Canaries in the Tech Mine? Deal Expert Warns of a Noxious Environment for Innovation

Even the largest technology creators appear to be vulnerable to weaknesses in the current global patent system, which according to a leading expert on IP deals, discourages licensing, no matter how fair or reasonable the terms. 

Nokia and Ericsson are two of the largest technology companies in the world, and among the most active licensors. Recent poor financials which have led to diminished shareholder confidence may be turning these market leaders into “the two new giant canaries in the perennial coal mine.”

A respected patent licensing expert, lawyer and former General Manager of licensing at Microsoft thinks so. Louis Carbonneau writes in Tangible IP’s recent IP Market Update (IPCU’s boldface):

In most arenas, all players are rarely created equal. For instance, an environment that stifles the little guy might favor large behemoths who can throw unlimited resources at a problem and have the capability to play the long game. Life is rarely fair as we all know!

Patent licensing has historically followed that rule and while small inventors and patent owners have royally struggled to enforce their rights in the last decade, Fortune 500 companies who sit on massive patent war chests have had no problem getting deals done. These deals include global cross patent licensing agreements with other large patent holders, and more traditionally monetizing their patent assets through a mix of licensing and, when necessary (which is often), assertion.

Two companies that have perfected this art are undoubtedly Nokia and Ericsson, both of whom have been extremely successful year after year returning massive patent licensing profits to their organizations. It doesn’t hurt that they each own tens of thousands of patents, including thousands of standard essential patents (SEPs).

However, there may be some red flags that bode for rougher seas ahead, as both European companies recently reported declining revenues resulting primarily from licensees to their SEP patents dragging their feet to renew existing agreements.

Falling Licensing Revenues

In Nokia’s case, under the new leadership of Alvin Patel, and despite more diversification on its patent licensing activities outside of the traditional telecom area, the company still announced that its IP licensing revenues had fallen by almost 20% year over year while net profits were also significantly lower and operating margins had declined from 78% to 68%. These results spooked both investors and analysts and Nokia’s stock immediately fell by almost 10% overnight.

One could peg this decline as isolated and specific to Nokia’s business. However, Ericsson also reported the very same day, and its results offer some striking parallels to its Finnish cousin. The Swedish company reported a year-on-year fall in IP licensing revenues of almost 40% (from 2.7 billion SEK to 1.6 billion SEK (roughly USD $100 million). These results played a large part in reducing the company’s overall gross profit margin from 44% in Q3 2021 to 41.4% over the past three months. Similarly, the market punished those results immediately and the stock was down over 15% overnight.

“This is how innovation ends, as the incentive to do so
is eliminated. This is also how democracies unravel over time,
as we have seen time and time again.”

We are not talking about small stocks that frequently fluctuate widely overnight here. This is a hard delivered message from investors that they do not appreciate this trend. This begs the question of who is to blame?

Ethical Concerns

As we all know, licensing of IP in the global ecosystem only works if players are rational and pay their fair share for using technologies and innovations that do not belong to them.

In these two cases, the main culprit is the non-renewal of existing licenses within an appropriate window. To be clear, we are not talking about some new technology that they are trying to force people/companies to adopt. On the contrary, licensees have already agreed that these licenses were legitimate by entering into an agreement in the first place. But something has changed as previous licensees now feel so emboldened by the current legal environment that they are starting to freeride in order to increase pressure on these publicly traded companies and gain leverage for a better deal later.

This is both unethical and dangerous, as we can only imagine what happens when everyone feels everything is theirs for the taking with no thought to the implications.

This is how innovation ends, as the incentive to do so is eliminated. This is also how democracies unravel over time, as we have seen time and time again.

Let’s hope this one will later be filed as a rare case of strange coincidence. In the meantime, the question remains; are Nokia and Ericsson the two new giant canaries in the perennial coal mine and their disappointing results a harbinger of things to come?

Subtle Danger

It is not that all innovation will end abruptly because the patent system has come to benefit fewer contributors. The danger is subtler than that. What will fade is the kind of important but “disruptive” innovation that we need and often seems to come out of nowhere. Incumbent players will do all they can to thwart recognition of other businesses’ IP rights, especially if the innovators are not commercializing it themselves. Carbonneau suggests it will get worse.

The incentive to take a license from a legitimate source on fair and reasonable terms continues to decline. Licensors are not taken as seriously as they once were. Hopefully, legislators, investors and the public will catch on.

Expect trouble ahead when a few businesses looking to increase their profitability and stock price can conspire with legislators to determine what is innovative and worth paying for.

Image source: IPMarketUpdate

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.