"Where money issues meet IP rights". This weblog looks at financial issues for intellectual property rights: securitisation and collateral, IP valuation for acquisition and balance sheet purposes, tax and R&D breaks, film and product finance, calculating quantum of damages--anything that happens where IP meets money.
Thursday 25 September 2014
Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution
As I was completing
my previous IP Finance posting on alleged royalty stacking in smartphones, last
week, it occurred to me I should also write more generally about the massive disruptions
in the mobile phone industry resulting from technological changes, new business
models and market entry by Apple with its iPhone and many others using the
Android operating system. Former market leaders have fallen and consequently exited
the market with handset division divestitures by Nokia, Ericsson and Motorola.
Challengers are succeeding on the basis of highly-standardized and readily
available hardware and software platforms. These are employed by all comers as
if they were commodities, but are rich in IP including standard-essential and
other technologies which are costly to develop. This is paid for downstream in a variety of ways including: merchant product
prices for chips; patent licensing fees for standard-essential patents and the other
patents needed to implement the radio communication protocols and various user
features consumers expect all smartphones to have; and advertising and apps spending
to Google in the case of Android. The following article on all this was first published in mobile industry trade publication FierceWireless Europe.
Nokia, BlackBerry left behind
amid untold disruption of the smartphone revolution
It is remarkable
how dramatically and rapidly the fortunes of so many mobile handset vendors
have turned with the advance of smartphones. Their marketplace was transformed
by Apple's iPhone starting in 2007 and a succession of Android-based smartphone
newcomers since 2008.
This has greatly
expanded the size of the handset market with global revenues doubling in the
last six years, as consumers substitute more expensive smartphones for their
feature phones and basic phones. Yet changes have devastated most of the
leading incumbent handset vendors.
Nokia, Ericsson and Motorola have exited by divesting their handset divisions,
and BlackBerry has struggled to survive following its precipitous market share
decline, as business models and competitive cost structures have changed.
Samsung Electronics is the only incumbent that has really flourished, while LG
Electronics has also advanced and HTC has wavered.
How the mighty have fallen
strengths became liabilities
brands, product distribution, patent ownership, vertical and horizontal
integration with chips, networks and manufacturing have been insufficient to
ensure survival, let alone success. The market leavers once had these
attributes in spades. For example, Nokia had it all with approaching 50 per
cent market share in smartphones and 40 per cent in mobile phones in general up
until 2007. It ranked highly in global consumer brand ratings, dominated
distribution in Europe and in many other nations worldwide. A cumulative $60 billion spent on R&D funded one of the very strongest
patent portfolios and it could exploit various synergies with its network
equipment division and in-house baseband modem development capabilities.
and the basis for success in smartphones and mobile phones in general have been
revolutionized. Costly supporting and complementary operations soon become
major burdens when incumbents were wrong-footed in the market and lost the cash
flows required to support all that, while also needing to do things
differently. Instead, low costs and much greater reliance on technologies from
others are the keys to success for most of the many recent market entrants.
exploiting platforms which are open, widely available and cheap to adopt. Apple
is something of an exception, having created much of its own ecosystem, but it
is also entirely dependent on others for radio technologies and manufacturing.
Samsung uniquely remains highly integrated, but also employs outside technology
including Android and Qualcomm's baseband chips in many cases.
Challengers rising high
made the smartphone revolution possible
Smartphones, or at
least the precursor to what we regard as such today, have existed for more than
decade with Nokia's Communicators from around the dawn of the new millennium
and the first cellular BlackBerry in 2002. But these were only niche devices and
network service constraints severely limited utility beyond messaging. A
combination of many technological advances has made modern smartphones the
enormous success they are today. These include much faster networks, as 4G LTE
today is 1,000 times faster than 2G GPRS introduced around 2000; fast and yet
low-powered application, graphic and digital signal processors; much improved
display technology; revolutionary improvements in operating systems and user
interfaces; better battery performance; and an extending ecosystem with apps
stores and mobile-oriented content.
entry barriers are now relatively low with standardized and openly available
technology platforms. Smartphone vendors can capitalize on extensive published
standards, market-leading merchant (i.e. off-the-shelf) chips and reference
designs provided by these suppliers, and contract manufacturing. Addressable
markets have grown to include hundreds of operators and several billions of
consumers. Average selling prices, at around $275 for smartphones versus $175
for handsets in general, generate substantial revenues while strong downward
pricing trends are maximizing smartphone penetration growth.
Much of the costly
R&D and standardization work required to create the platforms smartphone
manufacturers employ is still being borne by network equipment vendors like the
diversified former handset leaders above. These are increasingly dependent on
technology licensing to help fund ongoing R&D. Similarly, specialized
technology vendors such as Qualcomm and InterDigital have business models which
are largely dependent on licensing fees. Microsoft also generates income this
way as well, licensing its patents to Android device makers. In addition,
Google, which provides the Android smartphone platform and its Play app store,
generates income from these in various other ways including advertising
It is incorrectly alleged that stacked royalty costs prevent the other
smartphone manufacturers from making profits and cause other harms.
Evidence does not show that high royalties are paid or that royalty charges
undermine profits. Manufacturers that could negotiate the lowest royalty rates
through cross licensing, due to owning most standard-essential and other patents,
have taken the greatest competitive pounding by Apple, Samsung and various
other new entrants selling Android devices. The former lost money because they
had obsolete and uncompetitive strategies. Low profits for many newcomers are a
function of the open and "commoditized" nature of the business with
low barriers to entry, including the standardized and merchandized platforms
everybody uses. This makes product differentiation and high-margin pricing
difficult to achieve.
It is not possible
to determine true profitability on handsets because many manufacturers are
reluctant to disclose them, and businesses are mixed with the manufacture and
sale of other products and services. Some manufacturers are still benefitting
from being in both the handset and network equipment markets. For example, Huawei andZTE have reported strong profit growth recently. This is due
to the boom in LTE network investments, but smartphones are important
complements to these companies. Rising star Xiaomi, with a low-cost,
Internet-based distribution model, does not formally disclose profits but was reported last year as making a 10 per cent margin.