Nintendo Loses Wii Patent Lawsuit to Philips: What Happens Now?

Nintendo (NASDAQOTH: NTDOY  ) lost a case against Dutch conglomerate Koninklijke Philips (NYSE: PHG  ) last Friday, with a U.K. court ruling that it had infringed on two of Philips' patents in its Wii and Wii U consoles.

The two disputed patents cover motion control and wireless devices that can be controlled by a second device. Products that are in violation of the first patent include the Wii, Wii Mini, Wii Remote/Remote Plus, Nunchuk, Balance Board, Wii U, Wii U GamePad, and Wii MotionPlus. The Wii U and GamePad violated the second patent. However, the court ruled that Nintendo did not infringe on a third patent, which covered modeling a user in a virtual environment.

Source: Nintendo.

In addition to the U.K., Philips has filed patent litigation against Nintendo in the U.S., France, and Germany. The final damages won't be known until next month, but Philips' initial demand was that Nintendo halt sales of all products that had infringed upon its patents. Nintendo intends to appeal the decision.

In my previous article, I discussed the troubled relationship between Nintendo and Philips. In this article, I'll discuss the financial implications of the U.K. ruling for both companies.

What this loss means for Nintendo
The worst-case scenario for Nintendo looks grim -- it would have to halt sales of its consoles and peripherals across the U.K. and possibly pay back royalties on every one of these products sold in the region.

The ruling comes at a time when Nintendo's Wii U sales are accelerating in the U.K. thanks to Mario Kart 8, which has already sold 1.4 million copies worldwide since launching at the end of May. At the beginning of June, weekly sales of the Wii U in the U.K. surged 666% thanks to the launch of the Mario Kart 8 Wii U bundle.

It's unlikely that Philips actually wants Nintendo to halt sales of all Wii U consoles and their peripherals. Instead, Philips will likely force Nintendo to agree to a royalty settlement, which will add Nintendo's motion controls to its profitable portfolio of royalty-generating patents, which already include CDs, DVDs, Blu-ray discs, LED lighting, and various video codecs.

The worst-case scenario for Nintendo
Nintendo has sold approximately 895 million Wii games and 32 million Wii U games globally.

Prior to the expirations of several patents on CDs, Philips received about 1.8 cents in royalties per CD sold globally. If Philips requests 1.8 cents per Wii and Wii U title sold, Nintendo would owe Philips about $16.7 million. However, if Philips demands a royalty rate of $0.11 to $0.16 -- which is what Philips, Panasonic (NASDAQOTH: PCRFY  ) , and Sony (NYSE: SNE  ) currently charge manufacturers of Blu-ray discs and split, Nintendo could pay up to $148 million in software royalties.

For hardware, the rate could be much higher. Panasonic, Philips, and Sony earn $9 in royalties (split three ways) for each Blu-ray player sold. If Philips applies a similar rate to the 101 million Wiis and 6.3 million Wii Us sold so far, it would translate to nearly $966 million in back royalties.

Nintendo's bottom line simply cannot withstand over $1.1 billion in royalty payments to Philips.

The company has already posted three consecutive years of operating losses, with an operating loss of $456 million in 2013. It also reported a net loss of $228 million, down sharply from $71 million in net income in 2012.

Blu-ray player-like royalties could seriously hurt Nintendo. Source: Wikimedia Commons.

Of course, $1.1 billion is a worst-case calculation that assumes that Nintendo will lose its subsequent cases and pay back royalties on sales of all hardware and software sales worldwide. However, royalty payments could be limited to a certain region, and actually be much less than Blu-ray royalty rates. Individual Wii/Wii U software publishers could also be asked to pay the royalties instead of Nintendo.

What this victory means for Philips
Philips' disc-based royalties are reported in its consumer lifestyles segment, which generated $6.3 billion in revenues in 2013 -- a 7% increase from the previous year. The segment consists of Philips' domestic appliances, health and wellness, and personal care products, and accounts for a fifth of the company's top line.

Boosting revenue in this segment could help offset Philips' lackluster growth in its two other main businesses, health care and lighting. Healthcare revenue, which accounts for 41% of Philips' top line, fell 4% last year. The lighting division, which accounts for another 36% of its top line, posted flat growth.

Therefore, a patent victory against Nintendo could increase the weight of Philips' consumer lifestyles segment, and possibly offset the weak top line growth of the healthcare and lighting divisions.

The Foolish takeaway
In conclusion, it's still too early to fully assess the damages that Nintendo could face over the next year, but investors should understand the real motivations behind the lawsuits.

For now, the U.K. ruling shows that Philips' claims are credible, and therefore represent major threats to Nintendo's two largest markets -- Europe and North America. Subsequent damages could lead to a fourth year of operating losses for Nintendo, while Philips' consumer lifestyle business could grow faster with additional royalty payments.

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Read/Post Comments (9) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On June 25, 2014, at 8:13 AM, hiredgoonz wrote:

    Well, in fairness, Philips has such a wide range of products that use motion control that are clearly being copied by Nintendo. Ummm, wait, they don't? And the timeline of the patents is questionable at best? And both Sony and Microsoft (along with every smartphone manufacturer) include motion control in their products? And Nintendo has included motion control in games such as Wario titles for the GBA, not to even mention the "game mats" for games from the NES era? Patent trolling is a disease that punishes companies that actually put products to market. I thought it was bad in the US, with companies whose sole business model is based on, and entire revenue stream made up of, buying or acquiring as many patents as possible, scouring them for obscure ways in which they obliquely resemble something already on the market and filing suit. As far as the wireless patent, I'm almost positive Zenith had the first remote control for TVs, but no matter, a victory on that front, something no sane person could take seriously, would include everything from TVs to remote-controlled toys, to military drones. Patent law needs some serious reform along with training judges to understand technology more advanced than say, toasters.

  • Report this Comment On June 25, 2014, at 2:17 PM, mobrocket wrote:

    @hiredgoonz

    unless you read the case, you really cant just call phillips a patent troll

    1. Phillips claims they were working on a licensing deal and it feel thru, Patent trolls usually buy old patents from other companies then file suit first

    2. Did you see the patents that are in question? how would those apply to smartphones?

    3. Granted Phillips doesn't make video game consoles at this time, but they do use motion tech in some of their other products / unlike patent trolls that usually do not produce anything

    4. I do agree that patent laws need updating and improvement

  • Report this Comment On June 25, 2014, at 2:31 PM, sbo1111 wrote:

    So typical, these Motley fool guys are soooo happy every time there is anything negative they can write about Nintendo ROFL

    this is getting old and annoying

  • Report this Comment On June 26, 2014, at 1:53 AM, norman13 wrote:

    Given Nintendo has around $5B in cash and $12.6B in Current Assets I don't think even a worst case scenario is going to be company destroying.

    Sure, they wouldn't like to have to hand over $1.1B (who would), but they can afford it.

  • Report this Comment On June 26, 2014, at 4:01 AM, vrtra wrote:

    Seeing as how Nintendo and Philips do not compete in any way there should be no royalties paid in any way as Philips isn't losing any money. It seems more like a publicity stunt to get customers looking into Philips for suing Nintendo. This might go back to a grade Philips is holding back in the days of the CD-i when nintendo allowed them to make the most horrible Zelda and Mario games right before the CD-i fell into obscurity.

  • Report this Comment On June 26, 2014, at 4:03 AM, vrtra wrote:

    I meant to write grudge Philips is holding... I hate autocorrect.

  • Report this Comment On June 26, 2014, at 1:26 PM, Eurytus wrote:

    What happens now is it goes to appeals. Then a judge who actually knows what technology is will find in favor of Nintendo. Then Phillips will appeal that decision until they can get a judge who's stupid enough to fall for the suit. And so it will continue.

  • Report this Comment On June 27, 2014, at 1:37 AM, spinod wrote:

    These patent things are beyond stupid now. Patents were made for the little guys. If you invented something, it protects you from big companies using it without your permission. It no longer does that.

    People just think up random general ideas, patent it, then wait for a big company to "steal it" so they can sue.

    I like Philips, I think they are a good company, but what have they done recently beyond troll patents? Nothing. They don't even have any products making them money that use motion controls at all so there is no harm done. I think if you have a patent and are just sitting on it, you lose control of it.

  • Report this Comment On June 29, 2014, at 11:54 AM, Terikan wrote:

    We seriously need courts that can understand technological nuances, and rule 99% of current tech patents invalid due to being too broad or vague.

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