The following article was authored by Professor John Gong of the Department of Economics of the University of International Business and Economics (Beijing). Guest articles reflect the opinions of their authors, not those of ip fray.
As smartphone manufacturers like Apple, Xiaomi and OPPO have accumulated more and more standard-essential patents (SEP), making into the top ten list of holders of SEPs, they are increasingly becoming key contributors to the standard-setting process at 3GPP as well. Against this backdrop, it is time to give serious considerations to taking licenses from phone makers for the carrier network equipment makers, since they are also obviously SEP implementers. This article analyzes this issue primarily from three perspectives driving the determination of such aggregate royalty rates.
1. From the perspective of contributions to cellular technology
The expansion and enrichment of modern smartphone features have progressively diminished the value contribution of the basic cellular functions such as telephony, messaging and providing raw bandwidth. Many more applications not directly related to the basic cellular functions have been developed over time. In contrast, base stations, the most important category of carrier network equipment, serve a simple, singular purpose — providing cellular network coverage. Therefore, using the total device cost of the base station as the basis for determining licensing royalty base is a much more straightforward and reasonable approach, compared with the entire market value approach encompassing the total value of a whole range of parts and components in a smartphone that is totally unrelated to the cellular functions.
The current industry aggregate royalty rate for 5G smartphones is approximately 5%. If we assume that the value of cellular-related components in a smartphone is about 20% of the total value, then the effective aggregate royalty rate, based on cellaur-related components of 5G smartphone, is 25%(5%/20%).To arrive at the same effective aggregate royalty rate as if only applying to the cellular-related value of a smart phone, the theoretical aggregate royalty on a base station would have to be 25% as well! This is five times the actual aggregate royalty rate of 5% typically applied to a 5G smartphone. Therefore, if the smartphone industry’s aggregate royalty rate is extrapolated to the base station side, the base station aggregate royalty rate should be 25% of base station value since all the device is cellular-related. Then, we can see that the base station aggregate royalty rate could be approximately five times that of the UE (User Equipment) side.
2. From the profit margin perspective
We examine the financial performance of major carrier equipment makers, who are also major SEP right holders. The following five base station makers collectively held approximately 93.7% of the global market share in 2024, with the following gross profit margins:
| Year 2024 | Nokia | Samsung | Ericsson | Huawei | ZTE |
| Gross profit margin | 46.12% | 36.99% | 44.12% | 44.40% | 37.91% |
Meanwhile smartphone manufacturers’ gross profit margins, which we collected from annual financial reports from several publicly listed phone manufacturers, yield the following figure:
| Year 2024 | Lenovo | Xiaomi | Apple | Samsung | OPPO | Vivo | Transsion |
| Gross profit margin | 16.1% | 12.6% | 37.2% | 17.5% | 17% | 17% | 20.62% |
Weighting the gross profit margins of the five network equipment manufacturers by market share yields an average of 43.74%. Weighting the gross profit margins of UE-side manufacturers above by market share yields an average of 21.24%. This indicates that base station manufacturers’ capacity to bear SEP licensing costs is approximately 2.1 times that of UE-side manufacturers. Considering Apple’s unique business model and exceptionally high brand premiums, recalculating by excluding Apple smartphones yields 16.61%, with a corresponding multiplier of 2.6 compared to the base station side. Therefore, from a profitability perspective, we conclude that the aggregate royalty burden capacity of the base station side is able to reach 2.1 to 2.6 times that of the UE side.
3. Equal burden-sharing perspective
Statistics indicate the global smartphone market generated approximately $409 billion in annual revenue in 2022. The total SEP licensing revenue for the mobile industry can be roughly calculated as the industry’s annual total revenue multiplied by the 5G aggregate rate of about 5%, yielding $20.45 billion. CRA previously estimated that the global SEP licensing revenue could reach as high as $22.397 billion, which is closely aligning with our finding. Reports indicate that the mobile carrier network equipment market size in 2024 is approximately $113.8 billion. Assuming all licensing fees are split equally between the base station side and the UE side, the cumulative rate for the base station side would be $20.45 billion divided by $113.8 billion, which is 17.97%. This ratio is 3.59 times the 5G aggregate royalty rate for the UE side, which is at about 5%.
Our analysis shows that all three perspectives considered above indicate that the aggregate royalty rate for the base station side should be several times higher than that for the UE side. Considering practical implementation concerns and the need for a FRAND compliant royalty range assessment, we recommend that the ratio of the aggregate royalty rates between the base station side and the UE side should be between 2.5 and 3 times, with a more preferable multiple somewhat closer to 3.
Full text
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