More than 25 percent of a smartphone’s price may come from patent royalties

Two lawyers from Apple's law firm during its patent trial against Samsung and an executive from Intel have released a paper that shows how much consumers pay for patent royalties on an average smartphone.  

The report, titled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones, has finally tagged a dollar amount to what consumers pay toward royalty fees. The figure comes to about $120 for a hypothetical smartphone that costs $400. This means that 30 percent of a device's cost goes to royalty payments, which is almost equal to the price of the phone's physical components. 

The paper, written by WilmerHale intellectual property litigators Joe Mueller and Tim Syrett and Intel Vice President and Associate General Counsel Ann Armstrong, used public information to calculate patent royalty costs. 

"Using entirely public resources, we've attempted to provide a detailed, holistic picture of the royalty landscape for smartphones," Mueller said. "This data provides concrete evidence to inform discussions and analysis of the 'royalty stack' on such devices."

The $400 smartphone price tag for the paper is based on industry estimates. The average price of a smartphone was at $450 at the end of 2012. The figure has fallen to $375 recently. 

The paper shows a surprising disparity between the cost of patents and the physical components that go into a smartphone. For example, the royalties for the LTE cellular functionality on phones come to about $60 per unit. Meanwhile, the baseband processor, which implements the cellular functionality, only cost around $10 to 13.    

"In particular, there has been significant recent focus on "royalty stacking," in which the cumulative demands of patent holders across the relevant technology or the device threaten to make it economically unviable to offer the product," the paper read.

"The smartphone royalty stack across standardized and non-standardized technology is significant, and those costs may be undermining industry profitability—and, in turn, diminishing incentives to invest and compete."

Of course, there are tactics that smartphone manufacturers implement to cut cost on royalties, such as cross licenses and pass-through rights. These are "non-monetary" payment methods that tech companies use to slash cost. Since no dollar figure can be assigned to these deals, they weren't taken into account in the paper. The paper's authors intend to contribute to a journal. Before they do, they are asking the public for comments and suggestions. If you want to contribute, you can check out WilmerHale's website.
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