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Just let out a little wine

15/2/09

There is nothing sexier than a boy who can cook. An impressive dinner often leads to breakfast. There is one boy I know who is an excellent chef, but his business is feast or famine and I can always tell what how well he is doing by what I get to eat and drink. If he’s doing well it’s great steaks and medium wines, but last week it was curry and Châteauneuf-du-Pape 2001.

I knew he was in trouble.

The more broke he gets, the more he digs into his fine wine collection. He can’t afford to buy the ordinary stuff so what’s been laid down comes out of the cellar.

Selling the family silver might have helped people through the rough times in the last century, but in these difficult economic times it’s going to be invisible assets which get sold. IP – as in intellectual property rather than Internet Protocol –  will be the next thing to go. Look at all the companies which are currently down-sizing. Many of them have already shrunk to a fraction of the size they were a couple of years ago. Traditional assets like stock and factories have little value in a world of overproduction. Why buy a factory when the chances are it will cost a fortune to keep running and lay off a proportion of the workforce? BenQ has been there with Siemens.

Buying IP, particularly that you already licence, is an asset worth having and brings a cost saving. In particular the clique of core mobile phone companies which see royalties from almost every handset manufacturer. They also exchange IP so pay less themselves. A useful saving on the bill of materials when working to tight margins, and because the royalty is paid on the cost of the finished handset, quite a chunk of money on the more expensive ones. The members of this club include Nokia, Qualcomm, Motorola and Ericsson (which provides an umbrella for Sony Ericsson with the IP). Two of these companies don’t need to sell IP. Indeed Qualcomm sees itself as an IP company and litigation is offense not defense: a profit center. Nokia might be pulling in it’s horns but is a long way from a fire sale. The other two? Well Ericsson has just announced 8,000 redundancies but its still profitable. It’s not buying any more wine to lay down but can still nip out for a drinkable Rioja.

Motorola, however, is so far into the cellar it’s eyeing the champagnes and vintage ports.

That IP bottle might be the “one they will never open”,  but these are extraordinary times. Motorola has always had – still has – the best RF engineering. It’s so good they take it for granted. And the patent portfolio reflects this skill. The time may have come when the IP is worth more than the company. It certainly makes lots of money $319m last year according to the last accounts. If someone made a large public offer for that IP it  would be hard to turn down. Not just because it would provide a respite from the constant redundancy waves, but because if the shareholders saw a potential for enough income to balance the books in 2009 they would see it as a way to claw back some of the money they have lost since the shares tumbled from over $26 a share to under $4. They wouldn’t say that of course. They’d claim it was a way to put the company on an even keel and a start to reclaim former glory. The Wall Street parasites are lying, as soon as the money appeared and there was a blip in the share price they would dump their holdings, leaving Motorola without the one great source of revenue it has. That would be like drinking the Margaux and pissing off, but VCs probably do that too.

So who would be in line to buy the IP. If it was worth say $2bn? The obvious “who would buy” answer is always Nokia, but they are already part of the IP club so it’s worth less to them. Microsoft might be an interesting candidate. They sniffed very hard at buying Motorola, didn’t like the smell and walked away. That would be A Bad Thing. One of the great enlightenments of GSM IP royalties has been how the cost of IP has been reduced over the years. It’s one of the reasons GSM has been so successful and has been an issue between the traditional manufacturers and Qualcomm over 3G IP. Microsoft is unlikely to understand the benefits for the world and keep royalties high.

The most likely candidate is one of the Chinese companies.  A couple of weeks ago I looked at how the awarding of multiple 3G standards hurts China’s export capability. This would have the opposite effect. Many of the small Chinese manufacturers don’t pay for the IP. They can get away with this if they don’t export the phones and not even Motorola and Qualcomm whose nationalistic pride would normally have them reaching for the lawyers believe they could sue a Chinese company in a Chinese court and win. The big names, the ones you’ve heard of, like ZTE and Huawei, do pay for the IP. If they joined the club it would be possible for them to lean on their compatriots and defeating local competition is always very attractive.

Of course if Huawei was to buy Motorola’s IP it would just hasten the decline, and like James, my friend the chef, they will go to the cellar and find it’s bare. I’ll still pop round to James for a curry, because the food and company are great but I’ll have to start taking my own Fleurie

Cat Keynes publishes her thoughts on the mobile phone industry every Sunday at www.catkeynes.com you can read the column  the previous Friday by subscribing here.

 

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