Whereas litigation is bogging down the licensing of mobile customary important patents (SEPs) in autos with disputes about where in the production supply chain licensing may or must occur—from chip, to module, to telematic management unit (TCU), to total automobile—that is additionally delaying fee of Truthful, Cheap and Non-Discriminatory (FRAND) royalty expenses in these instances and inflicting confusion about licensing worth. This can be a pity as a result of readability is in everybody’s pressing curiosity.

Properly-established cell phone licensing benchmarks conservatively indicate a complete worth of a minimum of round $30 per automobile for patents important to the 2G, 3G and 4G requirements.

Nice expectations for IoT hinge on mobile know-how

There may be robust consensus and enthusiasm in authorities, enterprise and amongst commentators about the Internet of Things, with its multi-trillion dollar market potential. Whereas monetary and different advantages might be reaped by many distributors and customers in numerous completely different industries, in addition to by customers, a number of generations of patented applied sciences developed largely by corporations throughout the telecommunications business over a few years—as much as and together with newly launched 5G—are enabling this main alternative.

Regardless of mobile applied sciences being developed by and hitherto carried out largely amongst a comparatively restricted group of telecommunications business OEMs producing mobile merchandise—most importantly cellphones in addition to cell community tools—the range and numbers of potential know-how implementers in IoT are far higher. Whereas SEP licensing is properly established for cellphones and base stations—with 1000’s of agreements because the Nineties value many billions of {dollars} yearly—the business remains to be within the throes of building the idea and pricing to be used of those applied sciences in numerous completely different IoT purposes together with automobiles, home home equipment, industrial robots and distant meters.

This text conservatively estimates complete FRAND expenses for licensing all mobile SEPs in autos, based mostly on worth derived therefrom and reflecting some latest court docket judgements on FRAND expenses in different gadgets together with smartphones. 

How you can cost?

For the reason that early days of the 2G cell phone business, SEP house owners most frequently licensed their mobile patents at royalty charges calculated as a share of telephones’ common wholesale (i.e. unsubsidized) promoting costs. One motive for that is that OEMs anticipated the next downward pattern in cell phone costs, which fell dramatically following the introduction of digital mobile with 2G within the early Nineties. OEMs didn’t wish to be locked into mounted dollar-per-unit (“DPU”) royalty expenses that may improve in share phrases as manufacturing prices had been quickly declining.

Whereas royalties for 2G/3G/4G mobile connectivity in a cell phone have often continued to be charged as a share of the end-product promoting value, the worth established there—when said as an equal DPU determine—is a key consideration. As common cell phone costs elevated with the widespread adoption of 3G smartphones from the late 2000s and 4G smartphones a number of years later, SEP licensors have, in lots of instances, on the behest of OEMs, “capped” percentage-based royalties to most DPU figures to make sure royalties paid don’t exceed the worth of extra options deemed much less depending on mobile connectivity. 

Equally, DPU pricing can be relevant for different cellular-enabled “gadgets” together with, for instance, PCs and linked autos. There are additionally bountiful methods by which connectivity is exploited in these with numerous purposes. Nevertheless, a automobile OEM, for instance, would fairly moderately refuse to pay royalties for mobile SEPs which are calculated as a share of a automobile’s value or worth in alloy wheels or leather-based seats. 

I’ve argued for a few years against the proffered valuation methodology of basing royalties on a percentage of the sales price of a component or “smallest-saleable patent training unit (SSPPU)” and this method has been soundly rejected by US and European courts.  The US Ninth Circuit Court of Appeals has ruled in Federal Trade Commission v. Qualcomm that “the district court docket’s evaluation [relying on an SSPPU approach]remains to be essentially flawed. No court docket has held that the SSPPU idea is a per se rule for “affordable royalty” calculations . . . .” Equally, in Germany in Nokia v Daimler, the Mannheim court docket said that the “royalty supplied in [Daimler’s] counter-offer will not be affordable, because the reference worth used within the top-down method within the type of the typical buy value of [TCUs] is unsuitable. This reference worth prevents [Nokia] from collaborating adequately . . . in use of the know-how within the saleable finish product.” (Unofficial translation.)

I’m not commenting right here on how combination royalties can or needs to be apportioned amongst SEP house owners. Elsewhere, I’ve commented on the inaccuracies and other shortcoming in apportioning royalties based on the counts of declared-essential or judged-essential patents

The place to license?

Whereas I and plenty of others have additionally lengthy argued it’s also moderately less complicated and extra environment friendly to license on the total system degree—as has all the time been the case in cellphones—the Court docket of Appeals moreover dominated within the above that it’s the patent licensor’s prerogative to license the place it needs. 

As mentioned under, the worth of mobile performance to a linked automobile is a minimum of round $30 per unit, no matter the place licensing happens within the manufacturing provide chain, and regardless of the completely different formulae that might be used to calculate that determine with licensing at completely different levels in that offer chain. 

Valuation benchmarks

Whereas there has by no means been consensus within the telecommunications business that combination royalties for SEPs needs to be capped—with important dissent by various licensors including Qualcomm—most combination figures proposed by some main corporations that declare many patents important to mobile requirements—when accurately interpreted and utilized—present a minimum of some conservative valuation benchmarks. Court docket determinations of FRAND royalty charges for particular person licensors—additionally as percentages of unsubsidized wholesale handset costs—in a number of completely different instances have been based mostly upon or cross-checked utilizing such combination figures:

Nevertheless, changes to the above are warranted as a result of some supply figures have been misinterpreted and incorrectly utilized or various figures might have been moderately chosen as combination royalties in figuring out FRAND charges for the events’ portfolios. 

Previous to Decide Selna’s judgement being fully vacated on attraction, I confirmed he had muddled single-mode and multi-mode licensing charges in pages 5 to 7 of my critique of his “top-down” SEP royalty rate valuation analysis. As LTE was being first standardized in 2008, patent owner announcements from April that yr proposed particular person and combination single-mode LTE royalty charges. This was for like-for-like comparisons with claims of ”less onerous” licensing for rival 4G know-how WiMAX at “much lower” rates and with patent pooling at a “predictable cost”. Solely a few corporations additionally talked about their proposed multi-mode charges. It is just since then that Apple’s iPhones and Android-based smartphones have been multi-mode gadgets needing licensing of a couple of technology of know-how. The primary of those smartphones, together with even 3G, was not launched till the second half of 2008. The mixture charges Decide Selna utilized in deriving an combination FRAND charge of 6% to eight% (his judgement additionally cites a determine “not greater than 10%”), mirrored solely the worth in LTE and never that in 2G and 3G. The right determine for LTE handsets (i.e. multimode gadgets) along with his methodology ought to, subsequently, have been 11% to fifteen%, together with a further 5% for 3G, and conceivably extra for the inclusion of 2G. 

Justice Birss additionally makes use of the “complete royalty burden” in his FRAND charge determinations. He signifies, for a 4G multimode handset, “the combination implied by both get together’s case (Huawei’s 13.3% and Unwired Planet’s 10.4%).” The typical of those two figures is 11.9%. 

Based on Technique Analytics, the worldwide wholesale common promoting costs for LTE handsets (i.e. overwhelmingly multi-mode together with 2G, 3G and 4G requirements) had been $270 in each 2018 and 2019. That equates to $29.70 to $40.50 per handset at multi-mode royalty charges of 11% and 15%, respectively.

Whereas mobile SEP licensing revenues for Ericsson, InterDigital, Nokia and Qualcomm alone quantity to many billions of {dollars} per yr, that’s overwhelmingly from cell phone licensing with revenues understating value in cross licensing among these and other companies. For instance, as Ericsson and Nokia used to have giant handset system operations and nonetheless have main mobile community tools companies, licensing charges paid in money amongst these and plenty of different mobile business corporations considerably mirror netting off moderately greater nominal expenses. Main implementers—together with Apple, Huawei, LG and Samsung with substantial market shares of system gross sales in recent times—are inclined to generate little or nothing in money royalties for SEP licensing whereas they search to attenuate license payment outpayments via cross licensing. 

Licensing charges paid additionally understate worth as a result of many OEMs have remained unlicensed on account of free-riding with patent “hold-out” and since some OEMs would not have licensing applications however personal patents for defensive functions. 

SEP worth in autos versus smartphones

The worth of SEP know-how to autos is supplied in numerous methods and purposes to producers, customers and automobile fleet operators. In some respects, this worth exceeds the worth that the identical know-how confers on a smartphones. In addition to enabling in-vehicle data and leisure techniques, mobile know-how:

  • Connects all of a automotive’s occupants concurrently, whereas smartphones are usually utilized by just one individual;
  • Permits distant automobile diagnostics for upkeep, asset administration monitoring and route administration in vehicles; 
  • Improves automobile security with C-V2X, for instance, with collision avoidance alerts launched in 4G: thus saving lives by lowering the numbers of millions dying and plenty of extra affected by critical accidents on the roads worldwide annually; and
  • Can repeatedly join numerous third events, together with the automobile OEM, insurance coverage suppliers and fleet administration service suppliers.

The worth derived from the one-off licensing expenses can be elevated in linked autos as a result of these have longer working lives than smartphones.  Cars, for example, typically have 14-year lifespans before scrappage, versus seven years for mobile phones, whereas customers in developed nations change their telephones about each 18 months.

The DPU worth of mobile SEPs in autos is, subsequently, a minimum of akin to that in smartphones.

Whereas there’ll proceed to be a big proportion of prices and worth in autos that has nothing to do with mobile capabilities, the proportion of that in data and communications applied sciences—considerably together with mobile connectivity—is giant and rising quickly. As outlined by business analyst Markets and Markets, the global connected car market is anticipated to be value $54 billion in 2020 and is projected to succeed in $166 billion by 2025—a compound annual development charge of 25%. With sales of around 70 million light vehicles per year, that quantities to $600 per automobile in 2020 rising to $2,400 per automobile in 2025. It believes the connected truck market can be value tens of billions of {dollars} per yr. As well as, Markets and Markets circumscribes a separate global in-vehicle infotainment market which it tasks to develop from $24.3 billion in 2019 to $54.8 billion by 2027—a compound annual development charge of 10.7%.  Analysis reveals that car manufacturers charge consumers from a number of hundred {dollars} to many 1000’s of {dollars} for linked automotive utility “packages.”

In consideration of all of the above and the “most combination charges” relied upon by the judges, as mentioned above, an combination SEP worth of $30 to $40 per smartphones can be moderately relevant per linked automobile for multimode 2G/3G/4G licensing. Whereas DPU royalties are explicitly not derived as a share of a automobile’s value or value, it’s notably that the above figures correspond to lower than 0.1 % of average selling prices for cars—at $37,800 in the US and $27,400 globally— two orders of magnitude greater than for LTE smartphones at $270 during the last couple of years. 

The longer term in 5G

As indicated above, the linked automotive market is anticipated to quadruple in dimension over the subsequent 5 years, with extra development in adjoining markets which are additionally depending on mobile connectivity. In addition to buoying common costs and stimulating new automobile gross sales volumes, linked automobile capabilities in automobiles and vehicles—with Markets and Markets’ market definition, or with my broader market definition—will inevitably present among the many greatest alternatives for automobile OEMs to distinguish their merchandise and bolster revenue margins. For instance, capabilities including C-V2X are being enhanced in 5G over what is feasible in 4G, with enhancements corresponding to enhanced positioning to allow more and more autonomous and even self-driving autos. Whereas market definitions embrace the price or value of tech {hardware} and software program, utility and value to consumers will grow as autonomous capabilities—supplied by C-V2X, sensors and AI—save lives whereas relieving occupants from driving and enabling them to work, chill out or sleep. 

Whereas value and worth to producers and customers in linked autos is sort of fully nonetheless in 2G, 3G and 4G in the present day, it will more and more be in 5G with it anticipating to dominate the move of gross extra mobile connections (a number one indicator) and account for 31 % of all established connections worldwide by 2025. That justifies important extra royalties for 5G in autos, as some mobile SEP house owners are already acquiring via the licensing of 5G smartphones and different gadgets.

One-stop-shopping is greatest in IoT

Whereas bilateral licensing is feasible in IoT together with linked autos—as it’s in cellphones—the diminished transaction prices and different advantages inherent in platform-based licensing or patent pooling is highly attractive to both licensors and licensees in IoT, as I wrote in my previous article here very recently. Whereas all the main mobile SEP house owners have most popular to license bilaterally to the comparatively small variety of handset OEMs, most choose now to license these SEPs into the quite a few completely different vertical sectors in IoT via a platform or pool. For instance, whereas there are differences in analysis and opinion about exactly what proportion of cellular SEPs Avanci represents, there may be broad settlement that it, with its 39 licensors, has most of them. Avanci licenses all its 3G and 4G SEPs for $15 per linked automobile—the value of a automotive wash—no matter what number of TCUs, modules or modem chips the automobile comprises.