Global Economics

Zero Hour in the Nokia-Qualcomm Spat


The two companies are fighting over patent rights and fees just days before a licensing agreement between them expires

As titanic tech-company rivalries go, Nokia vs. Qualcomm may not yet rank with Apple (AAPL) vs. Microsoft (MSFT) or Oracle (ORCL) vs. SAP (SAP). But the dispute between the Finnish mobile handset giant and the U.S. chipmaker is approaching that magnitude. In the final days before a licensing agreement between the two expires on Apr. 9, they are turning up the volume in a dispute over the intellectual property underlying a growing share of the world's most advanced mobile phones.

The latest salvo: On Apr. 5, Nokia (NOK) said it would pay $20 million to Qualcomm (QCOM) to cover some patent rights through the second quarter. Analysts said this maneuver reduces Nokia's legal risk while setting a low bar for license fees. Just two days earlier, Qualcomm filed lawsuits in Texas and Wisconsin accusing Nokia of patent infringement, the latest in a long series of court disputes on three continents.

By prepaying, says analyst Richard Windsor of Nomura International in London, Nokia cuts the chances that a judge will find the company guilty of "willful infringement" and impose punitive damages. However, Qualcomm called the $20 million payment "arbitrary" and said it isn't up to Nokia to determine the fair value of the patents.

For Nokia, the world's biggest handset maker, the larger aim is to provoke a revaluation of the intellectual property that goes into the most advanced mobile handsets. Nokia gripes that Qualcomm is exaggerating the value of the research and development it has contributed to a technology known as wideband CDMA, or WCDMA. CDMA is the emerging standard for third-generation (3G) mobile devices that can surf the Internet and handle voice traffic.

Qualcomm Protests

Qualcomm's royalty demands threaten to raise the price of advanced mobile phones and hamper their spread to emerging markets, where a handset represents a huge investment for most people, Nokia claims. "In those markets every dollar counts," says Chief Financial Officer Rick Simonson.

Naturally, Qualcomm disagrees, arguing that the research it has done and licensed to equipment makers has, on the contrary, helped foster the spread of mobile technology. (see BusinessWeek.com, 3/20/07, "Nokia and Qualcomm Spar Over Royalties"). There's no disputing that the technology has spread: Handset sales are expected to hit 1.1 billion this year as people in emerging markets increasingly scrape together the means to get connected.

How the Nokia-Qualcomm dispute plays out could have an effect on how that growth continues, and how quickly low-income users get access to broadband 3G devices. "Primarily those markets aren't using 3G but they will," says Simonson. "That's why this is becoming more relevant."

Other Cases Pending

Representatives of the two companies are negotiating behind closed doors, even as they battle in courtrooms across the globe and in the media. Nokia and Qualcomm seem so far apart, however, that some observers are pessimistic that they will settle. "It's the immovable force against the unstoppable object," says Stuart Carlaw, London-based wireless research director for ABI Research. Analyst Windsor of Nomura tips Qualcomm to prevail—but only after a protracted legal fight.

In addition to the squabble over WCDMA patents, Nokia and Qualcomm also have pending litigation concerning patents for second-generation GSM technology. And Nokia is pushing the European Commission to probe whether Qualcomm's royalties are anticompetitive (see BusinessWeek.com, 10/31/05, "A Scrum Over Qualcomm's Fees").

The world won't come to an end on Apr. 9, when key licensing agreements between Nokia and Qualcomm expire. (Nokia also has an option to extend the existing agreement by a year.) But a stalemate would create more uncertainty in an industry that already suffers from a lack of clarity about intellectual property issues.

Agreements between companies are typically worked out behind closed doors, and there is little disclosure of terms. "There is no transparency, no benchmarks. It's a minefield," says Carlaw.

Risky Dispute

For Nokia, the worst case would be that a U.S. judge issues an injunction blocking sale of its phones in the U.S. Such a dire result is considered unlikely, though.

Nokia is known for painstakingly weighing every decision, and has certainly done a thorough assessment of the legal risks. "We know what we're doing here," CFO Simonson says. In any event, U.S. sales account for less than 5% of Nokia revenue.

Nokia, with its reserved Finnish culture, is a company that generally avoids public confrontations. So its decision to do battle publicly with Qualcomm illustrates how much is at stake.

It's not just the cost of Qualcomm's royalties, which typically amount to 5% of the price of a phone before operator subsidies. Nokia pays about 3% because it can barter its own intellectual property, some of which Qualcomm needs for its chips.

Ultimately, the dispute reflects how the balance of power in the industry has changed since Nokia first forged licensing agreements with Qualcomm in the early 1990s. Then, Nokia was an emerging handset maker, and Qualcomm was a pioneer in CDMA, a narrow-band technology widely used in the U.S.

Staying Focused

In the meantime, Nokia has invested some $40 billion in research and development, by its own reckoning. In addition, handsets come packed with more and more features, including cameras, music players, video players, and Internet browsers, not to mention a variety of receivers and transmitters designed to connect to different kinds of networks. Nokia's state-of-the-art N95 handset has six different radios operating on 10 frequency bands.

Nokia says that Qualcomm's share of all the intellectual property behind those technologies has fallen as devices have become more sophisticated, even as Nokia's IP contribution has risen. "Our rate of investment and innovation is one of the greatest of anybody in the industry during the period," Simonson says. "If we're spending this kind of shareholder money, it's incumbent that we get fairly compensated."

Ideally, the dispute would be resolved in a way that gives companies incentive to keep investing in research and development, without raising the cost of devices to the point where sales growth slows. But there's no guarantee that will happen. Because there is no global patent authority—in fact, there isn't even a Europewide patent authority—the companies will have to fight a series of court battles in numerous jurisdictions.

Unless, of course, they can agree. But the experts are not optimistic. Says ABI Research's Carlaw: "Eventually it's going to be litigation that settles this."


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