Rumors are circulating that Nokia Corp. is planning a major public offensive against Qualcomm Inc. over royalty rates for W-CDMA mobile phones. Those in the industry believe Nokia is hoping to get Qualcomm to lower its W-CDMA licensing rates. Whether or not the rumor is true, it serves to highlight the hush-hush world of royalty negotiations-particularly those for W-CDMA technology-as well as the high-stakes, turbulent nature of such dealings.
Nokia declined to comment on the rumor, which has been passed around by investment-banking firms and others in the market. The company offered its standard position on the issue: “Nokia considers licensing and cross-licensing to be the normal course of business in our industry.” Qualcomm did not return requests for comment.
The issue is largely wrapped in secrecy because no wireless company will discuss its licensing agreements and royalty rates. Indeed, rates for mainstay technologies like GSM and CDMA are still not public, although industry observers have largely come to a consensus on the numbers. Nonetheless, the issue drives right at the heart of the worldwide wireless industry and remains one of its most closely guarded secrets.
According to various industry estimates, Qualcomm holds the vast majority of CDMA patents and generally charges between 4 percent and 6 percent for the use of its technology-meaning a company that wants to build a CDMA phone must give Qualcomm about 5 percent of the phone’s price tag.
On the GSM side, the issue is a little less clear. More than a dozen companies hold essential patents on the technology, and industry observers guess royalty rates range anywhere from 2 percent to 10 percent. Licensing revenues generally are split among patent holders according to how many GSM patents they own. Nokia, L.M. Ericsson and Siemens AG are some of the largest GSM patent holders.
Adding a further twist into the issue is the prevalence of cross-licensing agreements. For example, if Nokia wants to sell a CDMA phone it would need a license from Qualcomm to do so. But Qualcomm itself wants to sell chips for GSM phones. Thus, the two companies would hole up until they hammered out a cross-licensing agreement-basically a trading arrangement that means neither company would have to pay the other the full licensing fee.
The same situations hold true for infrastructure vendors.
Thus, startups and other new entrants generally have to pay full licensing fees if they have no intellectual property rights with which to barter. This gives large players like Nokia and Qualcomm an added edge, one that can rankle others in the market. For example, Sendo Ltd. filed suit against Ericsson alleging unfair royalty rates. Motorola Inc. later acquired the handset upstart.
The issue gets even more complicated in the W-CDMA space. Dozens of companies claim they own essential W-CDMA patents, and each wants to get its share of the market’s licensing revenues. Qualcomm, Nokia and Ericsson have perhaps the strongest W-CDMA patent positions-although even that isn’t clear because there is no independent authority to validate W-CDMA patents. Thus, startups must negotiate licensing arrangements with each patent holder and on their own decide if those patents are essential.
Indeed, some companies are simply delaying the issue while pushing on with their W-CDMA sales.
“We have accrued for royalty costs where agreements have not been finalized using our current best estimate of obligation,” wrote PC card maker Novatel Wireless Inc. in a recent Securities and Exchange Commission filing. “These estimates are based on various market data information and other relevant information. When the agreements are finalized, we will revise our estimates accordingly.”
Although W-CDMA licensing rates are unclear at best, most in the industry agree they can be as high as 30 percent for those without cross-licensing agreements. The reason for such high rates? Everyone wants their cut.
Two years ago, Nokia proposed a 5-percent cap on W-CDMA royalty rates. The proposal fell flat, and Nokia said it is no longer pursuing the scheme. Many believe Qualcomm insists on keeping its rates at around 5 percent for W-CDMA-the same as its rates for CDMA. This enrages Qualcomm critics, who argue the company’s patent position in W-CDMA is not as strong as in CDMA, and its rates should reflect that. Nokia is often listed among Qualcomm’s critics, and the issue could form the basis for its rumored war preparations against the company. Others argue Qualcomm is merely following its tried-and-true business model.
Interestingly, there is a movement to straighten out the whole W-CDMA licensing issue. The W-CDMA Patent Licensing Program is an offshoot of standards work conducted in the European Telecommunications Standards Institute and the Third-Generation Partnership Project. The program is intended as a one-stop-shop licensing body for W-CDMA patents. It counts NTT DoCoMo Inc., Siemens, Sharp Corp. and others as participants and has received antitrust approval from the likes of the European Commission and the U.S. Department of Justice. The W-CDMA Patent Licensing Program charges around $2 per phone, or less than 1 percent, and expects to cover as much as half of the W-CDMA phone market this year. However, companies that license from the W-CDMA Patent Licensing Program must still sign agreements with Qualcomm, Nokia and others that are not participating.
Similar licensing bodies have formed around RFID, MPEG-2 and DVD technologies.
