Making it in Emerging Markets: Do the Math

Some cycles never divert from their persistent patterns. The moon waxes and wanes. Birds get pushed from nest to flight. Electronic devices find their first successes in developed markets and then look for success in emerging markets.

That last pattern, however, doesn’t happen quite as organically as the others do. A lot of strategizing, accounting and retooling has to go into that shift. That’s the place where the early makers/component suppliers of smartphones have been living recently. It’s the same old conundrum. How can makers and technology owners lower costs to create a market in a place where potential customers have less disposable income?

Some of them are paring down features, using less-expensive components and cutting IP licensing fees. Mobile device chip giant Qualcomm is a good example of how the pressure to lower costs (and stay out of trouble with Chinese anti-trust regulators) can result in pretty drastic measures. When Qualcomm’s feet were held to the fire, they had to agree to a settlement and adjust IP licensing terms or possibly be shut out of the Chinese market. They did the math, took the hit and continued doing business there. How has that been working out?

After a few quarters under its belt since settling with the Chinese government, it seems to be working out fairly well. The most recent financials show a nice uptick in profits, which the company attributes to progress with existing and new licensing agreements in China.

Exactly what kinds of adjustments Qualcomm made to its IP licensing is not known, but it’s a pretty good bet that those royalty rates have decreased. Not known for being shy about selling product and licensing IP, let’s say it was likely that Qualcomm’s profit margins were healthy enough that it could make some royalty-rate adjustments.

The tricky part is that once you make a deal with one customer/licensee, your other customers are probably going to want the same deal. Many years ago when the MPEG-2 video compression standard was embedded in all digital video consumer electronics devices, the inventors/licensors demanded about $5 per unit in royalties, and most of the CE industry was paying it. At the same time, computer suppliers wouldn’t agree to sign licenses at that royalty rate. The licensors dropped the royalty rate to about $2, signed licenses with computer suppliers and collected millions more in royalties for many years. So, all licensees benefited from lower rates—CE device suppliers got a big cut in their royalty costs and the PC suppliers, which represented hundreds of millions of annual units shipped, got the break they wanted.

The need to reset revenue-collection expectations when reaching out to a broader market is nothing new. Perhaps there will be a change in how much all mobile-device suppliers will pay in royalty fees?