Broadcom recently renewed its licensing agreement with MIPS, obtaining a license to its patents and a multiyear license extension to its CPUs and instruction-set architecture (expiring when the last of the covered patents expires) in exchange for $26.5 million in cash plus other unspecified consideration. Left undisclosed is Broadcom’s take, beyond patent protection. The company has long been MIPS’s largest customer, accounting for more than 10% of its revenue—most of which has been from royalties, however. Pending additional disclosure, we assume Broadcom’s royalty payments will see no significant change.

Because it is using homegrown compatible CPUs in addition to licensed cores yet is paying significant royalties, it may seem that Broadcom needs MIPS less than MIPS needs Broadcom. MIPS, however, has important patents on CPU design—patents that other CPU architectures likely infringe. Licensing ARM CPUs for use in its handset and other chips, Broadcom was at risk of being held liable for these products infringing MIPS’s intellectual property—particularly if MIPS sells its patent portfolio to a non-practicing entity (patent troll).

MIPS hasn’t aggressively pursued such infringement, but the company is desperate. Its operations lost money in 1Q12—not a lot, but a long-established intellectual-property supplier should be printing money, not burning it. Although the company bounced back that quarter, licensing revenue has been on a downward slide. MIPS’s stock price is off 60% since peaking at the beginning of 2011, and investors are pressuring the company to take action. Possible responses include selling the company, selling its patent portfolio, or taking other steps to monetize these patents. Any of these actions could lead to a shakedown of companies that use infringing CPUs in their chips—basically everybody.

By paying $26.5 million now, Broadcom insures itself against more-aggressive future action by the owner of the MIPS patents. It also validates the patents’ value, should MIPS choose to license them more aggressively. The cash infusion will also stabilize MIPS financially, giving it the resources to continue product development, avoid a sale of the company, and ameliorate potential licensees’ concerns about its long-term viability. Once stabilized, the company will be in a better position to keep rival licensor ARM in check, benefiting Broadcom and the rest of the semiconductor industry.