Is Nokia’s Patent Licensing Strategy Working?

In addition to selling 5G network equipment, Nokia (NOK) is also in a race to license its patents to manufacturers of 5G phones. On November 26, Nokia signed a multiyear patent license agreement with Chinese smartphone maker Oppo. A month earlier, Nokia had announced extending its patent license agreement with Samsung (SSNLF). Last year, Nokia inked patent license agreements with smartphone makers Apple, Xiaomi, and Huawei.

Nokia now has patent license agreements with all of the world’s top five smartphone companies based on market share at the end of the third quarter of 2018 as calculated by Counterpoint.

Most of Nokia’s patent license agreements are confidential, as the company doesn’t disclose patent royalty rates or what it expects to earn in aggregate in the life of the license period. But we know Nokia offers competitive patent royalty rates. Qualcomm (QCOM) can charge as much as $16.25 in royalty fees on every 5G phone that applies its patent, and Ericsson (ERIC) can charge as much as a $5 royalty fee on every 5G phone that applies its patent. But Nokia has capped its royalty rate at $3.5 for every 5G phone that uses its patent, thereby undercutting the competition in terms of pricing.

Nokia reports patent revenues under its Nokia Technologies unit, where revenue fell 27% YoY to 351 million euros in the third quarter. Operating profit in this unit was 290 million euros in the third quarter. Licensing patents is typically a higher margin business for Nokia.

Samsung, one of Nokia’s patent clients, is working with Verizon (VZ) to bring a 5G smartphone to market in the first half of 2019, suggesting Nokia could start earning from its 5G patent licenses in the coming months.