Ericsson 5G royalty play may be less generous than originally thought; but it's definitely smart 27 Mar 17
The week before last, Ericsson chief IP officer Gustav Brismark gave an interview to Bloomberg in which he revealed the royalty rates the company would be asking for in relation to patents covering 5G technology in the mobile communications sector. The transparency this implied received a great deal of praise, including from this blog. In taking a look at the move, we also stated that there would doubtless be much more in-depth analysis of it to come. And that is just what has happened.
We have received an overview of the Ericsson strategy from Eric Stasik of Swedish consulting firm Avvika AB. He sees the recent announcement as being part of a smart approach to 5G by Ericsson that may be a lot less generous and pioneering than people such as yours truly initially thought. It’s this kind of in-depth scrutiny that transparency delivers, of course. Here’s what Eric has to say:
Despite initial reviews by Bloomberg and the editor of this blog extolling the virtues of Ericsson’s recently announced "FRAND licensing terms for 5G/NR in 3GPP Release 15" (pdf), an analysis indicates Ericsson’s position vis-à-vis 5G/NR is essentially identical to its position on 4G/LTE - but with one key difference.
Ericsson’s FRAND licensing policies have been transparent for a long time. In 2009, Ericsson joined other 3GPP SEP holders in publicly announcing its ex ante royalty rates for 4G/LTE. Ericsson’s 2009 press release (no longer available on-line, but available from the author upon request) explained:
"Ericsson expects to hold a relative patent strength of 20-25% of all standard essential IPR. Ericsson believes the market will drive all players to act in accordance with these principles and to a reasonable maximum aggregate royalty level of 6-8% for handsets. Ericsson ´s fair royalty rate for LTE is therefore expected to be around 1.5% for handsets."
In keeping with this transparent ex ante tradition, Ericsson recently announced its “FRAND licensing terms for 5G/NR”:
"Ericsson is prepared to grant licenses to its portfolio of essential cellular patents [with coverage for multimode mobile handsets that fully conform to 3GPP's forthcoming 5G/NR Release 15 technology] subject to reciprocity by the license seeker, at a fair and reasonable royalty rate of $5 per 5G/NR multimode compliant handset." Ericsson also explained that it "has decided to voluntarily allow for even lower royalty rates on a case-by-case basis" and that "in exceptional circumstances, Ericsson is prepared to allow for rates as low as, but not lower than, a floor of $2.5 per 5G/NR multimode compliant handset."
At first glance, the change from calculating royalties as a percentage of the ASP of end-user devices to a royalty assessed as fixed price per unit appears significant. But the maths is more revealing: Ericsson's $5 per unit royalty rate is equivalent to a royalty of 1.5% on a handset ASP (average selling price) of approx. $330. Given that current forecasts of an ASP for all smartphones stand at under $300, Ericsson's 5G/NR royalty rate is likely to be on average the same or slightly higher than its royalty rate for 4G/LTE.
Ericsson’s introduction of a “floor of $2.5 … per 5G/NR handset” translates into a royalty of 1.5% on an ASP of approximately $165. Again, this is consistent with Ericsson’s royalty rates for 4G/LTE – although by insisting that the royalty cannot go lower than $2.5, smartphones with an ASP of under $165 will be expected by Ericsson to pay a higher royalty for 5G/NR than for 4G/LTE.
On the other end of the price spectrum, Ericsson’s $5 per unit royalty for 5G/NR handsets could be seen as something of a bargain compared to 4G/LTE. Smartphones with an ASP of over $330 will pay a lower royalty rate for 5G/NR than for 4G/LTE. At the very top end of the market – such as Apple’s iPhone which recently reached a new record high ASP of $695 – Ericsson’s $5 per unit royalty for 5G/NR will be less than half of what it demanded for a licence to its portfolio of 4G/LTE patents.
This makes sense. Ericsson is still a major supplier of infrastructure equipment and the demand for 5G services (and the networks needed to provide them) will be initially powered by high end devices like the iPhone. By offering a heavily discounted royalty rate for high-end 5G/NR smartphones, Ericsson hopes to spurn demand for the build-out of 5G/NR networks, so providing Ericsson’s infrastructure business with a very much needed avenue for growth.
Also noteworthy is that Ericsson's 5G/NR FRAND offer is: (1) a portfolio offer; and (2) only available to "mobile handsets that fully conform" to 3GPP specifications. This indicates that Ericsson will continue with the durable and sensible practice of offering 3GPP SEP portfolio licences to end-user devices and will not be making licences available to chipset manufacturers.
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