Industry Committee on Aug. 7th, 2009

[Mario Laframboise, Bloc, Argenteuil—Papineau—Mirabel, QC]

In your presentation, you said that this transaction was worth $140 million and that it should not be subject to the act. That's your book value. Let me tell you that your book values have caused a lot of problems in the past.

I think the actual value is much greater than the one you've carried on your books. In your opinion, the act shouldn't apply, but there haven't been any discussions. Has the government told you it could use this act?

[George Riedel]

My understanding is that the government has been clear that the test is the book value test.

[Mario Laframboise, Bloc, Argenteuil—Papineau—Mirabel, QC]

It's the book value and that's what you're maintaining. The text of the act includes other criteria than book value. It's important to understand and that you understand us as well. During this transaction, did you talk about head offices with Ericsson? Did you discuss job retention? Did the Ericsson people tell you that the corporation intended to redistribute its staff across Canada, that it had made new arrangements by transferring, for example, employees from Montreal to Ottawa?

[George Riedel]

I'll give a three-part answer, then I'll let the Ericsson folks comment directly.

The day they announced the transaction in their investor briefing, they did comment that there were no plans to consolidate operations between Montreal and Ottawa. Again, that's their public statement. You'll get the chance to talk to them later. So that's our best understanding about their desire between locations.

As Richard Lowe mentioned, they have in fact committed to take 2,500 employees as part of this transaction, a large number here in Canada.

To your first point about the legal guidelines we've been given to test for the threshold, currently it remains book value.

[Mario Laframboise, Bloc, Argenteuil—Papineau—Mirabel, QC]

I repeat: we can come back to what citizens may think about your book values. That's why we're entitled to ask you this question. I'm surprised that you're surprised we're asking that the act apply your transaction. If I understand correctly, in your view, the act shouldn't apply based on any consideration.

[George Riedel]

I'm simply guided by the law. And the way the law reads today—correct me, counsellor—that's the interpretation.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Riedel.

Monsieur Laframboise, merci.

We'll now go to Mr. Braid.

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

Thank you very much, Mr. Chair.

Thank you to the representatives from Nortel for being here this morning.

My riding is Kitchener—Waterloo, and my constituents and I have a particular interest in seeing that we continue to have a strong and vibrant high-tech sector in this country and continue to see leading-edge innovation and research and development undertaken in this country.

I want to focus my questions on the auction process, on the one hand, and also this important issue of the LTE patents. We'll start with that one, the LTE patents.

You described, in response to an earlier question, the transaction that's in the process of being completed as primarily a CDMA transaction, but there were some LTE patents as part of that. Is that correct?

[George Riedel]

No. It's a CDMA transaction with LTE development and a licence for LTE patents, but no LTE patents are being sold as part of that transaction.

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

Okay.

You currently own LTE patents.

[George Riedel]

That is correct.

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

Of the LTE business, then, if you could just help me understand this, what portion of the business has been bundled with this transaction, what portion of the LTE business is remaining, and will that remaining portion be part of a potential subsequent transaction that might be of interest to companies in Canada?

[Richard Lowe]

If I could answer that, Mr. Braid, I don't want to call it a business, because again, there are no commercial contracts associated with LTE. But in regard to the assets that are being transferred, it is the majority of the research and development individuals associated with the LTE development in North America. There is a small part of the resources located in Dallas, Texas, that is not part of this transaction. That could be part of a subsequent process. In addition, because we are licensing the patents on a non-exclusive basis, the patents associated with LTE will remain behind with the estate, and they could be part of a subsequent process.

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

Thank you.

Could you help me understand the distinction between licensing the patents through the transaction and actually selling them?

[Richard Lowe]

The patents that are licensed allow the buying party to utilize the software development and the algorithms that exist within the development regime, but the patents themselves can be subsequently sold.

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

So Nortel still owns the patents as they're being licensed.

[Richard Lowe]

That's correct.

[Derrick Tay]

There's one additional aspect that we need to understand, which Mr. Riedel touched on at the beginning. While Nortel Canada owns those patents, licences have been granted worldwide to the other Nortel entities, so Nortel Canada is not in a position to simply deal with these patents, to simply deal with this in complete disregard of the rest of the world and in complete disregard of the insolvency processes going on in the rest of the world. So it's an integrated issue.

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

Very good.

What was the business rationale for licensing the LTE patents as opposed to selling them outright?

[George Riedel]

Again, I'll go back to my statement about maximizing value. Every time we get to an asset transaction, it creates an equation around intellectual property--patents that get assigned to businesses, patents that get licensed. The rationale was quite simple: the buyer--remember where we were--the original buyer, the stalking horse buyer, NSN, that framed this transaction did not value those patents because it already had a rich collection of LTE development technology as well. Therefore, in our opinion, it wasn't going to give sufficient consideration to selling those patents with part of those assets.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Riedel. Thank you very much, Mr. Braid.

Mr. Masse.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

To follow up with the LTE technology, perhaps you can explain what the applications are, what could change for the devices, and the uses that this type of product can do for the market and also for services.

[Richard Lowe]

Sure. The LTE technology that is being developed worldwide is an open protocol, an international standard. It's being developed by the third-generation partnership project called 3GPP. There are at least seven companies developing this technology to an open standard. That's the first thing I'd like to say.

The second thing is that the modulation scheme that's being used allows a lot of information to be transmitted over relatively narrow bandwidths of spectrum. If you can stuff more information into a particular segment of spectrum, then you get a lot of spectral efficiency. As people are using their iPhones and different devices that are consuming considerable bandwidth, having a very efficient modulation scheme is very important and is commercially attractive to operators, because they can sell that value into the marketplace.

[Brian Masse, NDP, Windsor West, ON]

So it will also affect other devices that are used, for example, for public safety? As long as it's information based and moving, then it's going to actually have an application there as well?

[Richard Lowe]

There is encryption technology that's actually part of the standard, so public safety is an application that could be developed. Much as with CDMA, there are public safety applications, as with other types of air-interface technologies.