Brian Chau is a JD Candidate at Osgoode Hall Law School.
As Nortel nears the end of the insolvency process, it is exploring the potential sale of its extremely valuable patent portfolio. Nortel holds 4,000 “patent families” related to the next-generation wireless technology, most notably LTE (Long Term Evolution) among others. The sale of these patents will have wide-ranging effects across the industry: Nortel’s former competitors are seeking to protect their prior purchases of Nortel’s wireless technology and obtain a competitive advantage amongst their peers.
However, the price tag is steep: JP Morgan’s Ehud Gelbum is expecting the patents to raise upwards of $2.9 B. While this sum may be disputed, there is little argument that these patent rights are highly sought after in the market. With worldwide markets racing to deploy LTE infrastructure as their next-generation wireless networks, these patents will likely generate significant royalties in the next few years (China, Germany, Japan among others). Nortel must come up with a strategy soon – the patent protection period is finite and with each passing day, the value of its portfolio decreases. Several key questions are still outstanding:
Will the Canadian government, which has stood by so far, take action if the patents are sold outside of Canada? In particular, RIM has been pushing for government action to block such a sale, on the grounds that the assets are important to the “national interest”. Given that they are among the leading Canadian bidders for the technology, they have much to gain if this strategy succeeds. The Toronto Star considers a possible analogy between these assets and the Avro Arrow.
Will Nortel emerge from bankruptcy and restructure as a LTE patent company? Some investors think so: Given that the patent portfolio was excluded from its sale to Ericsson, some investors are speculating that this is the case: Arguably, there is the basis for a smaller, profitable business that focuses on licensing the technology it developed. More from Rethink Wireless on the topic. Nortel has published its LTE patent royalty rates recently, and set them at one percent of the handset sale price.
How much are the patents really worth? In his report, Gelbum calculates the maximum value by using the 1 percent handset fee outlined by Nortel, and applying it against an expectation of 15 years patent protection lifespan at a 10% discount rate. However, he also notes that realistically they’ll capture a smaller proportion, and expects around $950M in revenue over the life of the patents.
Given the importance of these assets to the worldwide wireless industry, there are many interesting developments coming over the next few years.