Why Apple should acquire Nokia

If you were to look at how the smartphone market has led serious blows to Nokia, you might think the company is doomed to closure. But smart acquisitions and an extensive patent portfolio may make them extremely attractive for the company that served as the root of its problems: Apple.

Patents treasure chest

Whether one likes it or not, a large portion of progress in the mobile space will be dictated by the availability and ownership of patents. While Apple and Samsung are most famous for their specific fights over patented technologies and approaches, Nokia has quietly built up a very strong and relatively young patent portfolio. This past July, Envision IP took a look at that portfolio and found that Nokia had almost 16,000 patents around telecommunication in the US alone (and another 20,000 patents outside of the US). With an average 13 years left on those patents, they include some of the building blocks for the next generation of mobile telecommunication services: building-block technologies like GSM (which was mostly developed by Nokia), 3G, and now LTE are all part of Nokia’s patent portfolio. A 2011 survey showed that Nokia was the largest patent holder for essential technologies relating to LTE.

Like everyone else, however, Nokia itself has worked on setting partnerships with other patent-holders in order to avoid getting sued. And, in reading some of its SEC filings, an interesting picture emerges. For example, the company’s 2011 annual report included the following interesting note:

In 2008, Nokia and Qualcomm entered into a new 15 year agreement, under the terms of which Nokia was granted a license to all Qualcomm’s patents for the use in Nokia mobile devices and Nokia Siemens Networks infrastructure equipment.

This essentially means that, for the next decade or so, the company has access to a rich set of patent protection related to LTE, as Qualcomm is the second largest holder of patents in that space. Of course, some people might argue that another vendor could go HSPA+ but this strategy would result in a checkmate as Nokia not only developed but is also the single largest holder of patents on that technology.

The giants in mobile telephony have taken notice. Last year, Apple had to settle out of court over some of Nokia’s patent claims. While numbers were not made public, I’ve heard that the initial payout was north of US$500 million and that Nokia could be making between $5 and $7 in patent fees from every iPhone sold. Now stop and think about this for a second: for every phone sold by Apple, about 1% of the price goes back to Nokia (remember that the heavy carrier subsidies cover a substantial price of the device, which explains the difference in price between a carrier-locked device and unlocked ones you can buy directly from Apple). And Nokia has similar lawsuits against some Android manufacturers.

In fact, Nokia’s patent portfolio may be valuable enough on its own to justify buying the company. With analyst putting its value at anywhere between US$6 and US$10 billion, one could buy a patent portfolio and get a telecommunication and mapping company for almost free.

The forgotten map maker

Maps? Yes, maps. Over the last few years, Nokia has made a number of bets on location and mapping, with the 2007 U$8 billion acquisition of Navteq. This acquisition made Nokia the largest provider of mapping services in the world. In fact, the company provides mapping services to Google, UPS, Fedex, and many of the largest players in the automotive industry.

When looked at in contrast to the recent release of Apple maps, it seems that this investment is one that would greatly benefit Apple and allow it to quickly catch up and surpass Google. The company could decide that it would not renew its offering to Google when that contract expires, forcing the search giant to go and build out a greater capability in that arena if it wants to retain its lead in the space. The reliance Google maps has on Navteq data is still very high and this is why the company invests heavily in augmenting the data with its own data set, making it clear to its provider that it intends to eventually become a competitor.

The reason for such heavy competition is that maps have become a critical service on mobile devices. Today, it would be considered crazy to have a smartphone that  does not include a GPS and have software on that phone which does not provide location-based services. Google has been promoting the strength of its mapping service for a long time and Nokia showcased it as a key differentiator in its Lumia line.

So maps are now essential to one’s mobile strategy and Apple is behind. When you’re as far behind as they are, there are two ways you can get back to the table: you can either run like crazy and try to iterate your product at light speed or you can buy your way back at the table.

And what better company than the market leader if you are to make the investment? On top of it, Apple would get some interesting support for its AppleTV product.

Nokia and TV

Before I move any further, I need to make a disclosure: back in 2000, I did some consulting for Nokia helping them move photos from camera-phones (yes, they were called that) to TV set top boxes. The basic idea was that you should be able to see pictures (and eventually video) you had taken on your phone and display them on a larger TV screen. This was a feature that could be included into set top boxes the company was selling to cable and satellite operators. The technology continued to evolve internally but never made it out of the labs.

Nokia, in fact, has had a long track record of providing TV-related technology. Early this year, it sold assets and employees from its IP TV division to Accenture. However, the company didn’t sell patents related to that business nor did it include its mobile TV business in the offering. Owned in a joint venture with Siemens, Nokia is one of the world leaders in technology relating to delivering live TV on mobile devices, something it is offering as part of its mobile broadband infrastructure division. Such a division would probably complicate an acquisition by Apple as it does not provide enterprise services today.

A 3-ways deal

So what would Apple do in this case? I think it would turn around and trade it. But who should the company trade such a giant to? My candidate for this is Alcatel-Lucent, a company with a substantial patent portfolio and other intellectual properties in areas Apple may want to bolster.

For example, Alcatel-Lucent was the birthplace of Unix, which powers Android and iOS; C and C++, the programming languages providing parentage to Java, which serves as the basis for Android, were also born there. If weaponized, this arsenal could be dangerous to Google.

Alcatel-Lucent and Apple already have pre-existing relationships as Apple licenses patents relating to audio (like portions of the MP3 format) from them. Getting those patents would lower the total cost of iTunes, iPods, iPhones, and iPads for Cupertino, allowing it to increase its margins further. And the two companies are still in court over other Alcatel-Lucent patents Apple is using. A settlement could include a transfer of the telecom assets Apple is not interested in.

Competitive impact

Of course, an acquisition of Nokia would have quite an impact on Microsoft as it tries to make its way back into the mobile space. With Nokia as its most important partner, Microsoft’s hope to become a likely contender for consumers’ hearts might be dealt something pretty close to a deathblow. The company would remain a strong players in the areas it has power in but its attempt at getting a strong footing in the mobile space would be the setback that kills its ambitions there.

Meanwhile, the increase in the size of the patent portfolio Apple would control would probably have a large impact on the company’s lawsuits against Android manufacturers. In a world where Android is prominent that you get a free Android phone when you buy a magazine, Apple’s lawsuits could eventually start cutting into that rate of growth.

In the mapping space, the company would not only become a dominant force but would also have a way to cut off the air supply of most of its competitors. While it would solve its immediate problem when it comes to mapping data, it would also have control of the data that currently powers Google maps, Amazon, Windows Phones, Rim, and Samsung. That’s a pretty strong position.

With a market cap of $10 billion for Nokia and Apple sitting on a cash pile of over $100 billion, the Cupertino giant could fund this from change it found in its couch. For the reasons listed above, I suspect that Google and Microsoft would also jump into the game, bidding Nokia’s share price further up. But few companies have the buying power Apple has and it would eventually win that fight and, once again, reorder the mobile landscape while solidifying its own control of the future.

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25 Comments. Leave new

  • I have argued that Microsoft should do this, but your idea for Apple would crush the mobile market, which means it’s likely to not pass regulatory scrutiny — and Microsoft would actually make more sense given that Nokia has gone all in with Windows Phone OS.

    • I suspect that it would pass scrutiny as Apple would argue that it is fighting against Android, which is the dominant operating system in the mobile world. So, from that standpoint, it would probably win approval (or do so, with a few divestitures required)

      Microsoft is indeed a likely fit (everyone argues that one) but I suspect that Apple’s interest would now be higher.

      • I doubt anyone will buy the idea that Apple is threatened by Android considering their level of profits and success. It’s not like the Windows vs Mac situation at the end of the 90’s at all, when Apple was on the verge of bankruptcy.

  • it is so clear that patents stifle innovation … they are an artifact of an earlier age, standing in the way of human progress.

    • It is indeed but, as unfortunate as that case is, it drives the value of patents further up. If innovation were the rule, there probably would be some other great provider of technology out there.

  • Mauritz Nordlund
    October 6, 2012 10:11 pm

    AAPL pays Nokia 1 dollar per phone. Not 5-7. You can read that in the financial report from Apple.
    Nokia was worth buying when they had their own factories. Today, they are to big and bloated. Even if the patents and maps are worth the price of Nokia, Nokia have over 130K employes. 4-5 times of how many Apple have hired. The expense of cutting these 130K would be enormous.

    Just wait a couple of years and the insane Elop will drive Nokia out of business.

    I personally hope that Elop gets the boot. That Nokia buys the MeeGo upstart and releases Andoid/MeeGo/MSFT phones. Why have 1 platform when you can have three.

    • An interesting assertion. I read through the Apple annual reports for 2011 and 2010 and can’t find any mention of Nokia licensing there. In which section is that info?

    • I agree with the comments from Mauritz about the cost of labor restructuring and other overheads. The author should not just the revenue opportunities but also the cost of managing the Nokia after the acquisition.

  • Mauri Viitamaa
    October 7, 2012 1:45 am

    Minor note about Alcatel-Lucent and Android connection. Android is based on Linux operating system which is an open source project initiated by Linus Torvalds. Despite the trailing x in names these operating systems are not based on each other.

    • Good point but considering how tough software patents can be these, I wouldn’t be surprised if ALU had some patents it could use to take even Linus to court…

  • Interesting article; patents and maps are alone enough to buy Nokia. But, Nokia would not come only that, but with many thousands of employees with a large number of them working in highly labor protected countries and outdated knowledge that goes with their history. Integrating this company with Apple and Nokia’s employees with Apple’s culture is a challenge that have never been tried and tested by Apple before. There is also the point of Apple’s brand dilution. Somehow Apple+ Nokia = Apple brand doesn’t hold up for me.

    • Here’s a question: why do you assume that Apple would rebrand Nokia. They could maintain it as a separate brand, take the parts it needs (patents, maps) and move those under Apple and let Nokia eventually ride off in the sunset when its market (low hand handsets) no longer exists.

  • No way!

    Do you expect Apple to run a company that makes money selling to less-than-affluent consumers in parts of the world Apple would find hard to spot on a map – whether Tom Tom’s or Navteq’s?

    • The handset business is slowly dying for Nokia so those customers will either
      a. move to something like an iphone in the future (let’s assume here that Apple kept more than 2 models in the market. What if they reintroduced the original iphone as targeted to that low end market)
      2. Sell that business (along with the infrastructure one) to Huawei, which could integrate both business in its existing offerings.

  • Interesting speculation, but nothing more ignores the practical facts of such a move. Regulators worldwide would jump all over this, the more likely method of obtaining these patents would be after Nokia has bankrupted itself. Much cleaner than taking on the fat of thousands of employees.

    • A valid idea (buying just those assets) but I suspect that Nokia will not go bankrupt because its business is so diversified that it will continue running even if it gets out of the mobile handset business.

    • Nokia already said it will transfer everything to Microsoft if bankruptcy will be the case. But Nokia is far from bankruptcy. And even may have a stunning future.

  • Best of all: Apple can do rubber boots for their iPods.

  • With about 100billion dollars’ cash, why not just buying a small country and naming it as United States of Apple? With land, natural resources, and most importantly, citizens, Apple can monopoly and make sure everybody in the country work to death for the freaking apple products. What about Android? don’t even consider get any exposure in USApple.

  • Apple needs Nokia like it needed Kodak or others on the verge of dissolution. Glad Apple’s board doesn’t listen to blogger ramblings.

  • Shile Oguntade
    October 8, 2012 3:38 pm

    my opinions here, not based on business logic or technical opportunities but, purely of a customer who has stood with nokia and thats that…the whole point of me chosing nokia/symbian is firstly because i have been a nokia user since 2000 and secondly just to for not wanting to be a part of the apple crowd. i have used all these phones for an acerage of 6months or more each..siemens m35i, nokias -3310, 3330, 8210, 8890, 3200, 6230i(opened my eyes to mp3 and cameras), 7610 then i switched to sony ericsson because nokia refused to get better cameras or allocate more memory to the and the java UI was a mess.Used SE k750i, k800i, then tried a samsung Innov8(shot my first few facebook pictures in 2007) which was the slowest phone with the best camera at the time. had the blackberry curve just to get a feel of bb but it sucked and was too slow for my liking and just then i went back and got the nokia n8 which has served me well(had its issues but i could live with it) and currently, i use a nokia 808 pureview. if for any reason apple gets in the picture, im out and i know a whole lot of people who would too because we nokia users have endured the worst mockery because we use symbian that gives us the freedom to enjoy a device we pay for the way we want and not dictated by some business rule.

  • I really like the article for its research efforts but I think it misses couple of other difficult aspects of post acquisition.
    For more on this

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