Targeted

Doomsayers take note: the $750 billion mobile-phone industry could, conceivably, grind to a halt on April 10. That’s the date a long-standing licensing agreement expires between Nokia, the world’s largest handset maker, and Qualcomm, telecom’s most powerful intellectual-property company. The two behemoths are warring not just over money, but ultimately over the structure of the industry itself and the increasingly complicated question of who pays how much to whom for the hundreds of patented technologies packed into every handheld gadget that customers all over the planet use to make calls, access the Net and send messages.

Already the sums at stake are enormous. According to Nomura Securities, Finland’s Nokia pays Qualcomm 4.4% of the wholesale price (or an average of $8.50) on each of the 131 million phones using Qualcomm technologies that Nokia is expected to ship next year — an annual bill that would, at current terms, top $1 billion. Not surprisingly, Nokia wants to reduce that fee, arguing that Qualcomm’s contribution to today’s phones is less than when Nokia first started using its designs in 1992. “The current rate is no longer the relevant one,” says Nokia’s chief financial officer, Rick Simonson. Qualcomm, which is headquartered in San Diego, maintains that its contribution to every phone is more vital than ever, and that Nokia should continue to pay the same rate. So far, neither side is budging. “We’ll hold our ground,” says Simonson. “The two negotiating teams are far apart,” says Qualcomm CEO Paul Jacobs.

Without an agreement by April 10, each company would suddenly be using the other’s technologies illegally. Lawsuits to stop sales of each other’s products would then fly, and mobile operators could balk at selling potentially infringing phones. Nokia has the option to simply extend the current terms, but Simonson won’t say if his company is going to blink, or whether Nokia is willing to push the industry into crisis.

Whether they extend, sue or even strike a new deal by the deadline, the Nokia-Qualcomm war illustrates a controversy gripping the entire industry: how to clarify the costs of intellectual property rights (IPR), the permissions that companies grant each other to use their patent-backed technologies. The problem is that as gadgets have acquired more features, IPR has become almost impossible to measure in a way that satisfies every party.

However you calculate it, Qualcomm’s power has bred resentment. Qualcomm has grown into a $7.5 billion company in part by licensing a broad set of chip and software patents that incorporate two important phone-signal protocols, CDMA (Code Division Multiple Access) and the more recent CDMA2000. These technologies have, historically, been used in about 20% of the world’s mobile phones. But much of the industry, including Nokia, is now moving to 3G phones that draw on a version called WCDMA (the w is for Wideband). It is the level of Qualcomm’s contribution to WCDMA that is at the heart of the Nokia-Qualcomm fight. “Qualcomm is perceived as a company that abuses its superior IPR position in order to make supernormal profits,” says Nomura analyst Richard Windsor in London, who predicts that Qualcomm will prevail in the Nokia standoff because of historical precedents in patent cases. “It shouldn’t be that Qualcomm dictates to the rest of the industry what the economic structure is,” says Nokia cfo Simonson. “Nokia’s battle with Qualcomm is part of this, but it’s really Qualcomm versus the industry.”

Indeed, it is. Some of the world’s leading mobile operators — including Vodafone, Orange, Sprint Nextel, T-Mobile, Holland’s KPN, China Mobile and Japan’s NTT DoCoMo — have banded together in a group called the Next Generation Mobile Network (ngmn) to try to figure out how best to develop phones that handle high-speed Internet access. High on their action list is a call for “much greater transparency and predictability of the cost of IPR,” they say in a 60-page white paper. Though they do not mention Qualcomm by name, their primary target seems obvious. They lace the document with references to an IPR regime they say doesn’t work because licensors no longer abide by “fair and reasonable” practices used in cellular’s earlier days.

Qualcomm CEO Jacobs insists his company is not a culprit. Qualcomm is good for the industry, he says, because its ready-made chipsets bring together a cornucopia of industry-leading designs from a variety of companies that allow vendors to bring new products to market quickly. This in turn leads to further innovations. Jacobs has been on a globetrotting mission meeting with the world’s leading mobile operators to convince them. “I’ve spent a lot of time explaining how it works,” he says. Are they buying it? “I’m not going to tell you that everyone believes what I believe,” says Jacobs. But he adds, “I feel like time is on our side.”

Vodafone, Sprint, Orange, T-Mobile and the ngmn all turned down requests to talk to Time about IPR, Qualcomm and Nokia. Hamid Akhavan, chairman of the ngmn and CEO of T-Mobile International, said in an e-mail that “IPR discussions re ngmn are at a sensitive stage,” adding that things will become more clear “later in the year when the IPR issue has become more stable.” An ngmn spokeswoman said the group could say more in mid-April (when, perhaps not coincidentally, the deadline in the Nokia-Qualcomm standoff will have passed).

Even if the Nokia-Qualcomm row ends amicably for now, similar high-profile clashes may be on the horizon. In a meeting with financial analysts last summer, Ed Zander, CEO of handset maker Motorola, articulated a strategy of “owning our own IPR and controlling our future.” Motorola had just invested in WiMax, a nascent wireless technology that threatens conventional cellular technologies. Although Motorola subsequently agreed to use Qualcomm WCDMA chipsets, the WiMax initiative could flag Motorola’s intention to play nice with Qualcomm for now, while charting greater IPR independence via WiMax in the future.

But if Motorola or any other mobile company thinks that a WiMax future will free them of commitments to Qualcomm, they should think again. “Any form of mobile WiMax has our technology in it,” CEO Jacobs says. Could that portend an eventual legal fracas with not just Motorola but also WiMax’s most vocal supporter, microprocessor giant Intel? “Intel is using Qualcomm intellectual property, and I’m sure Intel would take the position we’re using their intellectual property,” says Qualcomm’s chief counsel Lou Lupin. “It’s one of those situations that will likely work itself out over time.” Qualcomm vs. Intel? That would make a rollicking sequel to Qualcomm-Nokia. With all the disputes, and with over a billion phones expected to ship this year, two things remain certain. The mobile industry will remain a vital driver of the world economy — and an even more vital driver of the legal profession.