It's never easy being a patent king. Just ask companies like Rambus
Dealing with one courtroom headache after another, it's not surprising to see a patent king decide that it's better off compromising on its licensing and/or royalty rates, simply to bring down its legal expenses and start collecting revenue. Qualcomm appears to have done that with Nokia in 2008, settling its dispute with the world's largest cell phone manufacturer by agreeing to a $2.5 billion licensing payment, but also a royalty rate that's widely believed to be much lower than Qualcomm's traditional rates. Now, it looks as if Qualcomm has done it again, agreeing to a 15-year deal with the world's No. 2 phone manufacturer, Samsung, that appears to tie a $1.3 billion payment with a lower royalty rate than what Samsung has historically paid.
The market doesn't seem too bothered by the Samsung deal -- rather, it seems pleased that Qualcomm got a deal worked out without more courtroom drama. But I have to think that while one such compromise can be written off as a unique event -- especially with Nokia having a strong patent portfolio of its own -- a second compromise amounts to a trend.
You have to wonder what the suits at LG, the world's third-largest phone manufacturer, are thinking as they read about the Samsung deal. And for that matter, how about the execs at Sony Ericsson, Motorola
As far as tech companies go, Qualcomm is still a relatively low-risk investment. The company continues to generate stunning amounts of cash -- even with revenues for the fiscal year that just ended declining 7% thanks to the global recession, free cash flow (excluding Nokia's licensing payment) grew 25% to $4.4 billion. And as 3G phones continue growing as a percentage of global cell phone sales, Qualcomm's royalty and chipset revenues should steadily move higher.
But in the aftermath of the Nokia and Samsung deals, the long-term growth outlook for Qualcomm's royalty business doesn't look as rosy as it might have a few years back. And with Qualcomm saying on its conference call that it still has disputes with two licensees, investors shouldn't be shocked to see more compromise agreements arrive.
Fool contributor Eric Jhonsa has never found a coffee bean he wasn't willing to try out. He has no position in any of the companies mentioned. Apple is a Motley Fool Stock Advisor selection. Nokia is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.