Patents account for one-quarter of the cost of a smartphone, claims research

By Graeme Burton
30 May 2014 View Comments
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The intellectual property battles between technology firms has taken its toll on the cost of smartphones, with royalty payments now estimated to cost more than $120 of the price of a $400 smartphone, according to new research.

The estimates were provided in a new report by a trio of lawyers - including Ann Armstrong, vice president and associate general counsel at semiconductor giant Intel.

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"The data shows that royalty stacking is not merely a theoretical concern. Indeed, setting aside off-sets such as 'payments' made in the form of cross-licences and patent exhaustion arising from licensed sales by component suppliers, we estimate potential patent royalties in excess of $120 on a hypothetical $400 smartphone," concludes the report.

The authors say that more research is required into the costs intellectual property demands are imposing on technology in order to better determine "reasonable loyalties" under patent laws and commitments to licence on fair, reasonable and non-discriminatory (FRAND) and RAND terms.

"In particular, there has been significant recent focus on "royalty stacking," in which the cumulative demands of patent holders across the relevant technology or the device threaten to make it economically unviable to offer the product," write the report's authors.

According to estimates by Japanese investment bank Nomura, the cost of components in a typical $400 smartphone is between $120 and $150. However, claim the authors, royalty demands narrowly outstrip even the cost of the hardware.

"We find, for example, that announced royalty demands for LTE cellular functionality approach $60 for a $400 smartphone but the average cost of the baseband processor that implements cellular functionality is as little as $10 to $13," claims the report.

It continues: "The disparity between patent royalty demands and component prices is an issue that courts will increasingly confront as they apply the Federal Circuit's apportionment jurisprudence, which requires that damages be based on (at most) the smallest salable patent-practicing unit."

Furthermore, because a smartphone is a "converged" device, the number of patents potentially applicable - especially under the US patent regime - could amount to 250,000 or more, according to some estimates. "The large number of technologies provides a correspondingly large number of targets not only for smartphone competitors, but also non-practicing entities [patent trolls]," claim the authors.

Indeed, if payments were demanded for all of those patents at the same rate that courts have awarded the technology giants, smartphones would be unviable.

In addition to Armstrong, the other two authors of the 69-page report are Joseph J. Mueller and Timothy D. Syrett, lawyers at Wilmer Cutler Pickering Hale & Dorr.

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