Alcatel-Lucent Patents May Bolster Nokia’s Patent Portfolio

On Tuesday, Nokia announced an all-stock deal to acquire Alcatel-Lucent that valued the French company at around $16.6 billion.   While the purchase price was a significant premium over Alcatel-Lucent’s share price, it is not clear if Nokia paid a premium to acquire Alcatel-Lucent’s patent portfolio. Based on a high level analysis using Alcatel-Lucent’s most recent licensing revenue figures, we estimate the patent portfolio to have an intrinsic value of between $155 million to $696 million.

Overview of the US Patents

Both of these technology giants have a legacy of innovation and hold immense patent portfolios. As of the date of the deal announcement, Envision IP identified 15,877 in-force US patents assigned to Alcatel-Lucent and its subsidiaries. Similarly, Envision IP identified 8,446 in-force US patents assigned to Nokia. In 2013, Nokia sold its handset business to Microsoft, in a deal which included the transfer of Nokia’s approximately 8,500 design patents related to its various handset models.  In addition, Microsoft received a 10 year license to Nokia’s utility patents, however Nokia retained ownership of these utility patents.

Envision IP analyzed the US patent holdings of both Nokia and Alcatel-Lucent to understand how the two portfolios may complement, and overlap, with each other.

Taking a look at the most prevalent US classifications listed on the issued patents, the portfolios for both Nokia and Alcatel-Lucent contain a large percentage of patents in US class 370 for Multiplex Communications, with ~27% and 30%, respectively.

Nokia_Alcatel_Lucent_Patent_Class_Breakdown_EnvisionIP

The next largest classification of patents is in Class 455 for Telecommunications, with ~34% of Nokia’s patents and 17% of Alcatel-Lucent’s patents listing this class.

Another significant overlap between the two portfolios is in Class 375 for Pulse or Digital Communications, and Class 379 for Telephone Communications, as shown in the chart above.

The patents in Classes 370, 455, and 375 make up Alcatel-Lucent’s impressive portfolio of wireless standards-related patents, with approximately 200 patent families related to 3GPP/LTE and their underlying technologies.

Regarding notable differences between the two portfolios, 8% of Alcatel-Lucent’s US patents list Class 385 for Optical Waveguides, with less than 0.5% of Nokia’s patents listing this class.  These patents are likely related to Alcatel-Lucent’s fiber optic technologies, such as its fiber-to-the-home-networks, as well as its undersea cable network systems.

In addition, approximately 9% of Alcatel-Lucent’s patents are in Class 709 for Electrical Computers and Digital Processing Systems: Multicomputer Data Transferring, while less than 1% of Nokia’s patents list this class.  These Alcatel-Lucent patents are likely related to the company’s landline and wireless architecture, and related back-end networking systems, such as routers, servers, antenna towers, and accompanying hardware.

Strictly looking at the US patent classification data, it appears that both companies have significant patent protection related to signal transmission protocols and algorithms in general. However Nokia’s patents having broader coverage related specifically to wireless communication hardware and devices, with an emphasis on user-facing devices.

On the other hand, Alcatel-Lucent’s patent portfolio appears to have more coverage with respect to back-end networking and landline communication hardware and devices.

Thus, it appears that Alcatel-Lucent’s patent portfolio not only bolsters Nokia’s deep portfolio related to wireless signal transmission technologies, but will also add significant hardware patents related to router and back-end networking technologies.

The sale appears to be long coming for Alcatel-Lucent, as the company has in recent years explored various avenues to monetize its patent portfolio. For example, in 2012, Alcatel-Lucent attempted to spur patent licensing through RPX, and most recently, listed an auction of select patents through ICAP.

Given Nokia’s renewed focus on patent licensing after having exited the handset business, the Alcatel-Lucent patents may prove valuable if Nokia is able to identify patent assets that are not heavily encumbered with existing licenses, and which have enough term remaining to be of interest to new licensees.  Envision IP noted in its analysis last August that Alcatel-Lucent’s portfolio is facing a patent expiration problem, with more yearly expirations than grants.

Potential Value of Alcatel-Lucent’s US Patents

Alcatel-Lucent’s latest Form 20-F filed with the SEC states that the company generated €55 million (~$59 million USD) in licensing revenue in 2014 (compared to €578 million in 2014 revenue for Nokia’s Technologies division, which is primarily focused on patent and brand licensing).

Alcatel-Lucent’s current US patent portfolio has an average remaining term of 6.21 years. Assuming that the entire licensing revenue is attributed to its US portfolio (the licensing revenue is likely spread across its worldwide patent assets, however, for the purposes of our analysis, we assume that the global patent terms roughly mirror the US patent terms), a discounted cash flow analysis places a reasonable net present value (NPV) of the US patent portfolio at roughly $329 million, assuming that Nokia can maintain the licensing rate through the remaining term of the patents, and with a 10% discount attributable to yearly patent expirations.

Using a sensitivity analysis, we estimate the NPV of Alcatel-Lucent’s US patent portfolio to range from $155 million on the low end, to $696 million on the high end. The high end estimate assume that Nokia can at least double the 2014 reported licensing revenue realized by Alcatel-Lucent.  The low end assumes that the licensing revenue is halved going forward, and additional discounts are applied due to an increased rate of license expirations and the inability to replace expired patents with new issuances.

While Alcatel-Lucent has seen higher licensing revenue in prior years, with a reported €77 million in licensing revenues in 2013, the company appears to have experienced a steady decline in licensing efforts in recent years.

Summary

Given that this deal is not purely a patent-driven deal, it is not clear how much of a premium, if any, Nokia paid for Alcatel-Lucent’s patents. Given the fact that Alcatel-Lucent not only has a tremendous US patent portfolio, but also owns over 30,000 patents worldwide, there may be opportunity for Nokia to mine the portfolio and spur licensing efforts. These patents include technologies not just from Alcatel-Lucent, both also technologies built on the research and development efforts of Bell Laboratories, which was spun off from AT&T and re-named Lucent Technologies in 1996. The combined Nokia / Alcatel-Lucent will own over 24,000 US patents alone.

It will be interesting to see how the telecommunications landscape will evolve in the coming years, with Microsoft’s shift into the device space, and Nokia making a focused effort on its networking and licensing business. However, while Nokia is receiving an impressive and diverse patent portfolio that complements, as well as adds to, its own patent assets, it remains to be seen how much value Nokia will be able to extract from Alcatel-Lucent’s patents in terms of licensing and monetization.

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