Richard Lloyd

Exactly how much is being made from licensing patents to mobile phone manufacturers has become a touchstone issue in recent years leading to some wildly different numbers. The perceived power that the likes of Qualcomm, Nokia and Ericsson hold over the manufacturing community was underlined by a 2014 paper from WilmerHale and Intel which estimated that on a hypothetical $400 phone the royalty stack could be in excess of $120.

But according to a new paper, which studied the licensing revenues of 32 major licensors to the mobile sector, the royalty stack is likely to be much lower, accounting for just $14.3 billion in annual licensing revenues or 3.3% of the total value of the smartphone and feature phone markets in 2015. The paper, “A new dataset on mobile phone patent license royalties”, calculates that that translates to just $7.25 of the average sales price of a phone of $221.80.

The authors – Professor Stephen Haber of Stanford, Professor Alexander Galetovic of the Universidad de los Andes in Chile and Lew Zaretski, the head of IP strategy firm Hamilton IPV – make clear that they are not taking a position on the level of the royalty rate. However, in joining the band of academics attempting to throw some light on this opaque subject, the trio are clearly trying to prove that the concern that patent owners are subjecting the likes of Apple and Samsung to unduly high licensing rates is unfounded.

The problem for anyone looking to apply rigorous analysis to licensing rates is that most deals remain private. As a result, the paper’s authors use a mixture of publicly available material, such as financial disclosures from the largest licensors like Qualcomm, other material they can glean from the public record and estimates from those businesses where licensing revenues are not materially significant and are therefore not disclosed in financial filings. The authors appear acutely aware of the challenges and limitations in calculating licensing revenues and in the interests of full transparency include an excel spreadsheet which details all of the underlying data and their sources.

In one interesting side note, the paper estimates that Huawei is earning, just on its mobile phone patents, roughly 20% of all patent revenues earned by all Chinese companies in any line of economic activity. That shows the company’s undoubted status, in patent terms at least, as China’s most powerful tech company, but also the embryonic status of the country’s outbound licensing market.

I got in touch with Professor Haber and asked him why the authors had decided to write the paper. “We were motivated to undertake the study because all kinds of numbers about the "royalty stack" in a mobile phone get tossed around among academics, industry practitioners, and government officials--but many of those numbers are not generated by a theoretically-informed, empirically sound, and replicable method,” he wrote in an email. “Science has to start with the facts; with evidence dispassionately gathered.  Our purpose is to provide as comprehensive, transparent, and theoretically informed data source as is practically possible for use by other researchers, industry practitioners, and government officials.  As our paper states: "We do not take a position on whether the estimates of the royalty yield we present in this study are 'too high,' 'too low,' or 'just right.'   That is an important debate, but it can only be joined on the basis of evidence." 

Haber points out that the authors are building on the work of others (the paper cites previous studies by Keith Mallinson and J Gregory Sidak) so they are not the first to contradict the sky-high royalty estimates made by some. Such is the nature of this debate that it will likely run for a little while yet, but this latest piece is a valuable contribution to a very hot topic.