Richard Lloyd

There was more evidence last week of ongoing challenges for patent licensing when two giants of the tech world published their latest quarterly results.

On Thursday, Microsoft announced its numbers for the second quarter of its 2017 financial year, with a huge jump in revenues for its cloud business and the first contribution to the top line from the recently acquired LinkedIn among the highlights. Patent licensing, though, did not fare so well, as the software giant saw a 25% decline in revenues due to a drop in licensed units and licence revenue per unit.

As we have seen in other recent quarters, Microsoft’s royalty stream is slowing thanks to falling smartphone sales and decreases in the average price of a device. The Redmond-based tech company doesn’t split out the numbers for it IP business, so we don’t know exactly how much it brings in, but it is understood to have been as high as between $2 billion and $3 billion.

In other words, licensing is important for Microsoft (especially with regards to overall profitability), but it is not as a critical determinant of the company’s fortunes as it can be for others. Plus, as we have seen under new CEO Satya Nadella, the Windows giant has changed tack as its looks to forge new and develop existing business relationships, of which licensing agreements can be a useful part.

For Ericsson, the other major licensor to announce its quarterly numbers last week, the story is slightly different. As with Microsoft, the Swedish company saw a sharp decline in its licensing business as revenues fell SEK5.5 billion ($622 million) year-on-year. Last year’s numbers were boosted by a major deal with Apple and so without a similar headline deal in Q4 2016 (Ericsson accounts on a calendar year basis) some fall was perhaps expected.

But Ericsson also provided the market with some guidance for its future business. On a call with analysts CFO Carl Mellander referred to a “baseline based on the current contract portfolio of SEK7 billion ($791 million) on an annual basis”.

That guidance is significant as Ericsson – along with a handful of others like Microsoft – is one of the few businesses to have brought in more than $1 billion from patent licensing in a year. The company’s numbers don’t mean that it is not going to pass the $1 billion mark again – another blockbuster deal along the lines of the Apple one would certainly help – but at a time of transition in the mobile space, before 5G technology and the Internet of Things (IoT) fully develop, the message to the market was that ten-figure licensing returns shouldn’t be regarded as a given.

Commenting on future prospects, CEO Börje Ekholm did offer some hope. “The IPR market continues to shift and we see the future growth potential to be emerging markets and emerging device vendors as well as new licensing platforms,” he said during the earnings call. Such a comment was presumably a reference to the new IoT platform Avanci, headed by former CIPO Kasim Alfalahi. For Ericsson and the other companies backing it, it looks increasingly important that Avanci starts to pay off.