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Nokia's grip on patents offers revenue potential after Microsoft deal

By Dan Levine

SAN FRANCISCO (Reuters) - Nokia (HEX:NOK1V) may have sold its handset business to Microsoft (NSQ:MSFT) but by hanging on to its valuable patent portfolio, the Finnish company can try to boost royalties by sueing Android phone makers, or unload the patents in a future deal.

Nokia, once the world's dominant handset maker, has failed to close a yawning lead opened up by Apple (NSQ:AAPL) and Samsung <005930.KS> in the highly competitive market for smartphones. It will now concentrate on its networking equipment unit, navigation business and technology patents.

Microsoft on Tuesday agreed to pay 3.79 billion euros for Nokia's handset business, and another 1.65 billion euros for a 10-year license to Nokia's patents, considered some of the highest-quality patents in the mobile space.

"This involves the right to, in effect, make use of Nokia's inventions," Microsoft's general counsel, Brad Smith, said on Tuesday. "It doesn't involve the transfer or ownership of the patents itself."

Nokia has long been a savvy player in the intellectual property market. It sued Apple in 2009 and then reached a licensing deal with the iPhone maker. The terms were not disclosed but the deal was believed to be worth hundreds of millions of dollars to Nokia.

For Microsoft, taking a license to Nokia's patents - but not buying them - serves a strategic objective as well. Microsoft has already convinced about 20 Android manufacturers to pay patent royalties, part of Microsoft's effort to raise the cost of Google's (NSQ:GOOG) mobile operating system.

Now, Nokia remains free to go after those Android manufacturers for royalties as well.

"It wouldn't surprise me at all to see litigation filed by Nokia in coming months," said one senior IP executive who has dealt with both companies but did not want to be identified to maintain those relationships.

Had Microsoft bought Nokia's patents outright, that pincer movement against Android likely would have been foreclosed, the executive said.

Nokia also gave Microsoft the option to convert the 10-year license to a perpetual license, which Smith said Microsoft would exercise.

Nokia representatives were not immediately available for additional comment.

The market for high quality mobile patents, like Nokia's, could be quite strong judging by past deals. Google, for instance, paid $12.5 billion in 2011 for Motorola Mobility, a transaction largely driven by the patent value.

"For Nokia to sell the business, and not sell the patents, there must be something else cooking to recover value," said Michael Pierantozzi, a partner at Lumen SV, an intellectual property advisory firm.

Nokia could decide to try to sell its patent portfolio as a whole if the company thought it could get a price approaching the Motorola deal, Pierantozzi said, adding that Microsoft likely was not willing to pay that much.

Nokia "probably just weren't getting the price they were looking for," he said. (Reporting By Dan Levine; editing by Andrew Hay)