InterDigital, Inc (IDCC US)
A Follow Up
We have not published any follow ups to our InterDigital (IDCC) piece as we do not intend to provide periodic updates to our views. Only when something truly material emerge will we do so. Today coincides with IDCC’s FY25 earnings publication, which continues to demonstrate very strong underlying drivers to the business (the Q1 guidance, in line with our projections, was significantly ahead of sell-side consensus). However, unrelated to earnings, today we wanted to bring forward the single most material development that has come to light since the publication of our thesis back in October.
Avanci, the patent pool distributor and pioneer in collective patent licensing, announced today that it has signed its first licensee in the video streaming space along with rate disclosures for the program.
First for background, Avanci is a patent pool administrator, acting as an independent intermediary in joint patent licensing, neither owned nor controlled by a single licensor or licensee. In fact, IDCC is actually member of the Avanci Vehicle programs. Historically, Avanci was very focused on IoT and the connected car market and therefore overlapping directly with IDCC’s CE, IoT/Auto division.
Back in 2022. Avanci had been asked to repeat what it had created for Avanci Vehicle in the video space. The companies asked for a license that combined all video codec standards, patentees who historically don’t join other patent pools, and equal royalty terms for all licensees. The vehicle was launched and counts today 43 licensors, covering all five of the most recent video technologies – AV1, H.265 (HEVC), H.266 (VVC), MPEG-DASH, and VP9. IDCC is not part of this particular initiative.
Now why does this matter? The announcement today marks an important moment for the monetisation of video streaming/codec patents, providing validation around what these patents are ultimately worth in a real use case. By publishing its rates, Avanci also gives tangible evidence and ammunition to IDCC’s ongoing efforts, as well as allowing investors to directly triangulate what this could ultimately means for IDCC’s P&L.
Exhibit 1 – Avanci Video Published Licensing Rates
If you recall, IDCC has a very similar table published on its website for the smartphone division:
Exhibit 2 – IDCC Published Licensing Rates Menu for Handsets
What immediately stands out here is that HEVC rates in a streaming context are higher than in a smartphone context ($0.12-$0.15 vs. $0.10).
We can also calculate what Avanci Video’s rates would imply for IDCC if they were to obtain similar rates for their own patents. Applying Avanci’s rates to Disney+, Netflix, PrimeVideo (which is really just the tip of the iceberg in terms of monetisation potential for streaming), you get to roughly USD1bn in annual licensing potential. Currently, IDCC has an ARR target for its SCS division of $300m by 2030.
Exhibit 3 – Streaming, Cloud Services (SCS) Monetisation Scenarios
For context, this is what we currently assume for the SCS division over the course of the next 4 years:
Exhibit 4 – SCS Financial Projections
If we piece everything together:
- On the litigation side, in Liren Chen’s (CEO of IDCC) own words during the FY25 conference call today, “we could not be happier with where we are with Disney”. We will avoid going into the minutiae of every development on the Amazon and Disney cases across jurisdictions but we are also satisfied with the developments.
- With today’s Avanci rate disclosure, we now have vision of sight of what these patents could be worth beyond simply taking IDCC’s 2030 guidance. This is a very important datapoint that allows us to create various scenarios of what the monetisation path of SCS may look like.
- Given what we knew already, with SCS’s TAM being both bigger as well as faster growth than the Smartphone division, our suspicion was already that IDCC’s guidance may prove to be too conservative. We come away today thinking this increasingly is becoming more than just simple suspicion.
Whilst not wanting to place too much weight on triangulating accomplishments from peers, we believe today is very material for the general codec/streaming space. It provides legitimacy to IDCC’s effort along with the rest of the industry, as well as a clear benchmark on what would constitute fair, reasonable, and non-discriminatory (FRAND) terms. Not only is this helpful for IDCC’s ongoing litigation, but it ultimately leads us to conclude the future is bright for IDCC and its SCS division.