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Martyn,

You are spot on. Nortel's patents are worth so much that it lost 3X its R&D over its last five years. Good luck leveraging that lot, whoever you are.

Cynically, Nortel spent about $11-12 billion in R&D over the last decade and is selling itself off for 10% of that. Because there are other elements to the deal, like the value of Nortel's ongoing business, these patents are worth, at best, 10¢ on the dollar.

Most of the noise you hear comes from those who don't understand business basics, I'm afraid.

Martyn

While we share a name, blogging and a liking of Monty Python, I disagree with your conclusion that Nortel’s future doesn’t somehow lie in monetising its patent portfolio. In fact, I encourage you to read my comments on this as well at http://www.martinsuter.net/blog/2009/08/nortels-devolution-to-nonpracticing-entity.html.

Francis McInerney, despite asserting that people commenting on this “don’t understand business basics”, draws an incorrect conclusion regarding the value of Nortel’s patent portfolio. As an operating company, the determination of the value of the R&D investments is based on financial metrics, like revenue and profitability. Nortel lagged its peers, big time, in key areas like Gross Margins and Revenue/employee. Even after more than 7 years of massive lay-offs, Nortels’s revenue per head was ~$330K a year ago (when I did an analysis), about half of Cisco’s. With gross margins also running about 60% of Cisco’s numbers, it’s not surprising the company’s value to the market is what it is.

A key moving forward is that Nortel, as a non-practicing entity (NPE or less generously, Patent Troll), 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 have asserted its patent position offensively 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.

Nortel’s patent portfolio is broad and touches many technology areas (mature and emerging). You can check out its US patent portfolio at http://tinyurl.com/le7ncw.

I agree that the company’s prospects of emerging as an operating company are nil, however one must give them credit where credit’s due. Sell off the operating portions, reduce payroll without severances, screw détente, and move to a model with 100% gross margins. If, in fact, this is their strategy, it’s quite elegant, actually.

That’s my .02!

Martin Suter

martin.suter at iplicensing.net

I don't disagree with Martin Suter at all. I looked at Nortel's cash conversion fundamentals, which lagged Cisco's to the point of being terminal.

You can see in these cash fundamentals for company after company that once cash wait states pass a certain point, an ever-bigger gap opens between R&D expense and operating earnings.

This is the point where centralized R&D stops scaling. I call this the Edison Gap after the inventor of these labs. Nortel had fallen deep into the Gap and its patents had become net liabilities: every cent spent on R&D lost the company many times that in earnings.

Getting out of the Gap is impossible without cash velocities high enough to generate superior OFCF-R&D and OFCF-SG&A ratios. At this point, you get to innovate, and to sell the innovation, an insuperable advantage where patents actually begin to mean something. Below it and, like Japan for the last two decades, you could invent the next Internet and it wouldn't do you a damn bit of good.

I spend huge amounts of time every year (two months in '09) in Japan with companies racking up more patents than God for products that they will launch straight off a cliff.

This is what I mean by the business basics. Get these wrong and your patent pool is archeaology for you certainly, and may not be much more for others.