Wednesday 19 August 2015

Cumulative mobile-SEP royalty payments no more than around 5% of mobile handset revenues

As indicated in the recent IP Finance guest posting about the US Court of Appeals judgment in Microsoft Corp. versus Motorola Inc., by Kevin Winters, in some cases there can be a massive difference between what a licensor asks for and what a licensee ends up paying in fees and royalty rates for standard-essential patents. My latest blog posting assesses cumulative royalties paid on SEPs in mobile phones, including multiple licensors, by adding up what is actually paid and what is conservatively the maximum likely to be paid, where actual payment figures are not publicly available. This total is far lower than that calculated by simply piling-up every licensor's rate demands. Expressed as a yield on total mobile handset sales revenues, it is a much smaller percentage than this speculative and defective "royalty stack" calculation.
Cumulative mobile-SEP royalty payments no more than around 5% of mobile handset revenues
Vested interests including leaders at the mobile operator-dominated NGMN Alliance promote the notion that patent licensing fee rates are “perceived” to be too high in mobile technologies; but without substantiation for such claims. Speculation that patent fees, largely for mobile SEPs, may total 30 percent of smartphone costs are projected by Intel and others.[1]  This grossly inflated figure is based on theories of hold-up and royalty stacking that lack empirical support and it ignores marketplace realities including cross licensing and discounting rates for other reasons in patent-licensing agreement negotiations, as I have already noted here and here.  That percentage would equate to more than $110 billion being paid per year in patent fees based on total global handset revenues estimated by Morgan Stanley and IDC to be  $377 billion in 2013 and $410 billion in 2014.
Actual payments are much smaller than such perceptions and projections. The following table summarizes fairly exhaustive analysis of significant mobile-SEP licensing costs based on reported licensing revenues from the audited financial reports of major licensors and other public sources including patent pool rate-card charges.  Based on these figures, it is implausible that total royalties actually paid, including lump sums and running royalties, for standard-essential 2G, 3G, and 4G technologies, amount to more than approximately $20 billion per year. This figure represents a cumulative royalty yield for licensors of around five percent on mobile handset revenues.
Mobile SEP Licensing Fee Revenues and Royalty Yields on Global Handset Market


Major SEP owners with licensing programs: Alcatel-Lucent, Ericsson, Nokia, InterDigital, Qualcomm
$10.6 billion
Patent Pools: SIPRO (WCDMA), Via Licensing (LTE), Sisvel (LTE)
<$4 billion
Others: including Apple, Huawei, RIM, Samsung, LG
<$6 billion
Cumulative maximum:  fees and yield for mobile SEPs
~$20 billion

* Yields are total licensing fee revenues including lump sums and running royalties as a percentage of $410 billion in total global handset revenues
The majority of mobile-SEP licensing fees are earned by five companies with licensing programs who have collectively contributed most patented technologies to 2G, 3G and 4G standards.  Alcatel-Lucent, Ericsson, InterDigital, Nokia and Qualcomm altogether generate $10.6 billion per year in licensing fees for these and other technologies. Also collectively, this represents a yield of significantly less than three percent of total global revenues for mobile handsets including smartphones.
Cumulative mobile-SEP fees paid also include less than around one percent of total handset revenues to the three mobile-SEP patent pools plus, at most, one percent or so more to other companies licensing mobile SEPs bilaterally. Patent pools lay out their prices and so these indicate the maximum they might be able to collect with willing and responsive licensees and a lot of licensing effort on the part of the pool administrators. The remaining significant mobile-SEP owners are predominantly handset manufacturers who mainly cross-license to reduce royalty out-payments rather than generate royalty income, and so their royalty fee revenues are relatively small. With each percent of royalty yield on total handset revenues now representing more than $4 billion per year in patent fees, there is insufficient evidence and no justification to conclude that opportunists not included in any of the above categories, including so-called patent trolls, patent-assertion entities and other non-practising entities, yield more than a fraction of a percent of total handset costs.
As a percentage of all consumer charges, including handset costs and $1.13 trillion in mobile operator services (GSMA Wireless Intelligence figures), which are also highly dependent on SEP technologies, the cumulative royalty yield shrinks to 1.3 percent.  Deriving this lower percentage yield figure from the broader revenue base is also applicable because it is the innovative and relatively new SEP-based technologies including 3G HSDPA/HSPA and 4G LTE which enable and drive mobile broadband data service growth. Operator revenues in mobile data services (other than basic SMS text messaging) grew from single-digit percentages of total service revenues until the introduction of HSDPA a decade ago, to around 40 percent across the entire Vodafone Group with many different national operators, for example, in 2015, according to the company's annual reports.
My more detailed and much lengthier analysis is in a pdf here.
[1]  A working paper entitled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones was published by one in-house lawyer at Intel and two outside counsel from WilmerHale. Intel Vice President and Associate General Counsel Ann Armstrong and Wilmer Hale's Joseph Mueller and Timothy Syrett argue that aggregate patent licensing fees including SEPs and non-SEPs are excessive at around $120 per $400 smartphone.


Anonymous said...

$20 billion is still an insane amount. The self-selecting, self-perpetuating standards cabal will eventually be broken up... but not after fleecing consumers worldwide of outrageous amounts.

Anonymous said...

give me a break... the implementers cartel has stood on the shoulders of giants for decades and prefer to let sleeping dogs lie rather than justly pay the 5% cost for royalties rightfully due to the innovators who contribute to standards bodies. This article puts the discussion into a realistic perspective rather than constantly hearing a "chicken little" narrative.

Anonymous said...

"Shoulders of giants"? You must be joking.

Each giant assigns a team of, say, 30 engineers and 3 IP lawyers to attend standards meetings around the world. The engineers are given two standing orders: never vote for a standards proposal that is not replete with patentability disclosures, and be sure that their employer gets its fair share of patentable items into the standard.

Presto, an annuity with a nine-figure NPV is created despite low FRAND royalty rates. The ROI on the standards activity is astronomical. Of course, it is possible to write these standards just as effectively with very little patent-worthy content, but nobody does that because no royalties would be generated.

And if you don't think this is how the standards meetings work, you haven't been to them.

These companies are "giants" only in the sense that they are expert at playing the game they invented in the early 1990s.

Keith Mallinson said...

The people who participate in standards meetings are the tip of the iceberg in technology development. For example, InterDigital had 320 employees at the end of 2014, most of whom are engineers, and invested $75 million in R&D that year. InterDigital focuses on technology development for licensing rather than manufacture and sale of products itself.

Keith Mallinson said...

A reader has helpfully pointed out press reporting on the "biggest settlement" for IPCom in an agreement with Deutsche Telekom: If I'd been aware I would probably have mentioned it in my article. However, if I had I would also have noted the following. Even a few hundred million dollars from Deutsche Telekom for several/many years of infringement while unlicensed is not very significant on an annualized basis (even if multiplied a few times over in settlements with other big infringers) in comparison to my mobile-SEP total licensing fee estimates of $20 billion per year in total including my <$6 billion "Others" category including defensive cross-licensors who manufacture + NPEs, PAEs etc. Settlements with NPEs are mostly go-away-and-don't-come-back, one-off lump sums. Spread over many years the percentage on sales is really very small, but when accumulated over the term of the patent even a very modest royalty can result in the kind of payday that encourages settlement. As a practical matter, it is hard for any NPE to walk away from such sums of hard cash. And, incidentally, I did note in my article that IPCom is outstanding, if not unique as a PAE in mobile SEPs.

Anonymous said...

Definitely, the major holders of SEPs spend large amounts of money on R&D -- but that's not relevant to the point I'm making. We used to have a phrase in the telecoms industry: "little r big D". In other words, they spend very little on research but huge sums on development. Nearly all of that development takes place after the standards have been settled. These systems are complex; the development expense would be just as costly if the standards had zero patent-worthy content. So you can't trot out a gross R&D figure to justify the enormous royalties that these SEPs are generating. The players would be spending the R&D regardless.

Carma Gramyk said...

$20 B is a pretty significant amount that will end up costing consumers in the long run.

I discovered your this post while hunting down some related data on online journal search...Its a decent post..keep posting and upgrade the data.

Native News Live said...

Hello! Admin, Of course, it is possible to write these standards just as effectively with very little patent-worthy content, but nobody does that because no royalties would be generated. Native News Live"