This is the first in a pair of articles on standard-essential
patent (SEP) royalties. It updates my previous publications on this topic over
the last decade to show how royalty payments have trended including how rates
compare against licensors’ touted maximums. The second article shows how these royalties would be massively reallocated to Chinese companies with the top-down approach in rate-fixing regulation proposed by the European Commission.
Aggregate royalties paid to major SEP licensors Ericsson, InterDigital,
Nokia and Qualcomm have declined by 28% in nominal terms since peaking in 2015
to 2023, as indicated in Exhibit
1. The aggregate “royalty
yield” (i.e. total royalties paid divided by handset sales revenues) for these
licensors has dropped even more steeply by 38% since 2015.
The value of
total royalty payments has eroded an additional 22% in real terms after
inflation over those last eight years.
Percentage royalty
yields have been diminished by royalty base caps and the switch to monetary
amount per unit royalty rates in some cases. While ad valorem percentage rates
charged hedge for inflationary increases in phone prices, caps and fixed
amounts per unit are not indexed.
The recent plunge in total royalties from 2022 to 2023 is largely
due to falling smartphones sales. However, increasing quarterly smartphone
sales figures in 2024 suggest there will also be a bounce in royalties this
year.
Exhibit
1: Cellular SEP royalties including percentage yields have generally decreased
Royalty yield is based on all indicated
royalty revenues, but on only handset sales revenues.
Apple agreed in April 2019 to make a
$4.7 billion one-off payment to settle its dispute with Qualcomm, following
non-payment of royalties for two years. Under a long-term agreement with
Huawei in July 2020, Qualcomm received $1.8 billion covering previously unpaid
licence fees.
Figures
have changed slightly from versions of this chart published in
previous years as I have now switched to using smartphone revenue figures
from Statista. The revealed trends and my conclusions are unaffected.
Cellular SEP licensors obtain significantly lower royalties than
the maximum percentage rates and monetary rates per unit publicly headlined on their
web sites. That’s only to be expected because licensees insist that royalties
are capped on higher-priced smartphones. Some inevitable major discounts are explicit
in program rate cards. Other reductions arise from various different relationships
between licensing parties — such as cross-licensing to access each other’s
technologies in some cases. Average royalties received are also diminished where
licensing is delayed or never agreed.
Qualcomm remains the clear leader in SEP licensing. I also show in
this article that the royalty rates it obtains are much closer to its rate card
figures than other licensors achieve versus their rate card figures.
Fit for purpose in rebuttal
When I published my
seminal article on mobile handset aggregate royalties in 2015, my objective
was to disprove — with an approximate yet conservatively high estimate — the absurd assertion
from Intel and others that aggregate royalties paid to license a $400 smartphone
could be as high as $120 (i.e. 30%). I coined the term royalty yield (i.e.
royalties paid divided by product prices or revenues) to depict effective rates
paid as distinct from licensors’ notional maximum rates before caps, other
discounts and cross-licensing reductions. I concluded that the aggregate yield
was no more than around 5% of cellular handset prices or revenues. Others
validated my methodology and came up with similar (i.e. in my ball park versus
Intel’s), but even lower figures.
My cellular handset-focused methodology was for fit for purpose because
it conservatively somewhat overestimated rates paid. There are various
approximations in this kind of royalty yield analysis:
·
it includes licensing fees for
non-phone devices (numerator) but excludes device sales revenues for these
(denominator).
·
it includes licensing fees for base
station network equipment (numerator) but excludes the sales revenues for this
equipment (denominator).
·
It includes some non-cellular SEP
royalties such as for video codecs (numerator).
·
It includes some non-SEP royalties
(numerator) — for implementation technology patents and even brand licensing
royalties, such as to Nokia from handset manufacturer HMD.
SEP royalties generated from devices other than cellular handsets still account for less than 10% of total royalties. These are mostly from relatively small numbers of connected tablets, laptop PCs and cars in comparison to
Statista’s figure of 1.3 billion smartphones in 2023. Avanci is a success story with its patent pooling platform for cars leading by far in Internet of Things (IoT) licensing revenue growth over the last few years. Car licensing generates royalties at an annual running rate of around half a billion dollars on
automotive sales of 75 million units, with around 60% of those connected — few with 5G just yet — and approximately 80% licensed at an assumed royalty rate of $15.
Tracking overall royalty
trends
While
I have been able to chart the individually fluctuating and overall declining royalties
generated by those named major licensors since 2013, it has not been possible
to accurately track the trends for royalties garnered by most other licensors
since then. However, I was able to
estimate — very approximately with conservatively large figures for the purpose
of my rebuttal — the remaining share of royalties paid to other licensors back
then. For example, I allocated up to $4 billion for 4G patent pool
royalties at their rate card rates (by that I meant somewhere between
zero and $4 billion). I expected those embryonic licensing programs to fail,
but I wanted to conservatively give them the benefit of any doubts.
Those
named large licensors have continued to account for the majority of royalties
generated. The aggregate of their individual royalty yields each year has
remained as broadly representative of the entire licensing marketplace as it was
back then. Individual licensors’ royalties are more affected by their specifics:
for example, InterDigital significantly licenses video codec SEPs.
Grossing
up
In addition to the $8.6 billion royalties currently reported in annual audited financial statements by the five major licensors I have named, I estimate total cash royalties paid now are around half as much again at $12.9 billion (i.e. $4.3 billion more). I also include an additional non-cash value of $3.1 billion in cross-licensing. That all totals $16 billion in licensing value. For reasons I explain in my 2015 article and in
another article in 2024, I never include cross-licensing value in my royalty yield figures which are cash based. However, I introduce a value figure for this here because it should and would likely be included in any royalty prospective reallocations using the top-down approach — that I did not anticipate in 2015 — but as I will focus on in my next article.
My grossing up is less than that proposed in the European Commission’s Impact Assessment. According to the European Commission, “The largest share of royalty payments for SEP licenses comes from the mobile telecommunications industry, which generates an estimated patent royalty yield of EUR 14 – 18 billion per year with additional EUR 4 billion of non-monetary benefits from cross-licensing (
Impact Assessment Report, p.9). However, the sources cited for these figures (who had extensively cited my seminal article) are based on licensing around 2015 when the Euro was rather stronger against the dollar than it is now and before total royalties for the four largest licensees reduced 28% to 2023. My current figures here are consistent, approximately, with those old figures after prorating them for these declines.
Percentages and monetary
amounts per unit, maximum, headline and program rates
We can view royalty rates including yields as percentages or as
monetary amounts, but the lens chosen can make a huge difference to how costly
charges are perceived to be.
When
2G, 3G and 4G licensing rates were first offered or publicly disclosed, they were
almost invariably stated as ad valorem percentages of handset selling prices. This
was even though some licensing deals were for lump sum payments rather than running
royalties and some licenses ended up including caps and floors to the monetary
amounts paid. Percentage royalty yields, therefore, could be much lower than
the headline percentage rates.
However,
in more recent years and since the disclosure of royalties sought by licensors
for 5G, in some cases royalty rates are stated to be monetary amounts per unit.
Nokia’s rate is Euro 3.00 per handset, and Ericsson’s handset rate is $5.00, or
as low as $2.50 in “exceptional circumstances.” With smartphones increasingly including
functionality, manufacturing cost and value that is purportedly not dependent
on cellular SEPs, it is commonly argued that this is a more appropriate than ad
valorem percentage royalty rates. While OEMs such as Apple
with relatively high iPhone selling prices averaging at around $1,000 are
likely to agree, OEMs such as Transsion
targeting developing nations with many of its smartphones selling for less than
$100 tend to oppose paying the same amount per phone as OEMs selling smartphones
at much higher prices. InterDigital and Qualcomm still headline rates as
percentages, but they both apply royalty base caps that effectively convert
those percentages into monetary amounts per unit for higher-priced devices such
as premium smartphones.
There is significant ambiguity and scope for confusion as commentators
switch from depicting royalties as percentage rates to monetary amounts per
unit, and back again. The example of InterDigital’s rate card,
as published on its web site, illustrates this. This indicates a 4G handset
royalty rate of 0.5%. However, with an royalty base cap of $200 the royalty
cannot exceed $1.00 per unit. If the handset selling price is $1,000 then the
percentage royalty paid (i.e. the yield) will only be $1.00/$1,000 = 0.1%. That
qualifier is very transparent; it can make a huge difference to how its rates
are perceived. While 0.5% is the maximum, headline rate, that 0.1% rate is also
clearly without any deception, disguise or confidentially customized discounting.
However, royalty rate terminology is poorly defined and
unstandardised. For example, are “program rates” the same thing as maximum
rates, or can that 0.1% yield figure I calculated also legitimately be called a
program rate?
Exhibit 2 shows how the yearly average royalty yields of the each major
SEP licensors have fluctuated. Nokia’s yields sharply increased for a few years
after it sold its handset business to Microsoft, concurrently captured a 10-year
licensing agreement with the firm and with relief from needing to cross-license
any handset sales with other licensors. A decline in InterDigital’s yields has been
reversed as new leadership there has signed up additional licensees in the last
couple of years.
Exhibit 2: SEP
royalty percentage rate yield trends for major licensors in the 4G licensing
era
|
|
2013
|
2014
|
2015
|
2016
|
2017
|
2018
|
2019
|
2020
|
2021
|
2022
|
2023
|
Average
|
|
Ericsson
|
0.57%
|
0.44%
|
0.47%
|
0.32%
|
0.25%
|
0.22%
|
0.25%
|
0.29%
|
0.21%
|
0.25%
|
0.25%
|
0.31%
|
|
InterDigital
|
0.09%
|
0.12%
|
0.12%
|
0.18%
|
0.14%
|
0.07%
|
0.08%
|
0.09%
|
0.09%
|
0.11%
|
0.13%
|
0.11%
|
|
Nokia
|
0.28%
|
0.28%
|
0.33%
|
0.32%
|
0.48%
|
0.43%
|
0.41%
|
0.42%
|
0.40%
|
0.40%
|
0.29%
|
0.37%
|
|
Qualcomm
|
2.77%
|
2.42%
|
2.21%
|
2.09%
|
2.00%
|
1.94%
|
1.76%
|
1.47%
|
1.41%
|
1.52%
|
1.29%
|
1.85%
|
|
Total
|
3.72%
|
3.26%
|
3.14%
|
2.90%
|
2.86%
|
2.67%
|
2.50%
|
2.27%
|
2.11%
|
2.27%
|
1.96%
|
2.64%
|
Includes all licensing income including royalties
for all standards divided by total handset sales revenues.Many factors affect the difference between the maximum royalty
rates and royalty yields (stated either as percentages or as monetary amounts
per unit). These include: royalty base caps, cross-licensing, volume discounts
(e.g. in up-front lump sum royalty agreements), and unlicensed handset sales. I’ve
also explained these mechanisms in detail in my other publications. As
indicated above, this article focuses on yield levels, trends for these since
2013 and the ratios of these versus licensors’ publicly disclosed maximum rates.
Qualcomm continues to obtain royalties that are much closer to stated
maximum rates than for other licensors. Exhibit 3 shows how percentage yields compare
to major licensors’ touted maximum rates over that 11-year period in which 4G
licensing has predominated. Other firms that disclosed 4G licensing terms by
2010 were acquired, sold off by their parents or did not pursue licensing
programs.
Exhibit 3: SEP percentage
royalty rate yields for major licensors in comparison to their maximum rates in
the 4G licensing era
Where licensors are also heavily exposed as implementers, yields
are significantly depressed due to cross-licensing with charges being
significantly netted-off. Ericsson
and Nokia substantially reduced their need for cross-licensing by exiting the
handset business in 2012 and 2014, respectively. SEP owners Huawei and
Samsung remain OEMs significantly exposed as licensees.
Exhibit 4 shows how monetary amount per unit yields compare to
maximum rates disclosed over the last few years in which 5G has been introduced.
According to Statista figures, 5G
smartphone sales increased to 49% of all
units sold in 2023.
Exhibit 4: SEP dollar
per unit royalty yields for major licensors in comparison to their maximum rates
since 5G was introduced
|
|
Royalty yield*
|
Rate per unit
|
Ratio
|
Rate disclosed for and by when
|
|
|
Ericsson^
|
$0.75
|
$5.00
|
6.7
|
Multimode
5G NR Rel 15, 2017
|
|
|
InterDigital~
|
$0.32
|
$1.20
|
3.7
|
5G, 2020
|
|
|
Nokia+
|
$1.13
|
$3.21
|
2.9
|
5G
SEP portfolio, 2018
|
|
|
Qualcomm~
|
$4.27
|
$13.00
|
3.0
|
Multimode
5G, 2017
|
|
|
Huawei
|
$0.40
|
$2.50
|
6.2
|
5G,
2022
|
|
|
Total
|
$6.87
|
|
|
|
|
* Includes all royalties for all standards divided by total handset sales revenues 2020 to 2023. Huawei for 2022 only.
^ Ericsson indicates its $5.00 rate might be reduced to as low as $2.50 in “exceptional circumstances.”
~ My dollar equivalent assumes a $200 selling price with that royalty base cap for InterDigital and a $400 selling price or cap for Qualcomm.
+ Assuming an exchange rate of Euro 1.00 = $1.07. |
|
Upside potential
Royalty yields will always remain much lower than the maximum
royalty rates SEP licensors seek to charge before explicit caps and various other
discounts, with implementers such as Huawei cross-licensing their handsets for
use of others’ SEPs, and as some implementers hold out from paying royalties. However, the different ratios of these two figures
among licensors can provide an indicator for discussions about potential royalty
yield growth or preservation and of how effective licensors are in pursuing that.
Keith Mallinson, founder of WiseHarbor, has more than 25 years of
experience in the telecommunications industry as a research analyst, consultant
and testifying expert witness.
