Wireless Industry Analyst

[Originally for Sramana Mitra's site]

Last month, we discussed in detail the various businesses of Infineon and also peeked into its strategy. We noted that Qimonda was the cause of most of its miseries. We also suggested acquisition and growth possibilities for the German company. Against this background, it is time for us to look at its valuation.

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.

InterDigital, the King of Prussia-based wireless company, saw its shares jump by about 5% last week when the S&P and Nasdaq were down by around 2%. The reason for this optimism was the news that InterDigital and Nokia have agreed to end two legal proceedings in the UK.

In July 2005, Nokia asked a London High Court declare InterDigital's intellectual property as non-essential to UMTS (3G standard encompassing WCDMA and HSDPA). InterDigital, in turn, filed a suit against Nokia in December 2006. The companies recently decided to drop these lawsuits. The terms of the agreement are unknown. Besides, the companies continue to be at loggerheads in front of the ITC in the US. While this settlement does not reflect a sudden friendliness or alliance between the two warring companies, it is certainly a good sign for both parties.

For Nokia, it means lesser distractions from its focus of retaining and growing its mobile market share and its fight to match new niche players like Apple. For InterDigital, ending the UK disputes quickly was becoming important. Its legal disputes with tier-one handset vendors were dragging their feet pulling down the company's intrinsic value with them.

I see the amicable end to the UK disputes also as a sign of more good news to come. For both companies, this is a good data point for their ITC-related licensing negotiations. If the companies can agree on the ITC litigation as well (which I presume will revolve around the exact 'per-unit royalty' that InterDigital will then collect from Nokia's 3G phones), the wireless IP-house will widen its 3G footprint. It will also carry this momentum forward into the ITC litigation/negotiation discussions with Samsung for more favorable results.

Like I have said before, I don't doubt that IDCC has important 3G IP. It is more a question of when and how much the industry is willing to pay for it. Maybe we will know many of these answers over the next few months. Earlier coverage on InterDigital can be found here, here and here.

For me, like for many other InterDigital investors, this week will answer some other questions to bring more good news. This Friday, I will watch out for the many 3G iPhone teardowns that will follow its world-wide release. If my analysis is right, we will see InterDigital's 3G protocol stack inside the new iPhone. IDCC is guaranteed per-unit royalty from Infineon for each of its 3G chipset sold. I will let you guesstimate what it means to InterDigital's revenue for the next few quarters!

[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.]

Why would the energy/utility companies implement Smart Energy? What sense does it make for them? Fair questions to ask! I will attempt an answer here.

Despite the ‘green’ benefits, the most important thing to make this concept fly is for it to make business sense to the utilities companies and the slew of start-ups that have created an elaborate value chain.

The first argument is the ability of these devices to delay capacity expenses for the utility company. What does this mean? The energy companies have already invested substantial money in the infrastructure. For them, as the number of users increase, it will help them until they hit maximum usage. Once the usage hits this point, there are only two ways to go. If it has more money, and if it makes economic sense, the company will roll out infrastructure to support the load increase. If not, the user is faced with power outage.

The smart energy systems present an alternate route for the utilities companies. If the usage is controlled to a point that the capacity is reached five years later rather than today, then it delays the additional roll-out thus saving these companies billions of dollars temporarily.

Of course, the additional roll-out of capacity is inevitable. So the utilities companies should analyze what, if any, are the additional economic benefits of such a system. While I am sure there are research studies with cost-benefit analysis, the usage models and the consumer participation levels are unclear. So, the energy companies are likely to roll out minimal monitor systems to experiment and add incremental features to get a sense of what the consumer wants and what he is willing to pay.