Nokia IP Comparison To Those Of Peers Could Be Misleading

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Nokia Corporation (NYSE:NOK) (HEL:NOK1V)’s patent portfolio is in focus once again. The acquisition of Nokia Corporation (NYSE:NOK) (HEL:NOK1V)’s devices and services business by Microsoft Corp. (NASDAQ:MSFT) is almost complete. The new Nokia Corporation (NYSE:NOK) (HEL:NOK1V) will consist of three units: NSN, the HERE mapping app and Advanced Technologies (patent and R&D business). But most investors and analysts are focusing on the potential upside in its IP revenues because its patent portfolio is likely to account for over 30% of Nokia Corporation (NYSE:NOK) (HEL:NOK1V)’s earnings in 2014. For that, they are comparing the Finnish company’s IP licensing revenues with those of its peers.

Nokia in comparison to its peers

Bernstein Research analyst Pierre Ferragu says that comparison could be misleading. That’s because while comparing the company’s IP licensing revenue to those of peers, investors are going to consider the existing IP licensing and the number of patents. Using this method, the chart below shows that Ericsson (NASDAQ:ERIC) (STO:ERIC-B) has fared well in licensing patents. And it shows that Nokia Corporation (NYSE:NOK) (HEL:NOK1V) and Alcatel Lucent SA (NYSE:ALU) (EPA:ALU) have an opportunity to increase their IP revenues. But simply comparing the number of patents gives no indication about the quality of IP portfolio. Even forward citations and average licensing revenues also demonstrate Ericsson (NASDAQ:ERIC) (STO:ERIC-B)’s superiority. Bernstein analyst says that focusing on the content of an IP portfolio can’t be a good way to value it.


A better way to value Nokia’s IP portfolio

A better way to value the IP portfolio is analyzing the existing revenues, where they come from, and how licensing revenues can increase over time. We looked at them in greater detail last week. Mr. Ferragu says that the best way to estimate the licensing revenue potential of a portfolio is to look at how much revenue it has generated in the past. Bernstein expects the Finnish company’s licensing revenue to be around 500 million euros. Of that, Apple Inc. (NASDAQ:AAPL) would pay it 200 million euros, Samsung Electronics Co. Ltd about 100 million euros. Microsoft Corp. (NASDAQ:MSFT) would also pay Nokia Corporation (NYSE:NOK) (HEL:NOK1V) about 50 million euros for patent licensing, and BlackBerry Ltd. (NASDAQ:BBRY) (TSE:BB) would pay the company about 40 million euros. Another 10-30 million euros will come from HTC and about 150 million euros from other vendors.

This model of valuation looks realistic because when Nokia Corporation (NYSE:NOK) (HEL:NOK1V) negotiates with its licensing prospects and clients, the existing licensing agreement will act as an anchor for them.

Nokia Corporation (NYSE:NOK) (HEL:NOK1V) shares were down 1.63% to $7.87 at 9:48 AM EST.

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