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Exclusive Focus Stock Report InterDigital Communications Corp. (Nasdaq:IDCC) Map of this 100 page exclusive report 30 Year Evolution of InterDigital’s Business Model Revised July, 2003 See also: Representative message board posts on this topic below InterDigital’s
Role in Developing
Digital Wireless Technology InterDigital Emerges as THE World Leader in TDD Nokia Invokes Arbitration: 2G Royalty Obligation to IDCC InterDigital Communications Corporation, founded in 1972, has won a recognized place as a pioneer in developing wireless telecommunications technology and products. With well over 1,000 patents already awarded and thousands more applied for world wide, IDCC has emerged as a company devoted primarily to developing the air interface (g) technology at the very heart of cell phones and other devices, enabling them to communicate efficiently with each other, no matter what standard is used (2G (g), 2.5G (g), 3G (g), CDMA (g), GSM (g), TDMA (g), GPRS (g), WCDMA (g) etc.). Without air interfacing that works well, no "feature" like cameras, Internet access, messaging etc. is of any use. InterDigital's patented technology is embedded at the most important part of any wireless devices -- and InterDigital's technology is essential to every one of these devices. There are no exceptions. InterDigital's status as one of the world's key players in the wireless industry is confirmed by partnerships with Nokia and Infineon and the March 17, 2003 agreement by Ericsson that InterDigital is entitled to royalties for current generation 2G (g) cell phones and infrastructure.(See Understanding Intellectual Proper InterDigital's future in the wireless industry appears to be one of the brightest anywhere in the world. The Company looks like it is on the verge of locking in royalty rates for the next generation (3G) cell phones and other devices (and infrastructure) for the next decade or two. If InterDigital locks in a royalty rate of only one-half of 1 percent on all 3G products (it's patented technology is essential for all forms of 3G) this small to mid cap company COULD (if all revenue streams come in) be receiving $1.014 billion in annual revenue and $639 million in annual earnings by the end of 2007. That could readily translate to $11.62 per share in earnings(based on current 55 million shares). At an ultraconservative PE of 20, a reasonable share price at that point would be $232. (The PE would more likely be 30 or 35 if earnings are growing as well as these optimistic revenue figures suggest.) View these figures in table/chart form. This section of our Focus Stock: InterDigital Communications Corp. report explains how InterDigital has been evolving into an amazing earnings powerhouse and "cash cow." But it is not 2006 yet. Many important events will have to unfold between now and 2006 to justify such a high share price target. The Valuation Outlook section of this exclusive Focus Stock: InterDigital Communications Corp. report describes in detail the steps required for InterDigital shares to achieve the lofty price levels some observers are forecasting. Read on.
InterDigital’s Role in Developing Digital Wireless Technology
TWENTY YEARS
AGO, Sherwin Seligsohn, the founder and chief scientist of a small start-up
with the audacious name of "International Mobile Machines" (IMM),
shared his vision for the future of voice communications in America. Seligsohn
stated, "Someday everyone will carry a radio telephone small and light
enough to fit in a shirt pocket." This was at a time when pagers were
just beginning to be widely used and cellular telephones were large, expensive,
cumbersome objects designed with the analog technology that had been in
development for fifteen years. This statement by one of the "forefathers"
of InterDigital Communications Corp. certainly required a leap of faith
by his listeners. As with all great visionaries, however, Sherwin Seligsohn
had that rare ability to simplify the complex - in this case the world
of digital mobile technology - and walk us all into the future. (The story
of IMM, later known as InterDigital Communications Corporation, located
on the east coast, and Qualcomm Inc., its counter part on the west coast,
presents a fascinating contrast of two business strategies strongly tied
to intellectual property in the area of digital cellular wireless communications.
Read
an intriguing post that describes the
contrasting strategies. It is found in the "post" section at
the end of this part of this report on InterDigital.) InterDigital was founded in Philadelphia in 1972 as International Mobile Machines Corp. and until 1987 was primarily engaged in research and development activities related to its TDMA (Time Division Multiple Access) (g) mobile and fixed location wireless digital communications technology. Current generation GSM (g) wireless technology found today in 75 percent of the world's cell phones is based on this TDMA technology. In the 1970s, management and scientists at IMM recognized the advantages of the embryonic analog cellular technology, but also some of its inherent limitations, including bandwidth inefficiencies, high power consumption, and poor voice quality. As a result, they set out to design and develop a digital cellular system based on Time Division Multiple Access (TDMA) (g) technology, a well-understood technology used in a variety of military and commercial wire-line systems. IMM took that inherent technology and figured out how to make it work in a commercial wireless cell phone system. However, the small start up was often stymied by the pre-divestiture Bell Phone System. TDMA divides the available frequency spectrum into a number of time slots, allocating each time slot to an individual user. IMM's concepts were sound and patents were a natural outcome of some of this groundbreaking work. In the 1980’s and 1990’s InterDigital sought revenue from its proprietary wireless phone systems (hardware and software). In 1986, while seeking to collect royalties on its mobile digital cell phone technology, InterDigital introduced the UltraPhone system, a "last mile" or "fixed wireless access" – FWA (g) (vs. "mobile") digital wireless local loop (g) telephone system employing its patented and proprietary TDMA (g) technology, which it began installing in 1987. InterDigital’s operations from 1987 through 1992, although recognized for developing highly innovative technology, were characterized by increasing revenues but accompanied by significant operating losses. (See: "Introduction to Wireless for Non-Techies")
If you are using a cell phone today anywhere in the world, there is a 75 percent chance that the phone you are using (and the infrastructure that supports it) includes InterDigital's patented technology. As of March 17th 2003 (a "Watershed Event" ), manufacturers of 70 percent of these cell phones worldwide have now licensed with InterDigital at a royalty rate ranging from .5 %to almost 2%. Although the future seems exceedingly bright for InterDigital, that future and the steps needed for this investment to reach its full potential will be much better understood by knowing its thirty-year evolution For significant periods of time, the Company’s future did not seem rosy. InterDigital made some crucial mistakes in the 1980s and 1990s while trying to collect royalties for it's patented technology. Fortunately, the company learned from its mistakes and used an entirely different approach for next generation 3G, the wireless technology that is just beginning to hit the world market this year and will take several years to fully penetrate. But to understand why the InterDigital's current approach is likely to succeed -- and probably brilliantly so -- it is important to recognize the mistakes of the '80s in early '90s. (In spite of the mistakes, InterDigital management finally has put the pieces in place for a stream of lucrative royalties for it's 2G technology.) (See: "Watershed Event: Settlement of the Ericsson-InterDigital Litigation". In a March 17th 2003 conference call, InterDigital CEO Howard Goldberg characterized InterDigital's approach to collecting royalties in the bad old days: "We were not a strong organization at that point in time ... We were not participating in the standards bodies outside of the United States and we watched from the sidelines at the beginning of the 2G rollout." Indeed, instead of working with manufacturers on the final designs, InterDigital waited until phones were reaching mass markets worldwide then pounced in and demanded royalties for it's technology. Not a way to endear themselves to manufacturers! InterDigital sued Motorola for patent infringement in 1995. Most observers thought InterDigital would win easily, but InterDigital lost. Some parts of the jury decision were later reversed, some key patents remained valid and the U.S. patent office revalidated important InterDigital patents four years later. But immense damage was done to InterDigital's capacity to enforce its patents worldwide and the Company almost collapsed as a result. InterDigital eventually realized that it had been doing a poor job in writing its patent applications, allowing too much weasel room for manufacturers to escape or work around patent claims. Legal counsel was clearly not up to the task for the Motorola case. The company was probably overconfident going into the trial, failing to communicate to the jurors some of the most basic concepts. During its deliberations at the end of the trial, the jury reportedly sent a note to the judge asking what the difference was between a cell phone and a regular house phone. Now there was a failure of InterDigital attorneys to communicate! Legal counsel in the Motorola case was -- at least in hindsight -- inadequate in its handling of the appeal. Some ordinarily salvagable parts of the litigation were lost permanently. For the Ericsson litigation, just settled, world-class patent litigators Fulbright and Jaworski have done an excellent job. Since the time of the Motorola trial, the Supreme Court has ensured that a patent expert in the court system helps make the jury's task more manageable. And moist importantly, InterDigital, instead of being aloof during standards writing, has been very active in helping write the standards for 3G. The Company has met frequently with manufacturers as they designed their 3G products. A tough lesson -- but well learned. A Nokia licensing agreement in 1999 helped a lot to restore InterDigital's capacity to enforce its 2G patents, but it was not until March 17th 2003, with the successful settlement of InterDigital's landmark patent infringement case against Ericsson, that InterDigital took a major step toward receiving the lucrative 2G patent royalties it had so long envisioned.
Expansion into Wideband Wireless Technology (Forerunner of 3G)
InterDigital’s October 1992 purchase of SCS Mobilcom/Telecom enabled the company to expand its research and development activities in the wireless arena. SCS was primarily engaged in Code Division Multiple Access (CDMA) (g) research and development efforts, especially in the area of broadband or spread spectrum applications. Qualcomm is the most prominent name associated with CDMA technology. Qualcomm emerged as a break off from a company called M/A-COM Linkabit, founded by the legendary Irwin Jacobs and supported by the technological genius of digital encoding specialist Andrew Viterbi. However, Qualcomm has engineered and promoted a proprietary narrowband technology while SCS and InterDigital concentrated on the wideband (or "broadband") version of CDMA. SCS’s Andrew Viterbi (later a founding figure at Qualcomm) was a pioneer in spread spectrum applications and prior to acquisition by InterDigital, SCS had conducted field tests using broadband CDMA (B-CDMA™) (g) prototypes. As a result of this acquisition, IDCC has since allocated major resources toward developing and commercializing wideband CDMA (WCDMA) (g) applications. With considerable foresight -- and some very good luck -- InterDigital ten years ago chose to concentrate its efforts on the technology later dubbed WCDMA (for Wideband CDMA) that in 1999 would be recognized worldwide as the primary means for transmitting data (as well as voice) wirelessly for the decade or two ahead. Many telecommunications technology firms were caught flat footed. InterDigital had become an IPR (intellectual property rights) (g) think tank for next generation wireless communications while many of its competitors had been placing their bets elsewhere, not grasping that there would be an immense future demand for wideband wireless cell phone and other mobile devices to have a capacity for data as well as voice. Data transmission allows Internet access, transmission of photos and real-time videos, for example. Read an intriguing
post that describes the contrasting
Qualcomm and InterDigital strategies in their historical context. It is
found in the "post" section at the end of this part of this
report on InterDigital.) Era of Strategic Relationships and Profitability
During 1994, InterDigital began to realize positive results from its efforts to capitalize upon the revenue potential of its TDMA (g) and CDMA (g) patent portfolios and entered into its first major alliance, with Siemens, a worldwide technology firm headquartered in Germany. The goal was to develop the technology and establish an international market for fixed (g) (not mobile) wideband wireless local loop (WLL) (g) systems. WLL provides the "last mile" link in a fixed (wireline) telecommunications network through the use of radio technology. InterDigital recognized $28.7 million of 1994 licensing revenue. During 1995, InterDigital recognized $67.7 million of licensing and alliance revenue (much of it in prepaid royalties) enabling InterDigital to report its first profitable fiscal year since its inception. During 1996, InterDigital completed its second major wideband local loop (g) alliance, this time with Samsung, a worldwide technology firm headquartered in Korea, and recognized $28.7 million of licensing and alliance revenue. In 1997, InterDigital was not profitable, primarily due to substantially increased investment in the development of its B-CDMA™ (g) pioneering proprietary wideband version of CDMA technology. In March 1998, InterDigital entered its third wideband local loop alliance, this time with the French-based international telecommunications firm Alcatel, under which Alcatel agreed to pay InterDigital $25 million in technology transfer and service fees.
Leapfrogging into MOBILE Wireless
From 1994 until 1999, InterDigital was an alliance partner with Siemens (SI), Alcatel (NYSE:ALA) and Samsung. Each contributed both cash and engineering talent toward InterDigital’s efforts to develop a revolutionary telecommunications technology utilizing wideband CDMA (WCDMA) (g). This technology enables the communication of not only voice, but huge chunks of data (as would be required for Internet use) in a "fixed location" wireless environment. Although realizing that the technology it was developing could be used for both "mobile"(g) (as in cell phone) and fixed wireless (FWA) (g), InterDigital focused its 3G (g) efforts, until 1999, on fixed wireless systems, which was also the major interest of its alliance partners Siemens, Alcatel and Samsung. Even at that time it was hard to imagine that mobile telecommunications could economically utilize WIDE bandwidth. Where would the data originate that would require such wideband mobile technology? Of course, that was just before the data-gobbling Internet revolution raced across the world scene. How could a small cap, relatively unknown firm possibly emerge in 2003 as a world-class wireless tech "think tank" with immense cash resources and a deep and wide royalty stream as far as the eye could see? Simple! Own key patents in the technology that would not only be essential in a limited niche market (fixed location wideband wireless for fax machines etc) but that same technology would prove to be essential in future cell phones as well. Who thought in those days that anyone would ever use cell phones for anything but voice transmission? A blend of insight and sheer luck. Being at the right place at the right time and knowing where they are. That's how InterDigital has emerged in 2003 as a wonder kid. Not like the short-lived bubble stocks of the late 1990s -- InterDigital has been evolving towards its newly discovered prominence for the past 30 years. (2003 is finally the year the Company has "arrived." That word will eventually find its way around Wall Street.) In late 1998 and early 1999, both InterDigital and its alliance partners realized that the technology they had been developing (and patented exclusively by InterDigital) was quickly leading to a technological breakthrough. This wideband technology would allow data as well as voice transmission and thus would allow mobile wireless to leap right over fixed wireless. That is, InterDigital (and the few others working in this highly specialized area) would soon be able to provide the technology that would allow telephone service (including data-rich uses like fax machines and the Internet) to be completely mobile at basically the same cost as service that was limited to a fixed location. This meant that in the foreseeable future, it would be just as cheap to install a new wireless telephone "line" that one could carry along wherever one travels (local or long distances) as to install a "line" that would be limited to use at a certain location ("fixed"). In some parts of the world, most businesses and residences do not bother to install wired telephones at all, using mobile telephones both at a fixed location at home and in the office as well as on the move. By 1998, Nokia (NYSE:NOK), the Finnish corporation that is now the world’s largest manufacturer of cell phones, had become aware of InterDigital’s patented breakthrough technology in wideband CDMA (g) (developed with the help of Siemens, Alcatel and Samsung). For $40 million, Nokia contracted with InterDigital to develop for Nokia the technology for new cell phones and other wireless devices capable of transmitting huge amounts of data by means of a 3G WCDMA (g) mobile technology called TDD (time division duplexing) (g). Almost immediately after the Nokia agreement, Siemens, which had decided to commit major resources to develop TDD (g) in competition with Nokia, announced a reorganization plan for its worldwide corporation. It said that it would no longer be supporting InterDigital’s development of fixed wireless products. In April 1999, Alcatel also decided to no longer contribute toward InterDigital’s efforts to develop wideband fixed wireless products for Alcatel’s use. As would be expected, the stock market reacted positively to the announcement of the Nokia-InterDigital arrangement but negatively to the Seimens– Alcatel – InterDigital breakup, the latter of which introduced some uncertainty about InterDigital’s future. It was not clear to many observers at the time that a Nokia partnership would be much more profitable to InterDigital in the future than its previous Alcatel-Siemens-Samsung alliance. But the huge cash contributions of the three – as well as contributed engineering hours – had enabled InterDigital to become a premier IPR (g) think tank for worldwide CDMA (g) technology. In keeping with the original partnership agreements with Siemens, Samsung and Alcatel, InterDigital retained all of the patents on the very important 3G technology the partnership developed. Siemens continued its research into TDD and now, along with InterDigital and China’s Datang, are believed to constitute the world’s primary TDD patent holders. (WCDMA, a 3G technology, seamlessly employs both FDD and TDD technology to work effectively. InterDigital has essential patents in both parts of WCDMA.) In 1999, InterDigital shareholders had differing perspectives on the new Nokia – InterDigital partnership and especially on the subsequent dissolution of the Siemens and Alcatel alliances with IDCC. Some shareholders believed that the breakup of the Seimens – Alcatel – InterDigital alliance was inevitable once Seimens and Alcatel realized that their particular fixed location wireless markets (in India, particularly) would likely not support the extensive research and development costs associated with their alliances with InterDigital. Further, Siemens and Alcatel realized that InterDigital’s partner, their competitor Nokia, was quickly emerging as the primary manufacturer of 2G (g) cell phones, leapfrogging over Ericsson and Motorola. The very technology Seimens, Alcatel and Samsung had helped IDCC develop could – especially with the new InterDigital-Nokia partnership - leapfrog over their own wireless telecommunications products. One could hardly expect Siemens and Alcatel to continue to contribute cash and engineering time to a cause that could lessen, rather than strengthen, their respective positions in the telecommunications industry. Interestingly, Samsung never pulled out of the partnership with InterDigital, although it did not provide further cash or engineering. With the settlement of the Ericsson-InterDigital litigation, Samsung will be paying InterDigital about $20 million annually in 2G royalties. (See: "Watershed Event: Settlement of the Ericsson-InterDigital Litigation")
InterDigital gave up its stake in fixed location wireless in order to enhance its position as one of the leading developers of mobile wireless technology (which technology, in 20-20 hindsight, now has a far more lucrative future than fixed wireless). InterDigital management and its world-class engineers had made an enlightened decision to redirect their wireless efforts from narrowband (g) (for voice primarily) to wideband (g) (for voice and data). They now made another very important midcourse correction by refocusing from fixed location wideband to mobile wideband (as in cell phones). Perhaps because of its smaller more adaptable size, or its particularly astute leadership, InterDigital made decisions that put them squarely in the "sweet spot" of wireless communications, namely wideband mobile wireless communications. That is the WCDMA (g) technology, which is expected to capture 75 percent of the world's market by the end of this decade. While less adaptable, or perhaps less enlightened, firms were getting bogged down and losing most of their share value, InterDigital has been moving toward an extraordinarily lucrative spot with immense profit potential. (See: "Technology Risk" and "Introduction to Wireless for Non-Techies") For a full discussion of the Nokia-InterDigital partnership, including the benefits to each partner, see: Nokia's Strategic Partnership with InterDigital , below. Throughout this period, InterDigital continued to press its demands for royalties on all TDMA/GSM based cell phones and infrastructure (considered "narrowband"), which constitute 70 percent of the current market worldwide. Until the licensing of its technology to Nokia and the Ericsson settlement (March, 2003), the Company had decent but limited success, mostly with Asian manufacturers. The Ericsson settlement is the key to huge 2G profitability for InterDigital and sets the stage for a 3G revenue stream as far as the eye can see. (See: "Watershed Event: The Ericsson-InterDigital Settlement" and "Valuation Outlook".
Examples of InterDigital’s Contributions to the 3G International Standards Throughout this report exclusive report we note that InterDigital’s patented technology is at "the heart" of next generation (3G) wireless technology. Indeed, the Company has made over 600 "contributions" of its patented (or patent applied for) technology to the international standards body (ITU (g) ) and over 300 of these contributions have been accepted into the standards as either "essential" (won’t work without it) or "commercially attractive" (it will work a lot better with it). Here are some examples of the contributions InterDigital has offered during the standards-setting process. Many have been included as "essential." 1. Bandwidth on Demand
Nokia’s Strategic Partnership with InterDigital Updated: August 4, 2003 InterDigital benefits in these ways What has InterDigital given up? By the beginning of 1999, InterDigital had made a strategic shift in its business plan. Besides seeking royalties from its patented 2G cell phone technology, the Company had been a supplier of proprietary, finished fixed wireless(g) telecommunications systems. It gave up its role as a manufacturer/distributor of fixed wireless (FWA) (g) systems and concentrated on the far more lucrative part of its history as an IPR think tank for next generation wireless communication. . It became a provider of wireless mobile (g) technology and engineering services to the industry as a whole. InterDigital’s new relationship with Nokia, announced in February 1999, served as a verification of the Company’s ability to develop leading-edge technology. Nokia is the world’s primary mobile device supplier (with over 30% of the market currently) and a leading provider of mobile networks. Considering the size of the Nokia-InterDigital deal ($70+ million paid to InterDigital) it is obvious that Nokia felt it was important to complement its own engineering departments with the expertise that InterDigital has developed in the areas of : (a) wireless transmission of large quantities of data and (b) TDD – Time Division Duplexing (g) to help solve the challenges of compatibility between TDMA(g), GSM(g) and W-CDMA(g). Because of InterDigital's demonstrated competence and 16 years of experience with time division technology (as in TDMA - "time division multiple access) (g) Nokia partnered with InterDigital to develop an entire TDD (g) time division duplexing "suite" (from beginning to end). See: "InterDigital Emerges as THE World Leader in TDD" and "What is TDD?" below. InterDigital will also be benefiting from a ten year partnership with Infineon Technologies (IFX). Infineon, a former subsidiary of Siemens, is a worldclass leader in the design and manufacture of chips for wireless communications. InterDigital is under contract to provide essential "layers" of the very important protocol stack (g) technology in Infineon’s new 3G chips. See: "Chip Development Partnership with Infineon" Until the time of the payoff that InterDigital expects from its patented 3G technology, which is firmly embedded in all international standards, the Company can look forward to a wide and deep stream of 2G royalties. (See the important report "Watershed Event: The Ericsson Settlement with InterDigital" and "valuation Outlook."
1. The partnership
has given Nokia full access to the services of a group of some of the
most experienced 3G(g)
engineers and scientists in the world, the 300or so InterDigital engineers
and scientists. This group brings superb qualifications to develop, with
and for Nokia, that part of W-CDMA(g)
which allows users to download the huge amounts of data needed for efficiently
accessing the Internet and doing other data-heavy tasks such as a video-conferencing
and live TV. Prior to Nokia's partnership with InterDigital, Nokia lagged
far behind Siemens and Ericsson in the very important data-transmission
area of W-CDMA(g)
just when the time was ripe for its development.
4. InterDigital has wholeheartedly honored its 1999 contract provisions with Nokia, including major 2G and 2.5G royalty concessions to Nokia while IDCC developed the WTDD suite for Nokia. It is surprising to WirelessLedger.com that Nokia is not reciprocating in a similar manner in August 2003, now that it is time for Nokia to pay InterDigital the royalties clearly established in 1999. But with Nokia apparently obligated to pay IDCC literally hundreds of millions of dollars for 2G and 2.5G royalties during the coming decade, Nokia executives have challenged the $200 million royalty bill preferred by InterDigital for 2002 and 2003. Nokia is invoking the clause in its 1999 licensing contract with InterDigital, asking an arbitration panel for a binding ruling on its royalty obligations. (See: Nokia Invokes Arbitration: 2G Royalty Obligation to IDCC).
When the rate is established, another important factor in determining the InterDigital share price will be available. (See "Valuation Outlook" for a model to determine a fair price for InterDigital shares)
InterDigital gave up a large portion of the licensing and royalty fees it wanted for 2G products manufactured by Nokia through December 31, 2001. InterDigital also waived any royalties on the specific 3G technology in products manufactured by Nokia specifically covered under the TDD (g) development contract (but will accrue royalties on its broad non-TDD patent portfolio for 3G). Further, because many licensees have "most favored licensee" (MFL) clauses in their contracts, InterDigital found it very difficult to collect back payments of 2G royalties before January 1, 2002 at a rate any better than Nokia’s bargain basement rate ($30 million instead of hundreds of millions). Perhaps it should be noted that InterDigital management may be seeking to balance its reliance on Nokia with an alliance -- or even a partnership -- with another key 3G manufacturer. Strategically, it would serve InterDigital well to balance its Nokia relationship with a comparable relationship elsewhere in the industry. Thus, if Nokia chose not to make good use of the TDD (g) technology developed by InterDigital, or if Nokia chose, for some reason to play "hardball," then InterDigital could move toward a Nokia competitor to ensure early and maximum utilization of InterDigital's extensive TDD patented technology now that 3G WCDMA is beginning to take off. Another major partner to balance Nokia might be the very firm that InterDigital has been suing for patent infringement for the past ten years, Ericsson telephone. If InterDigital and Ericsson are on the verge of cooperating on some 3G related venture, it would explain why InterDigital management for the past three years has said that it was looking for a "creative" win-win type settlement with Ericsson. InterDigital executives have always spoken favorably of Ericsson (at least in public) and InterDigital's president once again spoke very highly of the Company's long-term litigation adversary during the conference call following announcement of the settlement of the Ericsson litigation on March 17th. For more on this, see: "Watershed Event: The Ericsson Settlement with InterDigital" which includes the press release and transcript of the 60 minute conference call relating to the settlement. (For more
information on InterDigital’s primary area of current technological
development, see: "InterDigital
Emerges as THE World Leader in TDD"
below.) Read the important WirelessLedger commentary: Nokia Seeks Binding Arbitration on Royalties It Owes InterDigital. Nokia has delayed (for up to a year), BUT NOT BYPASSED, payments of hundreds of million of dollars to InterDigital for 2G and 2.5G handsets and infrastructure. Wall Street has greatly overreacted by dropping IDCC shares 40% to mid-teen levels. WirelessLedger.com believes that this oversold condition will be corrected in the near term. InterDigital retains the discinction of having the best risk to reward (minus 10% risk to plus 200% reward potential) in the wireless industry. Read the WirelessLedger "arbitration" commentary and find links to best posts on this topic.
InterDigital Emerges as THE World Leader in TDD
See below: What is TDD?
WCDMA (g), expected to be the next generation 3G (g) standard used in 70 percent to 85 percent of 3G cell phones and other wireless devices. (Qualcomm’s CDMA2000 and the Chinese TD-SCDMA are expected to constitute the remaining 15% to 25% of 3G products and infrastructure worldwide.) WCDMA incorporates two distinct technologies -- FDD (frequency division duplexing) (g) and wideband TDD (time division duplexing) (g). The seamless combination of the two technologies make it possible for WCDMA to outperform any other 3G standard, its proponents claim. FDD and TDD accomplish certain objectives, as described below. InterDigital has essential patented technology in both the FDD specifications of WCDMA and the TDD specifications. In fact, InterDigital is the only firm in the world to have its patented technology included as essential in all five modes of 3G. It will not be possible to produce a standards-compliant 3G cell phone or other device, nor related infrastructure, without employing patented InterDigital technology. (See WirelessLedger.com exclusive reports : "Understanding the Standards-Setting Process" and "Understanding Intellectual Property Rights") Observers believe that InterDigital has more contributions of wideband TDD patented technology in the international standards than anyone else. InterDigital and Siemens are acknowledged as the world's largest holders of patented TDD (time division duplexing) (g) technology, with InterDigital probably holding even more patented technology than international powerhouse Siemens. How could a small firm emerge as the world's top holder of patented TDD technology? InterDigital has been involved as a cutting-edge developer of time division technology for over 30 years. It was there first -- and has maintained its lead for three decades. (See "InterDigital’s Role in Developing Digital Wireless Technology" above.) Currently, InterDigital is expanding its resources in several areas: 1. Licensing its patented to 2G, 2.5G and 3G technology to manufacturers of infrastructure (base stations/cell towers), cell phones, wireless PDAs, wireless capable laptops and other devices. 2. Providing engineering services 3. Serving on key panels developing/finishing international standards for 3G wireless communications 4. Extensive, ten-year (through 2010) relationship with with one of the world's leading wireless communications chip companies to develop software for layers 2 and 3 of the protocol stack to be included in Infineon Technologies next generation (3G) integrated circuits (chips)(g). (See "Chip Development Partnership with Infineon" below. 5. Developing TDD technology, which is being written into international specifications for 3G standards related to WCDMA (g) and TD-SCDMA (g). (See WirelessLedger.com's exclusive reports: "What is TDD?" below, as well as "Understanding Intellectual Property" "Understanding the Standards-Setting Process" "Technology Risks" and "Partnership Risks"
Two InterDigital executives, Executive Vice President Mark Lemmo and Chief Technology Officer Alain Briancon, have described wideband TDD (g) very effectively.
Mark Lemmo writes: "It is important to note that FDD and TDD are complementary rather than competitive technologies. The classical deployment strategy for cellular networks, which will also be adopted for 3G implementation, is hierarchical. In the first phase, large macro cells will be installed to provide the maximum coverage possible. Typically such cells in 3g will have coverage areas of up to 5km and will be used for urban, suburban and rural service provision. In the second phase, micro cells with coverage in areas of high traffic density. FDD technology will be used for both macro and micro cell deployment. "The third phase involves the deployment of pico cells with coverage areas of up to 100 meters. It is in this phase of deployment that TDD will used. "TDD is optimized for the high data rates that will be required for traffic hotspots. The majority of this data traffic is likely to comprise Internet or intranet access, which is highly asymmetric, with high bandwidth required in the downstream direction and minimal bandwidth upstream. TDD offers an optimal solution for such asymmetric traffic patterns. TDD, for example, can be configured to proved 384kbps downstream, in the direction to the major data traffic movement, and 54kbps upstream, where the traffic largely composes requests for information and acknowledgments. FDD on the other hand is symmetrical, with equal data bandwidth in both directions. Thus TDD offers a very adaptable and flexible solution for high data rates and it provides operators with greater capacity in their networks. . ." Dr. Alain Briancon explains how the asymmetric nature of wideband TDD (WTDD) (g) technology, also known as High Chip Rate TDD, is the most cost-effective solution for "always on" data applications for consumers and corporate users. "As 3G services are deployed, we, and many in the industry, believe that applications will shift from predominantly voice to data. We expect that as businesses become a more significant portion of the subscriber base with the introduction of 3G services, the trend toward a data services will accelerate. These data-rich voice services are typically asymmetric or bursty in nature. WTDD technology's ability to accommodate such asymmetry in a spectrally efficient manner provides an important tool for the operator to maintain and improve the quality of service."
Mark Lemmo notes: "The key issue for operators is, of course, how can they generate revenues from the deployment of TDD? First, and most obviously, the provision of high bandwidth in areas of high user demand will generate service revenues. The capability to download large amounts of data form the Internet or a corporate Internet whilst waiting in an airport lounge or hotel room, will be a tremendous boon to the global business community and they will certainly use such a capability extensively. "(The services which TDD makes possible) offer considerable benefits to operators. Firstly, new revenue streams in terms of payment for advertising from retailers would be opened up. Airtime usage, and hence revenues, from subscribers would be increased as they surfed the system searching for particular items or special bargains. "The most significant feature of such services is that they will be seamless. The user's tri-mode terminal (e.g. cell phone or wireless lap top -ed) will switch transparently into TDD mode immediately on entering the coverage area of the pico cell within the shopping mall or supermarket. No conscious effort would be required by the user. This represents an important service differentiate for traditional mobile operators over potential competitors who may be trying to deliver such services using other technologies such as BRAN (g) or wireless LAN (WLAN) (g). The seamlessness offered by the tri-mode phone and TDD would enable the traditional operator to win the traffic hotspot business, using spectrum that he already owns and technology, TDD, that is already incorporated into his network. Dr. Briancon highlights both the efficiency and the multiple deployment scenarios of WTDD. "For asymmetric applications, WTDD is 20 percent to 35 percent more spectrally efficient in the micro (g) and pico (g) cell deployments than a comparable FDD-only deployment, increasing significantly the number of users on the system. The technology supports voice and data functions, and is well-suited for 'always on,' asymmetric Internet access, e-mail, data transfer, video streaming, and other rich applications. In addition, because the technology is robust and is designed to operate seamlessly with FDD, WTDD can be deployed and implemented in 3G networks at very little additional cost." Briancon continues, "It will be particularly efficient handling a wide variety of multi-media traffic, including transmission of pictures, video streaming, making airline reservations on the go, Internet shopping and chat, music and many PDA applications. As the volume of data traffic over 3G networks increases, InterDigital sees applications for WTDD not only at capacity hotspots such a shopping malls and airports, but also for enterprise systems, such as intranets and extranets, and integrated services in Virtual Private Networks. InterDigital believes that the topography of most offices makes WTDD technology an ideal solution for enterprise applications." "We believe that the applications are almost limitless," Dr. Briancon says. "By focusing on full system deployment solutions with lower incremental costs per user, we open many doors. You can expect better and more frequent application implementation, constantly evolving network efficiency and an increasingly satisfying experience for the end-user."
Mark Lemmo notes, "The main focus of the standardization activity first within ETSI (g) and later 3GPP (g) has been very much on completing the specification of the FDD elements of UMTS (the European name for WCDMA -ed). The reason for this pressure is obvious, the launch date for 3G services is 2002 and it is important for credibility of 3G that this timeline is adhered too. "However, as has already been pointed out, standards groups are continuing to work on TDD standardization, in particular on the air interface (g) and on layer 2/3 protocol stacks (g). The FDD technology is now in the field trial phase and TDD trials are planned to start within twelve to eighteen months. Siemens, which is focusing much of its 3G development activity on TDD, is planning a TDD trial in South Africa in the near future. Although other major vendors are working to achieve the FDD deadline, they are also developing TDD solutions. "The gap between the launch of WCDMA (g), FDD 3G networks and the advent of TDD was planned from the outset. Given the hierarchical rollout strategy outlined earlier - macro, micro, pico- TDD will not be required in the first phase of deployment where the main aim will be rapid, widespread coverage via FDD. As 3G matures, and the demand for additional, focused capacity and higher data speeds increases, TDD will be ready and waiting in the wings ready to meet the needs of operators and subscribers." Dr. Briancon described the WTDD Baseband Modem Chip for 3G terminals that InterDigital is developing. "This is a fully standards-compliant baseband modem chip for multi-mode 3G terminals designed to interface seamlessly with FDD/GSM hardware and software to enhance terminals with WTDD capability. Our chip will be designed to enable wireless devices to support voice and data traffic up to two megabits per second. "Our design is harmonized with FDD and is implemented with a low gate count, enabling use of the WTDD technology at a low incremental cost," he said. InterDigital's complete WTDD solution consists of the baseband modem, a software protocol stack and the RF reference design. It will be particularly effective in delivering advanced voice and data capability to smart phones, wireless personal digital assistants, laptop computers, and other innovative wireless terminals.
Chip Development Partnership with Infineon
In 2001, InterDigital established a ten-year strategic partnership with Infineon Technologies AG (IFX) to develop an FDD-based 3G (g) WCDMA software protocol stack for cell phones and other mobile terminals. The extensive partnership with Infineon is particularly noteworthy since Infineon is one of the world's leading wireless communications software and chip companies. It has the potential for being immensely profitable for InterDigital beginning in 2004. Before forming the inter Infineon partnership, InterDigital management was strongly considering relationships with several smaller chip companies. Management was highly pleased that a company as prominent as Infineon not only eagerly wanted the partnership but also wanted to extend it over a ten-year period (very unusual in this industry). The partnership once again affirms the recognition InterDigital has received among the world's most prominent wireless communications firms. InterDigital's primary technological expertise is in air interface (g). This technology area, at the heart of wireless communications, is what enables cell phones and other wireless terminals to communicate with each other and with base stations (and therefore with the Internet). To functioned efficiently, wireless devices, whether 2G(g) (GSM (g) , TDMA (g), CDMA (g), PHS (g), PDC (g)) or 3G (g) (CDMA 2000 (g), WCDMA (g), TD-SCDMA (g), EDGE (g)) will have to send vast amounts of data to each other -- almost simultaneously -- around the world. This is where InterDigital's 30 years of experience in perfecting knowledge at the heart of each of these formats is paying off. No other firm in the world has the depth of technological experience (and patented technology) that InterDigital rightly claims. The company is in exactly the right place at exactly the right time! InterDigital's and Infineon's design teams in the United States and Germany are working together to deliver software in time for the mass market rollout of 3G products in Europe in 2004. Infineon and InterDigital are working together to develop the extremely complex software for foundational layers of the protocol stack (g) and Infineon's next generation (3G) FDD (g) WCDMA (g) integrated circuits. InterDigital has exclusive rights to design this very important part of the Infineon chips, and will be paid well for each such chip that Infineon sells. That revenue, of course, will be in addition to the royalties InterDigital is entitled to receive from every manufacturer of 3G terminals (like cell phones) and infrastructure because InterDigital's patented technology is at the heart of every 3G product made to international specifications. The Infineon
subsidiary responsible for the work with InterDigital is named COMNEON.
InterDigital’s FDD stack codeveloped with COMNEON runs on a breakthrough
platform with the SPINNER ® WCDMA baseband processor made by Zyray
Wireless. (See: Photo
In addition to the fees and royalties that InterDigital will receive for its important contribution to Infineon's 3G chips (probably the most expensive component in a cell phone), the partnership offers additional revenue potential for InterDigital. As part of this agreement, InterDigital has access to Infineon's extensive "libraries" of core chip technology, RF technology, Blue Tooth (g) technology, GPRS (g) and GSM (g) technology -- all areas where Infineon is a world class industry leader. Access to these chip technologies -- coupled with InterDigital's specific expertise -- will allow the company to develop its own custom chip designs for the 3G market, with Infineon providing fabrication support for these custom chips at reasonable rates. InterDigital will likely provide custom chips for particular niche markets that may be too small for other firms to service of a competitive basis. The partnership with Infineon deals with the WCDMA FDD (g) technology, which is expected to be the primary technology for 3G in this decade. The partnership does not, at least currently, involve the further evolution of WCDMA FDD technology. This evolution complements FDD with TDD (g) in order to provide for much more efficient transmission of the massive among the required for many 3G applications. International TDD specifications are being established to complement current WCDMA FDD specifications, but they were not yet completed in early 2003. It is already known, however, that InterDigital and Siemens (a former owner of Infineon) have the vast majority of patented technology essential to TDD specifications. InterDigital is expected to form a partnership with a chip maker for TDD related products in 2003. Infineon is in the running for this partnership, along with several of its competitors. See "InterDigital Emerges as THE World Leader in TDD" above for a report on InterDigital's emerging prominence in TDD technology development,) See also: "Partnership Risks" and "Technology Risks."
Representative Message Board posts Related to this "30 Year Evolution of InterDigital’s Business Model" portion of the Focus Stock: InterDigital report
By: mschere
Original source unknown -end of mschere post-
Watershed Event: Ericsson’s Settlement with InterDigital This report, linked from elsewhere on this site, also is pertinent in this "30 Year Evolution" report. Click above.
Nokia Invokes Arbitration: 2G Royalty Obligation to IDCC (NEW) With up to a billion dollars at issue Nokia Seeks Binding Arbitration on Royalties It Owes InterDigital
August 3, 2003
Also see below: News Release on Nokia Arbitration
Pertinent Message Board Posts/Threads on this Topic
Beginning in mid-March (with the announcement of the settlement of the ten-year patent litigation dispute with Ericsson) InterDigital executives shared their expectation that Nokia, world market leader in cell phone production, would be bound by the same 2G and 2.5G licensing terms as Ericsson. Nokia had been licensed since 1999, but the royalty rate was yet to be determined.
InterDigital shareholders were surprised by an announcement in late July that Nokia had rejected InterDigital's claim that the Ericsson settlement had determined the 2G and 2.5G royalty rate for Nokia as well as Ericsson.
InterDigital has maintained since 1999 that the royalty rate for its licensee, Nokia, would be determined in either of two ways: (1) by direct negotiation between Nokia and InterDigital or (2) by the establishment of a royalty rate between InterDigital and either of the then chief Nokia competitors, Ericsson or (probably) Motorola. (In early 1999, when Nokia licensed InterDigital's 2G, 2.5G and 3G wireless technology, Motorola already had won a patent infringement case brought against it by InterDigital. Ericsson was involved in a long patent infringement litigation also bought by InterDigital.)
It was believed by Nokia and InterDigital that the litigation with Ericsson would be resolved either by an out of court settlement or a court decision no later than January 1 st 2002 , when a period of concession on royalties by InterDigital would expire. Nokia also anticipated that by that time 2G royalties would be less important than next generation 3G. But 3G is arriving much more slowly than expected. InterDigital had agreed to a very modest blanket royalty payment of $30 million for all cell phones produced by Nokia through December 2001 in exchange for a $40+ million contract for the development of a 3G TDD suite for Nokia. InterDigital badly needed the Nokia cash infusion. |
