Intellectual Property is the backbone of today’s knowledge economy. The very competitiveness and durability of the nation’s economy depends on how well the framework of IP and patents works in the country.
Mobile has become the broadest available technology in the history of mankind. It has touched more citizens and has created more opportunities than any other computing technology before it. By the end of 2017, there will be over 17.7 billion connected devices touching over half of humanity. Smartphones have gone from luxury gadgets for the rich to an essential survival tool for all. Mobile devices, networks, and applications have become an important if not central component of the growth story worldwide.
IP licensing has existed for centuries. It has been a key foundational element for the mobile industry. Since the days of 1G, IP licensing has allowed hundreds of players to participate in the ecosystem at different levels. The licensing mechanism has been critical to the standardization process, development and manufacturing of infrastructure equipment and mobile handsets, and proliferation of millions of applications and services worldwide.
Mobile industry is not unique in this regard. All major industries use the tool of IP licensing to respect the innovation from companies who take the risk and spend R&D dollars. Automotive, Chemical, Semiconductors, Consumer Electronics, Medical, Pharma, and other industries have all benefited from IP licensing over the past many decades of growth and progress. One of the fundamental question that comes up is around valuation. How should one value IP when the complexity and sources of IP is so disparate? Observers also worry the impact IP can have on the overall cost of the products and the innovation curves of the respective industries. There are different methods used to ascertain the value that are based on market, cost, and income. There are nuances depending on the circumstances but most of the deals will follow one or a combination of these approaches.
For the wireless industry, the most practical way of assigning value to an IP transaction is about ascertaining the value of IP to the income of the enabling products and services. According to the Royalty rates database, the average licensing royalty rates across several technology industries is roughly 5%. A comprehensive study of the technology rates found that the communications industry royalty rates are lower than the overall median across all major industries. The Internet, Media/Entertainment, and Software industries are above the 5% mark.
IP licensing in the mobile device space has only accelerated the growth. Since the emergence of iPhone and Android, between 2007 and 2016, the number of smartphones shipped annually jumped from a mere 120 million to over 1.4 billion units. The revenue and profits during the same interval jumped increased 10- and 13-fold respectively.
The role of IP licensing in the globalization of the mobile industry cannot be understated. IP licensing flattens the playing field and allows new entrants to enter in the emerging markets who can manufacture and roll-out products at a fraction of the costs in the mature markets. The net-effect is clearly seen in the speed with which smartphones have proliferated around the globe. In 2008, only 14% of the devices sold globally were smartphones. By the end of 2017, almost 77% of the phones sold will be smartphones. This has been primarily because of falling ASPs that has allowed the OEMs to manufacture and sell these smartphones at different price points This has resulted in the expansion and the growth of the smartphone universe across regions, demographics, and income levels.
This can be easily demonstrated by the IPR costs for the most successful device on the planet – Apple. In the last five years, Apple has generated the most amount of profits than any other OEM. As with any other device manufacturer, Apple uses components from various companies in the value chain and pays for the IPR it needs by licensing it. According to the data from Credit Suisse, the royalty rate has stayed consist across models for the past five years below 2% of the device average selling price and its profit margins have stayed pretty consistent through the years at roughly 50%. For Apple, licensing IPR is another line item as it is for other components from over a dozen suppliers like Samsung, SK Hynix, Dialog, Qualcomm, Cirrus Logic, NXP, Bosch, USI, Skyworks, Sunwoda, and others.
Licensing of IP allows smaller and newer players to enter the market more quickly. Without the licensing regime, players like Oppo and Vivo would have never been able to make a dent in the global device market or at best their potential markets would have been severely limited. There are several factors that are important that allow an OEM to take a device to the market. Increasing competition has forced OEMs to make choices around how they spend the limited resources. Instead of being focused on high-risk R&D, OEMs new to the ecosystem will typically license the available technology and build the differentiators on the top. It is a sound strategy as it allows them to leverage the best-in-class features and be competitive in the marketplace. It also opens International markets for them.
The IP royalty expense is a small fraction of the overall cost of the device. According to the Consumer Technology Association, the overall revenue for the smartphone industry will be close to $480 billion in 2017. The licensing revenue for the industry is expected to be less than 3% of the overall smartphone revenues (it is a conservative estimate; a more realistic estimate is perhaps between 2-2.5%). This has been consistent through several years in the past. This is also the estimate that most OEMs will incorporate in their Bill of Materials (BOM) costs. As indicated earlier the mobile industry royalty rate is below the royalty rates in most of the other industries.
A mobile device is a complex device with a plethora of inventions and technologies and no one company has a monopoly on the IP that goes inside the device. As such, to grow the industry, to bring the products to the market faster, and to do it in a cost-effective way, IP licensing plays a critical role in introducing new capabilities in the devices. The more the industry is able to license and cross-license, the better R&D ROI the industry gets and as such the overall market grows. The model has worked effectively for several generation of mobile technologies and it is likely to serve the industry well in the coming years.