IP² Working Paper No. 18005
by Alexander Galetovic, Stephen Haber, and Lew Zaretzki

Original date: February 7, 2018
Published at Forthcoming in Telecommunications Policy

Keywords: royalty yield, running royalties, mobile phones, smartphone value chain, royalty stacking

ABSTRACT:

An influential literature argues that dispersed patent ownership may lead to royalty stacking and excessive running royalties, thus increasing the long-run marginal cost of manufacturing phones and their prices. In order to assess this claim, we estimate the average cumulative royalty yield—the sum total of patent royalty payments earned by licensors, divided by the total value of mobile phones shipped— in the world mobile phone industry between 2007 and 2016. This is a conservative proxy of the running royalties paid in the mobile phone value chain.

We “follow the money” and identify, with varying accuracy, 39 potential licensors in the smartphone value chain. We find that, of these, only 29 charged royalties in 2016, running from a low of $1.6 million to a high of $7.7 billion, summing to $14.2 billion in total, which compare with $425.1 billion in mobile phone sales. The average cumulative royalty yield in 2016 was 3.3 percent or $7.20 per phone. If we restrict this only to smartphones, the result would be $9.60 per phone, roughly 3.4 percent of the average selling price. A sensitivity analysis shows that even under a very restrictive set of assumptions, the average cumulative royalty yield on a smartphone would not exceed 5.6 percent.

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COMPLETE PAPER: An Estimate of the Average Cumulative Royalty Yield in the World Mobile Phone Industry: Theory, Measurement and Results
ABSTRACT: An Estimate of the Average Cumulative Royalty Yield in the World Mobile Phone Industry: Theory, Measurement and Results