There has been much discussion on this blog and elsewhere about Ericsson’s announcement that it had published its royalty rates for 5G devices. The Swedish telco revealed that it would charge $5 per handset for the most expensive devices but also that it would charge no lower than $2.50 for the cheapest. In a market where licensing terms often remain shrouded in secrecy and allegations of excessive royalties often lead to high-profile litigation, Ericsson’s move was clearly an attempt to get out ahead of the market well before the rollout of 5G.
In a guest post for this blog shortly following the announcement, Eric Stasik of Swedish consulting firm Avvika AB, made the argument that in many way Ericsson’s announcement does not represent a big departure from its approach to 4G/LTE. In 2009, for example, Ericsson disclosed that its royalty rate for 4G/LTE devices was expected to be around 1.5% for handsets. In his piece Stasik then crunched the numbers arguing that for the average device the new rate would not be a significant change on the Swedish company’s approach to 4G/LTE but would be higher for the cheapest devices. At the very top end, he suggested, the new rate would represent a significant discount on the current position.
This is one of those stories that’s going to continue to play out for several years as 5G wireless technology is introduced. Late last week I caught up with Ericsson chief IP officer Gustav Brismark to hear a little more about the move and why the company thinks it is such an important one. When we spoke he stressed a couple of points.
Firstly, in contrast to the announcement that the company made around its 4G LTE royalty rates, it has made its latest declaration well in advance of the launch of 5G. We might start to see some of the capabilities of the next generation of wireless technology in 2018, but it is still several years before most of us are going to have a device in our hands. Ericsson’s CIPO made the point that they are interested in ensuring the widespread adoption of 5G technology, and to demonstrate that the company remains a responsible member of the mobile ecosystem. “This will help Ericsson to remain a leader in the standardisation process,” Brismark stressed before adding that the move would ensure that “the market has full knowledge of Ericsson’s position as the 5G standard is being defined”.
What is not clear yet, though, is just how much Ericsson is going to put into the new 5G standard. The company was a significant contributor of standard essential patents (SEPs) to 4G/LTE. Stasik’s guest post cited a 2009 press release which revealed that Ericsson expected “to hold a patent strength of 20-25% of all standard essential IPR”. That helped guide how it set its royalty rate for 4G handsets, but with the 5G standard yet to be finalised, Ericsson is essentially making an educated guess on its likely share of SEPs.
On our call Brismark revealed that the company has made its own internal calculations on its likely contribution, but admitted that there is some uncertainty around this. “We have made a cautious estimate,” he said. “Ericsson is investing in being a leader in 5G, the company expects that to happen and that’s the assumption I’m working under.”
The second point that Brismark was eager to stress was that having a $5 cap and a floor of $2.50 reflected the modern realities of the smartphone sector. The range in prices from the cheapest to the likes of the iPhone at the top end is now far greater than it was 10 years ago. “That increased range calls for a royalty structure that includes a cap and a floor to make sure you set a robust system,” Brismark commented.
It’s not clear yet just how much new 5G devices are going to cost, but the Ericsson CIPO predicted that we would see higher prices than today’s top end of more than $700. According to Brismark that increased range in pricing means that it’s particularly important for licensors to set their rates as a dollar amount which he claimed was “much more informative than just offering a percentage”.
Ericsson is essentially trying to negotiate a very delicate balancing act. At the top end of the market, of course, you have Apple, a company that has shown that it is only too willing to cry foul when it deems that licensing terms are unfair. Up until late 2015 it was embroiled in litigation with Ericsson before agreeing to a licensing deal. More recently it has filed a lawsuit against Qualcomm over what it alleges are the chipmaker’s unfair licensing practices. With Ericsson setting a royalty at $5 for the most expensive devices it appears that it will be increasingly hard for Apple and others to argue that that rate is unfair. That will be particularly true if the price tag for the most expensive 5G handsets starts to approach $1,000.
But then you also have the lower end which Brismark described as “equally important to us”. The market for the cheapest devices is increasingly dominated by newer entrants from China and India, where Western technology companies have run into difficulties in demonstrating that they are licensing under fair and reasonable terms. That means that many now argue that licensors’ should apply different rates in those markets than in more mature jurisdictions, in order to take into account different local conditions. The response of low-end manufacturers (including those that don’t currently exist) to Ericsson’s announcement, might ultimately determine the telecom giant’s success in trying to free up some of the friction in the wireless licensing market.