High average royalty rates for W-CDMA technology are one among several elements dragging on the uptake of 3G handsets and service, according to a study by ABI Research. These high royalty rates are particularly irksome to the more lucrative handset replacement cycle in mature markets, impacting vendors’ and operators’ return on investment.
“The industry-accepted norm for cumulative royalty rates for consumer devices is 5 percent,” said Stuart Carlaw, ABI’s director of wireless research. “W-CDMA handsets’ average royalty rates currently stand at 9.4 percent. Our research indicates, however, that current high rates for W-CDMA are not the result of any one company’s actions in the market, but are a result of a flawed standardization process.”
The current process tends to favor companies with significant intellectual property holdings such as Nokia Corp. and Qualcomm Inc. and drives up costs for those handset vendors such as Samsung Electronics Co. Ltd. and LG Electronics Co. Ltd. that innovate in the 3G market but have lesser stakes, if any, in 3G intellectual property. Compelling services and data pricing by carriers are probably more important factors in 3G uptake, Carlaw said, but high average royalty rates impact margins for handset vendors and operators as they attempt to grow the market.
Open agreements
More transparency in royalty negotiations in the standard-setting phase at the European Telecommunications Standards Institute would allow industry players to establish benchmark levels for royalties, creating a better understanding for what constitutes fair, reasonable and nondiscriminatory terms, Carlaw said. If companies would disclose their royalty agreements, benchmarks would emerge and players could better anticipate their spending on royalty rates.
Carriers in Europe, in particular, are subsidizing W-CDMA handsets to entice subscribers to migrate to the faster networks and not seeing solid ROI. “If you want your customers to migrate, you don’t want your handset prices to be as high as they are today,” Carlaw said. “The higher royalty rates come out of the operator’s margin.”
When companies lay claim to owning essential patents during the standardization process, they don’t need to prove their claim is valid. A dozen companies have said they own essential patents for 90 percent of W-CDMA.
“If you’re a vendor looking to do W-CDMA and you don’t want to use Qualcomm’s chipset, you have to go to every other essential IP holder and negotiate a royalty term with them,” Carlaw said. “And then there are the players in the last 10 percent who claim essential patents-some are ‘patent vampires,’ as some have called them-they’re ready to jump in with heavy litigation as well.”
Transparency in vendor-to-vendor negotiations would lead to an industry-accepted benchmark, or a benchmark for dealing with a specific company, in Carlaw’s view, resulting in predictable costs and market growth.
Cross-licensing can reduce actual costs, as companies permit each other to use their own patents, but that favors large companies with significant intellectual property holdings and hurts those who do not own IP. Vendors with a strong portfolio of IP might pay less than 5 percent royalties on their handsets, while those without IP may pay as much as 28 percent.
An argument against the status quo is that it stifles innovation and favors incumbents that have invested in research and development. The silver lining is the current situation is driving R&D efforts to capture IP in so-called 4G technologies. The result may be a score of companies, perhaps 20, with essential patents in 4G, which they will likely cross-license, effectively dropping average royalty rates.
