Wednesday 11 September 2013

The Nokia-Microsoft Transaction: Further Thoughts on Strategy and Valuation

Fellow blogger Mike recently discussed ("Microsoft Acquires Nokia Handset Business and Licence-Related Patents"), here, the high-profile acquisition by Microsoft of Nokia's handset business. Permit me to offer my own view of certain aspects of this blockbuster transaction. To remind readers, Microsoft paid 3.79 billion EUR for the mobile phone and smart devices business units plus certain support assets and activities (the business "itself") and an additional 1.65 billion EUR for a 10-year non-exclusive licence (subject to possible extension in perpetuity) to use certain Nokia patents. I scratched my head and did a lot of on-line digging in search of a previous example where multiple billion dollars were paid for a non-exclusive licence, but my efforts came up empty. Whether or not these licence arrangements, having regard to the sums paid, are indeed without precedent, the more interesting question still remains: what do we make of these licence arrangements, given that the previous mega-patent transactions of recent years have focused in whole, or nearly in whole, on the acquisition of patent ownership of large patent portfolios? Two reports of this transaction offer somewhat different perspectives.

First, let's consider the 3 September Reuters report by Dan Levine ("Why Nokia didn't sell its patents to Microsoft"), here. Until the transaction, it is claimed, Nokia had not widely licensed its handset-related patents, instead using its patents as a shield against competitors. That will change, said a Nokia spokesman, "[o]nce we no longer have our own mobile devices, following the close of the [Microsoft] transaction, we would be able to explore licensing of those technologies." That is well and good, but it takes two enter into a non-exclusive licence arrangement, so why did Microsoft agree to take such a licence rather than to acquire the patents?

One answer may simply be that, when compared with several of the mega-deals for patents, most notably the Google-Microsoft Mobility transaction, Nokia simply did not receive an offer for the amount that it wished to receive for sale of its patent portfolio to Microsoft. Maybe yes, maybe no, given all of the second-guessing about the amount actually paid by Google that are attributed to the patents. The better answer, as suggested in the article, is not simply a case of the licence arrangement being the best available option. Rather, the licence was part of a strategy for the exploitation of the company's patents.

In particular, it is connected with Microsoft's attack on Android manufacturers. Thus, it turns out that Microsoft has already succeeded in convincing approximately 20 Android manufacturers to pay royalties, thereby adding a further cost to the overall Android system. The argument is that, by leaving the patents in the ownership of Nokia, the company can separately sue the same Android manufacturers, with the intention of obtaining a royalty and further adding to the cost of the device. The article called this step a "pincer movement" made possible by the ownership of Nokia in the patents. If this be correct, we can expect to witness, over the next several months, multiple law suits for patent infringement and filed by Nokia.

A somewhat different approach is offered on the FOSS patents blog post of 3 September ("1.65 billion euro patent licensing portion of Microsoft-Nokia validates Nokia's portfolio"), written by the perceptive Florian Mueller, here. Of particular interest are two slides set out in the post, taken from a "strategic rationale" document furnished by Microsoft (Mike's post provides a link to the document). Most notable are the following claims by Microsoft:
1. Microsoft is taking an assignment of more than 8500 design patents;

2. The utility patent portfolio that is the subject of the Nokia licence to Microsoft consists of more than 30,000 granted patents and pending applications and is described as one of the most valuable portfolios in the wireless connectivity industry.

3. Microsoft will taken an assignment of the benefits of more than 60 third-party patent licenses.
Mueller observes that Microsoft, unlike Google, already has a strong patent position (witness its success in smart-phone litigation and convincing 20 Android device manufacturers to take a licence with recourse to litigation). Thus it had no interest in acquiring the Nokia patents, but merely in ensuring that it would be free from interference based on these patents, whoever ultimately owns them. The blog also suggests (and others have apparently discussed more directly), that Nokia now is in a position to assert its patents against other parties for the purpose of obtaining royalties (and thereby becoming a "patent assertion entity" or even a "patent troll"?).

Despite the stark differences between the Google-Motorola Mobility transaction, in which the portfolio was acquired by Google, and the Microsoft-Nokia transaction, which emphasizes the grant of licences by Nokia, there are still some common nagging questions: (i) how did Microsoft reach the 1.65 billion EURO valuation for the licences; (ii) how did Microsoft assign a value to the design patents acquired; and (iii) how did Microsoft reach the conclusion that the Nokia portfolio is a particularly strong one?

More generally, Florian states that "Google grossly overpaid for Motorola's patents", apparently based on the thin record of successful litigation resting on these patents. Maybe yes, maybe no. Perhaps Google assigned a large value to the fact that in acquiring the patents, it precluded acquisition by someone else. Perhaps Google has other metrics by which it is valuing the success of its patent acquisition. As for Microsoft, the entire acquisition may make sense only if the company can make a go of it in the smartphone industry. If Microsoft fails, then not only can it be claimed that it "overpaid" for the Nokia patents, but in doing so, it precluded these amounts from being utilized by the company to develop other product categories. Seen from this vantage, the ultimate strategic concern is not the potential benefits flowing from the grant of the licensed rights, but rather the very transaction itself. As such, the issue of the licensing is at most a matter of high level (and expensive) tactics. Without being trite—"only time will tell."

1 comment:

V. Stoilov said...

that's a very interesting article because implies serious strategies behind such transactions.

It's curious for me what Nokia will do in the future regarding its technologies. Yes, Nokia apparently will grant licenses but is it possible to continue with developing of these technologies. Could Nokia become a developer of innovations based on existing patents.
That would be an interesting option which can be extremely profitable avoiding the risks of producing products.
Another interesting issue is what will happens with technology developed by Microsoft based on patents licensed by Nokia. Who will be their owner and who will patent them.