get a big bounce, or it won’t, in which case the takeover rumors are going to come back again and Nokia’s shares are still going to get a bounce.
If neither of these eventualities comes to pass and Nokia makes a middling showing at Christmas then it will remain a long-term good bet. It would mean that the brand remains strong and optimistic and in a position to leverage the final point — unlike every other handset manufacturer Nokia doesn’t have to pay license fees to Nokia.
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