The $120 Smartphone Patent Tax: Patent Royalties Cost More Than The Actual Hardware In Your Phone
from the innovation-tax dept
Obviously, there have been an awful lot of patent lawsuits in the past few years concerning smartphones and various software and hardware associated with smartphones. The folks over at law firm WilmerHale have now released a paper, which conservatively (and thoroughly) estimates that the patent royalties that need to be paid by smartphone manufacturers currently exceeds $120 per device -- which they note is right around the price of the components themselves (found via FOSS Patents, which notes that the estimates in the paper almost certainly lowball the patent royalties, so they may be much higher). Basically, more than half the cost of making a smartphone these days is in paying off patent holders.
Talk about a massive tax on innovation -- that all of us are paying for.
And, of course, many of these fees are going to pure trolls, who have contributed nothing to making actual smartphones. The paper highlights the explosion of troll lawsuits in the past few years:
Either way, this should be seen as a massive problem. Rather than going towards innovation and better, more affordable products for the pubic, money is going to lawyers and patent trolls who have contributed nothing to society. It's a massive dead weight loss to the economy.
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Filed Under: innovation, patent trolls, patents, smartphones, tax
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Might also depend on what is being defined as a 'smart phone' here but more clarification of some sort would be helpful.
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USPTO
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Microsoft tax
I was fortunate that my last smart phone purchase (a Samsung) happened before Samsung gave in to MS and started paying them. I'm not sure which phone my next one will be, but it won't be one that gives MS a cut.
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Re: Microsoft tax
It will probably have to be rotary dial.
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Re: Microsoft tax
Under what kind of an economic system does that make any sense?
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Re: Microsoft tax
How is there even still a FAT patent to enforce? FAT has been around for like 4 decades! I thought patents were only good for a limited time?*
*A REAL limited of time, not the theoretical copyright "limited time" that is in actuality forever.
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Take care
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FM is quite good at getting press coverage, using likely-sounding 'facts' and misleading statistics.
I only know the numbers behind a few of the categories, and the ones in the story are wildly wrong. But you don't need to be an insider to know that you can buy complete WiFi devices for less than the claimed license fee.
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Compare that to the reasonable amounts that truly innovative companies like Apple and Microsoft are asking for really innovative patents like "rounded corners", "icons", "grids of icons", "square or rectangular icons", "touch screens", "multi-touch gestures", "scroll rebound".
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But if it's this much, why the hell aren't OEMs pressing to adopt VP9 (only) harder?
Also, at least the other technologies in there have some merit, but Microsoft's tax is a true tax on innovation (by someone else).
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So what? The research probably cost more
The fact is that software and design and interface and other researchy, patentable things are a big, big part of the experience. If we don't pay for them, we won't have them.
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Re: So what? The research probably cost more
It is. Patents aren't require for that.
There is a big difference between building your product and selling it and getting to hold everyone else's product for ransom.
A 20 year license to shake the rest of industry down is what we're talking about here. That should not be taken lightly.
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Re: So what? The research probably cost more
You're an idiot, bob.
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I thought
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Not really accurate
I used to negotiate OS licensing for mobile companies. Motorola, Palm, Nokia, Microsoft, etc., all negotiate bulk license that are a fraction (maybe 20%-25%) of the amounts shown. Same thing for components... if you commit to five or ten million units there is a huge discount.
Otherwise companies like Motorola could never have gotten the price of a feature phone under $100 to the carrier.
The bad news is that these licenses are a barrier to entry for newer and smaller companies, but even then, if you are a friend of a big guy, you can tag on to their order. e.g. you are ex-employees spinning out, they throw you some help.
Old examples: (I don't want to get in trouble here) MicroSoft had Win CE license for $12, Palm OS $8, et cetera.) HP and Dell never paid a penny of royalty for the devices they shipped. Sony and Handspring negotiated much better deals than the smaller players. It was strategic to get those partners on board. Licensors also have to supply support and updates....
Same today
JF
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Re: Not really accurate
I was preparing to say something similar, and you beat me to it.
Your experience is similar to mine. The numbers cited in the post are asking rates and not actual rates. Based on similar experiences with other companies that have licensed patents to us, they often start with over-inflated rates, and we have generally been able to negotiate them down into the 5% to 10% range, and we have never paid over 20% of the "asking" price. These people are looking for fast money, and long, drawn-out negotiations do them no good, and they are certainly not looking to go into an actual trial where their patent might be weakened.
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Not true at all. Indeed, it is often the opposite way around, because patent holders are (yes, this is hard to believe, but it is true) typically not stupid. They know that big companies have lots of cash, and small companies do not. Smaller companies often end up getting a better deal because of economics.
Simple example:
If company X is producing 500,000 infringing units per year, and a patent holder believes there is $10 in infringement, then the value to the patent holder is $5,000,000 per year, which is easily worth a litigation.
If company y is producing 10,000 units, the value to the patent holder is only $100,000 per year. Of course, the patent holder knows that by the time the dust settles, the actual value after litigation could end up being anywhere from zero to realistically $50,000 or perhaps $75,000 per year. Except, if the patent holder has to actually go to court, the battle could end up costing several hundred thousand in attorney fees.
Does the patent holder really want to go to all that trouble for a small player? Not if the patent holder is just out for money, and not for stopping all infringers. Just to get in and out, the price could easily be $5,000 or $10,000, and patent holders routinely settle for that, because it is easy money.
The asking rate is almost never the actual rate, if ever.
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Okay, if you are a nobody, and you wanted to license a patent, the asking rate will be the starting point. However, the final contract will be full of "depends." If you are a podunk operation making low volumes, you could most likely get a license for a song, because the patent holder really does not have the time to deal with you. You are just not worth their time. I am willing to bet you that most patent licensing operations will grant you a license for 5-10% of asking if you are a small operation, with a caveat for certain volumes in case you become really successful, which perks their ears up.
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I don't think holding up the car sales business as some sort of example of what is acceptable is a good idea.
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"if you are a friend of a big guy, you can tag on to their order. e.g. you are ex-employees spinning out, they throw you some help."
So patent law makes the small guy dependent on the big guy. Nice to know.
I say we abolish patents. The claim that they're to protect the little guy is a big fat lie and I see it as an insult when the IP defenders around here try to use them as the poster child for defending IP. IP defenders know better and have little intent on defending the little guy.
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Re: Re: Not really accurate
The size of the company could well matter. However, that often works to the small company's benefit. Many smaller companies routinely infringe patents because they are so small that they figure (correctly) that it is not worth the patent holder's time to go after them. If the patent holder does go after them, the royalties tend to be very small because (1) the patent holder knows they will lose money in litigation and (2) the amount of product is so small that anything, even a pittance, is better than nothing. Smaller companies are typically in a much better position in these situations than bigger players, unless the patent holder wants to stop the smaller company from using the patents completely.
Being bigger just means being a bigger target, and it is relatively easy to hide in plain sight when you are smaller.
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Re: Re: Re: Not really accurate
Exactly, if there is cross licensing then your portfolio matters because then you have more cross licensing leverage. So they better care about your portfolio.
"However, that often works to the small company's benefit. Many smaller companies routinely infringe patents because they are so small that they figure (correctly) that it is not worth the patent holder's time to go after them."
Sure it is. When the patent holder doesn't want competition they can sue for an injunction.
"If the patent holder does go after them, the royalties tend to be very small because (1) the patent holder knows they will lose money in litigation"
The patent holder of a large corporation is much more capable of fighting these lawsuits. A mere legal threat would deter many small entities from entering or compel them to stop competing upon receiving these legal threats leaving the big guy free to sell their products without the threat of new entrants.
"the amount of product is so small that anything, even a pittance, is better than nothing."
If the intent is to stifle competition, which is more profitable, then suing for an injunction is more likely.
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Re: Re: Not really accurate
Like it or not, the size of your business often drives costs. Economy of scale comes in all sorts of ways, one significant driver is that you can obtain lower costs for your raw materials when you commit to buying a whole lot more.
So what you are saying is that we should abolish business, because clearly it's not fair out there.
Suck it up sunshine, the world ain't fair!
Also, you can look at licensing rack rates in the same manner that the "maximum room rate" that is published on the back of some hotel room doors by state or local law. They may only ever charge that rate once, but there is a top rate. Showing up at the counter and asking generally gets you a much lower rate. Is this unfair as well? It would certainly be very misleading if someone reviewed hotels and only used their "maximum room rate" to decide if a hotel was too expensive, right?
This story is just another example of an attempt to vilify patent holders by exaggerating the situation. It makes the MPAA and RIAA reports look reasonable.
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Ten guys walk in the door. Six of them have gross sales of $10 million per year total, and they each want a license. Four of them have gross sales of $100 billion per year total. How much time do the six guys get? Very little. The licensors want to cut a quick deal, they want the terms secret to keep anyone from knowing that the are getting much less than the asking rate, and then they want to focus on the four people with "serious" money.
Real life in the fast lane.
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Or a patent troll could just be a shell for the big companies knowing that the big companies are happy to pay up and not fight patents in court provided that the troll keeps competitors out of the market or force them to pay unreasonable prices.
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That's happening right now. Patents are not only not stopping it but making it worse.
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and exactly what reforms do you suggest?
Some reforms I suggest are don't allow corporations or businesses to own patents and don't allow patents to be transferable. But you will scream and cry against these suggestions because you want these laws to protect the big guy (though you will make up some other excuse). Instead any suggestions you do make will have the effect of helping the big players.
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As for "owning" patents, good luck. Incredibly enough, while patents are issued by the federal government, the rules for ownership are state laws, which includes the ability to transfer patents. So you end up with the interesting situation that patent infringement is tried in federal courts, and patent ownership is tried in state courts. To keep patents from being transferable, you would have to pass a law to that effect in each of the 50 states, which none of the 50 states will ever do.
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The inventor.
"To keep patents from being transferable, you would have to pass a law to that effect in each of the 50 states, which none of the 50 states will ever do."
Or you can pass a single federal law stating they are non-transferable. IP extremists are always trying to pass international agreements so that they can use them to pressure countries to enforce them and they have no problems manipulating federal laws so that they can use them to manipulate them into being enforced statewide.
but the point is I rest my case. The shills here are not interested in any meaningful patent reform. They are only interested in serving the interests of big corporations and patent trolls. Upon the suggestion that patents should be abolished they say "but what about the little guy". When it's pointed out that patents do little to help the little guy and they mostly help the big guy and are mostly lobbied for by the big guy they say "so we need reform". When reform is suggested to them that would fix the problem they say "No, we don't want reform". You want laws that only help the big guy.
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I didn't know this, thanks for clarifying that to me. But this is only because the federal government chose not to handle situations of patent transfer. The constitution gives the federal government the ability to grant patents to promote the progress and so the federal government can regulate them to promote the progress. The federal government may have chosen not to regulate the transfer of patents but they could and all it would take is for federal courts to enforce this. Yes it maybe unprecedented but new laws are unprecedented, that's the whole point. So the federal government simply passes laws stating that it would only grant patents under the condition that they are non-transferable otherwise it won't grant them and it doesn't have to.
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You said "But this is only because the federal government chose not to handle situations of patent transfer."
You also said "The federal government may have chosen not to regulate the transfer of patents but they could and all it would take is for federal courts to enforce this."
You further said "So the federal government simply passes laws stating that it would only grant patents under the condition that they are non-transferable otherwise it won't grant them and it doesn't have to."
Okay, you are hitting upon two separate issues here, and I will deal with the most significant one first.
Patents are treated as property, by law. The only way to undo that is to remove that stipulation, which will never happen unless patents themselves are eliminated, which is highly unlikely. Patents were given the attributes of property so that a whole new set of rules did not have to be created to deal with the ownership aspects of patents. This information is quite well documented.
Now, you claim that the federal government chose not to handle situations of patent transfer. That statement is not entirely true. As I said before, patents were given the attributes of property, but that was not done by the federal government, but by representatives of the people. This step was taken because states wanted to reserve the power to adjudicate property disputes, and they still do.
The constitution only gives the federal government the right to grant patents, and they can, to a certain extent, "regulate" them, BUT, and this is a tremendous but, only to the extent that patents are granted in the first place, the scope of a patent, and whether a patent is infringed. Ownership of a patent, as with all patents, is a state issue, and not a federal issue, and that is unlikely to change.
The reason is simple, because states adjudicate property rights, for the federal government to declare that they will adjudicate ownership issues would be to take one of the state's biggest areas of authority from them, and while the states have been incrementally giving up control to the federal government for decades, this area is one which the states, and individuals have fought for years. See this article for examples of the federal government "choosing" to take control of property rights, and losing:
http://reason.com/blog/2013/06/12/obamas-supreme-court-losing-streak-0-3-i
The other issue you raise is transferability of patents. If patents are non-transferable, then licenses to use them could never be granted. That makes zero sense. Furthermore, since patents are treated as property, by law, patents have all the same rights as are assigned to property; i.e., you can grant exclusive use of property (a lease), or non-exclusive use of property (joint use of water rights). Patents are, by law, treated the same way, and there is 200 years of history to support that treatment. To do otherwise would be to make patents a special case, which would hurt the brains of poor congressmen to the point where they would probably go insane.
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Regarding your claim that making patents non transferable means that they can't be licensed, you are just playing with semantics. That is just a matter of how the law is written.
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Fortunately, the Supreme Court has generally be on the side of states and property owners and has generally aligned with states and property owners' rights over the federal government. Amen to that.
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Making patents non-transferable is not that complicated. They seem to have no problems with complexity when the laws are intended to serve the interests of those greasing their palms. Now that someone suggests a law in the public interest all of a sudden you have a million objections.
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The same holds with leases across state lines. If someone rents a car and crosses a state line, the ownership still resides in the state of registration. In theory, the federal government can prevent a car from crossing a state line, but that would be restraint of trade by the federal government which is illegal.
Speaking of illegal, preventing transfer of a patent across a state line would fall under states rights, not federal rights. States do not permit transport of, say, alcohol and tobacco, across state lines all the time. Patents would and do fall under the same laws.
The federal government does not "honor" transfer of anything across state lines. The state on the transfer end does. Do you think that a state will not "honor" a patent license by one of its businesses? That would be illegal for a list of reasons so lengthy that I have neither the time nor inclination to list them. You, on the other hand, should learn more about contract law and property rights.
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Your argument is just one of semantics. You don't want patent law fixed because you want them to continue to serve patent trolls and incumbent businesses. So your response is to appeal to how the current system regards and handles patents and insist it can't be changed and to make the ridiculous claim that such changes would lead to a huge uprising. But changing it is simply a matter of changing the laws.
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The real question always has been, just how many "bogus" patents are there? If a patent is "bogus," but never gets enforced, then does anyone really care? Probably not. On the flip side, let's assume that ALL patents asserted by a troll are "bogus." Okay, that is an extreme assumption, but let's run with it for the sake of argument.
We know that while patent trolls are an obnoxious side effect of the patent system, the actual number of patents ever asserted by trolls is less than 2%, and based on estimates by researchers such as Bessen, is probably closer to 1.5%. It is difficult to have ANY complex system involving humans be reliable more than 98% of the time, and yet, the patent system seems to be.
So, how do we eliminate the estimated 1.5% of patents that are "bogus"? That indeed is a difficult challenge. Opposition processes are likely a step in the right direction, but preliminary opposition systems in beta have had little or no participation. So, even if a system is established, will anyone use it?
As for buying and selling patents, that is done all the time because patents are treated just like property. As I noted earlier, treating patents like property made implementing simple. Otherwise, a whole, special body of law would have to be created dealing with patents. Further, even if you somehow restrict buying and selling patents, it would not work. I was recently involved in a divestiture, and my part of that was identifying patents that needed to go with the divestiture. It was a complicated process (for me), but eventually the list of patents was sold with the divested business because that business needed the patents to operate.
Patents are sold every day, and though trolls make big waves because of their abuse of the system, many sales, and maybe even most sales, of patents are for legitimate reasons.
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Such a need is only artificial. IP lawyers need patents to operate. Abolish patents and the business would still be legally able to operate without the patents. Sure it may not be able to compete as easily but the competitors would then be allowed to operate.
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It's a waste of resources both to the patent holder, who needs to pay to get them, and to the patent office. A waste of resources directs labor and resources away from economically beneficial activities which harms the economy.
The majority of patents never make it to product. So why are all these unused patents being acquired. Reasons include for defensive purposes, which just goes to show how broken the system is when someone needs a bunch of defensive patents just to be in a market, or to turn the patent system into a landmine so that you can sue someone that accidentally stumbles upon a patent.
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I come from the software world, where the majority of patents I see are clearly bogus.
"If a patent is "bogus," but never gets enforced, then does anyone really care?"
Yes. Just because a bogus patent isn't enforced now, doesn't mean it won't be later. The larger issue is all those bogus patents that are hiding out there, invisible and unknowable, waiting until a product becomes a hit before it pops up.
"treating patents like property made implementing simple. Otherwise, a whole, special body of law would have to be created dealing with patents."
Umm, there is a whole special body of law for patents. There's even a special court system. There is nothing "simple" about patents.
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potential
Potential.
All of the rates quoted are the absolute maximum ever charged, I think, and not a realistic licensing cost. You can bet that your total licensing on any mainline phone is about a quarter of that.
It's nice to toss up big numbers and get outraged, but honestly, that makes you no better than the MPAA and RIAA types you always bitch about.
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Response to: Anonymous Coward on May 30th, 2014 @ 7:17pm
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You gave a patent on what?
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"I know industry leaders have very strong views on these things, but i'm asking you about groups like Choice or ACANN or others that might represent consumer interests or the public interest," he said."
http://torrentfreak.com/aussie-attorney-general-pressured-on-three-strikes-secrecy-140529/
IP extremists often try to argue that IP law is for the little guy. If that's true why is it always the big guy, the industry leaders, pushing for these laws the most?
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http://soylentnews.org/article.pl?sid=14/05/29/148234
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https://en.wikipedia.org/wiki/MP3
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Pass a federal law stating that patents are non-transferable? The law would be (1) unconstituitional and (2) the states would never permit it. Property rights are adjudicated under state law, not federal. If you tell state's otherwise, do you think they would sit still for that?
As for your statement of helping big versus little, I accept your statement as an interesting theory. Now, what facts support your position?
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Now you're just being dishonest. By making patents non-transferable obviously this would not be an option.
"Pass a federal law stating that patents are non-transferable? The law would be (1) unconstituitional and (2) the states would never permit it. Property rights are adjudicated under state law, not federal. If you tell state's otherwise, do you think they would sit still for that?"
More with the dishonesty. The constitution grants congress the legal ability, not the requirement, to grant such monopolies. That's the constitution giving the federal government control over these matters.
States already permit the federal government to regulate these issues because the federal government already does. Your only problem is that you don't want these issues being regulated in the public interest instead preferring that they get regulated in the interest of patent trolls and big corporations.
The facts that support my position are the fact that it's mostly big corporations that are responsible for pushing for more of these laws and not the little guy and the fact that these laws have been mostly helping the big guy. You keep ignoring the evidence and facts because you don't like others pointing them out to you. But it only makes you look more and more dishonest.
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"The inventor would own the patents? There would be essentially no difference from our present system. Corporations would require inventors to sign an agreement giving the corporation full rights to practice the invention, and full rights to pursue infringers. Assignment of the invention would be unnecessary."
AC Said:
Now you're just being dishonest. By making patents non-transferable obviously this would not be an option.
My response:
Not so obvious. Most public lands are currently not transferable, and yet they can be leased by the public. Just because something is not transferable does not mean it cannot be used by someone else. In fact, you are being dishonest, because an inventor would have to grant rights in a patent, otherwise, no one would eve be able to use a patent. One such right would be exclusive use by a single entity. If an entity has exclusive use of a patent, though they are not the owner, then they have the right to defend a patent. Assignment of the patent is unnecessary in this case.
I said:
"Pass a federal law stating that patents are non-transferable? The law would be (1) unconstituitional and (2) the states would never permit it. Property rights are adjudicated under state law, not federal. If you tell state's otherwise, do you think they would sit still for that?"
AC Said:
More with the dishonesty. The constitution grants congress the legal ability, not the requirement, to grant such monopolies. That's the constitution giving the federal government control over these matters.
My response:
You are either being deliberately obtuse, or you are a deliberate liar. The constitution gives the federal government the authority to grant patents. However, that is as far as federal authority extends. When it comes to ownership of patents, that matter is generally resolved in state courts. I refer you, for example, to page 709 of the following article:
http://www.gunn-lee.com/Attorneys/TedLee/Pubs/SMLJv19n3.pdf
which states "Actions to resolve patent ownership do not usually arise under federal law." If you are going to talk about the law, at least know the law.
AC Said:
States already permit the federal government to regulate these issues because the federal government already does.
My response:
See above. Patent ownership is decided in state courts. Please get your facts straight.
AC said:
Your only problem is that you don't want these issues being regulated in the public interest instead preferring that they get regulated in the interest of patent trolls and big corporations.
My response:
Where did I make any of these statements? Now you are lying about what I said, and about my intent. You have lost all credibility with a nonsensical statement like this.
AC Said:
The facts that support my position are the fact that it's mostly big corporations that are responsible for pushing for more of these laws and not the little guy and the fact that these laws have been mostly helping the big guy. You keep ignoring the evidence and facts because you don't like others pointing them out to you. But it only makes you look more and more dishonest.
My response:
First, what laws are you talking about? What "more" laws with respect to patents? Generally, patent laws have remained fairly static. I am only ignoring your supposed "evidence" and "facts" because you failed to present any.
So, let's conclude:
- You are wrong about the law. Evidence provided.
- You lied about what I said.
- You lied about providing evidence.
- You lied about providing facts.
I think that about sums it up.
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Now you are just playing semantics. Making it non-transferable would obviously ensure that the patent holder can always grant new people permission to use the patent regardless of any contract.
"See above. Patent ownership is decided in state courts. Please get your facts straight."
Ok, I didn't know that assignment is generally a state issue while granting is a federal issue. But the constitution does give Congress the ability to grant patents. So we simply pass a federal law stating that they are non-transferable and have federal courts enforce it. Nothing unconstitutional about that. Maybe unprecedented but not unconstitutional. Problem solved.
"First, what laws are you talking about? What "more" laws with respect to patents? Generally, patent laws have remained fairly static. I am only ignoring your supposed "evidence" and "facts" because you failed to present any."
Pushing for more laws and getting them are different things. and design patent length was recently extended by one year from 14 to 15 years. and every time someone suggests reducing patent laws it is the big corporations that are always opposed to it (ie: pharmaceutical industry). For instance when Obama suggested removing the pharmaceutical extensions that the FDA can grant early on (something he knows the public would want so it made for a good campaign pitch) the big pharmaceutical industry lobbied against it and he eventually changed his mind.
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WHAT....That the same as saying no contract is ever valid.
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Also patents are different than contracts because they apply to and can be enforced against entities that agreed to nothing. Those entities may be across states. The federal government can decide how to enforce them.
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I have a question? Just what patent laws are being pushed that you are discussing?
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The RIAA/MPAA have nothing, as far as I know, to do with patents.
With respect to patents, my impression is that the pendulum pretty much swung to it's maximum somewhere around a decade ago. Since then, rulings have been toward reducing patent scope and coverage, and laws have been moderating the ability of patent holders to enforce their patents. Perhaps one of the biggest rule changes in that area was preventing owners from lumping multiple respondents into one suit, which raised the costs for those litigating. The recent push toward loser pays is yet another example of push back. Yet another example are the rules that attempt to reign in NPE's, aka "patent trolls." It seems to me that there is more push to limit patent laws than there are to expand them.
What success has big pharma had in the last 10 or 15 years in "pushing for more IP laws"?
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What IP laws have big pharma been pushing in the last 10 or 15 years?
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And I still want to know, in the US, just what are the "big guys" pushing for?
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At the very least Mike says his discussions with small businesses has indicated patents harm them. And since he is not anonymous, he has a long history of being honest here on Techdirt, you seem to have a conflict of interest in that your profession is at least partially dependent on patents, and you have already proven yourself dishonest in this discussion alone, who should I believe.
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Funny thing is, when we called out the largest company for infringement, they said our patents were worthless. Except, of course, that's not what the court said. Thanks to patents, we still exist.
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Originally to protect the little guy
However, big companies have lots of money and lots of political influence to get additional laws passed and/or have existing laws interpreted in a way that ends up helping them instead of their intended purposes. They also learn to 'game the system' and make the technicalities involved in the enforcement of these laws work to their advantage. Give the large corporations enough time and they can essentially turn any law on its head and use it to serve their purposes.
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government's winfall
since our government is broke they will continue this legalized extortion.
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Death and Taxes!
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