Industry Committee on Aug. 7th, 2009

[Brian Masse, NDP, Windsor West, ON]

Okay. Now, with regard to the development back in 1998, as you mentioned, how much money has Nortel plowed in to get to this point, to reach this level?

[Richard Lowe]

On LTE specifically? The majority of the development dollars, as I said before, were spent in 2008-09. We've spent maybe an additional $50 million between 1998 and 2006, and then we've spent about $300 million since then on the technology.

[Brian Masse, NDP, Windsor West, ON]

So you've really seen this a probable way out of your situation. What you've suggested to me, through your previous testimony, is that you haven't made a profit since 2002 to return on the SR and ED credits, but there are other programs available. Then, in the last hour you went from $50 million to over $300 million of investment, despite shedding lots of jobs and struggling to make ends meet as a company. You made a massive investment into this at the eleventh hour.

[Richard Lowe]

I guess I would put it this way.

As with any technology, there is an ebb and flow of investment. Most of our investment between 1996 and 2006 in fact was with the CDMA technology. As that technology matures and is replaced by the next generation, the investment in CDMA goes down and the investment in LTE goes up. This is actually a natural ebb and flow.

So I wouldn't characterize it as an eleventh-hour investment.

[Brian Masse, NDP, Windsor West, ON]

Well, maybe that's not the right characterization. I think it's just highlighting the importance of this breakthrough.

You're suggesting right now that the book value is only $149 million in terms of what you're packaging. If that's the case, why would Ericsson pay over a billion dollars for it?

[Richard Lowe]

Again, as I said earlier, it's one thing to invest in technology and be granted or accorded kudos by the community for your technology. It's another thing to commercialize the technology. In order to do that, you need people willing to buy the technology.

It became pretty apparent to us over the last 12 months that while our major customer operators really appreciated our technology and what we had done, given our situation as Nortel, they were not prepared to purchase this technology from us.

[Brian Masse, NDP, Windsor West, ON]

Right, and I understand that, but it seems like quite a deal. If you think it's worth only $149 million U.S. and you get a billion dollars for it, that's quite a discrepancy. Why would Ericsson bid so high for something that you believe is so low?

[Richard Lowe]

Again, to come back to George Riedel's points, the market value is based on certain intangibles, which is how Ericsson would likely view it. You would have to speak with them directly, but likely they would view the evolution of their customers in the network and how they would utilize this current technology, CDMA, and the future technology to grow their business because of the scale they have, the international stature they have, and the strong balance sheet they have.

[Brian Masse, NDP, Windsor West, ON]

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Masse.

Thank you, Mr. Lowe.

Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you.

I want to come back to patent licensing. I'd like to get a little bit of clarification around that. Originally the commentary was that the patents were all being sold, and then there started to become some clarification around the fact that the LTE patents were being licensed.

Is this standard practice, selling patent licences for even an ongoing company?

[Richard Lowe]

George may want to elaborate at a macro level, but it is natural in our industry to have significant cross-licensing. People typically will license across one another so that nobody is found to be at a burden from a licensing point of view. Ericsson has patents that we license from them, I have patents that Qualcomm licenses from me. It's all part of the normal industry process to have patents and cross-licensing, because it encourages the globalization of international standards.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Might we expect to see further patent licences on LTE being a part of future auctions?

[George Riedel]

Again, to go back to what I said earlier, we haven't laid out a process for how we're going to monetize the value of that intellectual property. We're looking at a range of options. We do have the obligation to come back to the monitor and the courts, once we get to that point, to lay out those processes so that they can approve that.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

But just for clarification, any future patent licences that might hypothetically be included in auctions would be different in the sense that they wouldn't include the employees who were working on the patents that are a part of this transaction? Is that correct? A certain number of employees who were Nortel employees will become, under this transaction, Ericsson employees, employees who are working in research and development on LTE?

[George Riedel]

I'd like to make sure I understand your question. There are 2,500 employees who, when this transaction closes, will become Ericsson employees. They will not be part of future asset sales.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

It's asset licensing that I'm thinking of, not sales, in terms of licensing patents. If you were to license patents in the future, there would not be employees, talents, attached to the licensing of those patents?

[George Riedel]

No.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

So it would be a different circumstance.

[George Riedel]

Correct.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

How will the way in which you treat licensing now affect the value of owning the patents in the future? It's not just the dollar value but the practical value to a company that would buy the patents.

[George Riedel]

Again, let me put the world into two buckets, if I could.

First, for those assets that we're selling--CDMA, LTE, Enterprise, and the like--the buyer is going to want a set of patents that are predominantly used in those businesses and licences to a field of use to continue to operate with the rest of the technology. So that's bucket one.

Bucket two is the remaining 3,000 patents or thereabouts that we have opportunities to monetize. How we do that is still an open question that we're in the midst of analyzing, then having to come back to the courts to approve.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

To wrap up, I'll go in a bit of a different direction.

A lot of the commentary early on in the process talked about RIM being shut out of the process. I want to give you an opportunity to clarify, when it comes to comments around the confidentiality terms and things like that. Maybe you can explain how RIM was treated within this process, particularly in the context of confidentiality and why decisions were made the way they were.

[George Riedel]

It's a two-part answer. I'd refer back to what I said in terms of the court document yesterday. The monitor and the courts were satisfied that anybody who wanted to participate in the process and met the criteria was able to. The courts have found that there was no shut-out phenomenon. I think that's a useful phrase.

Secondly, from a practical standpoint, the standard NDA that we've had others sign up to--that is Ericsson, MatlinPatterson, Nokia Siemens--was the same model we were seeking to get RIM to sign up to.

[Derrick Tay]

For clarification on that, as Mr. Riedel said earlier on, the court process allows for anyone who's unhappy with any aspect of the process to come to court. In fact, many parties did come to court, including MatlinPatterson, and the process was adjusted to accommodate whatever concerns they had. That option was always open to anybody who had trouble with the process.