Patent Settlement Turns Nokia into Blackberry Fan

Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nokia (NYSE: NOK) and Research In Motion (NASDAQ: BBRY) have decided to settle all of their patent disputes whereby RiM will make payments to Nokia both up front and on an on-going basis. This has created a fresh licensing agreement between the two companies, the details of which – and the settlement – have not been released. In a similar case, Nokia extracted a $565 million royalty from Apple (NASDAQ: AAPL) last year. Nokia moved against RiM last month after it found that the latter was breaching its contract in the U.K, U.S and Canada. Both Apple and RiM will now be paying a lifetime of royalties to Nokia, which frankly, needs to scare up as much cash as it can. 

Nokia’s patent portfolio is really where much of the current value of the company lies, as its cash position, which is significant, is mostly pledged to covering their maturing debt over the next year. This fiscal tightrope is what had Nokia’s stock plummeting below $2.50 per share earlier in the year. So, to alleviate the cash crunch, they have wielded their patent portfolio as a weapon, extracting licensing deals along with a major sale to Vringo back in August. That deal looks similar to the RiM deal, for while Vringo will own the patents, Nokia will be paid for any revenues generated from them.

Nokia is looking stronger right now with the well-received Lumia 920/920T as well as the rest of its Windows Phone 8 lineup that spans from the top to the bottom of the smartphone market and targets specific high-growth markets like India and China. The Lumia 620 and 505 (Windows Phone 7.8) are designed specifically to attract cost-conscious buyers in those markets. The 610, the 620’s predecessor, sold very well. With the release of the latest version of Microsoft’s (NASDAQ: MSFT) mobile OS it allowed Nokia to put the last generation phones on clearance, which has resulted in big gains in certain markets – again price sensitive – in Europe, like Italy where BGR reported an 11.8% market share for Windows Phone. 

Mature smart phone markets are not going to see customer acquisition at the top end of the market, but rather at the low end where late-comers will be willing to move to a smart phone if the barrier-to-entry is low enough.  These customers will not care about specs. They will care about price and usability. 

Meanwhile RiM has been looking to launch its much-awaited hail Mary OS and smartphones --Blackberry 10 -- in January 2013 after being delayed by two years. This will be RiM’s last chance for survival. While Nokia held Symbian about a year too long, RiM has been plagued by management that was not only behind the curve but short on cash to make the switch.  Nokia had to work on devices primarily while Microsoft took care of the OS. RiM’s situation was worse and it refused to see the situation for what it was until it was nearly too late.

RiM has been losing money and market share for more than a year now. The company’s revenues plunged 47% year-over-year to $2.73 billion and, following the release, its stock crashed 22.7% on the news. Phone shipments fell from 7.4 million in Q3-2011 to 6.9 million in 2012 while subscriber numbers dropped sequentially by 1 million to 79 million.

However, the results were in line with estimates, and it earned $1 billion in net cash to increase its reserves to $2.9 billion. Its adjusted earnings loss was $114 million or $0.22 per share, which is better than the estimated loss of $0.32 per share.

RiM is now caught up in the dilemma outlined above -- it needs to be price competitive in a market rapidly becoming commoditized but also generate enough cash to fund future investment because, at this point BBOS 10 is not an OS with an app ecosystem to speak of. So, prices have to come down and this is exactly what the CEO Thorsten Heins is going to do now. Blackberry 7 prices and service fees are being slashed. These are the two main sources of company’s revenues, and service fees alone contribute 36% to the total revenues. It may or may be able to retain or even increase its customer base but margins are certainly going to fall further. This is why the share price fell, despite beating the Street’s expectations.

As I said previously, don’t buy the bounce in RiM’s stock price. Overall, it has fallen around 25% this calendar year. Nokia is in a knife-fight now with RiM to soak up lost market share and build a base from which to continue building.  And, in certain markets, like Italy and Spain, Nokia is competing at the top end of the market with Apple and pulling market share from them there. 

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Nokia</strong></p> </td> <td> <p><strong>RiM</strong></p> </td> </tr> <tr> <td> <p><strong>Stock YTD</strong></p> </td> <td> <p>-17.2%</p> </td> <td> <p>-24.8%</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>N/A</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>-1.67</p> </td> <td> <p>-1.53</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>4.20%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>-2.6%</p> </td> <td> <p>-3.9%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>-8.7%</p> </td> <td> <p>-42.9%</p> </td> </tr> </tbody> </table>

RiM will also report another loss in its fourth quarter, which includes the launch of Blackberry 10. Its management insists that the loss of subscribers was because people are delaying purchase decisions ahead of the launch of the new smartphone, similar to what Nokia experienced all summer and fall.  Around 150 carriers around the world are waiting for Blackberry 10. It already has the government’s security certificate while the business version of it is being tested in 64 Fortune 500 companies.

For those willing to play a possible RiM turn-around on Blackberry 10, I would consider waiting to see where the stock settles after last week’s washout.  I would consider selling $6 long-dated puts – 90 days or longer out in time – as long as the news coming from the company is positive.  Otherwise I would stay away from this stock because there is no easy solution to RiM’s problems.  Like Nokia it will be a long, hard-fought path back to relevancy in this industry, which is a result given the recent settlement that Nokia shareholders will cheer.

PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Microsoft. Motley Fool newsletter services recommend Apple and Microsoft. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus