Industry Committee on Aug. 7th, 2009

[Brian Masse, NDP, Windsor West, ON]

Is that per year?

[Mark Henderson]

That's $5 billion.

[Brian Masse, NDP, Windsor West, ON]

Nortel testified today that prior to 1998 they had put only around $50 million towards this LTE technology, but in the last couple of years they had really ramped it up to more than $300 million in research and development. They can't take advantage of the SR and ED tax credit right now, but it can be carried over, as you know.

As part of this agreement, do you get a chance to carry over that tax credit, or will it remain within Nortel?

[Mark Henderson]

I think the short answer is that we don't get the carry-over, but I'll let Richard explain why.

[Brian Masse, NDP, Windsor West, ON]

Thank you.

[Richard Corley]

It's because of the nature of this transaction. We are buying assets, we're not buying the enterprise; therefore, there's no opportunity to take advantage of those tax credits.

[Brian Masse, NDP, Windsor West, ON]

So whenever Nortel becomes profitable again, they can apply for the SR and ED tax credit. Thanks. That's very helpful, because it was new to the whole spectrum of things.

Here's the quandary that's evolving to a certain degree. I've never heard anything negative about Ericsson not living up to its agreements, but I've been around here long enough to hear companies promise they're not going to do this and that. In fact, we even have agreements through the Investment Canada Act that are supposed to be binding. Then we have to go to court when companies don't live up to their expectations, and so forth. I'm not suggesting that's the case for you, but we have to believe that in this case.

We're really coming to the conclusion that, if this goes through, you will have an advantage on breakthrough technology that's quite significant--and good for you for getting into the competition, seeing that, and taking advantage of the situation. But the problem is that the other competition will have to buy the old stuff from Nortel.

One could argue that licensing it out as opposed to selling it outright would actually lower the book value, because if somebody else wanted to get the patents they would be able to do so, but they would get an empty shell. They wouldn't get the workers, the infrastructure, and all those things. They would have just the patent itself. Alternatively, if you made a breakthrough on top of the current patent right now and patented that, they would have to go to you to get licensing for that.

Am I correct on how this is playing out?

[Mark Henderson]

It's true that if Ericsson creates a patent and we decide to license someone, we provide the licence. On the financial details behind that licensee agreement, there could be a financial portion of it or there could be a trade.

People interested in these kinds of patents are from other companies that are developing this technology as well. They have their own patents, and we'd like those patents, and that's kind of the way the market works. They move all over the world. The idea is that it's based on open standards, so no one is put at a tremendous disadvantage due to patents, and we're able to take these technological solutions and bring them to the market as quickly as possible.

[Richard Corley]

I'd like to add to that.

On the future for Nortel--and I have not spoken to Nortel about this--I observed in the newspapers that there have been discussions about Nortel taking the patents it owns, licensing them, and using them as a basis of revenue going forward. So on the patents that have been licensed to Ericsson, because the ownership is retained by Nortel, they could license them to each one of Ericsson's competitors and have that as a source of revenue. So that is quite different from the vision you had of hollowing out Nortel, because they would have this as a future revenue stream.

[Brian Masse, NDP, Windsor West, ON]

It will be that way for the LTE stuff, because you now have all the really important things. You have the mechanisms to advance the technologies. If next year you come out with a breakthrough, good luck to me trying to sell this product that's out of date or doesn't have the same capacity when you've already advanced the LTE to a really good level--and good for you. I'm just trying to make sure we have what's at stake here. I'm thinking from a consumer angle. We would have had this situation anyway under Nortel, to a certain degree, if it hadn't gone the way it did.

So you're right that somebody else could buy your LTE patent, but it would be worth a lot less because you wouldn't have the people. Every single day after the sale went forth, it would be worth less, because by then you'd be running in a new direction to improve the technology.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Masse.

Mr. Braid.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair.

Thank you very much, gentlemen, for being here this afternoon.

I'd like to start by continuing one of the major themes from today, the importance of LTE as the next generation of wireless. Today's proceedings have been very helpful. One of the things we've had confirmed is that the patents have been through the proposed arrangement and the deal will be licensed to Ericsson as opposed to being purchased outright. Was it your choice to lease as opposed to purchasing, or was that Nortel's?

[Mark Henderson]

I'm afraid I don't know if I have the answer to that.

[Richard Corley]

It was a function of the process. We heard this morning from Nortel that through the negotiation of the stalking horse bid, the stalking horse bid involved the licence to use those patents rather than an outright purchase. That was in the box of apples, to use Mark Henderson's analogy. It was a licence. I think it's important, again, to note the distinction between a non-exclusive licence and a lease or a purchase that gives exclusivity. This is a non-exclusive right that can be shared by an infinite number of other people.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Very good. Continuing with the low-hanging fruit, if you will, on the LTE patents you had indicated that you were also developing LTE technology. Can you compare how you were advancing LTE technology versus Nortel, from a market comparison perspective?

[Mark Henderson]

I think there's a couple of good comments around that.

First of all, for Ericsson the global spend on LTE development is quite a bit larger than what we're picking up here. This is a complementary set of competence and resources and patents for licensing, but our R and D spend for LTE is quite a bit larger than that. We have commitments and contracts. I think Verizon was one of the ones in the U.S. that have chosen to move to LTE. It's a huge network, and Ericsson is one of those suppliers. So the development and innovation for LTE with Ericsson is paramount, and we are marching down that road very quickly.

I think there was a great comment this morning from Nortel where, although they had worked on this technology and developed this technology, when they went out to the customer base they said, “That's great, we like what you have, but you'd better put those assets in safe hands.” I think what we're seeing here is exactly that, because we are considered the leader in LTE today.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Turning to the auction process quickly, Mr. Corley, I believe you indicated that Ericsson also signed an NDA as part of the process, but you do not have a standstill arrangement as part of the NDA. RIM was here earlier, and they indicated that they did have a standstill as part of their NDA and that was of great concern to them. Can you comment on why there would appear to be this difference?

[Richard Corley]

In a word, no, but as my partner, Paul Schabas, had pointed out, if RIM felt this was a real impediment to their providing a bid that would add value, the obvious thing for them to do would have been to go into court to say to the court that they objected to this form of NDA as it was preventing them from making a bid. The court would have taken anything, again based on our experience, that reduced the value they were going to get for the assets very seriously. I have to ask the question, why didn't they go to court and object to that if that was a concern? This was a court-supervised process.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Lastly, as you know, RIM officials were here earlier, and Mike Lazaridis is a highly respected business person in our country. As he concluded his presentation, he suggested that all the key parties, the key stakeholders, get together for a discussion on this issue. Would Ericsson be open to that?

[Mark Henderson]

I think what we've said here is that we really do consider the process as it was conducted to be very closely monitored by the courts in the U.S. and Canada. There were companies at the table bidding that obviously went through the proper hurdles to be at the table, and the presiding judges have deemed the process to be fair to all. I think we need to finish our work on the box of apples before we take any other discussions.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Braid.

Thank you very much, Mr.Henderson.

Monsieur Garneau.

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

Thank you, Mr. Chairman.

Thank you all for being here today.

I would like to start by congratulating you on your commitment here to Canada. The business definitely has a very impressive track record since 1953. It's a business that I often have the pleasure of crossing paths with. I believe it is located on the Décarie Autoroute underneath the 40. I see it every time I go back to Montreal.

I would like to ask you for some clarification.

I have one question. You mentioned, Mr. Henderson, that you would regard any further Nortel assets being offered up.... You would consider bidding on them if it were complementary to your business. If the patents currently owned by Nortel are put on the block, is that something that would be of interest to you?

[Mark Henderson]

It's a difficult question to answer. We already have the right to use the patents we have the licence to. If new patents came up that we thought were strategically important, I guess we would have to look at those.

I guess buying a patent means you can cross-license to somebody else. But again, because these technologies are built on such open standards and there are so many big companies working in these technologies, developing this intellectual property--not just the people who are developing the networks, like Ericsson, but the handset manufacturers, and how they work with the open standards--it is really to the benefit of the industry to keep licensing as open as possible, to cross-license.

So I guess there are a lot of conditions around it that we would have to consider before we'd say we have to go in and buy that licence. I mean, if we could just license on a non-exclusive basis, that would probably be the tack that would be the most--

[Marc Garneau, Liberal, Westmount—Ville-Marie, QC]

I want to pick up on something Mr. Van Kesteren asked a little while ago. It was referring to a comment that I believe we understood from RIM, that they were told that part of the auction conditions in bidding was that they would not be able to bid on other Nortel assets for a period of at least one year. That seemed to be something that I think I understood and that has been reported in the media. You were a bit surprised to hear that a few minutes ago. I was wondering if you could possibly—not today—get back to us and let us know whether that was a condition imposed upon you as part of your compliance with the bidding process.

[Mark Henderson]

I think we can let you know today.