Qualcomm (NASDAQ:QCOM) is no stranger to patents. The mobile processor and baseband leader already has thousands of mobile and wireless patents in its portfolio and has made a large amount of its past revenue by licensing them. With the purchase of some of Hewlett-Packard's patents this week, Qualcomm investors can expect the company to continue down the same path, hopefully with similar results.
What Qualcomm gets
Qualcomm's purchase includes Palm, IPAQ, and Bitfone patents, including 1,400 of them in the U.S. and more than 1,000 in other countries. In a press release, Qualcomm described the patents as "fundamental mobile operating system techniques." While that's pretty vague, the company could bundle necessary tech patents with its already lucrative wireless-technology patents.
When Qualcomm licenses patents to other device makers it sometimes bundles patents together so that original equipment manufacturers (OEMs) pay one fee for a number of patent licenses. For example, Qualcomm has a large amount of 3G and 4G patents and earns about 3% to 5% of the price of every mobile device sold that contain Qualcomm's intellectual property. That's a hefty fee OEMs have to pay to Qualcomm for each device, but the company also includes other patent licensing to help sweeten the deal.
With the purchase of the "fundamental mobile operating system techniques," Qualcomm may be able to do more of the same. The company's current position in 3G patents is extremely valuable, but its position in 4G is less so. If Qualcomm bundles its new mobile patents with some of its 3G and 4G patents, it not only gives device makers additional freedom to use patented technology but assures that it's still receiving strong royalty rates as companies transition further into 4G technology.
That's not to say Qualcomm is in a bad position with its 4G patents, but they aren't as strong as its 3G patents. It's likely that over the next decade 4G devices will be backward compatible with 3G as well, allowing Qualcomm to continue receiving its highly profitable royalty rates.
If there's any company that knows what to do with the HP patents its Qualcomm. Not only does the company have a long history of generating solid patent-licensing revenue, but just last year former Palm CEO Jon Rubenstein joined the company's board of directors. Rubenstein's experience with Palm, as well as running Apple's iPod division for a spell, should serve the company well.
The key to patent royalties is diversification and value -- and Qualcomm's recent purchase seems to have both of them. As the company rolls the patents into other licensing fees, it can add value to other OEMS while continuing to bring in future revenue for Qualcomm.
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Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and Qualcomm. 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.