Latest on the Nortel bidding war

The deadline for submitting bids for the Nortel patent portfolio is clearly drawing near and "informed" leaks are appearing. Presumably intentionally to drive up the price. The latest leak is reported on the fierce wireless website and lists Apple, Google as well as the Chinese companies Huawei and ZTE as potential bidders. Nothing surprising there. The Nortel portfolio includes a number of gems which any company operating in the wireless space would love to have - if only to act as a bargaining chip in licensing and negotiating deals. Neither Apple nor Google have an extensive telecoms patent portfolio and so they would love to build the portfolio. Huawei and ZTE are starting to build massive portfolios, apparently subsidized by the Chinese government. Indeed Huawei is now one of the bigger PCT patent filers and ZTE claims to hold 10% of the essential LTE related patents. However, whilst they have many pending patents, their granted portfolio is much smaller.

Intriguingly two consortia including patent licensing firms are also in the running. One consortium apparently consists of Intellectual Ventures and InterDigital. IV is known for its accumulation of patents, whilst InterDigital possesses several patents that are relevant to mobile telecommunications standards (but has also lost some court disputes). The other consortium includes RPX - a patent aggregator that acts on behalf of several major companies to take patents "out of the market". RPX is currently planning its IPO as reported here and here. Will it be using some of the proceeds to purchase the Nortel portfolio.

These two consortia could clearly push the price of the portfolio up tremendously. Neither has much interest in cross-licensing since they do not actually make any products as such. RPX is aiming to buy up problematic patents to support their membership base (as explained here). No doubt having a ripe bag of telecoms patents will "encourage" a few more companies to sign up and help the IPO on its way. IV has until recently not been known for enforcement of its patent rights, whereas InterDigital has been active. So it will be interesting to see how that works out if they win the pot of gold. Both companies will have an interest in "monetarising" their new assets.

The sheer sums of money here are just mind-boggling. The size of the mobile telecommunications market is clearly massive, but it is also going to take a major investment for any company to justify the figures that are being talked about. It will not be unnoticed that none of the established players such as Nokia, Ericsson or Alcatel figure among the potential acquirers. They all have substantial portfolios of relevant patents - but then Nokia is known to be a backer of RPX and Ericsson purchased the LTE assets of Nortel some months ago and presumably got a license to the relevant IP thrown in with the deal. So they don't need the rights. Has this all been factored in? The IAM blog was sceptical about whether the bond purchasers who have pushed up the value of the Nortel bonds really understood the process.

Let's hope nobody has to see his car because of his Nortel patent portoflio.

Technorati Tags:
Nortel, Telecommunications

Will the ZTE Brand and Name Find its Field of Dreams Outside China?

Like most of you, I imagine, I really did not know much, if anything, about the Chinese company ZTE (here)--at least until I read a recent article in Business Week ("Good Times for Cheap Cell Phones", by Bruce Einhorn, May 11th). It turns out that ZTE, which operates in the telecon equipment space, is the world's sixth largest manufacturer of cell phones. That bit of information, by itself, may be of limited interest--after all, China is a huge domestic market with an expanding consumer population. The size figures may simply reflect the position of ZTE in the local Chinese market.

In fact, however, there is an interesting IP angle to the activities of ZTE. As described in the article, ZTE is angling to become the 3rd largest manufacturer of cell phones in the world; if so, it will leap over Sony Ericsson and Motorola in the process. To do so, however, ZTE will need to establish a presence outside of China. The question is--how? More precisely--the question is how to achieve penetration of its brand overseas?

Until now, Chinese companies had preferred to purchase overseas operations and then try to do a better job than the previous Western owner in extracting value from the purchased operation. The results, however, have not been encouraging. As the article points out, TCL bought Thomson's TV business as well as Alcatel's handset units. It appears that neither acquisition has been overly successful. Even the much ballyhooed acquisition of the IBM PC division by Lenovo is stumbling a bit as of late, where it has been overtaken by Acer, the Taiwanese computer company. In the words of the article, this has been a strategy "to grab down-on-their-luck Western brands."

Indeed, it is the ascendancy of Acer in the PC market that highlights the strategic decision before ZTE in its quest for world-ide penetration of its handsets:

(1) Does ZTE purchase an existing handset business and try to revive it under the ZTE brands?

(2) Does ZTE expand, at least initially, by providing handsets for foreign carriers, but allowing the carriers to remove the ZTE mark in favor of the carrier's brand, and only later attempt to build its own brand recognition? or

(3) Does ZTE attempt to develop brand recognition from the outset (and presumably earn the higher margins for the sale of its branded product)?

According to the article, ZTE has opted for the second strategy. Despite its size in the handset market, at this stage it is content to sell its product to carriers who will then rebrand the product under their own name. The rationale for this strategy is that, if it is successfully carried out, ZTE will gain market share. Presumably later, if it wishes, it can then try to enter foreign markets under its own name. In adopting this strategy, it rejected the purchase of an existing overseas handset business, such as that of Motorola.

There is a precedent for this--which suggests both the risks and opportunities in adopting such a strategy--namely Acer itself. As I recall. Acer started out as a successful contract manufacturer of computer equipment. In the 1990s it then sought to market its products under its own brand. The move was questioned (Taiwanese companies could never compete at the marketing and distribution level required, it was said) and in fact the first stage effort was not a rousing access. But Acer renewed its efforts, and it would appear that it has now successfully made the transition from contract manufacturer to manufacturer of its own branded products.

Not just an Ace(r), but a royal flush

Based on the Acer experience, the current strategy of ZTE not to promote its own branded products abroad might make sense. As Kevin Costner never said in "Field of Dreams" (here): "Build market share, and the customers for your branded products will ultimately come." But if ZTE is to realize its "field of dreams", it will take time to do so. ZTE may have the benefit of access to abundant capital (the article states that it has a five-year, $15 billion credit line with the China Development Bank), and access to funding is no trifling matter, especially these days. But it will not be enough. Building a strong, lasting, durable brand is always a time-consuming and challenging effort. It took Acer many years to do so, and while it appears that Acer has ultimately succeeded, Acer's success was never assured. I expect that ZTE is in a similar position.

Will ZTE find its field of dreams in foreign markets?