Why Qualcomm Folded to Nokia

Qualcomm struck a patent deal with Nokia when it seemed a Delaware court wouldn't go its way. So ends mobile's biggest, costliest battle

by Jennifer L. Schenker

The longest running, highest-stakes poker game in the history of the mobile industry came to a surprising conclusion July 23, when Nokia (NOK), the world's largest mobile-handset maker, and Qualcomm (QCOM), the largest chipmaker for cell phones, suddenly agreed to settle their legal battles over intellectual property and royalties, just as a pivotal court case in Wilmington, Del., was about to begin. The accord will have wide-ranging implications for both companies and the future of the mobile sector.

The two sides said they have agreed to drop all legal complaints against each other in the U.S., Europe, and Asia. The companies also struck a 15-year licensing deal that gives Nokia rights to a wide portfolio of Qualcomm patents, covering a wide range of different-generation mobile-phone standards. Nokia will pay Qualcomm an up-front sum and ongoing royalties, but the companies did not elaborate on terms. The Finnish phonemaker agreed not to use any of its patents directly against Qualcomm, allowing the U.S. chipmaker to integrate Nokia technologies into its chip sets. Nokia will also hand over to Qualcomm several essential patents in fourth-generation wireless networking technologies known as Long Term Evolution (LTE) and WiMAX.

The agreement, announced after European markets closed, sent Qualcomm shares soaring 16.82%. (Qualcomm, which was supposed to report earnings July 23, postponed its earnings announcement to July 24). Nokia shares were up 4%, with analysts predicting a number of upsides, including a potential increase in the Finnish phonemaker's U.S. business.

Expensive Struggle

So ended a standoff that crimped the expansion of both companies' businesses, cost each side hundreds of millions of dollars in legal fees and threatened to fragment the mobile industry's approach to fourth-generation services. "It has been a long time but it has been worth it," says Rick Simonson, Nokia's chief financial officer, explaining that the Finnish phonemaker was able to negotiate a much lower royalty rate than the one it was paying when a licensing agreement between the two companies expired in April 2007. He declined to be specific.

Billions of dollars were at stake. "There is a reason this was such a decisive battle," says Ben Wood, director of CCS Insight, a British mobile consultancy. "If you are striking a 15-year agreement and Nokia is making half a billion mobile handsets every year, even a fraction of a percentage point has massive implications for both sides."

Qualcomm will benefit immediately by receiving a lump sum in royalties—likely more than $1 billion for the past year. Just in calendar year 2009, the royalties could add about 30¢ per share to Qualcomm's earnings, boosting them from $2.50 to $2.80, says Mark McKechnie, an analyst with American Technology Research.

San Diego-based Qualcomm, which gets about two-thirds of its profits from licensing fees on its patents, has been refusing to accept payments from Nokia ever since the contract it had with the phonemaker expired 15 months ago, preferring to defer hundreds of millions of dollars in royalties until a new bargain was struck.