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Hoover Institution Working Group on Intellectual Property, Innovation, and Prosperity
Stanford University
www.hooverip2.org
WORKING PAPER SERIES NO. 16011
“A NEW DATASET ON MOBILE PHONE PATENT LICENSE ROYALTIES”
ALEXANDER GALETOVIC
UNIVERSIDAD DE LOS ANDES
STEPHEN H. HABER DEPARTMENT OF POLITICAL SCIENCE AND HOOVER INSTITUTION, STANFORD UNIVERSITY
LEW ZARETZKI HAMILTON IPV
� SEPTEMBER 25, 2016
1
ANewDatasetonMobilePhonePatentLicenseRoyalties1September2016Update
AlexanderGaletovic,StephenHaber,andLewZaretzki2
Thisversion:September25,2016
1.Introduction
Mobilephonesintegrateawidearrayoftechnologies,fromcomputingtoconsumer
electronicstocommunications,andfromsemiconductorstohardware,softwareand
services.Thismakesthemarelevanttargetforalargeandbroadarrayofpatentsand
licensors.Inaddition,mobilephonesrelyontechnologicalstandardstomakethem
interoperable.Astandard-compliantsmartphoneuseshundreds,ifnotthousandsof
standardessentialpatents(SEPs),whichareownedbymanydifferentpatentholders.3
1WethankJonathanBarnett,AnneLayne-Farrar,KeithMallinson,JorgePadillaandotherswhowishedtoremainanonymousbutprovidedimportantperspectiveandhelpfulcomments.JordanHorrilloprovidedexcellentresearchassistance.2AlexanderGaletovicisProfessorofEconomics,UniversidaddelosAndes,Santiago,Chile.Hiscurrentresearchfocusesonstandardessentialpatents,competitionpolicyandantitrust.GaletovichasbeenaResearchScholarattheInternationalMonetaryFund,aTinkerVisitingProfessoratStanfordandaRita-RicardoNationalFellowattheHooverInstitution.StephenHaberisA.A.andJeanneWelchMilliganProfessorintheSchoolofHumanitiesandSciences,ProfessorofPoliticalScience,ProfessorofHistory,Professor(bycourtesy)ofEconomics,SeniorFellowoftheStanfordInstituteforEconomicPolicyResearch,andPeterandHelenBingSeniorFellowattheHooverInstitution,atStanfordUniversity.HaberdirectstheHooverInstitutionWorkingGrouponIntellectualProperty,Innovation,andProsperity(HooverIP2).HooverIP2succeededtheHooverProjectonCommercializingInnovation(PCI).Toensureacademicfreedomandindependence,bothPCIandIP2,alongwithallworkassociatedwiththem,haveonlybeensupportedbyunrestrictedgifts.SomemajordonorshaveincludedMicrosoft,Pfizer,andQualcomm.LewZaretzkiisManagingDirector,HamiltonIPVaSiliconValleyIPstrategyconsultingfirmservingmanyoftheworld’sfinesttechnologycompaniesandleadingtechnologyinvestorsinmattersofcorporatestrategy,IPstrategy,M&A,andIPtransactions.3Itisestimatedthatthereareabout150.000declaredmobileSEPsworldwide(issuedandappliedfor)intheso-called“4Gstack,”whichincludesLTE,WCDMAandGSM/GPRS/EDGE.Ofthese,about20,000areUSpatents.GaletovicandGuptareportthatin2013therewere128SEPholders.“RoyaltyStackingandStandardEssentialPatents:TheoryandEvidencefromtheMobileWirelessIndustry,“HooverIP2WorkingPaper15012,2016..
2
WhilesomehaveclaimedthatdispersedownershipofSEPsleadstohighcumulative
royaltyrates,theestimatesthatunderpintheseclaimsarebasedonthesimpleadditionof
publishedhandsetroyaltyrates.4Thereareavarietyofreasonstobedubiousofthis
method,nottheleastofwhichisthatitconflates“rackrates”whichmightnotbepaidby
anybody,withactualmarkettransactionrates.Indeed,justasfirmshaveincentivesto
declareallpossiblepatentsasessential,theyalsohaveincentivestoposthighroyalty
ratestolicensetheirportfolio,eveniftheyneveractuallyearnanylicensingrevenuefrom
thatportfolio.5
ThisnotedescribesanewdatasettoestimatetheAverageCumulativePatent
RoyaltyYieldpaidinthemobilephonevaluechain—thesumtotalofpatentroyalty
paymentsearnedbylicensors,dividedbythetotalvalueofmobilephonesshipped.We
builduponearlierworkbyMallinsonthatfocusedonmobileSEPs6butgobeyondthat
Oneshouldnotethatitmayhavebeenintheinterestsofpatentholderstodeclareallpossiblepatentsas“essential.”Onereasonisthatpatenteesriskedlegalpenaltiesfornotdeclaringapatentessential.Also,somefirmsmayhaveactedontheperceptionthatalargeSEPportfoliobolsteredtheirreputationandincreasedtheirleveragewhennegotiatingroyalties.Moreover,theETSIIPRdatabase,justlistsdeclaredessentialpatents,butneitherETSInoranybodyelseauditsthosedeclarations.Forthesereasons,itisnotclearhowmanyofthesepatentsaretrulyessential.Industryparticipantsoftenestimatetherateofover-declarationat50%ormore.OthersthinkthatfewSEPswouldpassalegaltestofessentiality.4See,forexample,EricStasik,“RoyaltyRatesandLicensingStrategiesforEssentialPatentsonLTE(4G)TelecommunicationsStandards,”LesNouvelles,September2010,pp.114-119.5AtonepointintimeitbecamecommonforthemajorequipmentvendorstopublishadeclaredLTEroyaltyrate,usuallywithcaveatsthatitcouldbeadjustedinlightofgrantbacksorforotherreasons.Forexample,Norteldeclareda1%rate,butitappearstohaveneveractuallyreceivedanyLTElicensingrevenue.6SeeKeithMallinson,“CumulativeMobile-SEPRoyaltyPaymentsNoMorethanAround5percentofMobileHandsetRevenues,”IPFinance,August19,2015.J.GregorySidakbuildsuponMallinsonaswell,buttakesasomewhatdifferenttheoreticalapproach,includingpaymentsinkindandestimatesofthevalueofcross-licenses.Thus,itisastudyofpotentialIPvalue,ratherthanthecumulativeroyaltyyield.SeeJ.GregorySidak,“WhatAggregateRoyaltyDoManufacturersofMobilePhonesPaytoLicenseStandard-EssentialPatents?”CriterionJournalonInnovation1(701). FollowingMallinson,weusethetermroyalty“yield”ratherthanroyalty“rate.”“Rate”
3
workby:(i)analyzingpatentroyaltiesintheentiremobilephonevaluechain(i.,e,
royaltiesonmobileSEPs,butalsoaudioandvideocodecs,imaging,operatingsystems,
semiconductors,andothercomponents);(ii)comparingourresultsonpatentroyaltiesto
othercostsofmobilephonemanufactureandtoOEMprofits;(iii)generatingtimeseries
thatpermitresearcherstoanalyzethestabilityoftheAverageCumulativePatentRoyalty
Yieldbackto2007.Forsomefirms,ourcoveragegoesbackto2000.
Ourpurposeistoprovideascomprehensiveandtransparentadatasourceasis
practicallypossibleforusebyotherresearchers,industrypractitioners,andgovernment
officials.Thus,thisnoteshouldbereadasanadjuncttotheExcelWorkbookthatwehave
postedtothewebat:http://hooverip2.org/wp-content/uploads/New-Dataset-on-
Mobile-Phone-Patent-License-Royalties.xlsxThatworkbookshowstheunderlyingdata
andsources.Italsoexplainsthedecisionswemadeinestimatingorapproximatingvalues.
Wedonottakeapositiononwhethertheestimatesoftheroyaltyyieldwe
presentinthisstudyare“toohigh,”“toolow,”or“justright.”Thatisanimportant
debate,butitcanonlybejoinedonthebasisofevidence.
2.Methods—“FollowtheMoney”
Allmethodsofanalysisaredependentuponanunderlyingtheory,andunderlyingtheories
arecreatedinordertoanswerparticularquestionsofinterest.Calculatingthecumulative
royaltiespaid(orearned)inthemobilephonevaluechainisnotanexceptiontothis
referstotheactualroyaltypaidbyalicensee,typicallyanOEMorEMs,toalicensorasapercentageofthelicensee’ssales.Yieldisthesumtotalofpatentroyaltypaymentsdividedbythetotalvalueofmobilephonesshipped,thelatterofwhichmightincludetheproductionofOEMsthatevadepatentlicenses.Someresearchersrefertoroyaltyyieldasthe"royaltystack,"atermweeschewbecauseitistheory-ladenandanoxymoron.
4
generalrule.Thebasicquestionresearchersareaskingishowdoroyaltiespaidbyfirmsin
themobilephonevaluechainaffectproductionanddecisionsatthemargin?Thatis,if
royaltyrateswereXpercenthigher,byhowmuchwouldoutputfallandpricesincrease?If
theywereX’lower,byhowmuchwouldoutputriseandpricesfall?Microeconomic
theoryprovidesaguidetotherelevantfactsnecessarytoanswerthisquestion;ittellsus
thatweneedtoapproximatepaidper-unitroyalties.7
Inanidealworldforresearchers,mobilephoneOriginalEquipmentManufacturers
(OEMs),ElectronicsManufacturerServices(EMSs),OriginalDesignManufacturers(ODMs)
andcomponentmanufacturersinthemobilephonevaluechainwouldreportthe
identitiesoftheIPholdersfromwhomtheylicenseandthevalueofthepaymentstoeach
ofthoselicensors.Itwouldthenbepossibletodeterminethe“IPBillofMaterials(BoM)”
paidbyeachfirmintheinthemobilephonevaluechain.Fromthere,onecouldcalculate
aweightedaverageBoMforeveryfirminthevaluechain,withtheweightsdeterminedby
theirrelativecontributiontototalmobilephonesales.
Itisalmostneverthecasethatresearcherscanworkwiththeidealdata,andthe
dataonmobilephonepatentlicensesarenotanexceptiontothisrule.Thefundamental
problemisthatlicenseeshaveveryweakincentivestodisclosetheirpatentlicenseroyalty
payments.
7Onemightclaimthatthisapproachtodataignoresothereconomiccostsbornebymanufacturers.Forexample,wedonotincludetheopportunitycostbornebyamanufacturerthatbuyspatentstopreventclaimsofinfringement,ortheopportunitycostbornebymanufacturerswhocrosslicensetheirpatents(inacrosslicensingagreementfirmsmayforegosomeoranyroyaltypaymentinexchangeforaccesstoanotherfirm’sportfolio),orthemembershipsubscriptionspaidtodefensiveaggregatorsofpatents.Suchexpenditureswillincreaseafirm’sfixedcosts.Theywillnot,however,affectmarginalcostsofproduction,andthusnotinfluenceproductionandpricingdecisionsatthemargin.
5
Asamatterofaccounting,however,paymentsbylicenseesmustshowupas
revenuesforlicensors,andlicensorshavestrongincentivestodisclosetheirpatent
licensingrevenues.Forpublicly-tradedfirmswithlicensingrevenuesthatareanon-trivial
componentoftheirtotalrevenues,thoseincentivesarelegalandregulatory;thesources
ofrevenuemustbedisclosedtoinvestors.Evenlicensorswithoutlegalandregulatory
incentivestodisclosetheirrevenues,however,suchaspatentpoolsadministeredbyfirms
thatspecializeinpooladministration,havemarket-basedincentivestodisclosethe
identitiesoftheirlicenseesandtheirtieredroyaltychargesperunit,therebyallowingthe
royaltyrevenuesofthepooltobeapproximated.
Itisthereforepossibletoestimatethetotalcostofpatentlicensesinthemobile
phonevaluechainbyidentifyingthemajorlicensorsandretrievingtheinformation
necessarytoestimatetheirlicensingrevenues.Onecanthendividethesumofthese
revenuesacrossalllicensorsbythetotalvalueofmobilephonessoldtoobtainanaverage
cumulativeroyaltyyield.Therearethreenumbersthatoneneedstoknowinorderto
estimatetheAverageCumulativeRoyaltyYield:(i)themobilephonepatentlicensing
revenueearnedbyeachlicensor;(ii)thetotalnumberofmobilephonessold;(iii)the
averageselling(wholesale)priceofamobilephone(ASP).
2A.EstimatingtheSizeoftheMarket
ThenumberofphonessoldandtheASPareeasytocomeby:anumberofdata
analyticsfirmsestimatethese,andissuepressreleasesthattheythenposttotheweb.
FirmssuchasICInsights,IDC,Gartner,andGFKproducetheseestimates.Theestimates
tendtobewithinafewpercentagepointsofoneanothersuchthatresultswouldnotbe
6
sensitivetowhichsourceisused.8Thesesamefirmsalsoproduceestimatesofthe
quantityandvalueoftablets.Wedonotincludetheseinthesecalculations.Ifwewould
includetablets,itwouldincreasethevalueofdevicesales,andthusdrivedownthe
AverageCumulativeRoyaltyYield.
ThesesameentitiesalsoestimatedevicesalesandpricesbymajorOEMs,and
providethisdatainpressreleases,whichtheyposttotheweb.Theseestimatesalsotend
tobewithinafewpercentagepointsofoneanother.9Weusethisdatainorderto
estimatetherevenuesearnedbypatentpools,whichtendtohavetieredroyalty
schedules.
2B.EstimatingPatentLicensingRevenue
Estimatingpatentlicensingrevenueisstraightforwardinprinciple,thoughitcanbe
complicatedinpractice.Firmsthatearnsignificantrevenuesfrompatentlicensingreport
thosefiguresinfinancialreports(e.g.SECforms10kand20-fforexample).Privatefirms
arenotobligatedtodisclosesuchinformationabouttheiroperations.Inthesecaseswe
estimaterevenuesbasedoninformationthatfirmsmakepublicallyavailable.Forexample,
successfulpatentpoolstypicallydisclosetheidentitiesoftheirlicensorsandlicensees,the
patentscoveredbythepool,andthefeescheduleforlicensees.Developinganestimate
giventhisinformationispractical,althoughitoftentendstooverestimateroyalties.
However,thatisconsistentwithourchosenbiasandsoweexpectit.10
8Forthedata,seeTab1.8,DeviceSales,intheExcelworkbookthataccompaniesthisdocument.9Forthedata,seeTab1.9,OEMSales,intheExcelworkbookthataccompaniesthisdocument.10Forthedata,seeTab1.7,RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument.
7
Therearesomepublicfirmsthatearnpatentlicensingrevenueinthemobile
phonevaluechainbutinamountsthataremodestrelativetotheirotherrevenuesources.
Theythereforedonotbreakoutthisrevenueasareportablesegmentintheirpublic
filings.Therearealsoprivatefirms,andthesearenotobligatedtodisclosetheirrevenue
sources.Whenitispracticable,weestimatetherevenuesofbothtypesoffirmsonthe
basisofinformationontheirwebsites,reportsinthetradeandfinancialpress,and
interviewswithindustrypractitioners.11Whenitisnotpracticable,weenumeratethose
firms.12Wethendoasensitivityanalysisinwhichweassignaseriesofplausibletotal
revenuesforthesefirmsasagroup(basedoninformationfromthetradepressaswellas
interviewswithindustrypractitioners)inordertoseethedegreetowhichtheirinclusion
affectsourresults.13Thatsensitivityanalysisfindsthatevenanupperboundestimateof
thecombinedmobilephonepatentlicensingrevenuesofthesefirmswouldnothavea
significanteffect:evenifthemobilephonepatentlicensingrevenuesforthesefirmsasa
groupwere$2billion,theaveragecumulativeroyaltyyieldwouldonlyincreasebetween
0.4and0.6percentagepoints.
Thecoreofourmethod,then,isto“followthemoney.”Infollowingthemoney,
wemakenodistinctionsastowherealicensorisearningrevenuesinthemobilephone
valuechain,nordowemakedistinctionsamongthedifferentpatentedtechnologiesina
mobilephone.Wecapture,forexample,revenuesearnedfromlicensestakenby
11Forthedata,seeTab1.7,RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument12Forthelistoffirms,seeTab6.0,OtherFirms,intheExcelworkbookthataccompaniesthisdocument.13See,Tab1.6Sensitivity,intheExcelworkbookthataccompaniesthisdocument.
8
semiconductorandbasebandchipproducers,aswellastheOEMsandEMSsthat
assemblephones.Wealsocapturerevenuesearnedfromlicensesonpatentsthatenable
video,imaging,audio,andotherfunctions,aswellastheSEPsthatenablemobility.We
capture,aswell,therevenuesofamajorsoftwarecompanythatearnsrevenuefromits
patentsthatreadonthemostpopularmobilephoneoperatingsystem.
2C.BasicPrinciplesofDataCollection
Infollowingthemoneyweareguidedbyfourprinciples.First,tothedegree
possible,theestimatesshouldbeproducedusingpublicly-availablesourcessothatour
resultscanbereplicatedandimproveduponbyotherresearchers.Indeed,weinviteusers
ofthedataintheExcelworkbookthataccompaniesthisdocumenttoshareinformation
withussothatwecanimproveourestimates.Second,weendeavortohaveaslonga
timeseriesforeachlicensorasispracticallypossible.Third,decisionsabouthowtotreat
datashouldbiasinfavorofobtainingalargerroyaltyyield.Thisimpliesthatweerronthe
sideof:(i)includinglicensorsthatlicensetoavarietyofindustries,notjustmobile
phones,whichmeansthatwemaybecountingtheirrevenuesfromthoseotherproducts
aspatentroyaltiesonmobilephones;(ii)attributingroyaltiestomobilephonesthatmay
havebeenpaidonothermobileproducts,suchastablets;(iii)doublecounting,which
meansthatwemaybeincludingboththeroyaltyrevenuesdeclaredbyalicensorandthe
royaltyrevenuesearnedbyapoolwherethelicensorisamember;(iv)biasing
approximationsupwards.14
14Forexample,inthecaseofHuawei,whichisarelativelynewlicensorwhoselegalstatusasaprivatelyownedcollectivemeansthatitisnotsubjecttothesamekindofreportingrequirementsasU.S.orEuropeanfirms,weliberallyassumethatitsmobilephoneroyaltyrevenuesarethe
9
3.DataQuality
Thequalityofdatavariesacrossfirms.Weclassifylicensorsaccordingthe
accuracyofourestimatesoftheirlicensingdatainfourcategories:Confirmed,
Documented,Approximated,andResearched.Table1showsthelicensorsclassifiedin
eachcategory.15
Asasageneralrule,thelargestlicensorsarealsotheentitieswhichdisaggregate
licensingrevenuesfromotherrevenues,andforwhichwehaveaprimarysource
documentthatwasgeneratedasalegalrequirement.Qualcomm,Interdigital,Nokia,and
Ericsson,areexamplesofthesekindsoflicensors.Giventhehighqualityand
accountabilityoftheirdirectknowledgeoftheiroperationsandtheirreportingunderSEC
auspices,weconsiderthesefigures"Confirmed.”In2015,thiscategoryaccountedfor80.6
percentoftotalrevenues.
Otherlicensorsprovidesufficientinformationinpubliclyavailabledocumentssoas
toallowustoestimatetheirlicensingrevenues.Insomecaseswehavetodisaggregate
licensingrevenuesrelatedtomobilephonesfromotherlicensingrevenuesbasedon
informationinfootnotestoSEC10k’s.Inothercases,wehavelicensingfeeschedulesand
theidentitiesofthelicensees,andcanestimatethelicensingrevenuesperlicensee.We
denotetheseas"Documented."Entitiesinthiscategoryincludethemajorpatentpools
suchasMPEGLAMPEG4;MPEGLAAVC/H.264,andVia'sAACpool.Italsoincludes
Microsoft,whichlicensesitspatentsthatreadontheAndroidOperatingSystemtoOEMs.
sameasawell-established,U.S.-basedtechnologycompany,Interdigital.Indoingso,weassumethatHuaweiisearning,onitsmobilephonepatentsalone,roughly20percentofallpatentrevenuesearnedbyallChinesecompaniesinanylineofeconomicactivity.15AlsoseeTab6.0,Others,intheExcelworkbookthataccompaniesthisdocument.
10
Therearesomeentitiesthatarenon-trivialmobilephonevaluechainlicensorsfor
whichwehaveinformationabouttheirtotallicensingrevenues.Wehavetomake
assumptions,however,basedonotherdataorinterviews,aboutthepercentageoftheir
totallicensingrevenuesthatarefromthemobilephonevaluechain.Wedenotetheseas
"Approximated."TheyincludeTessera,Wi-LAN,andRambus.
Finally,therearesomeentitieswithlittleornodisclosure.Examinationofthe
availabledataindicatesthattheyhaveverymodest,sometimeszero,revenues.We
denotetheseas“Researched.”Theoneexceptiontothegeneralizationaboutsizeand
dataqualityisIntellectualVentures.Inthiscase,wehaveestimateditstotalrevenues
frominformationonitsownwebsiteovertime(usingtheweb-toolsthatallow
researcherstolookatarchivedwebpages)andfrominformationinthetradepressabout
itsfinancialperformance.Wehavetoapproximatethepercentageofthisrevenuefrom
themobilephonevaluechainonthebasisofinformationonthefirm’swebsiteaboutits
patentportfolio,aswellasinterviewswithindustrypractitioners.
Inaddition,therearefirmsthatappeartoearnsomepatentlicensingroyaltiesfrom
themobilephonevaluechain,butthereislimitedinformationinthepublicdomainabout
themagnitudes.Somelarge,publiccompanies(someofwhicharemobilephoneOEMs)
earnsomepatentlicensingrevenues,buttheirlicensingactivitiesarenotsignificant
enoughtobeareportablesegmentintheirfinancialstatements.Someofthesefirms,or
EMSsthatproduceforthem,arealsomajorsourcesoflicensingrevenueforotherfirms
coveredinthisstudy.Therearealsosmallprivatecompaniesthatappeartoearnsome
patentlicensingroyaltiesfromthemobilephonevaluechain,butthepubliclyavailable
11
informationabouttheirrevenuesandoperationsisfragmentary.Wecallthose“Other
identifiedfirms.”Theavailableevidencedoesnotsuggestanyoneofthesefirms—public
orprivate—individuallyhaslicensingrevenuessignificantenoughthatitsadditionwould
haveamaterialeffectontheoverallmagnitudeofthecumulativeroyaltyyield.
4.Results
Weareabletoestimate,withvaryingdegreesofaccuracy,themobilephone
patentlicensingrevenuesof32licensorsinthemobilephonevaluechain.Weestimate
thatthe32licensorsasagrouphadcumulativeroyaltiesin2015ofalmost$14.3billion
(seeTable2).16Ofthese32,11havelicensingrevenuesofeffectivelyzero.Licensing
revenuesoftheremaining21firmsrunfromalowof$2.4milliontoahighof$8.2billion
in2015.
Onewaytoputthesenumbersintoperspectiveistoaskhowtheycomparetothe
valueofmobilephoneshipments.In2015originalequipmentmanufacturers(OEMs)sold
1.97billionmobilephonesfor$437billion.17ItfollowsthattheASPwas$221.80,andthat
theaveragecumulativeroyaltyperphonewas$7.25.TheAverageCumulativeRoyalty
Yieldissimplytotalpatentroyaltiesdividedbythevalueoftotalphoneshipments,or3.3
percent.18
16Forthedatabylicensor,seeTab1.7,RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument.17AccordingtoIDC.Forthedata,seeTab1.8,DeviceSales,intheExcelworkbookthataccompaniesthisdocument.18Forthecalculations,seeTab1.3,RoyaltyYieldSummary,intheExcelworkbookthataccompaniesthisdocument.
12
Anotherwaytoputthesedataintoperspectiveistoaskhowtheycomparetodata
fromearlieryears.Becausewetakeatime-seriesapproach,someofourfirm-level
revenueestimatesgobackto2000.By2007,wehavedatafor10firms,andthese
accountedfor76percentofallroyaltyrevenuesin2015.By2009,wehavedataon15
firms,andtheseaccountedfor92percentofallroyaltyrevenuesin2015.AsFigure1
shows,bothofthoseseriesareremarkablystable.The2009-15series,forexample,
hoversataround3percent,fallingonlymarginallyduringthelasttwoyears.19
Yetanotherwaytoputthesedataintoperspectiveistoaskhowtheycompareto
estimatesthatotherresearchershavemadeabouttheothercostsofproduction,suchas
semiconductorsandbasebandprocessors,aswellasOEMoperatingmarginsonmobile
phones.Figure2presentsthatdata.Theresultsindicatethatpatentlicensingisthe
smallestofthecategories:slightlylowerthanthecostofbasebandprocessors,about
one-sixththecostofsemiconductors,andaboutone-fourthofOEMoperatingmargins.20
5.SensitivityAnalysis
Theseresultsdonotseemtobesensitivetohowonetreatsthedata.For
example,whatifweassumethatfeaturephonesnolongeryieldpatentlicensing
revenues,becausetheyarenowmostlyproducedandsoldinjurisdictionsthattendnotto
bestrongenforcersofIPrights?Whatwouldhappenifthecumulativeroyaltiesof$14.3
billionin2015wouldbespreadacross1.424billionsmartphoneswithatotalvalueof
19Forthedata,seeTab1.4,RoyaltyYieldSeries,intheExcelworkbookthataccompaniesthisdocument.20Forthedataandsources,seeTab1.5,EconomicAnalysis,intheExcelworkbookthataccompaniesthisdocument.
13
$424billioninsteadof1.97billionsmartandfeaturephoneswithavalueof$437billion.
TheAverageCumulativeRoyaltypersmartphonewouldbe$9.93.TheAverageCumulative
RoyaltyYieldwouldbe3.4percent.21
Whatwouldhappenifweimputedtheroyaltiesoffirmsthatweknowearnsome
licensingrevenues,butthatdonotprovideenoughinformationforustoestimatethose
revenuesonafirm-by-firmbasis?AsTable3shows,theresultswouldbeamodest
increaseintheAverageCumulativeRoyaltyYield.22Forexample,ifweassumethatthese
firmsasagroupearned$1billioninlicensingrevenuesin2015,whichwouldbea
generousassumption,thentheroyaltyyieldonasmartphonewouldincreasefrom3.4
percenttocometo3.6percent.Ifwemaketheextremelygenerousassumptionthatthe
combinedroyaltiesofthesefirmscameto$2billionin2015,thenthecumulativeaverage
royaltyyieldwouldstillonlybe3.8percent.
Whathappensifwerelaxtheassumptionthateverysmartphoneshippedin2015
paidlicensingroyalties?WhatifitwasthecasethatsomeOEMsevadedlicenses,such
thatthe$14.3billionisactuallyspreadacrossfewerthan1.4347billionsmartphones?As
afirststep,wefinddetermineanupper-boundevasionrate,whichweputat30
percent.23WethencalculatetheAverageCumulativeRoyaltyYieldassumingthatonly70
percentofsmartphonespaidlicensingroyalties.Table3showstheresults.Underthe
assumptionsthat:(i)allroyaltiesarechargedonsmartphones(noneonfeaturephones);
21SeeTab1.3RoyaltyYieldSummary,intheExcelworkbookthataccompaniesthisdocument.22SeeTab1.6,Sensitivity,intheExcelworkbookthataccompaniesthisdocument.23Foradiscussionofhowweestimatedthatupper-boundevasionrate,seethefootnoteinTab1.6,Sensitivity,intheExcelworkbookthataccompaniesthisdocument.
14
and(ii)that30percentofsmartphoneproductionevadesroyalties,theaverage
cumulativeroyaltyratewouldgrowfrom3.4percentto4.8percent.
Whatifwepushedharderstill,andmadethreestrongassumptions:allroyalties
areearnedonsmartphones;theevasionrateis30percent;andtheroyaltiesforfirmsin
the“Other”un-enumeratedcategoryin2015was$2billion?Howhighcouldwepushthe
estimateoftheAverageCumulativeRoyaltyYield?AsTable3shows,theansweris5.5
percent.
6.ConcludingRemarks:
Acrucialinputtoanyacademicinquiry,policydebate,orindustrystudyisthefacts,
dispassionatelygathered.Ourpurposeincreatingthedatasetweoutlineinthisnoteisto
dothat.Theinformationinthisdatasetisthereforenotmeantasajudgmentofanysort
uponthemeritsoreffectivenessofanyentityoritsoperations.Weinviteusersofthis
datasettosharetheirideas,suggestions,andcorrectionswithussothattheymaybe
potentiallyincludedinfutureversions.Wewouldliketoimproveupontheseestimatesby
makingcorrectionswhenwehaveerredandtoobtainsuperiordatasourceswhenthey
exist.Wewillbefirsttoseekimprovementinournextedition,andhopetobenefitfrom
thesupportoflikemindedothers.Perhapswithongoingcooperationwithinthe
communityovertimewemayallgaingreaterclarityastothefunctioningofindividual
firmsandtheindustry.
15
Table1:TypesofLicensorsClassifiedbyTypeandQualityofTheirData
Confirmed
Documented
Approximated
Researched
Otheridentifiedfirms
Publiccorporation
Qualcomm(2.1)Ericsson(2.2)
Nokia(2.3)(incl.Alcatel-Lucent)1
Interdigital(2.4)ParkerVision(3.9)
UnwiredPlanet(3.10)2VirnetX(3.11)
Microsoft(2.5)
Philips(3.1)3Tessera(3.5)Rambus(3.6)
AcaciaTechnologies(3.7)WiLAN(3.8)
MarathonPatentGroup(3.12)
AT&T802.11(3.2)AT&TMPEG4(3.3)Broadcom(3.4)
Apple(6.0)
Blackberry(6.0)Google(6.0)Infineon(6.0)
SamsungElectronics(6.0)Siemens(6.0)
Technicolor(6.0)TexasInstruments(6.0)
Vringo(6.0)
Privatecorporation
Huawei(5.6)
SISVELWireless(5.1)IPCom(5.2)5
PanOptis-Optis(5.3)2
IPBridge(5.4)IntellectualVentures(5.5)
CoreWireless/Conversant
(6.0)7FranceBrevet(6.0)8
ETRI(6.0)9ITRI(6.0)10
LongitudeLicensing(6.0)11MobileMediaIdeas(6.0)
Rockstar(6.0)RoundRock(6.0)VoiceAge(6.0)
Patentpool
ViaLicensingAAC(4.1)MPEGLAMPEG4(4.3)
MPEGLAAVCH.264(4.4)
ViaLicensingLTE(4.2)4
SISVELLTE(4.5)SISVELWiFi(4.6)
SIPROLabWCDMA(4.7)VectisWiFi(4.8)6
(TabsintheWorkbookinparentheses.)LicensorsincludedintheCumulativeRoyaltyYieldestimateinboldface.Technologyleadersinitalics.Source:seetab1.7RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument.
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NotestoTable1(1)NokiaacquiredAlcatel-LucentinJanuary2016.(2)PanOptisrecentlypurchasedUnwiredPlanet.BothlicensepartofEricssons’spatentportfolio.(3)Philipsisamajorlicensor,butismorediversifiedwithmajortrademark/brandlicensingoperations,andalsomajordigitalA/Vlicensingwhichincludesmajorpoolparticipation.However,ithassomemobileSEPlicensingbusiness.(4)GooglelicensesitsLTEpatentsthroughVia.DolbyownsViaLicensing.(5)IPCommanagestheformerBoschmobilepatents.(6)VectislicensessomeofEricssons’sWiFipatents.(7)CoreWireless/ConversantlicensespartofNokia’spatentportfolio.(8)FranceBrevetisaFrenchsovereignfundwithaportfolioincludingnear-fieldcommunication(NFC)patents.(9)ETRIisaSouthKoreanresearchinstitute.(10)ITRIisaTaiwaneseresearchinstitute.(11)LongitudeLicensingrepresentsSandiskandothermajortechcompanies.
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Table2CumulativeRoyaltyYieldClassifiedbyQualityofData(in2015)
Source:Seetab1.7RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument.
Type1Public
company
Type2Privatecompany
Type3Patentpools
Total
Confirmed
$11,512,623,115
(81%)
-
-
$11,512,623,115
(81%)
Documented
$1,134,500,000
(8%)
-
$310,218,512
(2%)
$1,444,718,512
(10%)
Approximated
$604,358,781
(4%)
$432,488,000
(3%)
-
$1,036,846,781
(7%)
Researched
$124,752,491
(1%)
$68,400,000
(0%)
$86,982,900
(1%)
$280,135,391
(2%)
Total
$13,376,234,387
(94%)
$500,888,000
(4%)
$397,201,412
(3%)
$14,274,323,799(100%)
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Table3:ASensitivityAnalysisoftheAverageCumulativeRoyaltyYield(2015)
%Unlicensed EffectiveSmartphonesRoyaltiesChargedby"Other"licensorsasagroup($m)
Phones $0 $500 $1.000 $1.500 $2.000
0% 3.4% 3.5% 3.6% 3.7% 3.8%
5% 3.5% 3.7% 3.8% 3.9% 4.0%
10% 3.7% 3.9% 4.0% 4.1% 4.3%
15% 4.0% 4.1% 4.2% 4.4% 4.5%
20% 4.2% 4.4% 4.5% 4.7% 4.8%
25% 4.5% 4.6% 4.8% 5.0% 5.1%
30% 4.8% 5.0% 5.1% 5.3% 5.5%
Source:seetab1.6Sensitivity.
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0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Figure1PatentRoyal_esas%ofValueofMobilePhones
(SmartandFeature)Shipped,2007-2015Total,FirmsCoveredSince2007as%MobilePhoneRevenues Total,FirmsCoveredSince2009as%MobilePhoneRevenues
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PatentLicenseCost3.3% BasebandProcessorCost
3.7%
OtherSemicCost15.5%
OtherCosts62.6%
OEMOpera_ngProfits14.9%
Figure2:MobilePhoneEconomics(2015)