Telecom Market Evolution & Part 3 of Nortel's Story

Nortel has sold its GSM business. This article from LightReading summarizes the sales so far and the expected asset sales.

Telecom Market Discussion

Now check this article from Economist on forecasted mobile subscriber base. 2 things of note:

1. Check the forecast by 2011 when the mobile broadband subscriber base passes fixed broadband subscribers.

2.  The costing of the netbooks and other low cost computing devices meant to improve internet penetration.

Another point is that as 3G is made available across the world, the mobile eliminates the need of a separate computing device. This matters a lot to 2 types of subscribers - convenience oriented and cost oriented. The convenience oriented market has been more or less addressed.

The cost oriented ones are the ones that are forming a very large part of the mobile broadband forecast in the Economist article.

Finally, fixed broadband has a role to play in rural and other emerging areas. That is described in the intern-kiosk model that is there in Economist. And of course the folks who are already onto it in established markets.

Valuing Nortel's LTE Patents - Part 3

Nortel has come out with ~3400 patents. All About Nortel reports that these will be assessed for its value and the strategy for sale will be decided after their consultant provides inputs on the portfolio's potential.

As I had discussed in my earlier blogs, there are 2-3 methods to assess the value of the patents. Most probably it will be a mix of direct market potential and value of real option.

The older posts - Patent related post 1 and Patent related post 2.

Valuing LTE Patents of Nortel - An approach - Part 2

I received a few comments on part 1 of this article. Thanks to Paddy and Fehrzard for their comments. This article is an attempt to make the first one more complete.

1. First, the disclaimer - Black Scholes assumes efficient markets as well as liquidity of the asset. Both may be challenged and rightly so.

2. Now, one very interesting thought on how to view patent is how to define it? It may be as a product or a service that can be developed as a result of the patent - this was the primary assumption in the earlier article.

However, the patent is also something that gives exclusivity to the innovation, not the innovation itself. Hence more pertinent is the value of 'exclusivity', or even the benefit from suing the competitor who infringes the patent.

3. The time to expiry is minimum of patent expiry or time for technology obsolescence.

4. A big assumption in my first article is the knowledge of investments needed in developing marketable products from the patents. Obviously, this is a difficult thing to predict. One can go by historical stats but that too is no guarantee to future. Only thing we can do is scenario analysis.

5. Finally, the opportunity cost of delaying the project also needs to be adjusted in the calculations.

---
Tailpiece - Nortel has now put on block the Carrier Division - Software minus the patents. More info on All About Nortel.

Valuing LTE Patents of Nortel - An approach

Now that Nortel's Wireless and Enterprise businesses have been auctioned, Nortel still has LTE Patents with it. LTE is a considered to be a successful technology for the 4G wireless business and is expected to take the world to seamless broadband wireless paradigm. Nortel is said to have 600 patents in this area. Now let’s try to assess how this asset can be valued.

Following is with the assumption that the potential buyer is going to know everything about the patents.

1. A Patent is an asset that will be used directly or indirectly through applications based on the patent.

2. First step would be to find the directly assessable market based on history. That market is of those products this patent and its extensions can directly substitute.
That is the possible market potential.

The subjective part here is how much one can be sure on this market potential.

3. Next is finding the potential of those products that are not conceivable as of now. This is the tricky one.

(i) One way to approach this is on the basis of historical statistics of patents from the same industry. For example, in this case of 4G, we can take a random sample of 600 patents (or possibly more) from the period when 3G (or any other technology) was a new area of research.

(ii) Now analyze how many of these samples proved to be huge successes, moderate successes and damp squibs. With this as the basis, we can use the same probability on this set of LTE patents (this is a huge assumption). Obviously this is not something that will always work yet if we are going to use history as any indicator then this is one way to follow.

(iii) The next 2 things we can draw from the above sample would be the standard deviation and volatility.

4. Now if we look at this set of patents as an asset, then the value of buying an asset with unknown potential is nothing but buying an option on the asset.

5. So now the value can be assessed as the value of a real option with a possible market value that was calculated in points 2 AND 3.
a. We have - Possible Value of the asset and the volatility.
b. We also have the risk free interest rate.

c. Now the tricky ones, the strike price of this option and the expiry time.
(i) The PV of the investment in productizing these products is the strike price. Why? Compare this to a stock call option - What you earn in a call is the difference between the stock price and the strike. Similarly, here the gain of the patent owner is the difference between the revenues and capital cost.

(ii) Now the expiry time is how long these patents are useful. We cannot sit on 4G patents when the market is already preparing for 5G technology. Beyond a certain time, any technology simply loses relevance.

6. At this point we can insert the values in any Black Scholes Calculator.

Alternative
An alternative to this step is to break the 600 patents in several sets of like patents and then assess each set individually. The next step can be to sum them all and use these steps for overall value or consider each set as a separate option and value them one set at a time.

Major assumptions of the above approach -
1. This set of LTE patents will have a market performance similar to historical set of randomly chosen 3G patents from a similar period in 3G's lifecycle.
2. Cost of productizing and other capital costs.

I have applied theory of real options in this case and will try to find out of there are other better methods already used elsewhere. That would form some other post

- Siddharth Garud

Reference:
http://www.cbc.ca/technology/story/2009/07/29/f-lte-long-term-evolution-wireless.html