This is the first in a pair of articles on standard-essential
patent (SEP) royalties. It updates my previous publications on this topic over
the last decade to show how royalty payments have trended including how rates
compare against licensors’ touted maximums. The second article shows how these royalties would be massively reallocated to Chinese companies with the top-down approach in rate-fixing regulation proposed by the European Commission.

Aggregate royalties paid to major SEP licensors Ericsson, InterDigital,
Nokia and Qualcomm have declined by 28% in nominal terms since peaking in 2015
to 2023, as indicated in Exhibit
1. The aggregate “royalty
yield” (i.e. total royalties paid divided by handset sales revenues) for these
licensors has dropped even more steeply by 38% since 2015.

The value of
total royalty payments has eroded an additional 22% in real terms after
inflation over those last eight years.

Percentage royalty
yields have been diminished by royalty base caps and the switch to monetary
amount per unit royalty rates in some cases. While ad valorem percentage rates
charged hedge for inflationary increases in phone prices, caps and fixed
amounts per unit are not indexed.

The recent plunge in total royalties from 2022 to 2023 is largely
due to falling smartphones sales. However, increasing quarterly smartphone
sales figures in 2024 suggest there will also be a bounce in royalties this
year.

Exhibit
1: Cellular SEP royalties including percentage yields have generally decreased

Royalty yield is based on all indicated
royalty revenues, but on only handset sales revenues.
Apple agreed in April 2019 to make a
$4.7 billion one-off payment to settle its dispute with Qualcomm, following
non-payment of royalties for two years. Under a long-term agreement with
Huawei in July 2020, Qualcomm received $1.8 billion covering previously unpaid
licence fees.
Figures
have changed slightly from versions of this chart published in
previous years as I have now switched to using smartphone revenue figures
from Statista. The revealed trends and my conclusions are unaffected.

Cellular SEP licensors obtain significantly lower royalties than
the maximum percentage rates and monetary rates per unit publicly headlined on their
web sites. That’s only to be expected because licensees insist that royalties
are capped on higher-priced smartphones. Some inevitable major discounts are explicit
in program rate cards. Other reductions arise from various different relationships
between licensing parties — such as cross-licensing to access each other’s
technologies in some cases. Average royalties received are also diminished where
licensing is delayed or never agreed.

Qualcomm remains the clear leader in SEP licensing. I also show in
this article that the royalty rates it obtains are much closer to its rate card
figures than other licensors achieve versus their rate card figures.

Fit for purpose in rebuttal

When I published my
seminal article on mobile handset aggregate royalties in 2015, my objective
was to disprove — with an approximate yet conservatively high estimate — the absurd assertion
from Intel and others that aggregate royalties paid to license a $400 smartphone
could be as high as $120 (i.e. 30%). I coined the term royalty yield (i.e.
royalties paid divided by product prices or revenues) to depict effective rates
paid as distinct from licensors’ notional maximum rates before caps, other
discounts and cross-licensing reductions. I concluded that the aggregate yield
was no more than around 5% of cellular handset prices or revenues. Others
validated my methodology and came up with similar (i.e. in my ball park versus
Intel’s), but even lower figures.

My cellular handset-focused methodology was for fit for purpose because
it conservatively somewhat overestimated rates paid. There are various
approximations in this kind of royalty yield analysis: