InterDigital - Thoughts on the ITC staff report

Wednesday, July 9, 2008

The staff attorney assigned to the InterDigital-Samsung ITC dispute favored Samsung in his report. His position that there is no violation calls for rejecting InterDigital's proposal to ban disputed Samsung products in the US. InterDigital's stock took a 25% dip as the Street is now pessimistic about its prospects. As the drama unfolds, here is an attempt to even out public perception. Before you read on, however, please note that I am neither a legal expert nor a Wall Street analyst. So, take it for what it is, just an opinion.

Firstly, while the staff report is an unbiased third-party opinion on the case, it is still only one instrument for the Administrative Law Judge (ALJ) to decide. The judge is yet to hear both companies' positions. The staff report is not binding on the judge. There is precedence in the past where the ALJ has acted against the staff recommendation. So, while InterDigital has lost some positioning in this case now, the staff recommendation is certainly not the end of the road for this ITC dispute.

Secondly, contrary to what I alluded to in my last post, an unfavorable decision by the ALJ will only reject the call to ban Samsung phones in the US. Besides, one theory is that a 'no violation' decision may be the result of the staff attorney finding that this is a licensing dispute that has to be amicably resolved between the parties without warranting a ban.

Thirdly, and perhaps most importantly, InterDigital has many more things going for it beyond the ITC dispute. Most notably, the company has already licensed to Apple and RIMM, both of whom are battling it out in the smartphone market. It is also very likely to be a beneficiary of the 3G iPhone to be released shortly. Ironically enough, Samsung sources 3G chipsets for some of its designs from Infineon. These phones will hence use InterDigital's 3G protocol stack and, like the 3G iPhone, contribute per-unit royalties to the King of Prussia-based company. You can find more about InterDigital's products and strategies here and here.

Finally, for the curious minds who are wondering what will happen to InterDigital's valuation if the Samsung case goes against it, I will direct you to my February 2008 valuation post here. A nominal assumption on the total royalty money gave me a $75/share valuation then. You can look at the revenue impact of the royalty rate replete with graphs there.

In summary, I feel that the sell position taken by many investors is understandable. InterDigital is a volatile story stock and the ITC staff report did little to buttress investor confidence. On the other hand, a 25% drop seems unwarranted in the light of a) lack of enough information given that the case is still in its preliminary stages and b) many other developments to look forward to from InterDigital.

[PS: Thanks to all the readers who responded to my previous post]

[Disclosure: Long IDCC at the time of writing]

Disclaimer: All thoughts expressed by Vijay Nagarajan in his articles are his and do not necessarily reflect those of either Atheros Communications or TensorComm Inc.

Posted by Vijay Nagarajan at 3:30 PM  


thanks for looking further into the itc matter...i would like you to know that samsungs opening remarks contained references to samsung making offers to license w/ interdigital on a FRAND basis...and that interdigitals current rate offering was two times what samsung wished to pay...given interdigitals very publicly documented rate structure that is currently being paid by rimm,apple,htc,lg and many others of approximately 2.00+ per sounds like samusung is offering interdigital 1.00 per phone which would more than justify a 50+ share price...given the fact that samsung is actively pursuing an interdigital license,as is nokia....i think we can safely say that samsung does not expect to win on all isssues in this case...indeed both the staff and the ALJ have already been overuled by the commision on the matter of the 791 patent after they tried to knock it out on a technicality over the definition of the word "if"...the patent was reinstated in the case w/ very strong language by the fact at this point given the commissions language surrounding the reinstatement of the 791 patent...that patent looks pretty rock solid in this proceeding....that alone is enough to win an injuction in this case...since it only takes a violation of one ESSENTIAL PATENT to issue an embargo...we have to think of this as a commercial dispute that will be resolved over the coming might not be the absolute victory interdigital shareholders were excpecting...but they will emerge from this proceeding w/ enough of a victory to carry the ball bet is that before the court rules in november samsung and nokia will have licensed w/ little has signed on for ifx 3g chips that contain interdigital software and hspda designs...maybe if idc gets creative they can work their chip solutions deeper into samsungs product line [their goal]...all in all Interdigital is here to stay for 3g and its extensions to LTE and wifi.....thanks for you efforts on interdigital...ANTHONY

Anonymous said...
July 10, 2008 at 5:07 AM  

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