Nokia and Qualcomm Settle Their Suits: What it Means

| Jul 28, 2008 | Mobile Devices | Competitive Intelligence Report

| Analyst: Avi Greengart

Current Perspective: Positive
Vendor Importance: Very High
Market Impact: High

Event Summary

July 24, 2008 – Nokia and Qualcomm have a new 15 year agreement covering various standards including GSM, EDGE, CDMA, WCDMA, HSDPA, OFDM, WiMAX and LTE. All litigation has been settled, and Nokia has withdrawn its complaint to the EC. Nokia has been granted a license to all Qualcomm's patents, and Nokia has assigned ownership of some patents to Qualcomm, including patents essential to WCDMA, GSM and OFDMA. There is an up-front payment and on-going royalties payable to Qualcomm; specific terms are confidential.

Analytical Summary

• Current Perspective: Positive on Nokia and Qualcomm’s landmark agreement, because it clears both companies to focus on their primary businesses: IP licensing and chipset design for Qualcomm, and handset design and mobile services for Nokia. Without knowing the financial terms of the settlement it is impossible to determine who made deeper concessions, but what is clear is that the agreement is comprehensive (covering just about every wireless standard), lasts a long time (15 years), and will have a significant impact on the competitive landscape as Nokia likely retains a cost advantage over rivals and may now place more emphasis on CDMA and dual-mode CDMA/LTE devices.

• Vendor Importance: Very high to both companies because the issues they were fighting over go to the core of their business models. Qualcomm can now extend its IP licensing through LTE and OFDM. Nokia can build handsets with a predictable royalty rate that likely retains a cost advantage over its competitors, and can more fully participate in established CDMA markets. Litigation costs (both material and managerial) were bogging down both companies as well.

• Market Impact: High on smartphones and consumer handsets, because it ensures Qualcomm’s place as a core IP supplier through the next major technology shift or two. The impact in the U.S. will not be felt until Nokia shifts resources – and possibly chipset suppliers – in reaction to the new deal.

Recommended Competitor Actions

• The other parties in the EU case against Qualcomm (TI, Ericsson, NEC and Matsushita) should continue pressing the EU to give the company a hard time and demand that Nokia’s licensing terms with Qualcomm be extended to the rest of the industry. The EC may like this argument, since the standards bodies to which this IP has been submitted require licensing on “fair and reasonable” terms, and nobody has defined just what “fair and reasonable” means.

• Samsung, LG and Motorola should seek to renegotiate their license agreements with Qualcomm. Motorola in particular should be able to claim it has core IP that offsets Qualcomm’s contributions.

• Vendors seeking to compete in emerging markets – where minute cost advantages can make enormous differences – have the most to gain. Nokia already claims enormous market share in India and China. Competing in these markets involves building distribution networks and a strong brand, but lower licensing costs could make it economical for established vendors who have invested in IP R&D to compete with lower cost Chinese manufacturers.

• Sony Ericsson can’t afford to revisit CDMA at this point, even though it is now clear that it will have to pay Qualcomm licensing fees on LTE down the road. Sony Ericsson’s first order of business is to stop building high end European featurephones that are not competitive with smartphones from Nokia and Apple. It must also figure out a clear mobile OS transition that takes it through the next couple of years as UIQ development is dead, but the Symbian Foundation OS is not ready.

• With Qualcomm’s large up front payment due from Nokia and its IP licensing business secure, Broadcom may have some leverage to get Qualcomm to settle on more favorable terms. Broadcom can also note that Wall Street clearly favors settlements even when the terms are fuzzy; Qualcomm’s stock immediately rose 17% following the resolution of its lawsuits with Nokia.

• Kyocera was originally Qualcomm’s handset division, and it (along with its Sanyo acquisition) will disproportionately feel competition from entry level Nokia phones should Nokia reappear in Sprint and Virgin Mobile. (Verizon Wireless buying Alltel, which will kill all unique Alltel handsets, isn’t helping either.) Kyocera must immediately move from building commodity entry level and mid-tier phones and begin competing in touchscreens and smartphones.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

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