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Qualcomm and Nokia make deal over fees
Finnish phone maker to pay lump sum, licensing costs
By Jonathan Sidener
July 24, 2008
Qualcomm resolved a nearly three-year, unprecedented challenge to its royalty-based business model yesterday when the world's largest phone maker, Nokia, agreed to cease hostilities and sign on the dotted line.
The Finnish phone giant, which stopped making payments to Qualcomm in April 2007, agreed to pay the San Diego wireless technology company a lump sum along with licensing fees for 15 years.
Nokia had resisted Qualcomm's fee structure for technology that is vital to smart phones, which feature high-speed connections to the Internet using Qualcomm's technology.
The companies agreed to drop all litigation, including an anti-competitiveness complaint Nokia filed against Qualcomm at the European Commission. Other plaintiffs remain in the case.
“This is a huge win for Qualcomm,” said analyst David Marchesani of Quality Growth Management in Rancho Santa Fe. He said the length of the deal and the number of technologies covered were noteworthy.
“You don't have to wonder whether they're going to have to go through all the same stuff again in three, four or five years,” Marchesani said. “This resolves a lot of uncertainties – and the market hates uncertainties.”
The deal covers not only technologies for the emerging third-generation, or 3G, phones but also for the fourth generation as well, Marchesani said.
Qualcomm's shares rose sharply in after-hours trading, first on speculation of a deal when the company delayed its afternoon earnings release and conference call with analysts. After the deal was announced, the stock traded at $53.20, up 18.7 percent from the close. It had risen 72 cents in regular trading.
Nokia stock rose 31 cents in after-hours trading to $27.01.
Terms of the deal were not disclosed, but comments from a Nokia executive suggest that the company will pay less than the 5 percent royalty Qualcomm typically charges manufacturers.
Throughout the legal battles, Nokia had criticized Qualcomm's structure of rates.
“We are happy to have a rate structure that will not slow down growth and innovation in the industry,” said Nokia Chief Financial Officer Rick Simonson. “We're not going to disclose the rate structure, but I will say 'mission accomplished.' ”
Simonson said the legal combat since the license deal between the companies expired in April 2007 paid off for Nokia.
“We got a deal that was financially beneficial to Nokia,” he said. “It was worth it.”
In what is known as a cross-licensing deal, Nokia receives a license to all of Qualcomm's patents, while Qualcomm receives the right to integrate Nokia's technology into its chip sets.
Qualcomm also receives ownership of several Nokia patents, including patents considered essential to WCDMA and OFDMA, two technologies to send multiple, simultaneous digital voice calls or data streams across a single radio signal that allows a single cell tower to handle more voice and data connections.
Qualcomm makes chips for wireless devices and sells them to phone manufacturers. A larger portion of its profits comes from licensing its technology to companies that make their own chips, such as Nokia.
Qualcomm pioneered the use of a technology called CDMA, or code division multiple access, which allows multiple phone calls to exist on the same frequency without interfering with one another. The technology is the basis for Sprint's and Verizon's networks and the phones for those networks. Manufacturers pay Qualcomm an estimated 5 percent of the cost of phones to license its patents.
CDMA became one of two dominant technologies in the United States, but it wasn't used in the first generation of digital phones in Europe, where a competing technology, GSM, had been adopted as a unified standard. European wireless companies such as Ericsson and Nokia were able to sell GSM phones and network equipment without paying royalties to Qualcomm.
For third-generation networks, Europe is migrating to wideband CDMA, or WCDMA, which set up the conflict among Qualcomm, Nokia and Ericsson. The battle with Nokia dates to October 2005, when Nokia and five other technology companies filed the complaint. The impact of Nokia's withdrawal on the other companies is not yet known.
On another front, Qualcomm is battling rival chip maker Broadcom on several patent-related issues.
Qualcomm delayed release of its earnings at the last minute in response to the pending settlement. In a statement released without comment, it said its revenue was $2.8 billion, up 19 percent from the same quarter last year. However, net income of $748 million was down 6 percent. Earnings per share were 45 cents, down 4 percent.
Excluding items such as taxes, stock-based compensation and strategic investments, earnings were 55 cents per share, meeting Wall Street expectations.
The company is scheduled to discuss earnings and the Nokia deal with analysts today.
“Revenue growth of 19 percent is very good,” said Marchesani, the Quality Growth Management analyst. “If they can do 19 percent without Nokia (payments), it will be interesting to see what their guidance is for going forward with Nokia.”
Jonathan Sidener: (619) 293-1239; Jonathan.email@example.com