Let the patent royalty games begin

The $20 million Nokia ponied up to Qualcomm for the use of 3G patent licenses during the second quarter gives us an idea of the kind of money that is at stake if Qualcomm doesn't settle its nasty battle with the world's largest handset maker in a favorable way.

A licensing agreement that allows Nokia to sell CDMA and W-CDMA handsets and Qualcomm to sell GSM chips that rely on Nokia patents expires today. As a pre-empter, Nokia said it paid Qualcomm $20 million for the use of W-CDMA patents during the second quarter of this year. The amount is what Nokia believes to be fair and reasonable compensation for use of W-CDMA patents owned by Qualcomm. (It also said the payment had nothing to do with the ongoing dispute with Qualcomm. Yeah, right.) Qualcomm said the amount is just a fraction of the amount it's owed.

Citigroup said the $20-million payment suggests that Nokia believes its royalty obligation to cover 3G licenses for one quarter amounts to a rate of about 0.6 percent. Under the deal that expires today, Nokia reportedly paid 3 percent. It looks like a lot more patent lawsuits, negotiations and nasty comments will occur before the two reach an agreement.

Shareholders are also grappling with the idea of lowered royalties in general. Not only is it unlikely that Qualcomm will prevail with the same percentage of royalties it once enjoyed with Nokia, but the world of OFDMA is threatening to change Qualcomm's financial fortunes in the patent arena too. Most believe Qualcomm's CDMA/WCDMA patent portfolio is much more solid than its OFDMA position, although Qualcomm contends its OFDMA patent portfolio is strong.

The big question, however, is when will the big shift to OFDMA happen? The WiMAX hype gives the impression that today's mobile operators need to move to an OFDMA-based system as soon as the standard is available to compete. There was even talk from vendors at last month's CTIA trade show that a number of 2G operators may skip CDMA-based 3G technologies altogether and jump on the WiMAX bandwagon.

I'll wager that CDMA has a long life ahead of it. Operators need a compelling reason to rip out the networks they have optimized for so long and replace them with OFDMA-based systems. The likely scenario is OFDMA in Greenfield deployments in new spectrum tied together with dual-mode phones--like Sprint Nextel is doing with its CDMA EV-DO Rev. A and WiMAX networks. How much revenue Qualcomm could derive in this situation is questionable. Won't vendors try to argue that royalties should shrink as CDMA's footprint shrinks?

Right now, Qualcomm, usually the master of marketing, finds itself in a position where it needs to bolster the argument for CDMA's lifecycle. It announced support for CDMA EV-DO Rev. B during CTIA but has little vendor support and no carrier support at this point. It would also help jittery investors if the company spelled out its technology position in OFDMA in more detail and how strong its OFDMA patent position really is. It's a mystery at this point. -Lynnette