The Apple stock price got a small bump from the patent deal with Ericsson (Nasdaq ADR: ERIC) today (Monday) - but a bigger benefit is coming a couple of years down the road.
At first glance it looks like Swedish telecom equipment maker Ericsson made out better in the seven-year deal with Apple Inc. (Nasdaq: AAPL), which ends a yearlong dispute.
Apple agreed to pay Ericsson to license its 2G, 3G, and 4G-LTE technology in its iPhones and iPads. The deal is global and settles issues with the earlier technologies, as well as setting terms for the use of the current 4G-LTE standard.
Ericsson said Apple will pay an initial amount followed by ongoing royalties. Further details were not disclosed.
Investment bank ABG Sundal Collier estimated that Ericsson will end up with about 0.5% of Apple's iPad and iPhone revenue.
I did the math to find out what that means for Ericsson. Based on that figure and fiscal year 2015 iPhone revenue of $155.1 billion and iPad revenue of $23.2 billion, the deal puts about $892 million into Ericsson's pocket annually.
If true, the deal would boost Ericsson's intellectual property 2014 revenue of $1.163 billion by about 75%. However, the company is projecting 2015 IP revenue of $1.52 billion to $1.64 billion, suggesting Ericsson isn't getting quite that much. But even half of Collier's estimate would add $446 million of IP revenue per year.
That's why Ericsson stock shot up as much as 7.23%, to $9.79, in early trading today.
But in pre-market trading, the AAPL stock price rose as well - as much as 1.74% to $107.88. The Apple stock price went flat on the day by midmorning, falling in tandem with the broader market.
Still, it begs the question: Why would the AAPL stock price go up in the wake of news of a patent settlement that has the company forking over millions of dollars a year?
Here's what Apple gets out of the Ericsson patent deal...
Why the Apple Stock Price Will Get a Boost from Ericsson Deal
In the short term, the deal with Ericsson ends another costly patent dispute for Apple.
Apple is embroiled in several other patent disputes, most notably with smartphone rival Samsung Electronics (OTCMKTS: SSNLF).
Patent wars between large tech companies typically waste a lot of time, energy, and money. Since just about every tech company needs to license patents from other tech companies, they are better served by forging cross-licensing agreements than engaging in yearslong court battles.
The Apple-Ericsson deal includes such a cross-licensing deal, but goes a step further. As leaders in mobile phone technology, Apple and Ericsson both have much to gain from cooperation.
According to the press release, Apple and Ericsson "will collaborate in multiple technology areas, including the development of the next generation 5G cellular standards, the optimization of existing wireless networks for the benefit of operators and users worldwide, and video traffic optimization."
Getting an advantage in new technologies like 5G networks and the optimization of video traffic by working with Ericsson will be huge for Apple.
The transition to the 5G standard is already under way, with the rollout starting in 2018.
A close relationship with Ericsson will help Apple exploit these new technologies in the iPhone sooner and in better ways than most, if not all, of its rivals.
And make no mistake, 5G mobile technology will be a game-changer. It will drive a massive upgrade cycle in smartphones.
Early tests have shown 5G to be 30 to 50 times faster than 4G. That's comparable to broadband speeds people have in their homes. It would allow Apple to build Apple TV-like features into its mobile devices.
The first iPhone with 5G will likely arrive in 2018 or 2019, triggering a wave of upgrades comparable to the larger screens of the iPhone 6. And thanks to the Ericsson deal, Apple's implementation of 5G is likely to add some twists that others won't have.
[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
All of which will drive iPhone sales, which will pump up Apple's profits, which will drive up the Apple stock price.
Follow me on Twitter @DavidGZeiler or like Money Morning on Facebook.
China Just Opened Your Next Window of Opportunity: By scrapping its one-child rule, China's created a massive investment opportunity. This policy reversal will drive an historic shift in production and consumption that will double the size of China's economy by 2035. The time to act is now. Here's how to align your money for maximum profit...
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.