WCMDA offered higher capacities and more features than GSM, but operators could not substitute their 2G networks for 3G networks overnight. 3G handsets continue to support the previous generation of technology.
This trend will continue with LTE; there will probably never be a pure LTE handset – even data-only dongles are likely to be multimode. Next generation handsets will likely support LTE, WCDMA and GSM/GPRS, not to mention a number of other connection technologies such as Bluetooth, WiFi, WiMAX and RFiD.
Each additional standards-based technology will add incremental cost to the product in terms of technical complexity, but also royalty costs. The mix of other technologies expected in modern handsets such as MP3, cameras, DVB-H, GPS and touch screens increase this complexity further.
Handset manufacturers trying to decide on which technologies to include face the problem of patent stacking; each new technology added to the product adds a new set of patents, additional licensors and potentially new royalty costs. The main communication technology will probably dominate the royalty burden, but the cumulative bill for the entire product will be significantly higher.
Royalty rates are only one aspect. PA’s own analysis of the 3G patent landscape identified 62 companies claiming to own patents Essential to the technology. PA’s analysis of declarations made to ETSI for 3G shows that less than 40% of patents declared as essential are actually technically essential – meaning large levels of uncertainty for licensees trying to understand who to negotiate with, and for what.
It is still early days for LTE, but already new patent owners have emerged, and PA expects the patent ownership to be more diverse for LTE. A broader ownership means increased transaction costs as manufacturers, in principle, need to obtain licences for all Essential patents. Broader ownership also increases the complexity and uncertainty in identification of patents.
Managing expectations
In April 2008, Nokia, Nokia Siemens Networks, NextWave Wireless, Alcatel-Lucent, Sony Ericsson, NEC and Ericsson called for LTE patents to represent a single-digit percentage of the sales price of mobile phones and a single-digit dollar figure for laptop computers.
It is interesting to note that the announcement only mentions mobile phones and laptop computers. The industry appears to have not yet embraced the idea of embedding wireless connectivity into CE devices or white goods.
The number of CE devices that support any broadband connection is extremely low, even in devices which are obvious targets for such connectivity such as digital cameras, DAB radios, portable video devices and Blu-ray players.
Consumers are exploring how to use the broadband access to their content in time- and place-shifted ways and there is a significant opportunity for the CE industry to tap into that appetite. However the IPR royalty model currently applied to handsets is a barrier to adoption of wireless broadband in the CE world.
For example, an average digital camera, retailing for around $300, already has a battery, a screen and relatively large form factor to accommodate the additional components required to support a wireless standard such as LTE. The incremental bill of material cost of adding wireless to such device is likely to be around $10 (baseband and radio). The royalty cost, under the typical current model is potentially around 15% of total product cost – as much as $50. Those critical of this model would point out that the incremental functionality to the camera is small compared to the incremental cost. The wireless connectivity may not be used by all users and the camera still functions as a camera. It is questionable if the CE device/white goods manufacturers can justify or support such a significant erosion of their margins.
While mobile handsets increase in technical complexity and try to attract consumers with bigger, better, faster offerings, the opportunity for mass adoption of 4G technologies in other industries seems to depend on licensors lowering their expectations on royalty collection and potentially changing their royalty models.
Graham Bell is a principal consultant in PA’s communications and electronic systems practice