Variable royalty pricing for the right to use proprietary technologies in high-tech consumer products is a trend that is afoot. While it lacks the drama of the Apple vs. Samsung smartphone patent wars, it is happening for some of the same reasons.
Recent developments have both patent-pool licensors and individual companies creating a two-tier royalty system that charges a different rate on products shipping into emerging markets like China or India.
Recently, Via Licensing’s program for the Advanced Audio Coding (AAC) compression standard announced that pool patent owners will charge lower royalty rates to licensees distributing AAC-compatible products into emerging markets. It basically divides the world into two regions: developed countries… and all the rest. The “other” licensees will pay a lower royalty rate.
Not long after the change, Via signed up China giant tech product providers Lenovo and Xiaomi as AAC licensees. This may not have made many industry headlines, but it should have. The lack of participation by Chinese technology device makers in paying royalties has been a thorn in the side of IP owners for years. If this is a sign of thawing relations between large IP owners and China and other emerging markets, it may represent a new era in sharing (for a discounted price) innovation.
Qualcomm recently found itself at the same junction but it got there by a different route. Last year, it settled a case with Chinese regulatory authority and began signing up big Chinese players, such as Coolpad and Hisense, for licenses of its technologies (presumably at lower rates, but the deals aren’t public). And when patent pool administrator HEVC Advance formed its patent pool for the HEVC video compression standard, it did so with variable royalty rates for developed and developing parts of the world.
Why is this happening now?
One reason is because China got tired of just being the world’s factory. Making the world’s smartphones and TVs is OK, but it isn’t the same as making products developed by homegrown companies like Lenovo and Xiaomi, which have grown dramatically in a short period of time. Part of that growth comes from building or buying into an international market (more Lenovo than Xiaomi) and adapting to an international IP market that relies, in part, on cross licensing deals with other IP owners. Without those deals, which basically call a preemptive truce on infringement fights, developing new products/technologies is prohibitively expensive and can dramatically slow down the business of selling those new products.
Another reason is that growth has slowed considerably for blockbuster products like smartphones. Over time, costs have come down, but they are still expensive consumer products. Companies must adopt new strategies to keep the wheels turning in emerging markets. The lowering of royalty rates for specific regions is an acknowledgement that individual market conditions do matter—especially when those markets represent billions of consumers.