It is well known that Nokia was, and is an intellectual property giant in the world of the telecommunications industry. Nokia’s history starts in 1865 as a forest and power industry company called Nokia. In 1967 three companies merged and created what we know today as the ‘Nokia Corporation’. From its beginnings till today, Nokia’s been investing a large portion of its resources in Research & Development. Nokia knew that securing their intellectual property is foundation for building a long-standing company, so Nokia intensified its investments in securing and protecting their inventions in the last 20 years.
In the last 20 years Nokia spent an amazing €115 billion in R&D, or in average €5.75 billion annually. Over that time, Nokia has built an impressive stockpile of patents, and is one of the biggest patents holder in the mobile and telecommunications market. In the last 5 years, years that were most turbulent in history of Nokia, the company spent €17.6 billion or 17.8% of 5-year revenue. In the three years of manufacturing smartphones with Microsoft’s Windows operating system (2011-2013), Nokia’s R&D spending was decreasing in total amount of million euros spent, but if we observe R&D expenses as a percentage of revenue, the spending increased from 14.5% to 20.6%. This year, after merging with Alcatel-Lucent, Nokia’s R&D spending in first three quarters was €3.6 billion or 21.4% of revenue, which is a considerable amount.
At last week’s Nokia Capital Markets Day event we found out a lot of interesting details about Nokia’s patents business. Maria Varsellona, Chief Legal Officer at Nokia, talked about ongoing licences disputes and financial performance of IP part of Nokia Technologies.
We learned that Nokia owns over 30.000 patent families, with more than 90.000 patents. Out of 30.000 patent families, 2.100 are standard essential patent families, what means that they are very important in their industry area, and they must be licenced under FRAND terms – fair, reasonable, and non-discriminatory. Nokia’s patents are relatively young, so Maria expects that over 2/3 currently active patents will be in force in 2025. Maria announced that Nokia will reduce its holding in unattractive patents that are almost impossible to licence, to cut costs in maintaining such large patent portfolio. Rajeev Suri, the CEO, stated at the same event that patent monetization is Nokia’s No.1 priority. That means that Nokia will cut costs in maintaining its patents, but it will increase patent licencing. In 2015, Nokia filed over 1.700 new patents, and the number is expected to increase in 2016.
One of the most attractive markets for patent licencing is the mobile market, and Nokia is looking into expanding its mobile devices licensing program.Currently only 30% of the €300 billion-worth smartphone market is under Nokia’s licence. That gives €800 million annualized net sales in 2016 for patent licencing at Nokia. Nokia has more than 100 licenses in total on the mobile market, but one of the most important ones is expiring this year – Apple’s.
In June 2011, after a two-year long court battle, Nokia and Apple settled their litigation with Apple agreeing to pay Nokia an undisclosed one-time payment as well as continuing royalties. Even though the financial details remained unknown, analysts argue that Apple paid €800 million as one-time payment, and agreed to pay €8 per sold phone, which seems a little too much. Apart from a new agreement with Apple, Nokia expects the result of an arbitration with LG that will decide how much will LG pay to Nokia for the patents, but Nokia is also negotiating with Chinese vendors and the government. As Maria pointed out a few times, Nokia is now in a stronger position to negotiate with smartphone vendors because Nokia doesn’t make phones anymore. This means that there is no need for cross-licensing, so Nokia can receive more compensations for its patents.
In 2013 Nokia formed Nokia Technologies – a unit inside the company responsible for patent licensing. In the last 3 years, excluding this year, Nokia Technologies had over €2.1 billion revenue, with a 70% operating margin. This year, the company expects €950 million annual sales for Nokia Technologies, but three big contracts worth €150 million are expiring this year. If Nokia fails in renegotiating the contracts, revenue for 2017 could lower to €800 million.
Next year Nokia set up the task to expand its patent reach into new markets. Apart from mobile, Nokia will target the automotive industry and consumer electronics industry. In automotive, more, and more vehicles will be connected to the internet using some of the core radio technologies that Nokia owns. Nokia sees that as an opportunity to expand its license business to big players in the auto industry. In fact, Maria Varsellona noted that Nokia started early discussions with the industry players, and expects to score first agreements next year.Consumer electronics consists of top boxes, game consoles, media streaming devices, and similar that use Nokia’s Wi-Fi and video coding technology. Nokia has already about 50 smaller licensees in this segment, and the number is of course expected to grow.
One more segment that Nokia is heavily investing in is IoT. ‘Internet of Things’ represents a whole bunch of different devices that can connect to the network. Patent monetization is at the given moment not possible, because the IoT industry is still in its early stages of development, but Nokia is filling many patents in this area. To be precise, in 2016, Nokia filled the third largest number of Internet of Things patents, behind Qualcomm and Intel.
One of the questions that each of us could ask is ‘How much (patent business) is it worth?’. For Nokia, a lot of Research and Development resources were spent in creating one of the world’s biggest patent stockpile. Patents generate up to a billion euros annually for Nokia, but it is important to say that it’s a high-margin and long-term business, that requires much of R&D spending before monetization. For Nokia, or most of the companies, it is not enough to invent something, patent it, and licensed it, the innovation needs to packed in some product that can be a success on the market. That’s way Nokia is redefining its patent portfolio, and carefully choosing the areas to invest in.
Now, the numbers. After selling the devices and services business to Microsoft many analysts gave their estimate about the worth of Nokia’s patents. They mostly argue the patent stockpile’s worth was between $4 billion and $6 billion (€3.8B-5.6B). In 2012, Alcatel-Lucent patents were valued from $3.9 billion to $5.9 billion, or slightly under Nokia’s. Together, we could conclude that Nokia’s patents are worth about $10 billion, or even more. They have the potential to generate near billion euros per year, which is almost entirely profit.