Hoover Institution Working Group on Intellectual Property, Innovation, and Prosperity

Stanford University

www.hooverip2.org

WORKING PAPER SERIES NO. 16011

“A NEW DATASET ON MOBILE PHONE PATENT LICENSE ROYALTIES”

ALEXANDER GALETOVIC

UNIVERSIDAD DE LOS ANDES

STEPHEN H. HABER DEPARTMENT OF POLITICAL SCIENCE AND HOOVER INSTITUTION, STANFORD UNIVERSITY

LEW ZARETZKI HAMILTON IPV

� SEPTEMBER 25, 2016

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ANewDatasetonMobilePhonePatentLicenseRoyalties1September2016Update

AlexanderGaletovic,StephenHaber,andLewZaretzki2

Thisversion:September25,2016

1.Introduction

Mobilephonesintegrateawidearrayoftechnologies,fromcomputingtoconsumer

electronicstocommunications,andfromsemiconductorstohardware,softwareand

services.Thismakesthemarelevanttargetforalargeandbroadarrayofpatentsand

licensors.Inaddition,mobilephonesrelyontechnologicalstandardstomakethem

interoperable.Astandard-compliantsmartphoneuseshundreds,ifnotthousandsof

standardessentialpatents(SEPs),whichareownedbymanydifferentpatentholders.3

1WethankJonathanBarnett,AnneLayne-Farrar,KeithMallinson,JorgePadillaandotherswhowishedtoremainanonymousbutprovidedimportantperspectiveandhelpfulcomments.JordanHorrilloprovidedexcellentresearchassistance.2AlexanderGaletovicisProfessorofEconomics,UniversidaddelosAndes,Santiago,Chile.Hiscurrentresearchfocusesonstandardessentialpatents,competitionpolicyandantitrust.GaletovichasbeenaResearchScholarattheInternationalMonetaryFund,aTinkerVisitingProfessoratStanfordandaRita-RicardoNationalFellowattheHooverInstitution.StephenHaberisA.A.andJeanneWelchMilliganProfessorintheSchoolofHumanitiesandSciences,ProfessorofPoliticalScience,ProfessorofHistory,Professor(bycourtesy)ofEconomics,SeniorFellowoftheStanfordInstituteforEconomicPolicyResearch,andPeterandHelenBingSeniorFellowattheHooverInstitution,atStanfordUniversity.HaberdirectstheHooverInstitutionWorkingGrouponIntellectualProperty,Innovation,andProsperity(HooverIP2).HooverIP2succeededtheHooverProjectonCommercializingInnovation(PCI).Toensureacademicfreedomandindependence,bothPCIandIP2,alongwithallworkassociatedwiththem,haveonlybeensupportedbyunrestrictedgifts.SomemajordonorshaveincludedMicrosoft,Pfizer,andQualcomm.LewZaretzkiisManagingDirector,HamiltonIPVaSiliconValleyIPstrategyconsultingfirmservingmanyoftheworld’sfinesttechnologycompaniesandleadingtechnologyinvestorsinmattersofcorporatestrategy,IPstrategy,M&A,andIPtransactions.3Itisestimatedthatthereareabout150.000declaredmobileSEPsworldwide(issuedandappliedfor)intheso-called“4Gstack,”whichincludesLTE,WCDMAandGSM/GPRS/EDGE.Ofthese,about20,000areUSpatents.GaletovicandGuptareportthatin2013therewere128SEPholders.“RoyaltyStackingandStandardEssentialPatents:TheoryandEvidencefromtheMobileWirelessIndustry,“HooverIP2WorkingPaper15012,2016..

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WhilesomehaveclaimedthatdispersedownershipofSEPsleadstohighcumulative

royaltyrates,theestimatesthatunderpintheseclaimsarebasedonthesimpleadditionof

publishedhandsetroyaltyrates.4Thereareavarietyofreasonstobedubiousofthis

method,nottheleastofwhichisthatitconflates“rackrates”whichmightnotbepaidby

anybody,withactualmarkettransactionrates.Indeed,justasfirmshaveincentivesto

declareallpossiblepatentsasessential,theyalsohaveincentivestoposthighroyalty

ratestolicensetheirportfolio,eveniftheyneveractuallyearnanylicensingrevenuefrom

thatportfolio.5

ThisnotedescribesanewdatasettoestimatetheAverageCumulativePatent

RoyaltyYieldpaidinthemobilephonevaluechain—thesumtotalofpatentroyalty

paymentsearnedbylicensors,dividedbythetotalvalueofmobilephonesshipped.We

builduponearlierworkbyMallinsonthatfocusedonmobileSEPs6butgobeyondthat

Oneshouldnotethatitmayhavebeenintheinterestsofpatentholderstodeclareallpossiblepatentsas“essential.”Onereasonisthatpatenteesriskedlegalpenaltiesfornotdeclaringapatentessential.Also,somefirmsmayhaveactedontheperceptionthatalargeSEPportfoliobolsteredtheirreputationandincreasedtheirleveragewhennegotiatingroyalties.Moreover,theETSIIPRdatabase,justlistsdeclaredessentialpatents,butneitherETSInoranybodyelseauditsthosedeclarations.Forthesereasons,itisnotclearhowmanyofthesepatentsaretrulyessential.Industryparticipantsoftenestimatetherateofover-declarationat50%ormore.OthersthinkthatfewSEPswouldpassalegaltestofessentiality.4See,forexample,EricStasik,“RoyaltyRatesandLicensingStrategiesforEssentialPatentsonLTE(4G)TelecommunicationsStandards,”LesNouvelles,September2010,pp.114-119.5AtonepointintimeitbecamecommonforthemajorequipmentvendorstopublishadeclaredLTEroyaltyrate,usuallywithcaveatsthatitcouldbeadjustedinlightofgrantbacksorforotherreasons.Forexample,Norteldeclareda1%rate,butitappearstohaveneveractuallyreceivedanyLTElicensingrevenue.6SeeKeithMallinson,“CumulativeMobile-SEPRoyaltyPaymentsNoMorethanAround5percentofMobileHandsetRevenues,”IPFinance,August19,2015.J.GregorySidakbuildsuponMallinsonaswell,buttakesasomewhatdifferenttheoreticalapproach,includingpaymentsinkindandestimatesofthevalueofcross-licenses.Thus,itisastudyofpotentialIPvalue,ratherthanthecumulativeroyaltyyield.SeeJ.GregorySidak,“WhatAggregateRoyaltyDoManufacturersofMobilePhonesPaytoLicenseStandard-EssentialPatents?”CriterionJournalonInnovation1(701). FollowingMallinson,weusethetermroyalty“yield”ratherthanroyalty“rate.”“Rate”

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workby:(i)analyzingpatentroyaltiesintheentiremobilephonevaluechain(i.,e,

royaltiesonmobileSEPs,butalsoaudioandvideocodecs,imaging,operatingsystems,

semiconductors,andothercomponents);(ii)comparingourresultsonpatentroyaltiesto

othercostsofmobilephonemanufactureandtoOEMprofits;(iii)generatingtimeseries

thatpermitresearcherstoanalyzethestabilityoftheAverageCumulativePatentRoyalty

Yieldbackto2007.Forsomefirms,ourcoveragegoesbackto2000.

Ourpurposeistoprovideascomprehensiveandtransparentadatasourceasis

practicallypossibleforusebyotherresearchers,industrypractitioners,andgovernment

officials.Thus,thisnoteshouldbereadasanadjuncttotheExcelWorkbookthatwehave

postedtothewebat:http://hooverip2.org/wp-content/uploads/New-Dataset-on-

Mobile-Phone-Patent-License-Royalties.xlsxThatworkbookshowstheunderlyingdata

andsources.Italsoexplainsthedecisionswemadeinestimatingorapproximatingvalues.

Wedonottakeapositiononwhethertheestimatesoftheroyaltyyieldwe

presentinthisstudyare“toohigh,”“toolow,”or“justright.”Thatisanimportant

debate,butitcanonlybejoinedonthebasisofevidence.

2.Methods—“FollowtheMoney”

Allmethodsofanalysisaredependentuponanunderlyingtheory,andunderlyingtheories

arecreatedinordertoanswerparticularquestionsofinterest.Calculatingthecumulative

royaltiespaid(orearned)inthemobilephonevaluechainisnotanexceptiontothis

referstotheactualroyaltypaidbyalicensee,typicallyanOEMorEMs,toalicensorasapercentageofthelicensee’ssales.Yieldisthesumtotalofpatentroyaltypaymentsdividedbythetotalvalueofmobilephonesshipped,thelatterofwhichmightincludetheproductionofOEMsthatevadepatentlicenses.Someresearchersrefertoroyaltyyieldasthe"royaltystack,"atermweeschewbecauseitistheory-ladenandanoxymoron.

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generalrule.Thebasicquestionresearchersareaskingishowdoroyaltiespaidbyfirmsin

themobilephonevaluechainaffectproductionanddecisionsatthemargin?Thatis,if

royaltyrateswereXpercenthigher,byhowmuchwouldoutputfallandpricesincrease?If

theywereX’lower,byhowmuchwouldoutputriseandpricesfall?Microeconomic

theoryprovidesaguidetotherelevantfactsnecessarytoanswerthisquestion;ittellsus

thatweneedtoapproximatepaidper-unitroyalties.7

Inanidealworldforresearchers,mobilephoneOriginalEquipmentManufacturers

(OEMs),ElectronicsManufacturerServices(EMSs),OriginalDesignManufacturers(ODMs)

andcomponentmanufacturersinthemobilephonevaluechainwouldreportthe

identitiesoftheIPholdersfromwhomtheylicenseandthevalueofthepaymentstoeach

ofthoselicensors.Itwouldthenbepossibletodeterminethe“IPBillofMaterials(BoM)”

paidbyeachfirmintheinthemobilephonevaluechain.Fromthere,onecouldcalculate

aweightedaverageBoMforeveryfirminthevaluechain,withtheweightsdeterminedby

theirrelativecontributiontototalmobilephonesales.

Itisalmostneverthecasethatresearcherscanworkwiththeidealdata,andthe

dataonmobilephonepatentlicensesarenotanexceptiontothisrule.Thefundamental

problemisthatlicenseeshaveveryweakincentivestodisclosetheirpatentlicenseroyalty

payments.

7Onemightclaimthatthisapproachtodataignoresothereconomiccostsbornebymanufacturers.Forexample,wedonotincludetheopportunitycostbornebyamanufacturerthatbuyspatentstopreventclaimsofinfringement,ortheopportunitycostbornebymanufacturerswhocrosslicensetheirpatents(inacrosslicensingagreementfirmsmayforegosomeoranyroyaltypaymentinexchangeforaccesstoanotherfirm’sportfolio),orthemembershipsubscriptionspaidtodefensiveaggregatorsofpatents.Suchexpenditureswillincreaseafirm’sfixedcosts.Theywillnot,however,affectmarginalcostsofproduction,andthusnotinfluenceproductionandpricingdecisionsatthemargin.

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Asamatterofaccounting,however,paymentsbylicenseesmustshowupas

revenuesforlicensors,andlicensorshavestrongincentivestodisclosetheirpatent

licensingrevenues.Forpublicly-tradedfirmswithlicensingrevenuesthatareanon-trivial

componentoftheirtotalrevenues,thoseincentivesarelegalandregulatory;thesources

ofrevenuemustbedisclosedtoinvestors.Evenlicensorswithoutlegalandregulatory

incentivestodisclosetheirrevenues,however,suchaspatentpoolsadministeredbyfirms

thatspecializeinpooladministration,havemarket-basedincentivestodisclosethe

identitiesoftheirlicenseesandtheirtieredroyaltychargesperunit,therebyallowingthe

royaltyrevenuesofthepooltobeapproximated.

Itisthereforepossibletoestimatethetotalcostofpatentlicensesinthemobile

phonevaluechainbyidentifyingthemajorlicensorsandretrievingtheinformation

necessarytoestimatetheirlicensingrevenues.Onecanthendividethesumofthese

revenuesacrossalllicensorsbythetotalvalueofmobilephonessoldtoobtainanaverage

cumulativeroyaltyyield.Therearethreenumbersthatoneneedstoknowinorderto

estimatetheAverageCumulativeRoyaltyYield:(i)themobilephonepatentlicensing

revenueearnedbyeachlicensor;(ii)thetotalnumberofmobilephonessold;(iii)the

averageselling(wholesale)priceofamobilephone(ASP).

2A.EstimatingtheSizeoftheMarket

ThenumberofphonessoldandtheASPareeasytocomeby:anumberofdata

analyticsfirmsestimatethese,andissuepressreleasesthattheythenposttotheweb.

FirmssuchasICInsights,IDC,Gartner,andGFKproducetheseestimates.Theestimates

tendtobewithinafewpercentagepointsofoneanothersuchthatresultswouldnotbe

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sensitivetowhichsourceisused.8Thesesamefirmsalsoproduceestimatesofthe

quantityandvalueoftablets.Wedonotincludetheseinthesecalculations.Ifwewould

includetablets,itwouldincreasethevalueofdevicesales,andthusdrivedownthe

AverageCumulativeRoyaltyYield.

ThesesameentitiesalsoestimatedevicesalesandpricesbymajorOEMs,and

providethisdatainpressreleases,whichtheyposttotheweb.Theseestimatesalsotend

tobewithinafewpercentagepointsofoneanother.9Weusethisdatainorderto

estimatetherevenuesearnedbypatentpools,whichtendtohavetieredroyalty

schedules.

2B.EstimatingPatentLicensingRevenue

Estimatingpatentlicensingrevenueisstraightforwardinprinciple,thoughitcanbe

complicatedinpractice.Firmsthatearnsignificantrevenuesfrompatentlicensingreport

thosefiguresinfinancialreports(e.g.SECforms10kand20-fforexample).Privatefirms

arenotobligatedtodisclosesuchinformationabouttheiroperations.Inthesecaseswe

estimaterevenuesbasedoninformationthatfirmsmakepublicallyavailable.Forexample,

successfulpatentpoolstypicallydisclosetheidentitiesoftheirlicensorsandlicensees,the

patentscoveredbythepool,andthefeescheduleforlicensees.Developinganestimate

giventhisinformationispractical,althoughitoftentendstooverestimateroyalties.

However,thatisconsistentwithourchosenbiasandsoweexpectit.10

8Forthedata,seeTab1.8,DeviceSales,intheExcelworkbookthataccompaniesthisdocument.9Forthedata,seeTab1.9,OEMSales,intheExcelworkbookthataccompaniesthisdocument.10Forthedata,seeTab1.7,RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument.

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Therearesomepublicfirmsthatearnpatentlicensingrevenueinthemobile

phonevaluechainbutinamountsthataremodestrelativetotheirotherrevenuesources.

Theythereforedonotbreakoutthisrevenueasareportablesegmentintheirpublic

filings.Therearealsoprivatefirms,andthesearenotobligatedtodisclosetheirrevenue

sources.Whenitispracticable,weestimatetherevenuesofbothtypesoffirmsonthe

basisofinformationontheirwebsites,reportsinthetradeandfinancialpress,and

interviewswithindustrypractitioners.11Whenitisnotpracticable,weenumeratethose

firms.12Wethendoasensitivityanalysisinwhichweassignaseriesofplausibletotal

revenuesforthesefirmsasagroup(basedoninformationfromthetradepressaswellas

interviewswithindustrypractitioners)inordertoseethedegreetowhichtheirinclusion

affectsourresults.13Thatsensitivityanalysisfindsthatevenanupperboundestimateof

thecombinedmobilephonepatentlicensingrevenuesofthesefirmswouldnothavea

significanteffect:evenifthemobilephonepatentlicensingrevenuesforthesefirmsasa

groupwere$2billion,theaveragecumulativeroyaltyyieldwouldonlyincreasebetween

0.4and0.6percentagepoints.

Thecoreofourmethod,then,isto“followthemoney.”Infollowingthemoney,

wemakenodistinctionsastowherealicensorisearningrevenuesinthemobilephone

valuechain,nordowemakedistinctionsamongthedifferentpatentedtechnologiesina

mobilephone.Wecapture,forexample,revenuesearnedfromlicensestakenby

11Forthedata,seeTab1.7,RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument12Forthelistoffirms,seeTab6.0,OtherFirms,intheExcelworkbookthataccompaniesthisdocument.13See,Tab1.6Sensitivity,intheExcelworkbookthataccompaniesthisdocument.

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semiconductorandbasebandchipproducers,aswellastheOEMsandEMSsthat

assemblephones.Wealsocapturerevenuesearnedfromlicensesonpatentsthatenable

video,imaging,audio,andotherfunctions,aswellastheSEPsthatenablemobility.We

capture,aswell,therevenuesofamajorsoftwarecompanythatearnsrevenuefromits

patentsthatreadonthemostpopularmobilephoneoperatingsystem.

2C.BasicPrinciplesofDataCollection

Infollowingthemoneyweareguidedbyfourprinciples.First,tothedegree

possible,theestimatesshouldbeproducedusingpublicly-availablesourcessothatour

resultscanbereplicatedandimproveduponbyotherresearchers.Indeed,weinviteusers

ofthedataintheExcelworkbookthataccompaniesthisdocumenttoshareinformation

withussothatwecanimproveourestimates.Second,weendeavortohaveaslonga

timeseriesforeachlicensorasispracticallypossible.Third,decisionsabouthowtotreat

datashouldbiasinfavorofobtainingalargerroyaltyyield.Thisimpliesthatweerronthe

sideof:(i)includinglicensorsthatlicensetoavarietyofindustries,notjustmobile

phones,whichmeansthatwemaybecountingtheirrevenuesfromthoseotherproducts

aspatentroyaltiesonmobilephones;(ii)attributingroyaltiestomobilephonesthatmay

havebeenpaidonothermobileproducts,suchastablets;(iii)doublecounting,which

meansthatwemaybeincludingboththeroyaltyrevenuesdeclaredbyalicensorandthe

royaltyrevenuesearnedbyapoolwherethelicensorisamember;(iv)biasing

approximationsupwards.14

14Forexample,inthecaseofHuawei,whichisarelativelynewlicensorwhoselegalstatusasaprivatelyownedcollectivemeansthatitisnotsubjecttothesamekindofreportingrequirementsasU.S.orEuropeanfirms,weliberallyassumethatitsmobilephoneroyaltyrevenuesarethe

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3.DataQuality

Thequalityofdatavariesacrossfirms.Weclassifylicensorsaccordingthe

accuracyofourestimatesoftheirlicensingdatainfourcategories:Confirmed,

Documented,Approximated,andResearched.Table1showsthelicensorsclassifiedin

eachcategory.15

Asasageneralrule,thelargestlicensorsarealsotheentitieswhichdisaggregate

licensingrevenuesfromotherrevenues,andforwhichwehaveaprimarysource

documentthatwasgeneratedasalegalrequirement.Qualcomm,Interdigital,Nokia,and

Ericsson,areexamplesofthesekindsoflicensors.Giventhehighqualityand

accountabilityoftheirdirectknowledgeoftheiroperationsandtheirreportingunderSEC

auspices,weconsiderthesefigures"Confirmed.”In2015,thiscategoryaccountedfor80.6

percentoftotalrevenues.

Otherlicensorsprovidesufficientinformationinpubliclyavailabledocumentssoas

toallowustoestimatetheirlicensingrevenues.Insomecaseswehavetodisaggregate

licensingrevenuesrelatedtomobilephonesfromotherlicensingrevenuesbasedon

informationinfootnotestoSEC10k’s.Inothercases,wehavelicensingfeeschedulesand

theidentitiesofthelicensees,andcanestimatethelicensingrevenuesperlicensee.We

denotetheseas"Documented."Entitiesinthiscategoryincludethemajorpatentpools

suchasMPEGLAMPEG4;MPEGLAAVC/H.264,andVia'sAACpool.Italsoincludes

Microsoft,whichlicensesitspatentsthatreadontheAndroidOperatingSystemtoOEMs.

sameasawell-established,U.S.-basedtechnologycompany,Interdigital.Indoingso,weassumethatHuaweiisearning,onitsmobilephonepatentsalone,roughly20percentofallpatentrevenuesearnedbyallChinesecompaniesinanylineofeconomicactivity.15AlsoseeTab6.0,Others,intheExcelworkbookthataccompaniesthisdocument.

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Therearesomeentitiesthatarenon-trivialmobilephonevaluechainlicensorsfor

whichwehaveinformationabouttheirtotallicensingrevenues.Wehavetomake

assumptions,however,basedonotherdataorinterviews,aboutthepercentageoftheir

totallicensingrevenuesthatarefromthemobilephonevaluechain.Wedenotetheseas

"Approximated."TheyincludeTessera,Wi-LAN,andRambus.

Finally,therearesomeentitieswithlittleornodisclosure.Examinationofthe

availabledataindicatesthattheyhaveverymodest,sometimeszero,revenues.We

denotetheseas“Researched.”Theoneexceptiontothegeneralizationaboutsizeand

dataqualityisIntellectualVentures.Inthiscase,wehaveestimateditstotalrevenues

frominformationonitsownwebsiteovertime(usingtheweb-toolsthatallow

researcherstolookatarchivedwebpages)andfrominformationinthetradepressabout

itsfinancialperformance.Wehavetoapproximatethepercentageofthisrevenuefrom

themobilephonevaluechainonthebasisofinformationonthefirm’swebsiteaboutits

patentportfolio,aswellasinterviewswithindustrypractitioners.

Inaddition,therearefirmsthatappeartoearnsomepatentlicensingroyaltiesfrom

themobilephonevaluechain,butthereislimitedinformationinthepublicdomainabout

themagnitudes.Somelarge,publiccompanies(someofwhicharemobilephoneOEMs)

earnsomepatentlicensingrevenues,buttheirlicensingactivitiesarenotsignificant

enoughtobeareportablesegmentintheirfinancialstatements.Someofthesefirms,or

EMSsthatproduceforthem,arealsomajorsourcesoflicensingrevenueforotherfirms

coveredinthisstudy.Therearealsosmallprivatecompaniesthatappeartoearnsome

patentlicensingroyaltiesfromthemobilephonevaluechain,butthepubliclyavailable

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informationabouttheirrevenuesandoperationsisfragmentary.Wecallthose“Other

identifiedfirms.”Theavailableevidencedoesnotsuggestanyoneofthesefirms—public

orprivate—individuallyhaslicensingrevenuessignificantenoughthatitsadditionwould

haveamaterialeffectontheoverallmagnitudeofthecumulativeroyaltyyield.

4.Results

Weareabletoestimate,withvaryingdegreesofaccuracy,themobilephone

patentlicensingrevenuesof32licensorsinthemobilephonevaluechain.Weestimate

thatthe32licensorsasagrouphadcumulativeroyaltiesin2015ofalmost$14.3billion

(seeTable2).16Ofthese32,11havelicensingrevenuesofeffectivelyzero.Licensing

revenuesoftheremaining21firmsrunfromalowof$2.4milliontoahighof$8.2billion

in2015.

Onewaytoputthesenumbersintoperspectiveistoaskhowtheycomparetothe

valueofmobilephoneshipments.In2015originalequipmentmanufacturers(OEMs)sold

1.97billionmobilephonesfor$437billion.17ItfollowsthattheASPwas$221.80,andthat

theaveragecumulativeroyaltyperphonewas$7.25.TheAverageCumulativeRoyalty

Yieldissimplytotalpatentroyaltiesdividedbythevalueoftotalphoneshipments,or3.3

percent.18

16Forthedatabylicensor,seeTab1.7,RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument.17AccordingtoIDC.Forthedata,seeTab1.8,DeviceSales,intheExcelworkbookthataccompaniesthisdocument.18Forthecalculations,seeTab1.3,RoyaltyYieldSummary,intheExcelworkbookthataccompaniesthisdocument.

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Anotherwaytoputthesedataintoperspectiveistoaskhowtheycomparetodata

fromearlieryears.Becausewetakeatime-seriesapproach,someofourfirm-level

revenueestimatesgobackto2000.By2007,wehavedatafor10firms,andthese

accountedfor76percentofallroyaltyrevenuesin2015.By2009,wehavedataon15

firms,andtheseaccountedfor92percentofallroyaltyrevenuesin2015.AsFigure1

shows,bothofthoseseriesareremarkablystable.The2009-15series,forexample,

hoversataround3percent,fallingonlymarginallyduringthelasttwoyears.19

Yetanotherwaytoputthesedataintoperspectiveistoaskhowtheycompareto

estimatesthatotherresearchershavemadeabouttheothercostsofproduction,suchas

semiconductorsandbasebandprocessors,aswellasOEMoperatingmarginsonmobile

phones.Figure2presentsthatdata.Theresultsindicatethatpatentlicensingisthe

smallestofthecategories:slightlylowerthanthecostofbasebandprocessors,about

one-sixththecostofsemiconductors,andaboutone-fourthofOEMoperatingmargins.20

5.SensitivityAnalysis

Theseresultsdonotseemtobesensitivetohowonetreatsthedata.For

example,whatifweassumethatfeaturephonesnolongeryieldpatentlicensing

revenues,becausetheyarenowmostlyproducedandsoldinjurisdictionsthattendnotto

bestrongenforcersofIPrights?Whatwouldhappenifthecumulativeroyaltiesof$14.3

billionin2015wouldbespreadacross1.424billionsmartphoneswithatotalvalueof

19Forthedata,seeTab1.4,RoyaltyYieldSeries,intheExcelworkbookthataccompaniesthisdocument.20Forthedataandsources,seeTab1.5,EconomicAnalysis,intheExcelworkbookthataccompaniesthisdocument.

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$424billioninsteadof1.97billionsmartandfeaturephoneswithavalueof$437billion.

TheAverageCumulativeRoyaltypersmartphonewouldbe$9.93.TheAverageCumulative

RoyaltyYieldwouldbe3.4percent.21

Whatwouldhappenifweimputedtheroyaltiesoffirmsthatweknowearnsome

licensingrevenues,butthatdonotprovideenoughinformationforustoestimatethose

revenuesonafirm-by-firmbasis?AsTable3shows,theresultswouldbeamodest

increaseintheAverageCumulativeRoyaltyYield.22Forexample,ifweassumethatthese

firmsasagroupearned$1billioninlicensingrevenuesin2015,whichwouldbea

generousassumption,thentheroyaltyyieldonasmartphonewouldincreasefrom3.4

percenttocometo3.6percent.Ifwemaketheextremelygenerousassumptionthatthe

combinedroyaltiesofthesefirmscameto$2billionin2015,thenthecumulativeaverage

royaltyyieldwouldstillonlybe3.8percent.

Whathappensifwerelaxtheassumptionthateverysmartphoneshippedin2015

paidlicensingroyalties?WhatifitwasthecasethatsomeOEMsevadedlicenses,such

thatthe$14.3billionisactuallyspreadacrossfewerthan1.4347billionsmartphones?As

afirststep,wefinddetermineanupper-boundevasionrate,whichweputat30

percent.23WethencalculatetheAverageCumulativeRoyaltyYieldassumingthatonly70

percentofsmartphonespaidlicensingroyalties.Table3showstheresults.Underthe

assumptionsthat:(i)allroyaltiesarechargedonsmartphones(noneonfeaturephones);

21SeeTab1.3RoyaltyYieldSummary,intheExcelworkbookthataccompaniesthisdocument.22SeeTab1.6,Sensitivity,intheExcelworkbookthataccompaniesthisdocument.23Foradiscussionofhowweestimatedthatupper-boundevasionrate,seethefootnoteinTab1.6,Sensitivity,intheExcelworkbookthataccompaniesthisdocument.

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and(ii)that30percentofsmartphoneproductionevadesroyalties,theaverage

cumulativeroyaltyratewouldgrowfrom3.4percentto4.8percent.

Whatifwepushedharderstill,andmadethreestrongassumptions:allroyalties

areearnedonsmartphones;theevasionrateis30percent;andtheroyaltiesforfirmsin

the“Other”un-enumeratedcategoryin2015was$2billion?Howhighcouldwepushthe

estimateoftheAverageCumulativeRoyaltyYield?AsTable3shows,theansweris5.5

percent.

6.ConcludingRemarks:

Acrucialinputtoanyacademicinquiry,policydebate,orindustrystudyisthefacts,

dispassionatelygathered.Ourpurposeincreatingthedatasetweoutlineinthisnoteisto

dothat.Theinformationinthisdatasetisthereforenotmeantasajudgmentofanysort

uponthemeritsoreffectivenessofanyentityoritsoperations.Weinviteusersofthis

datasettosharetheirideas,suggestions,andcorrectionswithussothattheymaybe

potentiallyincludedinfutureversions.Wewouldliketoimproveupontheseestimatesby

makingcorrectionswhenwehaveerredandtoobtainsuperiordatasourceswhenthey

exist.Wewillbefirsttoseekimprovementinournextedition,andhopetobenefitfrom

thesupportoflikemindedothers.Perhapswithongoingcooperationwithinthe

communityovertimewemayallgaingreaterclarityastothefunctioningofindividual

firmsandtheindustry.

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Table1:TypesofLicensorsClassifiedbyTypeandQualityofTheirData

Confirmed

Documented

Approximated

Researched

Otheridentifiedfirms

Publiccorporation

Qualcomm(2.1)Ericsson(2.2)

Nokia(2.3)(incl.Alcatel-Lucent)1

Interdigital(2.4)ParkerVision(3.9)

UnwiredPlanet(3.10)2VirnetX(3.11)

Microsoft(2.5)

Philips(3.1)3Tessera(3.5)Rambus(3.6)

AcaciaTechnologies(3.7)WiLAN(3.8)

MarathonPatentGroup(3.12)

AT&T802.11(3.2)AT&TMPEG4(3.3)Broadcom(3.4)

Apple(6.0)

Blackberry(6.0)Google(6.0)Infineon(6.0)

SamsungElectronics(6.0)Siemens(6.0)

Technicolor(6.0)TexasInstruments(6.0)

Vringo(6.0)

Privatecorporation

Huawei(5.6)

SISVELWireless(5.1)IPCom(5.2)5

PanOptis-Optis(5.3)2

IPBridge(5.4)IntellectualVentures(5.5)

CoreWireless/Conversant

(6.0)7FranceBrevet(6.0)8

ETRI(6.0)9ITRI(6.0)10

LongitudeLicensing(6.0)11MobileMediaIdeas(6.0)

Rockstar(6.0)RoundRock(6.0)VoiceAge(6.0)

Patentpool

ViaLicensingAAC(4.1)MPEGLAMPEG4(4.3)

MPEGLAAVCH.264(4.4)

ViaLicensingLTE(4.2)4

SISVELLTE(4.5)SISVELWiFi(4.6)

SIPROLabWCDMA(4.7)VectisWiFi(4.8)6

(TabsintheWorkbookinparentheses.)LicensorsincludedintheCumulativeRoyaltyYieldestimateinboldface.Technologyleadersinitalics.Source:seetab1.7RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument.

16

NotestoTable1(1)NokiaacquiredAlcatel-LucentinJanuary2016.(2)PanOptisrecentlypurchasedUnwiredPlanet.BothlicensepartofEricssons’spatentportfolio.(3)Philipsisamajorlicensor,butismorediversifiedwithmajortrademark/brandlicensingoperations,andalsomajordigitalA/Vlicensingwhichincludesmajorpoolparticipation.However,ithassomemobileSEPlicensingbusiness.(4)GooglelicensesitsLTEpatentsthroughVia.DolbyownsViaLicensing.(5)IPCommanagestheformerBoschmobilepatents.(6)VectislicensessomeofEricssons’sWiFipatents.(7)CoreWireless/ConversantlicensespartofNokia’spatentportfolio.(8)FranceBrevetisaFrenchsovereignfundwithaportfolioincludingnear-fieldcommunication(NFC)patents.(9)ETRIisaSouthKoreanresearchinstitute.(10)ITRIisaTaiwaneseresearchinstitute.(11)LongitudeLicensingrepresentsSandiskandothermajortechcompanies.

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Table2CumulativeRoyaltyYieldClassifiedbyQualityofData(in2015)

Source:Seetab1.7RevenuesbyLicensor,intheExcelworkbookthataccompaniesthisdocument.

Type1Public

company

Type2Privatecompany

Type3Patentpools

Total

Confirmed

$11,512,623,115

(81%)

-

-

$11,512,623,115

(81%)

Documented

$1,134,500,000

(8%)

-

$310,218,512

(2%)

$1,444,718,512

(10%)

Approximated

$604,358,781

(4%)

$432,488,000

(3%)

-

$1,036,846,781

(7%)

Researched

$124,752,491

(1%)

$68,400,000

(0%)

$86,982,900

(1%)

$280,135,391

(2%)

Total

$13,376,234,387

(94%)

$500,888,000

(4%)

$397,201,412

(3%)

$14,274,323,799(100%)

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Table3:ASensitivityAnalysisoftheAverageCumulativeRoyaltyYield(2015)

%Unlicensed EffectiveSmartphonesRoyaltiesChargedby"Other"licensorsasagroup($m)

Phones $0 $500 $1.000 $1.500 $2.000

0% 3.4% 3.5% 3.6% 3.7% 3.8%

5% 3.5% 3.7% 3.8% 3.9% 4.0%

10% 3.7% 3.9% 4.0% 4.1% 4.3%

15% 4.0% 4.1% 4.2% 4.4% 4.5%

20% 4.2% 4.4% 4.5% 4.7% 4.8%

25% 4.5% 4.6% 4.8% 5.0% 5.1%

30% 4.8% 5.0% 5.1% 5.3% 5.5%

Source:seetab1.6Sensitivity.

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0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure1PatentRoyal_esas%ofValueofMobilePhones

(SmartandFeature)Shipped,2007-2015Total,FirmsCoveredSince2007as%MobilePhoneRevenues Total,FirmsCoveredSince2009as%MobilePhoneRevenues

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PatentLicenseCost3.3% BasebandProcessorCost

3.7%

OtherSemicCost15.5%

OtherCosts62.6%

OEMOpera_ngProfits14.9%

Figure2:MobilePhoneEconomics(2015)