Kasim Alfalahi, Ericsson: It was important that Nortel’s patents
stayed with the leaders of the industry 
                             
                                 
Two events in 2011 highlighted as never before the value of the other sort of IP — not internet protocol but intellectual property.
First, after the all the hardware-based parts of Nortel Networks had been sold off to a variety of other vendors, the team selling off the bankrupt company put the last bits up for sale: its intellectual property.
Google bid, but was outbid in July 2011 by a surprise consortium of six of the industry’s global equipment leaders, which offered $4.5 billion — four times what Ericsson paid two years earlier for Nortel’s wireless equipment business.
A few months later Google came back with an agreed deal worth $12.5 billion for Motorola’s handset operations, a price seen by many as inflated because of Motorola’s patents in the mobile business. That deal is still uncompleted in December 2011, but Motorola Mobility is expected to be part of Google not long into 2012.
So, two IP-based deals within five months worth a total of $17 billion. Is this a sign of a bubble in the IP market?
Adam Sutton, a director at accountancy firm PricewaterhouseCoopers, defends the prices paid for IP. “It’s been said that a bubble exists or is forming, but you can’t say a bubble is forming when you look at the strategic value of patents.”
Prices are being driven by strategic uncertainty that arises for businesses with smaller or less significant patent portfolios and the desire to maintain a competitive advantage by denying competitors’ access to vital IP, he says.
“There are established ways of valuing patents, but putting a value on their defensive and strategic qualities is extremely challenging. Nevertheless, when you consider the size of the prize these patents support in the end products, it’s easy to see why the stakes are so high.”
This all comes at a time when — according to research by Wipro, reported in the interview on pages 34-35 of this issue — the main vendors are spending less and less on research. But they are being defensive, if Sutton is right.
“The most basic right that comes from owning a patent is the potential for exclusive use of the technology in your product,” he says. “Products found to be in violation of your patents can be banned from the marketplace until such time as infringing products are redesigned. A comprehensive patent portfolio is also a powerful deterrent against potential lawsuits: ‘Sue us and we’ll sue you’.”
The consortium that successfully bid $4.5 billion for Nortel’s IP portfolio was formed of Apple, EMC, Ericsson, Microsoft, RIM and Sony.
“Nortel had about 6,000 patents. It had a very broad portfolio,” says Kasim Alfalahi, Ericsson’s chief intellectual property officer and head of licensing. The company had acquired key patents by “aggressively buying companies” in the past — especially patents related to the internet backbone and optical transmission. “It was important for us as a company that these stayed with the leaders of the industry.”
Though he didn’t say so, it is clear that leading vendors did not want these patents to go to Google, seen by many as the industry’s most aggressive competitor.
And what happens to the income from the patents once they are in the hands of the consortium? “What’s important is that the players in the industry understand that the patents come from research,” says Alfalahi. “Any kind of revenue will be re-invested in R&D, so it will continue in the ecosystem. There is no leakage.”
It’s not clear yet how the consortium members will collaborate. Alfalahi points to the way the industry has worked together over the years in the 3GPP partnership, which is at the centre of the development of LTE technology and is a masterpiece of collaboration. “The whole thing is a cooperative effort,” he says. “It really is technology sharing. There is concurrent research in companies, and then they vote for the best technology and choose the standard. No single company owns everything. That’s extremely important.”
But, he notes with satisfaction, Ericsson owns “30% of the patents” for LTE — and that means income from other LTE vendors in the future. “Licensing is mostly a bilaterally agreement between two companies. Both hold essential payments. Nobody owns everything.”
The Motorola and Nortel deals are likely to alert managements of vendors and operators alike in 2012 to the potential value of their own IP.
There are a few operators with their own labs and their own patent portfolios. It would be surprising if BT were not thinking about the value of the patents that have been filed from its research labs at Adastral Park; and the same goes for France Telecom, which owns Orange Labs on the edge of Paris.
Similarly Alcatel-Lucent must be looking at the value of the huge number of patents taken out by its researchers at Bell Labs — the home of much of the key research in the telecoms industry for decades. If Nortel’s patents are worth $4.5 billion and Motorola’s at least part of that $12.5 billion that Google is paying, what must Bell Labs’ patents be worth? Perhaps in 2012 we will see. GTB

Further reading from Global Telecoms Business:
LTE will be the unifying technology for the world's mobile ... 16 Dec 2011
Telecom innovation at risk, says Wipro VP Jeff Heenan-Jalil 30 Nov 2011
Patents protect innovation as the price of intellectual property ... 24 Oct 2011 
Google to buy Motorola's handset unit 15 Aug 2011
Former executives mourn the final demise of Nortel 08 Jul 2011
Five outbid Google in Nortel patent auction 01 Jul 2011