Recently, a Fierce Wireless article by Keith Mallinson discussed the issue of cellular SEP FRAND royalty rates and in my opinion made some very good points on the cumulative level, based on a practical rather than theoretical argumentation.
In the article, there's an estimation of cumulative royalty rates, where the actual combined licensing revenues of the world's major cellular SEP licensors are basically divided by the actual number of phones sold. Based on such a calculation, it was estimated that "a total aggregate SEP royalty across all handsets worldwide is most likely to be no more than a mid-single-digit percentage". That estimation is probably quite accurate, and I find the "reality-check" approach very refreshing. Not least considering the amount of dubious theoretical argumentation one can find on this subject.
But since I myself mentioned the figure of "around 10%" in an earlier post on cellular FRAND royalty levels, I felt that a clarification might be needed to remove any potential confusion. Mr Mallinson's calculation method gives a high-level view; a global average estimation of the cumulative royalty rate. On the other hand, my post focused on the question: "What cumulative SEP FRAND royalty does an OEM without own basic R&D or SEP holdings have to pay?". These are two different things. Let me explain.
Essentially, there are three categories of mobile phones sold on this planet:
1) Phones sold by OEMs with own basic wireless R&D and SEP portfolios.
Many (other) asserting SEP portfolio holders are themselves implementers, and thus need a "grantback" license to these OEMs' SEP portfolios. Therefore, this subset of phones is subject to lower SEP royalty rates due to "royalty netting". As I described in my post and is also clear from Mr Mallinson's article, this is not discriminatory, due to fair value transfer. The cumulative royalty for this category of phones is somewhere in the 0-10% interval.
2) Phones sold by OEMs without own basic wireless R&D and SEP portfolios.
Instead of doing heavy investments in cellular wireless R&D, these OEMs have chosen to focus their business efforts on e.g. design, brand management, localization, feature development, marketing or logistics. The basic cellular technology is procured through the SEP FRAND licensing regime. This is the category of phones I addressed in my post, and in my experience, its cumulative royalty is around 10%.
3) Phones sold by OEMs that are "unwilling licensees".
Due to factors such as patent hold-out and the emergence of major localized OEMs in jurisdictions with less effective IPR enforcement regimes, a number of phones sold globally today are unlicensed. That is, they constitute infringing devices and no royalty at all is payed for them.
So a new OEM has two legitimate choices: a) get into basic wireless R&D to contribute to the standards and in the longer term pay somewhere between 0% and 10% or b) let others do all that and pay around 10%. As is worth repeating, there are no free lunches.
Considering that the phones in the three categories are subject to cumulative royalties of something like 0-10%, 10% and 0% respectively, it's perfectly possible that the global average might end up somewhere around 5% as indicated by Mr. Mallinson's calculation. Having said that though, it's important - for new OEMs but also for courts and agencies - to appreciate that the global average is not necessarily a relevant reference per se for a given OEM.
Finally, it's of course quite alarming that a subset - and probably a sizable minority - of phones sold globally are currently not covered by SEP portfolio FRAND licenses and corresponding royalty payments. Or to put it more bluntly, are sold by OEMs who "willfully infringe" other's SEP portfolios. Partly a result of the "patent hold-out" challenges discussed in a previous post, this is a grossly under-reported problem that I hope to return to in another post.