Nortel's LTE Patent Goldmine

There's a good reason why Nortel Networks Ltd. seems keen to hold on to its LTE (Long Term Evolution) access intellectual property and not flog it to Nokia Siemens Networks as part of its wireless asset fire sale: Those patents are worth an absolute fortune! (See NSN Picks at Nortel's Mobile Bones .)

That, at least, is the view of JP.MorganChase analyst Ehud Gelblum, who issued a research note Monday stating that Nortel's LTE patents could generate royalty revenues of hundreds of millions of dollars, possibly even as much as $2.9 billion.

Quick recap: Nortel's key LTE-associated intellectual property rights (IPR) are not being sold as part of the wireless asset deal struck with Nokia Siemens, which is set to buy Nortel CDMA and LTE access business to bolster its North American presence and add more than $1 billion in annual revenues to its top line.

If the acquisition is completed in July (as the Finnish/German joint venture hopes), Nokia Siemens will license Nortel's crown jewels -- its OFDMA (Orthogonal Frequency-Division Multiple Access) and MIMO (Multiple Input, Multiple Output) IPR -- to develop its own LTE access infrastructure products. (See Nortel Hangs On to Its LTE Smarts and How NSN Is Funding Its Nortel Bid.)

And it's that type of license deal that Gelblum believes could be a nice little earner in the coming years for whoever owns the IPR.

Nortel has known for some time it had valuable assets on its hands, and laid out its LTE patent royalty rates for device manufacturers in May 2008: Basically, Nortel expects to receive 1 percent of the sale price of every LTE device that includes its IPR. (See Nortel Publishes LTE Rates.)

Now, with the race to deploy LTE infrastructure and launch wireless broadband services well under way, the analyst believes significant royalties could start rolling in within a few years. (See China Mobile Fast-Tracks TD-LTE , DoCoMo Shells Out on LTE, DoCoMo LTE Devices in 2010, Huawei Bags Another Euro LTE Gig, TeliaSonera: We'll Do 4G in 2010, MWC 2009: Verizon Picks LTE Vendors, V'fone Germany to Test LTE for Rural Broadband, and China Mobile Joins LTE Threesome.)

Gelblum calculates that if Nortel (or whoever ends up owning the IPR) collects a full 1 percent of every relevant LTE device sale price in the coming years (based on the assumption that LTE has a lifespan of 15 years and with a 10 percent discount rate), the IPR is worth just over $2.9 billion.

However, the analyst believes a more realistic scenario is that Nortel's LTE patents could more realistically generate almost $950 million in royalties during the next 15 years, based on Nortel collecting only 0.5 percent of each device sale price, with a 10 percent discount, and with Nortel only managing to collect the royalties on 65 percent of relevant devices.

Gelblum adds, though, that "any cash generated by Nortel’s LTE patent portfolio would likely go to offsetting obligations to creditors and pension funds," leaving shareholders without a share of the proceeds.

In the meantime, the Delaware bankruptcy court dealing with Nortel's affairs has given the green light to the bidding and auction process set in motion by the initial asset sale agreement with Nokia Siemens. According to this Reuters report, any rival bids must be submitted by July 21 (prior to the July 24 auction). A court hearing to approve any resulting asset sale is set for July 28.

In addition, industry speculation suggests a sale of Nortel's Enterprise division is set to be announced any day, with Avaya Inc. the favorite to spend about $500 million on the business, while a host of potential buyers have lined up to run their eyes over Nortel's optical business. (See Who's Waving Their Wad at Nortel’s MEN?)

— Ray Le Maistre, International News Editor, Light Reading