The battle of giants: Nokia vs. Qualcomm

The ongoing conflict between Nokia and Qualcomm shapes like one of the defining IT IP (Information Technology-related IP) events of the early 21st century. Its outcome will affect not only the market position of the two combatants but also the approaches to patent valuation in this area as well as the relevant royalty calculations, not to mention the development and exploitation of industry-wide standards. The core of the battle is not so much about the validity of patents but about their economic implications.

Before discussing the prospects for the case, let’s recall its background.

Qualcomm, one of the gladiators of IT IP, owns key patents for the next generation of mobile communication networks (3G). The relevant technology comes in two variants: CDMA2000, which is a direct descendant of earlier generation of CDMA networks, and W-CDMA (also referred to as UMTS), which is the 3G technology path migration for GSM networks. On the basis of current trends, it would appear that W-CDMA will ultimately gain a considerably larger market share than CDMA2000.

Qualcomm’s position has been that its contribution and patent coverage was as important for W-CDMA as it was for CDMA2000. This position appeared to be validated by official telecom standard organisations such as ETSI (European Telecommunication Standard Institute and more importantly by other suppliers, including Nokia, who all signed in the last five years licensing agreements concerning W-CDMA patents. However, as deployment of the full-scale deployment W-CDMA network is approaching, many suppliers felt that licensing costs were excessive and adversely impacted the speed of deployment. Nokia was in the forefront of offensive against Qualcomm for several years now. Its action was multi-fold and included a complaint (with eight other suppliers) in October 2005 to the European Commission. Its particular focus however was on W-CDMA, which according to Nokia was a very different case from CDMA2000. Nokia refused to accept that Qualcomm patents were central to deployment of the former, arguing, on a basis of a 2005 study by two US academics (study funded by Nokia), that the number of W-CDMA patents was lower than that owned by Nokia and the bulk of Qualcomm patents were of not essential variety. It made plain and public that it wanted to renegotiate licensing agreement, which was expiring on April 9.

Qualcomm, not surprisingly, rejected with its usual vehemence the arguments of Nokia. It argued that most patents filed by Nokia had limited value and it hired its own advisers to rebuke the Nokia study. Qualcomm advisers argued that the methodology of Nokia study was flawed as the value of a patent portfolio is not a function of the number of patents. Qualcomm also stressed a large number of existing W-CDMA agreements with important industry participants, including Motorola and Alcatel Lucent, some of which were signed recently. The vigour of its defence has been based on a strong conviction that any substantial concession to Nokia may trigger a wave of similar or tougher demands from other licensees. And given Qualcomm’s dependence on royalties as a major source of revenue, the impact of the royalty decision, whatever it is, on the company is likely to be considerably greater than on Nokia. This may explain a recent volatility of Qualcomm shares, as the conflict is widely publicised, any news affects expectations and in turn move, often significantly (with monthly variations of over 10% and daily variation of over 1%), the stock price.

Most analysts expected that the two companies will not reach new agreement by April 9 deadline and Qualcomm confirmed that it shares this view. Sure enough, nothing happened on April 9. In preparation of the protracted battle, Nokia already launched other IP lawsuits against Qualcomm, primarily in the European courts. Qualcomm is preparing a counteroffensive, going beyond the defence against Nokia lawsuits. On April 5, it requested an arbitration ruling in the US that the continuing use of contested Qualcomm’s patents constitutes a de facto extension of the prior agreement. Past experience that the conflict is likely last at least few months. As in so many other crucial IP cases, it is highly likely that the ultimate decision on the new licensing agreement will be made through the judicial channels rather than the market mechanisms.