An analysis of the patent portfolios of Broadcom Ltd. (AVGO), Qualcomm Inc. (QCOM) and NXP Semiconductor (NXPI) by LexisNexis® PatentSight®, suggests that Qualcomm’s portfolio is rated highest among the three companies based on the Patent Asset Index (PAI).
The PAI is a scientifically developed and industry-proven methodology to measure the innovative strength of an enterprise or an entire technology field. It is calculated at the level of a patent portfolio as the sum of the competitive impact scores of the individual patent families contained in this portfolio. The competitive impact in turn is calculated based on the technology relevance (citation-based indicator) and market coverage (patent protection around the globe, calculated based on the potential economic value of each country) of a patent family. Depending on the question to be addressed the Patent Asset Index can be calculated for a company as a whole, or just for patents belonging to specific business areas or technology fields: it then shows the strength of the company in those particular domains only.
Qualcomm has a Patent Asset Index score of 116,291, which represents 1.1% of the Patent Asset Index of the entire world. Only Samsung has a higher score at 186,000. Neither NXP nor Broadcom score in the top 50; combined, Broadcom, Qualcomm and NXP would have a Patent Asset Index of 154,000, meaning Broadcom’s and NXP’s score combined at only 37,709.
LexisNexis® PatentSight® proprietary Patent Asset Index has been used by antitrust regulators in the European Union to assess the effect of mergers on innovation in the European market. Regulators view patents as a proxy for innovation because they are the best way for companies to protect their innovations.
EU antitrust regulators used the Patent Asset Index to analyze the patents owned by Dow Chemical and DuPont to ascertain how a merger of the two companies would affect innovation in the European market. That analysis was used to force the combined companies to divest their crop protection business because it was too concentrated —the combined companies would have controlled close to 60% of the combined value of the top patents, which would have crowded out other competitors and raised barriers to entry.
The field of transmission of digital information is dominated by 4 major players, Qualcomm, LG Electronics, Samsung Electronics and Intel Corp.. Prior to the prospective merger, Qualcomm had 41% of the combined value of the top 10% patents owned by the big 4, followed by LG with 23.5%, Samsung with 19.3% and Intel with 16.1%. After a merger of Broadcom, Qualcomm and NXP, the combined entity would own 43.4% of the combined value of the top 10% patents owned by the big 4 in the field of transmission of digital information, versus 22.6% for LG, 18.5% for Samsung and 15.5% for Intel.
Marco Richter, head of consulting and customer success at PatentSight, said the firm’s analysis shows that Qualcomm’s patents are of much higher quality and a newer vintage than the other two, though NXP’s patents also are of a newer vintage than Broadcom. While Qualcomm’s active patents are on average 7.8 years old and NXP’s are 8.8 years old, Broadcom’s patents are on average 11.6 years old.
Qualcomm has far more patents that are of a younger vintage, with most being less than 10 years old. Qualcomm’s younger patents, versus Broadcom or NXP, suggests it continues to be far more innovative recently.
To be sure, PatentSight analysis shows that patent quality is much more tied to innovation than the sheer number of patents. For example, it cites figures that show that while Qualcomm has fewer patents than IBM and spends similarly on research and development, it brings in more in IP related income. The pure number of patents has little economic meaning
In 2014, IBM had 41,112 active patents and brought in around $500 million in IP related income, while Qualcomm with 20,337 active patents brought in over $7 billion in IP related income. During that time, IBM and Qualcomm spent similarly on R&D, spending $5.4 billion and $5.5 billion, respectively.
Furthermore, PatentSight analysis shows that Qualcomm actively protects its inventions with patent protections outside the U.S. and especially in Asian markets. For example, Qualcomm protects 50% of its inventions in China, compared with 11% for Broadcom and 31% for NXP.
The results are similar in Japan and South Korea, where Qualcomm protects 43% and 41% of its inventions. In comparison, Broadcom protects 6% of its inventions in Japan and 6% of its inventions in South Korea. NXP protects 8% of its inventions in Japan and 4% in South Korea.
Overall, Qualcomm protects its patents in potential markets that, in total, are almost two times bigger than the markets protected by Broadcom, as measured by market coverage, an indicator that looks at the economic potential of a country using the Gross National Income as a proxy.
“We see a good indication from a patent and innovation perspective as to why Broadcom is so interested in the Qualcomm portfolio,” Richter said. “The sheer strength and quality being one, the much younger portfolio structure being another. In addition to that, a wide global reach, which promises large economic potential. Broadcom on the other hand, has a comparably old portfolio, with over half of their patents being older than 12 years. A fact that might make them want to acquire innovation.” Moreover, Richter said this suggests that Broadcom may have to sweeten its bid for Qualcomm if it wants to secure its future.
In the meantime, Qualcomm management has described Broadcom’s reduced $79 a share offer as grossly undervaluing Qualcomm’s semiconductor chip technology and licensing business.
Qualcomm officials also have dismissed Broadcom’s offer as opportunistic and grossly inadequate, at only 10 times Qualcomm’s expected non-GAAP fiscal 2019 earnings of $6.75 to $7.50.
For its part, Qualcomm asserts that an earnings multiple near that of the semiconductors index, at 19 times, or more like 22 times, is more appropriate. A 19 times multiple would mean a $133 a share, while a 22 times multiple would mean $154 a share or almost twice Broadcom’s reduced revised and best offer.
One of the biggest reasons Broadcom may want Qualcomm is that Qualcomm is the top player from a patent perspective in 19 of the top 20 technology fields in which it operates, as identified by PatentSight. For instance, 14.2% of the patent strength, measured by Patent Asset Index, in H04B 7, radio transmission systems belongs to Qualcomm — good enough for the top position. Similarly, Qualcomm controls 18.2% of the Patent Asset Index, also the top position, in IPC HO4W 72: Wireless communications – Local resource management. Qualcomm’s lowest score in its Top 20 IPC areas is 6.4% for No. 3 in HO4M 1: Telephone substation equipment.
The PatentSight analysis also shows that after a merger between Broadcom and Qualcomm, Qualcomm’s competitors will depend even more on the merged entity, which suggest antitrust regulators may force significant adjustments. For example, patents representing 40.7% of Apple’s entire Patent Asset Index have active prior art in Qualcomm’s portfolio. If Broadcom acquired Qualcomm that would increase to 47.1%. Indeed, the merger would affect 31.9% of Apple’s active patents versus only 24.3% without the merger.
“We can’t comment on Broadcom’s IP portfolio,” said a Qualcomm spokeswoman. “On the other hand, we have always said that Qualcomm has one of the strongest IP portfolios in the industry. Our patents cover a wide array of technology areas that matter to all aspects of the mobile device, network and applications. Our patents have great quality demonstrated through their seminal nature, forward citation and foundational value for the entire industry.All this stems from our company’s invention DNA and culture, our focus in R&D investment, our foresight and vision, and our unique engineering talent. We remain committed to function as the industry’s R&D engine and drive growth for the entire ecosystem.” In a statement, San Diego, California-based Qualcomm said its board remains unanimous in its view that Broadcom’s current offer of $79.00 per share, as well as the previous offer of $82.00 per share, materially undervalues the company. Similarly, it said Broadcom’s initial offer of $70.00 per share was so low that it did not merit engagement. “Since evaluating and subsequently rejecting the $82 per share offer on February 8, Qualcomm has repeatedly and genuinely attempted to engage with Broadcom on issues including price, regulatory and other closing certainties, including most recently at meetings on February 14 and February 23,” the company said. “In each of those meetings, Broadcom refused to engage in good faith. It instead reiterated its ‘best and final’ stance which it established prior to our first meeting, despite our attempts to find a path to a deal that makes sense for Qualcomm stockholders. Broadcom’s refusal to outline its proposal and the future direction of Qualcomm’s licensing business also raises significant issues from a value and regulatory perspective. All three items – price, closing certainty and the licensing business – are critical to the board’s evaluation of Broadcom’s proposal.”
Officials from Broadcom didn’t return an emailed request for comment. To reach the reporter responsible for this story, please contact Dan Lonkevich at707-318-7899 or at [email protected]
Update:
The merger of Broadcom and Qualcomm was prohibited by US-President Donald Trump on March 12, 2018.
Learn more about PatentSight and the Patent Asset Index.
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