Why Qualcomm And Ericsson Have Teamed Up To Form Avanci?

Recently, Qualcomm (NYSE:QCOM) teamed-up with four other companies to form a consortium to jointly license patents in the Internet of Things (IoT) market. Joining Qualcomm in the initiative are Ericsson (NYSE:ERIC), KPN, ZTE, Inter Digital and others. By providing a single license to IoT device manufacturers requiring connectivity in their products, the development of IoT devices should gain momentum. This comes from the fact that IoT manufacturing companies will not required to negotiate with technology holders individually. Avanci will be initially focused on issuing licenses for 2G, 3G and 4G wireless technologies deployed in connected cars and smart meters. And it plans to rapidly expand to other IoT devices as they come to market.  As wireless IoT devices proliferate, we can expect more companies to join the league going ahead. In this analysis, we specifically explore this topic in more detail from the perspective of Qualcomm:

Qualcomm’s Has A Leadership Position in IoT Patents

Though Qualcomm remains a leader in the baseband processor and application processor market, its growth of late has been plagued by the following reasons:

• Slowdown in smartphone sales
• Competition from low cost chipset makers such as Mediatek
• Non-compliance of licensing terms in China.

However, Qualcomm is seeing significant growth potential in the IoT market, which can offset its current concerns. According to a report by Mckinsey, the number of connected devices are expected to grow from 8.5 billion in 2013 to approximately 28 billion in 2020. Qualcomm is well positioned to benefit from this growth.  The company not only holds the top-spot in a ranking of the total number of Internet of Things patent holders, it is even better positioned  among holders of the most critical patents.  Given these factors,  it is quite evident that the company is likely to have large gains when the IoT market grows bigger.

                                                         Source: Quartz

Avanci To Charge Royalty Fee Differently

Currently, Qualcomm collects a one time licensing fee from each of its licensees that use its proprietary technologies. It also charges royalty fee, which is set as a fixed percentage of the sales price of the final product sold by its licensees. We have estimated this figure to be around 3% in 2015. Considering the average selling price of a smartphone to be around $200, the royalty fee for Qualcomm comes out to be only $6.

However, this model of charging royalty fee on the final product is difficult to apply in case of connected cars. This comes from the fact that cars are much more expensive than smartphones and car makers are already operating at razor thin margins. Due to this, car companies cannot afford to shell out 3% of their final sales to Qualcomm. Further, given that the Qualcomm’s technology will only be secondary to the core operation of a car, it doesn’t make sense for the company to charge royalty fee on the final product on something as expensive as a car.

According to Wall Street Journal, Qualcomm will now base its royalty rate for connected cars on the smaller wireless sub systems instead of the total car price. Nevertheless, the royalty fee charged by Avanci to its licensees will be dependent upon the value that the licensed technology will bring in the final product. For example, connected cars are likely to have higher fee as compared to a smart meter, given that there will be more heavy usage of the wireless technology in case of connected cars.

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