Interdigital Series - Part 6

Sunday, January 13, 2008

The genesis of my question is perhaps the synergies that I found hard to ignore between the two companies –

  • The complementary intellectual property (IP) portfolios: The two companies are often in the news due to their legal wranglings. Interdigital recently won a English High Court ruling against Nokia that one of its patents is essential to 3G UMTS WCDMA. With Nokia already locked in a licensing war with Qualcomm, Interdigital patents can only create more value for Qualcomm.
  • iPhone and the other smartphones: Qualcomm is the wireless chipset market leader. The iPhone can be its crown jewel. I am sure the company is trying hard to be part of future iPhones. Apple’s propensity to maintain its technology innovator can help Qualcomm’s cause. But as I mentioned in my previous articles, I see Infineon and Interdigital in the 3G iPhone. Besides, Interdigital is slowly making progress in the smartphone market. An acquisition will strengthen and expand on Qualcomm’s leadership position. It will provide a vital segue for Qualcomm as it tries to sell to Apple and the others in this segment.
  • Competitive chipset market: Interdigital’s long-term survival as a stand-alone company in the industry is based on the sustained success of its ASIC business. If this initiative fails, the company will die a slow death as 3G gives way to OFDMA-based systems. On the other hand, it can leverage on Qualcomm’s engineering excellence, quality assurance and customer support capabilities to provide its own customers cheaper and better products.
  • New offices for Qualcomm: An Interdigital acquisition will usher in more dynamic engineering talent that Qualcomm is always open to. One of the key factors behind the Flarion acquisition apart from the OFDMA IP, was the new blood it brought with it. The teams at King of Prussia, Melville and Quebec will also bring with them diverse experience and office culture that is vital as Qualcomm looks to grow further. Being part of the Qualcomm legacy will not only be a great learning experience for the Interdigital engineering teams in the east but will also lend substantial credence to their work.
  • Legal teams: The legal teams can complement each other. Besides, some fresh faces with very relevant experience can certainly help Qualcomm in light of the negative publicity that its legal team has been receiving recently.

My list is not a comprehensive set of synergies but rather pointers to a potentially strong acquisition. Also, at the moment, I don’t see major negatives in such an alliance. However, the question in my mind is the feasibility of such a deal. I will try to answer this question briefly in a sequel. In the meantime, given these synergies, what do you think about a potential Interdigital acquisition by Qualcomm?

Posted by Vijay Nagarajan at 5:00 PM  

6 comments:

vijay...idc has more than just a 3g patent portfolio...their work on 802-21,lte and wimax tells me they will be part of the wireless IPR landscape for a very long time...imo their patent portfolio only gets stronger as the network evolves towards packetized data...evidence of this strength is the ongoing work idc is doing for SK Telecom and their ipr that has been included in the 802-21 standard and the evolving LTE standard [verizon has stated they will evovling their network to LTE....i do think you are on the right track w/ a qcom/idc merger...although i think your price range is a little low...imo idc would not even entertain an offer that is south of 50

Anonymous said...
January 22, 2008 at 1:49 PM  

Thanks for your comments. I do agree that IDCC has OFDMA IP as well. But, given the more dispersed nature of the OFDMA IPR landscape, I think that like Qualcomm, IDCC will also have reduced licensing revenue. I do think that with 3G looking to mushroom in 2009 and 2010, the IP-based revenue will peak during these years and perhaps continue into 2011 and 2012.

Also, I have been part of the RAN1 forum of 3GPP until last year. The IPR has been carefully chiseled to make sure that no one company has an upper hand. IDCC is no exception considering that all companies are aware of its position as an IP powerhouse and its reputation of going after them as products come out.

Valuation..I can look more carefully into my estimates a little later. I will perhaps write a post-note on my interdigital series shortly.

Vijay Nagarajan said...
January 22, 2008 at 5:00 PM  

vijay...i do agree that the lte ipr landscape is much flatter going forward...but interdigitals current licensing fees at just over 2.00 per unit...are more likely to be sustainable going forward than qualcomms across the board 3/4/5%[you choose] demands...which now equate to well over $20 for a full featured smartphone...intedigitals long term projections are for $1 per phone...at 700myn units [min]thats 700myn revenue vs 250-300myn in costs..400myn pre tax 250myn after tax vs 40myn shares thats 6 bucks...surely worth 60 per share...and we havent once spoke about the chip side of the business...thanks for your time...anthony

Anonymous said...
January 22, 2008 at 5:43 PM  

Anthony,

I very much appreciate your insights. I am aware of the handset shipments and how Interdigital stands to gain with the cellular boom. I was planning to do a valuation analysis much on the scale of what I did for Qualcomm on Sramana Mitra's site but haven't gotten around to doing so. My worry on IDCC's licensing model is the flat fee model. The 'cap' that they may have to agree will curtail the kind of numbers you mentioned. Besides, the inherent risks associated with the licensing business alone makes the company's fortunes that much more volatile. Unlike QCOM which is well established in the chip business as well, IDCC has a harder battle to fight for the patents alone. The company has lesser leverage and more of a bad reputation in this matter. This goes back to my point of IDCC needing some good design wins for its chipsets for a firmer foot as a stand-alone company.

This being said, the main purpose of my IDCC-QCOM article is to bring a larger awareness about the potential of IDCC and the power that a combined entity can bring to the US wireless industry. Also, my 'value' is certainly conservative and is based on how much QCOM will be willing to give in return for the power. With the current share price of IDCC, north of $50 may be too high for QCOM to contemplate as a premium. I suppose it is a different matter if some huge recurring licensing deals and bigger chipset wins come through for IDCC, right?

Vijay

Vijay Nagarajan said...
January 22, 2008 at 10:56 PM  

as far as idc's reputation in the industry....it is certainly no worse than qcom's heavy handed ways...when the big boys dont want to pay you...there is not much more you can do than to scratch and fight...i think you'll be surprised at the depth of their patent portfolio...i think the current number is about 3000 w/ 2000 in the pipeline...you are right in that the modem business should help things along..they have targeted a specific niche for their first product...im looking for idc's modem to appear in apples laptops by the end of this year or early next year....apple as your first customer is not too bad...they also recieve royalty from infineon for every umts/modem sold..thanks for your thoughts....anthony

Anonymous said...
January 23, 2008 at 4:51 AM  

Given that Apple's wireless vision is centered around WiFi, I would look to companies that have ASICs with WiFi bundled with GSM/UMTS.

Anonymous said...
February 9, 2008 at 12:36 PM  

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