An estimate of the average cumulative royalty yield in the world mobile phone industry: Theory, measurement and results. (April 2018)

• Record Type: Journal Article
• Authors: Galetovic, Alexander; Haber, Stephen; Zaretzki, Lew
• Is Part Of: Telecommunications policy. Volume 42:Number 3(2018)
• Page Start: 263
• Page End: 276
• Publication Date: 2018-04
• Subjects: Telecommunication -- Periodicals; Télécommunications -- Périodiques; 384
• DOI: 10.1016/j.telpol.2018.02.002
• Languages: English
• ISSNs: 0308-5961

Abstract

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. One set of estimates claims that the royalty stack is on the order of 20–40 percent of the value of the average phone. 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. 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 compares 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. Highlights: Specialized firms develop the mobile phone technologies and license them to manufacturers. A large literature claims that decentralization leads to royalty stacking and excessive royalties. We estimate average cumulative royalty yield in the mobile phone value chain. The average cumulative royalty yield in 2016 was 3.3 percent or $7.20 per phone.