Should Amazon Buy Nokia to Go Full Metal Jacket?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With its recent purchase of UpNext, which provides 3-D mapping services, speculation is mounting that Amazon (NASDAQ: AMZN) is preparing to introduce its Kindle Smart Phone. Competitors in the smart phone market place such as Apple (NASDAQ: AAPL), producer of the iPhones, just replaced Google Maps, from smart phone competitor Google (NASDAQ: GOOG), with its own in-house service. While mapping technology is attractive to smart phone makers due to the earnings generated from advertisements, even greater revenues and a very imposing competitive advantage for Amazon could result from its purchasing Nokia Corporation (NYSE: NOK) and going "Full Metal Jacket" with the prosecution of its patent portfolio.
According to the Urban Dictionary, "Full Metal Jacket," originally a Stanley Kubrick movie about a United States Marine unit in Vietnam, means, "...doing something full bore, regardless of negative consequence." That is what Amazon Corporation will have to do if it hopes to even survive in the smart phone sector, which Nokia Corporation is not doing very well. If the goal of Amazon Chief Executive Officer Jeff Bezos is for his company to compete with Apple with a range of Kindle products against the iPhone, iPad and iPod, then the I-5 from Silicon Valley to Seattle will run with blood. Buying Nokia Corporation and becoming a "patent troll" is a very effective way to make the road ahead even slippier for Apple, Google and other smart phone foes.
Nokia Corporation is now selling cheap, with a market capitalization of around $7.3 billion. The price-to-cash ratio is 0.60, so there is more than enough in the bank to pay for the costs of the acquisition after buying Nokia. In addition, royalties from Nokia's more than 30,000 patents and about 10,000 patent innovations bring in $500 million annually.
Amazon would hardly be the first "patent troll" to roam Silicon Valley, but with Nokia's portfolio and a grand strategy of taking products out of the marketplace rather than extracting payments, it could be one of the most effective. Yahoo recently sued Facebook in an action that some claimed was filed solely to secure "a big payday." The lawsuit by Yahoo, claiming the violation of 10 of its patents, was filed in March of this year during Facebook's pre-initial public offering phase. Facebook countersued in April. The settlement, just reached, calls for a deeper integration of Facebook's tools into the content pages of Yahoo. Apparently not too much in the way of hard feelings developed in Silicon Valley over the lawsuit.
There is current talk of Nokia Corporation going after Google as it claims the new Nexus 7 violates its patents. For Nokia Corporation, a cash settlement would be preferable than Google not being able to produce the Nexus 7. But for Amazon, removing a competitor from the Kindle Fire would be far more desirable, and likely to be more lucrative over the long term.
Microsoft (NASDAQ: MSFT) would be very vulnerable as it currently partners with Nokia in the Windows Phone. Untangling the Windows Phone after an acquisition of Nokia Corporation would be very costly and very sloppy, at best, for Microsoft. At worst, it could result in the banning of the Windows Phone, as happened with the Xbox in a recent lawsuit filed by Motororla.
With the amount of cash on the balance sheet, much more than the market capitalization, the acquisition of Nokia Corporation would be very cheap in terms of capital outlays. Amazon could book the cash, collect the $500 million in patent royalties yearly, and sell off the rest of the assets of Nokia. At present, Nokia Corporation sells the second most mobile phones of any company, so there is value there to the Amazon Kindle smart phone, particularly in emerging markets. Amazon might be able to just buy the patent portfolio of Nokia.
But the most effective and efficient means of battle for Amazon to lead the Kindle to primacy would be in going "Full Metal Jacket" with the patent portfolio of Nokia Corporation. Buying Nokia Corporation to make life as difficult as possible for its competitors and as profitable as possible for its shareholders through intellectual property lawsuits to eliminate competitor products could be very appealing for Amazon. One thing is certain: smart phone competitors such as Apple, Google and Microsoft will do everything in their power to ensure that the Amazon Kindle meets the same fate as every product from Nokia Corporation. Faced with this for the Kindle, being branded a "patent troll" should not concern Amazon in the least.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, Facebook, Google, and Microsoft. Motley Fool newsletter services recommend Amazon.com, Apple, Google, Microsoft, Nokia, and Yahoo!. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.