Disruptive Tendencies

Nortel’s Devolution to Non-Practicing Entity?

As someone who once wore a Nortel employee badge, and who counts many ex-Nortel employees among friends and family, watching Nortel’s descent from the peak has been hard to watch. Those, with better visibility into the decision-making than I, will ultimately dissect all of the wrong turns. 

Financial mismanagement, ill-conceived M&A deals, and strategic missteps have, unfortunately, landed Nortel where it is today – in bankruptcy protection and actively divesting entire businesses; its enterprise business possibly to Avaya, its wireless business to Ericsson. But like the Black Knight in Monty Python’s “The Holy Grail”, they’re “not dead yet”, despite hacking off multiple limbs.

When Nokia Siemens Networks’ bid was announced for Nortel’s remaining wireless business (CDMA and LTE roadmap), the decision to exclude wireless-related patents was a very strong indicator of intent. Under the terms of the announced transaction, NSN received a license to Nortel wireless IP, while Nortel retained ownership of said IP. According to reports, the Ericsson deal construct is very similar, with ownership of Nortel patents remaining with Nortel.

Once NSN’s stalking horse bid was announced, others emerged as suitors for the wireless business, including most notably RIM and the eventual winner of the auction, Ericsson.

Why would RIM pursue Nortel’s wireless business at the 11^th hour? Is it because it aspires to get into the CDMA/LTE base station business? I’m guessing not. Could it be that RIM saw Nortel’s moves signaling a fundamental shift in its future business model? Rather than remaining in the messy business of actually producing and selling product, why not sell off the operating businesses for a bunch of cash, throw in non-exclusive licenses to Nortel’s IP, and re-emerge as Nortel, the Non-Practicing Entity (aka Patent Troll)?

Few companies have been as badly burned recently, by NPEs, as has RIM. With its $612.5m settlement with NTP, for what ultimately amounted to the assertion of just a couple of claims (the validity of which was being seriously challenged), and more recently, its settlement with Visto for $267.5m, I’m sure RIM can see a day when Nortel, the NPE, asserts claims against RIM’s LTE products, at a cost to RIM that makes its $1b pseudo-offer seem reasonable. No doubt this is why RIM is rumoured, already, to be pursuing licensing discussions with Nortel for LTE patents.

A key here is that Nortel, as an NPE, would no longer be constrained by the usual rules of engagement that make the assertion of claims, by practicing entities (PEs), so rare. As a going concern, and even with an impressive patent portfolio (reportedly 5,500 patents), it would be highly unlikely for Nortel to assert its patent position against its main competitors. A kind of détente exists with patent holders, who understand that an assertion here will bring a counter-assertion there. The worst fear of PEs, however, is the NPE (or Troll), for which this détente is irrelevant, and where the business model is uniquely about asserting and monetising IP rights.

So Ericsson gets a pass on LTE patent assertion by Nortel, a key US customer committed to LTE, and a team capable of enhancing the CDMA to LTE migration story. Not a bad deal for $1.13b. And while one is tempted to feel sorry for NSN, its original bid of $650m turned out to be woefully miscalculated. One can only guess at what losing the deal with Nortel will end up costing NSN; in legal costs, eventual royalties and market share. Conversely, Ericsson will have gained in all of these areas. Kudos to its management team for realising this.

So what of Nortel? Can it make the transition from multi-billion dollar equipment vendor to NPE/licensing company? There certainly are precedents, even in Nortel’s backyard. Wi-LAN and Mosaid are two companies that have gone done this path, each of which has developed IP licensing as a core competency. Keep an eye on key Wi-LAN or Mosaid employees. If they start to leave, perhaps it’ll be to take on the challenge of monetizing Nortel’s patent portfolio. And if I’m Jim Balsillie, I’d be super pissed.

That’s my .02!

Martin Suter

(martin.suter at iplicensing.net)

To LTE or not to LTE

(Originally posted at http://www.von.com/blogs/guest/2008/12/to-lte-or-not-to-lte.aspx )

Talk about confusion in the market! Is the arrival of LTE-based 4G imminent or still years away? Depending on which articles you’ve been reading, you could draw highly contradictory conclusions.

Earlier this month, Qualcomm announced it is dropping development of its flavor of 4G technology, known as Ultra-Mobile Broadband (UMB), and is shifting its focus to LTE technology.

Qualcomm’s announcement comes on the heels of Nortel Networks Ltd.’s announcement this past summer that it’s shifting its development focus from WiMAX to LTE and Motorola Inc.’s announcement that it’s planning to release 700MHz LTE products in 2009.

It sounds like 4G is right around the corner! Or is it?

It’s not surprising to see vendors jumping on the LTE bandwagon. Qualcomm had $600 million tied up in goodwill related to UMB (Flarion M&A), and without carrier support for UMB, it’s possible some level of writedown may be in the cards. Both Nortel and Motorola have seen their stock prices decimated this past year, and announcements related to “the next major thing” allow them to add some (Gartner) Hype into their stories for the Street without having to back it up with any performance metrics.

In early October, AT&T Inc. (T), North America’s largest wireless carrier, suggested publicly that its HSxPA-based 3G networks still have a lot of life left in them, and is projecting LTE won’t be deployed on a commercial scale for another five years. Of note is that in the month following this disclosure, AT&T announced its acquisition of Wayport, the country’s largest commercial Wi-Fi service provider. With this acquisition, AT&T adds very significant wireless data capacity, for devices of all kinds, across its footprint without having to spend anything on additional spectrum.

And what of the prospects for 4G to get mired down in a patent quagmire? Some of the handset vendors have banded together to create a patent framework for LTE, but other key players are absent. ADC has indicated it has several key patents related to 4G. There also has been speculation Qualcomm may attempt to assert its OFDM patent portfolio, much of which was acquired with its Flarion deal announced back in 2005. With the discontinuation of its UMB (i.e. Flarion) development, it is not a stretch to imagine attempts to recoup its $600 million price tag via threatened litigation and broad-based licensing of the related IP.

Will LTE be rolled out? In all likelihood, the answer is yes. However, three things threaten to continue to push this date further to the right:

• Capital markets
• IP landscape and uncertainty
• Existing, low-cost substitute technologies like Wi-Fi

Previously, I blogged that the debate as to which technology is better, is moot. Ultimately, the market will dictate timing and required capabilities. There are true broadband wireless devices shipping today in the hundreds of millions of units, heading to over a billion per annum. While AT&T has come out and indicated its 3G network has legs, its investment in Wayport is a strong indication that Wi-Fi has legs too!

That’s my .02!

Martin Suter is vice president of business development at BelAir Networks, a provider of broadband mesh solutions for Wi-Fi, WiMAX, 4.9 GHz Public Safety and 5.9 GHz ITS networks. Previously, Martin was the CEO at Cohda Wireless, where he raised the company’s profile and negotiated a licensing deal with a Fortune 100 vendor in its core franchise. Prior to Cohda, he was vice president of business development at MeshNetworks Inc., a classic tech transfer/disruptive technology success story that achieved a major liquidity event for its investors in Q4/2004 with its acquisition by Motorola. Martin also was responsible for building several high-profile alliances with and for leading technology companies, including Fujitsu, Microsoft, Netscape, Sun Microsystems and Teradata. Additionally, Martin successfully has negotiated technology transfer, distribution and/or licensing deals with companies like 3Com, BioChem Pharma, Dow Chemical, Exodus, Fujitsu, IBM, Microsoft, Motorola, Netscape and Sun.

Fight or Flight? Why Big Companies Do Deals

I love the web and am constantly amazed at what one can find or learn from others skilled in the art.

I recently came across a very interesting piece in Marc Andreesen's blog: "The Moby Dick Theory of Big Companies", in which he suggests that "There are times in the life of a startup when you have to deal with big companies." He then builds a very interesting metaphorical case for SmallCo as Captain Ahab and BigCo as Moby Dick. It's an entertaining and enlightening piece, but I will endeavour to go a few steps further and try to delve into the psychology driving the players in this game.

Marc makes some interesting points about a BigCo's behavior being inexplicable when viewed from the outside. He suggests that there are some many moving parts and agendas, that the dynamic of decision making is highly unpredictable. While I tend to agree at a macro level, it's my experience that people (and a company is an aggregation of people) will react most predictably to fear. I think it was Intro to Psych class where we are all introduced to the concept of "Fight or Flight" and that it applies equally to business psychology.

SmallCo's are used to talking about the opportunities created by their disruptive technology: new markets, huge revenue, vast market share, value creation. This is a natural side effect from their creating business plans and pitching investors on how compelling the opportunity is.

Once they've convinced themselves and their investors that the opportunity is huge, they will often go out and try to convince one or several BigCo's of the same thing. Getting funding or landing a whale require different stories, but usually SmallCo re-uses their investor pitch in trying to get BigCo's attention. You may get nodding heads in meetings and even hear that they agree with your assessment of the opportunity, but all too often BigCo inertia takes over and nothing happens.

I first experienced this in a big way shortly after being recruited from a start-up into the Disruptive Technology group at Nortel in Q3/2000. MeshNetworks had just emerged from stealth mode with a classic, highly disruptive story that had the potential to impact many incumbent technologies and R&D programs in the wireless space. Nortel was heavily invested in 3G, having made a major UMTS bet, and I was advised to identify a new market opportunity created by this emerging technology rather than positioning it as a disruptor to 3G. So, I began the exercise of focusing on a net new commercial opportunity that this technology could enable for Nortel. It was a billion dollar opportunity in 3-5 years, yadda, yadda. I got the nods in meetings and the "Atta boy" from my boss at review time, but there was no sense of urgency to act.

Frustrated by this, and deciding to win big or die trying, I spoofed a news story using the San Jose Mercury News banner and inserting quotes from John Chambers and industry analysts. The banner read: "Cisco Leapfrogs 3G and Goes Right to 4G; Acquires MeshNetworks for $400m". I then printed off my mock-up and put it on the fax machine, sending it around internally. Within 5 minutes, my phone began to ring - "Holy shit! What the hell just happened? How could we have let this happen?!?"

Basically I then told them that we have a do-over, that this didn't really happen (yet). But I then asked whether this was a version of the future that we were prepared to accept. If so, not acting was a reasonable course of (in)action. If we couldn't contemplate this version of the future, then we needed to act urgently.

What did I takeaway from this?

BigCo's are largely risk averse. Status quo rules the day and that having a team of singles hitters internally is easier to manage than going to the free agent market and bringing in the guy who will either hit it out of the ballpark or go down swinging. Unless that home run hitter is also talking to another team in your division which could lose you more games. The threat of him landing with a competitor usually changes the way in which you look at his availability as well as what you're willing to pay to get him on your team. It's the competitor pre-emption premium.

Winning vs. not losing. Opportunities or threats. Two different ways of framing the discussion.

After 20 years of dancing with 800lb gorillas, or hunting the great white whale, my experience is that BigCo action is catalysed more often from perceived threats than from potential opportunities. My hunch is that this is an 80:20 relationship, although I have no quantitative data to support this.

What happens inside companies when presented with a perceived threat? The Fight or Flight instinct kicks in. Corporate DNA is pre-disposed to fighting (they don't call it "competition" for nothing), while fleeing is anathema to most BigCo's. Status quo is not an option when under threat of attack.

You've decided, for whatever reason, that you're going to go hunt the big white whale. You've got a disruptive technology, well it's called disruptive for a reason. Change the lens through which you have them view you. Build your story around the threat to their status quo and you are more likely to get them to act with a sense of urgency.

But be careful what you wish for. You might just end up harpooning the whale and you then have to answer the "Now what do I do?!?"

That's my .02!

Martin Suter

(martin.suter@iplicensing.net)