Tuesday, October 4, 2022

After its billion-dollar patent license deal with InterDigital, Apple can expect to pay several times more to Ericsson and Nokia

Yesterday, InterDigital (IDCC) issued a press release according to which it had just "entered into a patent license agreement with a major technology company." It wasn't hard to figure that most likely this was Apple, as InterDigital's previous license deal with Apple was set to expire on Friday. Any residual doubt was eliminated by the licensing firm's simultaneous SEC filing:

"On September 30, 2022, InterDigital, Inc. (the 'Company') renewed a patent license agreement with Apple, Inc. The Company expects to recognize approximately $134 million in revenue each year over the seven-year term of the license, which commenced on October 1, 2022."

So much for all that secrecy. By the way, Apple doesn't like it at all when a comma is inserted between Apple and Inc., which happens all the time and was one of 271 typos and similar errors in last year's Epic Games v. Apple judgment in the Northern District of California.

That's approximately $940 million for a seven-year deal. Independently of the agreement with Apple that affects revenues only from the fourth quarter onwards, InterDigital reported better Q3 figures than projected. Its stock price soared by almost 20%. To put those numbers into perspective, the volume of the Apple contract corresponds to twho thirds of InterDigital's market capitalization. In other words, if it weren't for antitrust and other reasons, Apple might just have bought the entire company.

The circumstances of that deal are fundamentally different from the situation Apple is facing with Ericsson (pending litigation) on the one hand, and with Nokia (license agreement presumably expired) on the other.

Let's try to look at the deal--which was agreed on the very last day of the previous license agreement--from the perspective of InterDigital's management. They determined that a billion in the hand is better than two or three in the bush.

Not only do Ericsson and Nokia have far larger and more diversified patent portfolios than InterDigital but they also aren't nearly as dependent on Apple as InterDigital. Apple's royalty payments don't even remotely account for a quarter of Ericsson's or Nokia's total revenues, nor for two thirds of either company's market capitalization (Ericsson: $20B; Nokia: $25B).

Again, let's look at the billion-dollar deal through InterDigital's management's lens. Earlier this year, IDCC was trading at up to $74.27 per share, which was not too far below its all-time high of a few years ago (which was well over $90). Even a few months ago the stock price was still between $60 and $70. Then it plummeted to a 52-week (and five-year) low of $40.23.

Against that backdrop, the license agreement with Apple--again, we're talking about a quarter of InterDigital's total income--was about to expire. There were only two alternatives:

  • to take Apple's last offer, or

  • to go to court.

We know the specifics of the first scenario by now. What would have happened in the other event?

  1. Apple would have ceased its royalty payments. That fact alone would have reduced InterDigital's revenues and cash flow--temporarily--by about 25%, and IDCC would have had to report--temporary--losses.

  2. Those--temporary--losses would have been exacerbated by litigation expenses, and Apple might have challenged dozens of IDCC patents through IPR petitions with the USPTO's PTAB and/or nullity actions in Germany, and/or declaratory judgment complaints in jurisdictions like the UK, and/or might have brought a FRAND rate-setting action in the U.S., all of which would further drive up litigation costs.

  3. InterDigital's stock price would have taken a further hit, which in turn would have affected executive compensation. As a result, key players might even have left.

  4. I'm pretty sure InterDigital would have won some German patent injunctions within about a year. But Apple would have appealed, and in order to enforce provisionally (i.e., during an appeal), InterDigital would have had to provide collateral, possibly on the order of $5-10 billion. That would have been a multiple of IDCC's market capitalization and, therefore, hard to make work.

  5. So, in order to be able to actually enforce, IDCC would have had to prevail in a German appeals court. At that point, you can enforce without security. But that takes another year, and in the meantime there is a risk of bad news from the nullity (or opposition) proceedings.

The asymmetry here is unbelievable, which is why I want to mention it again: what Apple agreed to pay under a seven-year license deal is two thirds of InterDigital's current market capitalization, and that one is already 20% higher than it was then they signed the deal.

OPPO is being sued by InterDigital, and I doubt that OPPO would accept to pay anywhere near the per-unit amount that the most profitable company in the industry--with the highest-priced products--pays. OPPO will presumably argue that it should only pay a fraction of the per-unit royalty InterDigital gets from Apple.

The economics underlying the InterDigital-Apple deal are also fundamentally different from when a company like Ericsson or Nokia has to deal with Apple. Ericsson has now been litigating for about a year (counting from the original filings in the Netherlands and the Eastern District of Texas). Ericsson has done pretty well in terms of case management decisions (virtually all of which went against Apple) and claim construction. The only risk to Ericsson that InterDigital wouldn't have had to fear consists in Apple's countersuits, one of which will go to trial in Mannheim in two weeks from today.

It would make a lot of sense for Apple and Ericsson to settle ahead of the Texas FRAND trial in December, but if they don't, Ericsson has the financial strength to keep litigating for another year or two.

Nokia will announce its Q3 figures on the 20th. Should the license agreement with Apple have expired on June 30 (as many observers assume), the impact will be visible. That's why I believe we'll either hear about a renewal of the Nokia-Apple license agreement or about renewed litigation (it would be their third patent dispute) soon.

Another factor here is that Nokia has now repeatedly prevailed on certain patents in particular German courts. It can score some predictable wins over Apple if need be. And a company like Nokia or Ericsson could enforce an injunction even during an appeal, though it would take some financial engineering to make it work.

This game isn't entirely meritocratic. Sometimes might makes right. Especially when Apple is involved. But what enabled Apple to avoid a dispute with InterDigital won't impress Ericsson or Nokia.