Why Apple should acquire Nokia

If you were to look at how the smartphone market has led serious blows to Nokia, you might think the company is doomed to closure. But smart acquisitions and an extensive patent portfolio may make them extremely attractive for the company that served as the root of its problems: Apple.

Patents treasure chest

Whether one likes it or not, a large portion of progress in the mobile space will be dictated by the availability and ownership of patents. While Apple and Samsung are most famous for their specific fights over patented technologies and approaches, Nokia has quietly built up a very strong and relatively young patent portfolio. This past July, Envision IP took a look at that portfolio and found that Nokia had almost 16,000 patents around telecommunication in the US alone (and another 20,000 patents outside of the US). With an average 13 years left on those patents, they include some of the building blocks for the next generation of mobile telecommunication services: building-block technologies like GSM (which was mostly developed by Nokia), 3G, and now LTE are all part of Nokia’s patent portfolio. A 2011 survey showed that Nokia was the largest patent holder for essential technologies relating to LTE.

Like everyone else, however, Nokia itself has worked on setting partnerships with other patent-holders in order to avoid getting sued. And, in reading some of its SEC filings, an interesting picture emerges. For example, the company’s 2011 annual report included the following interesting note:

In 2008, Nokia and Qualcomm entered into a new 15 year agreement, under the terms of which Nokia was granted a license to all Qualcomm’s patents for the use in Nokia mobile devices and Nokia Siemens Networks infrastructure equipment.

This essentially means that, for the next decade or so, the company has access to a rich set of patent protection related to LTE, as Qualcomm is the second largest holder of patents in that space. Of course, some people might argue that another vendor could go HSPA+ but this strategy would result in a checkmate as Nokia not only developed but is also the single largest holder of patents on that technology.

The giants in mobile telephony have taken notice. Last year, Apple had to settle out of court over some of Nokia’s patent claims. While numbers were not made public, I’ve heard that the initial payout was north of US$500 million and that Nokia could be making between $5 and $7 in patent fees from every iPhone sold. Now stop and think about this for a second: for every phone sold by Apple, about 1% of the price goes back to Nokia (remember that the heavy carrier subsidies cover a substantial price of the device, which explains the difference in price between a carrier-locked device and unlocked ones you can buy directly from Apple). And Nokia has similar lawsuits against some Android manufacturers.

In fact, Nokia’s patent portfolio may be valuable enough on its own to justify buying the company. With analyst putting its value at anywhere between US$6 and US$10 billion, one could buy a patent portfolio and get a telecommunication and mapping company for almost free.

The forgotten map maker

Maps? Yes, maps. Over the last few years, Nokia has made a number of bets on location and mapping, with the 2007 U$8 billion acquisition of Navteq. This acquisition made Nokia the largest provider of mapping services in the world. In fact, the company provides mapping services to Google, UPS, Fedex, and many of the largest players in the automotive industry.

When looked at in contrast to the recent release of Apple maps, it seems that this investment is one that would greatly benefit Apple and allow it to quickly catch up and surpass Google. The company could decide that it would not renew its offering to Google when that contract expires, forcing the search giant to go and build out a greater capability in that arena if it wants to retain its lead in the space. The reliance Google maps has on Navteq data is still very high and this is why the company invests heavily in augmenting the data with its own data set, making it clear to its provider that it intends to eventually become a competitor.

The reason for such heavy competition is that maps have become a critical service on mobile devices. Today, it would be considered crazy to have a smartphone that  does not include a GPS and have software on that phone which does not provide location-based services. Google has been promoting the strength of its mapping service for a long time and Nokia showcased it as a key differentiator in its Lumia line.

So maps are now essential to one’s mobile strategy and Apple is behind. When you’re as far behind as they are, there are two ways you can get back to the table: you can either run like crazy and try to iterate your product at light speed or you can buy your way back at the table.

And what better company than the market leader if you are to make the investment? On top of it, Apple would get some interesting support for its AppleTV product.

Nokia and TV

Before I move any further, I need to make a disclosure: back in 2000, I did some consulting for Nokia helping them move photos from camera-phones (yes, they were called that) to TV set top boxes. The basic idea was that you should be able to see pictures (and eventually video) you had taken on your phone and display them on a larger TV screen. This was a feature that could be included into set top boxes the company was selling to cable and satellite operators. The technology continued to evolve internally but never made it out of the labs.

Nokia, in fact, has had a long track record of providing TV-related technology. Early this year, it sold assets and employees from its IP TV division to Accenture. However, the company didn’t sell patents related to that business nor did it include its mobile TV business in the offering. Owned in a joint venture with Siemens, Nokia is one of the world leaders in technology relating to delivering live TV on mobile devices, something it is offering as part of its mobile broadband infrastructure division. Such a division would probably complicate an acquisition by Apple as it does not provide enterprise services today.

A 3-ways deal

So what would Apple do in this case? I think it would turn around and trade it. But who should the company trade such a giant to? My candidate for this is Alcatel-Lucent, a company with a substantial patent portfolio and other intellectual properties in areas Apple may want to bolster.

For example, Alcatel-Lucent was the birthplace of Unix, which powers Android and iOS; C and C++, the programming languages providing parentage to Java, which serves as the basis for Android, were also born there. If weaponized, this arsenal could be dangerous to Google.

Alcatel-Lucent and Apple already have pre-existing relationships as Apple licenses patents relating to audio (like portions of the MP3 format) from them. Getting those patents would lower the total cost of iTunes, iPods, iPhones, and iPads for Cupertino, allowing it to increase its margins further. And the two companies are still in court over other Alcatel-Lucent patents Apple is using. A settlement could include a transfer of the telecom assets Apple is not interested in.

Competitive impact

Of course, an acquisition of Nokia would have quite an impact on Microsoft as it tries to make its way back into the mobile space. With Nokia as its most important partner, Microsoft’s hope to become a likely contender for consumers’ hearts might be dealt something pretty close to a deathblow. The company would remain a strong players in the areas it has power in but its attempt at getting a strong footing in the mobile space would be the setback that kills its ambitions there.

Meanwhile, the increase in the size of the patent portfolio Apple would control would probably have a large impact on the company’s lawsuits against Android manufacturers. In a world where Android is prominent that you get a free Android phone when you buy a magazine, Apple’s lawsuits could eventually start cutting into that rate of growth.

In the mapping space, the company would not only become a dominant force but would also have a way to cut off the air supply of most of its competitors. While it would solve its immediate problem when it comes to mapping data, it would also have control of the data that currently powers Google maps, Amazon, Windows Phones, Rim, and Samsung. That’s a pretty strong position.

With a market cap of $10 billion for Nokia and Apple sitting on a cash pile of over $100 billion, the Cupertino giant could fund this from change it found in its couch. For the reasons listed above, I suspect that Google and Microsoft would also jump into the game, bidding Nokia’s share price further up. But few companies have the buying power Apple has and it would eventually win that fight and, once again, reorder the mobile landscape while solidifying its own control of the future.

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