Why Qualcomm Folded to Nokia

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Patent Payments

At issue was how much Nokia—and the rest of the industry—should pay to license Qualcomm's patents (BusinessWeek.com, 10/17/07) for third-generation mobile technology. When 3G mobile standards were being developed about a decade ago, the San Diego company held key patents on the underlying technology, known as W-CDMA, that were adopted by the industry. Qualcomm agreed to license those technologies to other companies on reasonable terms, and, as a result, its patented inventions became an integral part of 3G.

But Nokia argued that the royalties Qualcomm demanded were too high relative to the value of the company's patents, and teamed up with a half-dozen other tech firms to try to force Qualcomm lower. The Finnish company filed a number of lawsuits and, two years ago, asked the European Commission's antitrust division to investigate Qualcomm's licensing fees. In their original complaint, Nokia, Broadcom (BRCM), Ericsson (ERIC), Texas Instruments (TXN), NEC (6701.T), and Panasonic Mobile Communications (MC) alleged that Qualcomm overcharged for its intellectual property and had used potentially abusive techniques to prolong its dominant position in mobile-phone technology. On July 23, Simonson said Nokia will drop its EU complaint. "Seeing as Nokia was the driving force for this complaint, we think that this will effectively end the EU complaint of the other plaintiffs," said a research note from Richard Windsor, a mobile analyst at brokerage Nomura (NMR).

What led to the breakthrough just hours before the trial in Delaware was about to begin? On July 23 a German federal patent court ruled that a Qualcomm GSM patent asserted against Nokia was invalid, the third consecutive court to conclude that Qualcomm's patent claims against Nokia were without merit. Britain's High Court and the U.S. International Trade Commission also rejected Qualcomm GSM claims. But it was the Delaware case that was the most important in the dispute, deciding the key issue of W-CDMA royalties. Analysts speculate that Qualcomm may have settled because it feared it wouldn't win that one, either.

Qualcomm was effectively asking for a royalty rate of about 4.5% of the phone's average selling price, an amount "which is fairly crippling in an industry with operating margins of 5% to 15%," according to a research note from mobile-industry analysts in the London office of Dresdner Kleinwort. Nokia wanted to pay less than 3%. "With almost the entire industry on the side of Nokia and with the principles of FRAND (Fair, Reasonable, And Non-Discriminatory) terms being widely accepted by almost all industry players for the longer-term well-being of the industry itself, we believe that the legal argument may have been in Nokia's favor," the research note said.

Eleventh-Hour Deal

Pressed on what led up to the last-minute agreement, Simonson says it came as a surprise to Nokia. "It was unlikely and unpredictable," he says. "We all happened to be in Wilmington, Del., and when there was movement we were well prepared and it came together."

The legal battles were taking a toll on Nokia and Qualcomm's businesses, say analysts. One of the disputes led to a temporary ban on importing handsets containing the San Diego chipmaker's technology into the U.S. And Nokia's court battles with Qualcomm have adversely affected the Finnish phonemaker's CDMA business and its dealings with U.S. wireless carriers, says CCS Insight's Wood. "Psychologically, U.S. carriers were very worried about dealing with Nokia while the patent dispute was raging, and it was almost impossible for Nokia to deliver mobile phones for CDMA networks without working with Qualcomm," says Wood. "The agreement will help Nokia's efforts in North America, which is their Achilles' heel right now."

Nokia's Simonson says, and analysts agree, that the end of the disputes between Nokia and Qualcomm will also boost the industry's efforts to advance fourth-generation mobile networks.

The agreement could also put pressure on other companies, such as Texas Instruments and Broadcom, to settle with Qualcomm.

One downside for Qualcomm: If Nokia has obtained a discount on royalties, analysts say other big mobile handset makers such as Motorola (MOT), Samsung, and LG may demand a similar cut.

With Olga Kharif