Technology Royalty Statistics

Chapter 6

Innovation in this industry is being driven by consumer demand for more features, and the emergence of demand for hybrid vehicles, that run on a combination of electric and combustion engines. The race is also on to develop engines that use no petroleum products, such as hydrogen-powered engines.

In a press release, Exide Corporation revealed that the U.S. District Court of Delaware ruled against the company in a patent infringement action brought by GNB Battery Technologies. Exide said the court had held that Exide infringed a battery patent issued to GNB. The patented invention involved a dual-terminal configuration associated with connecting the battery to cars and trucks. The court assessed $3.6 million in damages, and $1.65 million in prejudgment interest. Exide said it plans to appeal, adding that neither party manufactures batteries embodying the technology disclosed in the patent. Exide also said the amount awarded was slightly more than one percent of the damages sought by GNB.1 This licensing and court decision information shows low royalty rates for this industry.

Transaxles

In the early 1990s, Mercedes Benz AG of Germany entered into a ten-year agreement with Ssangyong Motor Company of Korea. Under terms of the agreement, Ssangyong was to produce small trucks, vans, mini-buses, diesel engines, and transaxles using Mercedes Benz technical inputs. The deal called for Ssangyong to invest almost $1 billion to build the necessary manufacturing plants. Initially, eighty thousand trucks, vans and other vehicles were to have been produced, with plant production capacity to increase to one hundred thousand units after 1996, at which time Ssangyong was to begin producing cars licensed by Mercedes Benz. Royalties and fees that were to have been paid to Mercedes Benz included: an eighty million mark down payment, made in four installments, over a thirty-eight month period; a fixed payment of sixty million marks, to be paid in six installments, following the down payment; and a running royalty charge of two percent of sales, per unit. Ssangyong had been producing jeeps, and specially equipped vehicles and trucks. The company planned to upgrade its jeeps with up-to-date, low-pollution diesel engines, to be introduced under the agreement.2

Manufacturing Technology

Japan’s number two automaker, Nissan Motor Company, agreed to sell to Samsung Group the manufacturing technologies that the South Korean conglomerate needed to build a new auto business from scratch. Nissan, and about seventy of its Japanese partsmakers, agreed to supply Samsung with state-of-the-art technology to build a car similar to Nissan’s popular Maxima. The move is a radical departure for Japanese manufacturers, who have tended to transfer only older technologies abroad; Nissan’s transfer of leading-edge technology could create a future global rival. The deal apparently didn’t go down easily within Nissan, who had spurned Samsung’s overtures four years earlier before capitulating two years later. By then, Nissan’s financial position had soured. They had accumulated a heavy debt load, following deep losses for the previous two years amid Japan’s prolonged recession. The Samsung agreement gave Nissan a desperately needed cash infusion. Samsung’s plans cost billions. In addition to $1.9 billion in research and development plans unveiled by the company, a manufacturing plant in the Korean city of Pusan was expected to cost $5.7 billion. Samsung’s hefty research and development budget was required to keep pace with plans that called for the first cars to roll off assembly lines by 2003.

In order to accomplish its goals, Samsung hoped to have its own models designed by 1998. The speedy start-up was helped along by Nissan technical advisors, who assisted three hundred fifty researchers on Samsung’s own car and engine designs. Samsung hoped to have its own models by 2003, without Nissan’s support, and expand annual production from an initial sixty-five thousand to half a million units. The deal called for Samsung to pay royalties to Nissan that included: $190 million down payment, running royalties of one and six-tenths to one and nine-tenths percent of the factory price of each unit sold; and $676 million, as part of a joint development of new models.3

Self-Dimmable Rearview Mirrors

Research Frontiers announced that Glaverbel SA extended the scope of its license agreement relating to self-dimmable automotive rearview mirrors. Glaverbel is now permitted to manufacture and sell self-dimmable rearview mirrors worldwide. Research Frontiers will receive royalties equal to five percent of net sales by Glaverbel. Self-dimmable rearview mirrors using Research Frontiers’ proprietary suspended particle device (SPD) technology will automatically reduce glare and eyestrain from approaching car headlights. Self-dimmable rearview mirrors using SPD technology do not have the yellow tint normally associated with most electrochromic mirrors, and are expected to be cheaper, and faster. In addition, Glaverbel’s SPD mirror, with its virtually instantaneous reaction time, will feature “real-time” switching, in which the mirror can automatically adjust to an infinite number of intermediate levels of glare reduction, rather than merely switching from light to dark.

CHEMICALS

Base chemicals are the leading source of revenue for the U.S. chemical manufacturing industry. The industry has benefited from the good economic conditions within the plastics and coating sectors, resulting in strong demand for ethylene and titanium dioxide. The industry produces raw materials, used by companies in a great variety of industry sectors. Consequently, the chemical industry experiences cycles directly linked to the general economy. The increasing price of hydrocarbons continues to be problematic for manufacturers and end-users.

Chemical manufacturers are very focused on increasing the efficiency of their operations, to improve yield and reduce employee costs. In addition, e-commerce has brought about supply chain improvements. Chemical manufacturers are using e-commerce to improve the efficiency of their procurement processes. Buyers and sellers are increasingly connecting their respective planning systems through online marketplaces. E-commerce increases the speed, and quality, of procurement activities, and reduces operational expenses. Cost savings result, but all industry participants can enjoy the same savings.

United Fire Technology (UFT) entered into a license agreement with Yuanchen for the Far East territories of Taiwan, Hong Kong, Thailand, Indonesia, Malaysia, the Phillipines, and Singapore. Yuanchen projects the Far East market to substantially exceed $1 billion in the next ten years. The license agreement provides for a $500,000 set-up, training, and license fee, with a minimum initial order of $500,000 for raw materials. UFT will earn a three percent royalty on all retail sales within the licensed territories. It is anticipated that the flame-retardant products will become mandatory for all commercial businesses, including hotels, nightclubs and retail outlets. UFT products include environmentally safe fire extinguishing products, substantially superior to current products, for all four classes of fire. Recent tests proved the extinguishing products to be over ten times more effective than current products. Their flame-retardant formulations will “fire-proof” fabrics to over two thousand degrees Fahrenheit, while a cigarette burns at four hundred degrees.4

Fuel Reactor Technology

Hydro Environmental Resources (HER) and Allied Energy entered into a non-exclusive worldwide license agreement that gives Allied the right to market, and manufacture, HER’s ECHFR system. The ECHFR is a fuel reactor that produces clean-burning hydrogen gas, at low pressure, from any water source. HER’s ultimate objective is to build, market, and operate a stationary power site, using an ECHFR system capable of supplying power for a city of approximately three thousand people. HER plans to market the ECHFR technology in areas underserved by conventional power companies, including Indonesia, China, the Philippines, Malaysia, the Middle East, and parts of Central and South America. Allied agreed to pay HER a one-time fee of $500,000 and 1.5 million shares of Allied’s common stock, upon the successful completion of a demonstration test using the HER reactor. Allied has also agreed to pay HER a royalty of five percent of net sales for products manufactured by Allied, and eight percent of net sales for products manufactured by HER. Allied has the right to grant sublicenses to third parties, if the terms and conditions are approved by HER.5

Fuel Technology

Unocal Corporation sued Valero Energy for patent infringement, claiming that Valero has been making cleaner burning gasoline, using Unocal’s patents, without a license agreement. Unocal said it was seeking damages from Valero, which it says has refused to discuss a license agreement, for willful infringement of two of Unocal’s five fuel patents. Included in the suit were refineries owned by Ultramar Diamond Shamrock, which Valero bought last year. Unocal sought damages triple the five and three-quarter cents-per-gallon royalty rate, as imposed in earlier cases, and a mandatory license for court ordered royalties, for future infringements by Valero. Unocal is involved in the exploration and production of crude oil and natural gas in fourteen countries. In 2001, Unocal produced one-hundred-seventy thousand barrels of petroleum liquids, and two billion cubic feet of gas, per day. Unocal also has a geothermal operations group that provides steam, for the generation of electricity, to power plants.

COMMUNICATIONS EQUIPMENT AND SERVICES

Mobile phones are the equipment segment of this industry’s primary source of revenue, but broadband in the United States has created a large demand for DSL modems. The industry is characterized by a high degree of product obsolescence, as new products are constantly introduced, with new technologies and features. This keeps sales volume high, as consumers trade up to the new devices. This same condition also requires continuous research and development expenditures. Examples of product evolution include the inclusion of cameras into cell phones. Most recently, cell phones have been combined with PDA and email capabilities.

To remain competitive, industry participants must commit to continuous new product introductions, which require continuous research and development spending, which in turn pressures profit margins. These costs, coupled with increasing costs for labor and energy, have driven communications equipment manufacturers to relocate some of their production to areas of low cost labor and energy, such as China. Cost savings result, but they are not proprietary to any specific company.

The Universal Mobile Telecommunications System (UMTS) Intellectual Property Association (IPA), which includes the world’s major telecommunications-equipment makers, has proposed a maximum five percent royalty for the licensing of patents essential to the making of various types of 3G mobile communications equipment. Seeming to have found a compromise acceptable to most of its constituents, the UMTS IPA is presenting the 3G Patent Platform as the commercial enabler for 3G systems. The 3G patent platform went into effect on March 1, 2000.

Qualcomm disagreed with the proposed 3G patent arrangements. The alternative is a free-for-all, as happened in GSM, with a multitude of bilateral agreements. That would make UMTS technology very expensive to acquire. Proponents of 3G cellular telephony are setting up an independent company to oversee IP claims for 3G technology, but the move is already drawing fire from some observers, who say the effort lacks the clout of a full patent pool or licensing agency. The debate comes as the industry grapples with how best to handle patent claims, from multiple companies, on technologies destined for wide deployment. Independent consultants—largely attorneys and accounting firms—are assuming what appears to be a growing role in areas such as licensing administration, patent evaluation, and royalties collection. Indeed, hiring outside experts, to sort through the tangled web of IP rights essential to emerging standards, has become a trend. In this climate, the 3G Patent Platform appears to be following an uncharted path. It will be set up as a new, nonprofit company called NewCo that is neither a patent pool nor a licensing agency. Rather, the group will oversee the task of licensing administration and patent evaluation, which it plans to outsource.”6

Under the 3G Patent Platform scheme, the licensees will pay royalties directly to the companies holding the corresponding licenses. Patent holders and licensees are free to negotiate deals to meet their business requirements. All licenses, whether obtained through the 3G Patent Platform or by separate negotiation, are made between the patent holder and the licensees. In this way, the 3G Patent Platform aims to create a voluntary, industry-led process that simplifies IP rights, and cuts the cost of patents, in hopes of gaining a bigger market for the platform. According to industry sources, a lesson was learned from GSM phones. Today, twenty percent of the cost of a second-generation GSM handset pays for IP rights, due to the lack of a joint licensing program.

Video Patent Pool

The Denver-based MPEG LA is an independent agency that has established a successful IP model for MPEG-2 video patent pooling. By getting a clean bill of health from the U.S. Department of Justice, which ruled in June 1997 that the agency is not anti-competitive, MPEG LA is believed to have shown the way for commercializing complex, cross-industry standards. The business models for MPEG LA and the 3G effort are markedly different. Since 3G royalty payments are arranged between licensees and licensors, no fee is taken out of the royalty revenues. At MPEG LA, it is the licensing administrator’s responsibility to collect royalties, and to bring companies holding essential IP to the joint licensing program. Because MPEG LA earns its fee according to the amount of money it successfully collects from technology users, it is more financially motivated to succeed in patent pooling. MPEG LA, and the new 1394a (IEEE Standard for a High Performance Serial Bus), are using the same fee structure. The licensing administrators get ten percent of what they collect from licensees, for collected royalties up to $75 million annually. The cut drops as annual royalties rise. For example, administrators get five percent for collected yearly royalties between $75 million and $250 million, and only two and one-half percent for royalties above $250 million a year.7

Code Division Multiple Access Technology

Qualcomm and China Unicom have agreed to a framework agreement, but no contracts or license agreements have been signed. The reported royalty rate that Qualcomm would receive from China Unicom, in exchange for Qualcomm’s Code Division Multiple Access (CDMA) technology, is five and one-quarter percent of sales. Qualcomm was founded in 1985 and developed the CDMA technology, which is now used in wireless networks and handsets around the world. By making efficient use of the radio frequency spectrum, CDMA allows more people to use airwaves simultaneously, without static or interference. The telecommunications industry is now migrating to CDMA2000 technology. China Unicom operates one of the largest cellular communications companies in China. Based in Hong Kong, China Unicom conducts business in twenty-one provinces, and numerous municipalities, throughout the country, providing nationwide radio paging, international and domestic long distance telephone services, data communications, which include Internet and IP telephony services, and other related value-added services.8

Wideband Code Division Multiple Access Technology

Unlike CDMA, which was patented by San Diego-based wireless giant Qualcomm, W-CDMA was developed by the 3G Partnership Project (3GPP), and is the radio access standard proposed for UMTS services (the European version of IMT-2000). The standard was developed as a 3G technology to support very-high-speed multimedia services, such as full-motion video, Internet access, and video conferencing. Qualcomm currently sets its royalty rates at five to six percent of equipment costs, for it’s own flavor of 3G technology, CDMA2000. Both are viable alternatives to the GSM wireless standard that dominates Europe.9

COMPUTER HARDWARE

Profit margins are under pressure in the personal computer industry, as low-margin machines are now capable of running comprehensive applications without notable loss in performance. New technologies, and new features, are filtering into all price-points of PCs, bringing the industry dangerously close to commoditization. Competition is heated in this industry. Prices are being forced down, and while sales volume is increasing, profit margins are under pressure. Many companies, including Dell, have the majority of their production processes in countries with low-cost labor and energy. These measures only allow price competition to continue along, with slim profits.

Computer manufacturers in the United States have begun to make distinctive products, by combining PC and consumer electronics applications into their new products, creating multimedia-enabled computers. These PCs exploit the massive growth of digital music and film, resulting from the growth of MP3 and DVD platforms. These enhanced machines are selling at higher price-points, and generating better profits, but they have yet to dominate any company’s business model. Another strategy to enhance profits involves getting consumers to purchase accessory products when they buy a new PC. These accessories include printers, software upgrades, extended service plans, and other items. Dell’s website is very adept at coupling accessory products with PC sales. Overall, profit margins are under pressure, and so are royalty rates.

Wells American Corporation licensed exclusive worldwide rights to manufacture and sell certain personal computer hardware from Northeast American Enterprises. Under this agreement, Wells introduced the MegaMac CPU Performance Extender in 1990. This enhancement board increased the clock speed of the Apple CPU—from between 8 and 30 MHz to 50 MHz—and enhanced other operating attributes of disk drives and memory management. The agreement called for a running royalty of five percent of net sales.10

Computer Architecture

Dell Computer licensed XT class, AT class, and microchannel architecture in 1988, from IBM. The royalty rate varied, depending on the type of computer involved. XT and AT computers were associated with royalties as high as three percent of net sales. Microchannel design computers had a royalty rate of five percent of net sales. As IBM’s market share deteriorated, they expanded their computer technology licensing and licensed a number of Taiwanese clone-makers, who paid two percent of net sales on AT and XT computers sold outside the United States. For products sold inside the United States, the rate was three percent.11

PS/2 Computers

Computer Automation Systems (CAS) designs and manufactures custom, rack-mount, and industrial computer applications, primarily for the telecommunications industry. The company offers in-house engineering, to provide innovative, customized hardware and software applications, to meet non-standard customer specifications and requirements. In addition, CAS provides computer system integration assemblies, and test services of electronic products, to OEM’s and nationwide electronics distributors. CAS also specializes in the development of National Equipment Building Standards (NEBS) certified, Sun and Intel microprocessor-based, fault-tolerant systems for the telecommunications industry. NEBS is a telecommunication industry design standard for manufacturing telecommunications applications equipment. Currently, all of CAS’s manufacturing and engineering is conducted out of its Texas facility.

CAS could potentially derive an enormous amount of royalty income, by licensing a patent that covers the technology used in IBM’s new personal computer line, the Personal System/2 (PS/2). IBM licensed the patent technology from CAS after discovering that the technology developed for its PS/2 computer line was similar to a 14-year-old patent held by CAS. CAS believes that companies will need to obtain a license to produce legal copies of the PS/2 line, or add-on boards, for the IBM machines. George Pratt, CAS chairman said, “We don’t believe either class of potential licensees can produce PS/2 clones, or microchannel compatible addons, without infringing on our patents.” Michael Murphy, editor of the California Technology Stock Letter, estimates that the royalty payments will average between $8 and $10 for each clone machine. It is likely, however, that IBM will pay royalty fees that are considerably lower. Licenses from CAS will require advance royalty payments of between $25,000 and $300,000.12

Modem Standards

3Com Corporation is a pioneer in the computer networking industry, and believes it is the only networking company that offers a unique blend of practical and innovative technology, which provides its channel partners and customers with high-value, practical-to-use solutions. 3Com’s competitive strengths include a strong balance sheet, an industry-leading IP portfolio, distributor and customer relationships, and brand identity. 3Com signed an exclusive licensing agreement with the inventor, who made the 56K modem possible, in hopes of moving the industry closer to a uniform standard. 3Com claims that it holds the exclusive license to the IP of independent inventor, Brent Townshend, who developed the fundamentals behind the new generation of high-speed modems.

3Com also said it will license its own patents, to other modem makers, for a one-time fee of $100,000, or at a running royalty, capped at $150,000. The company said licensing its own, and Townshend’s, IP would move the industry closer to a uniform standard for the new high-speed modems. 3Com’s U.S. Robotics unit has been selling its “x2” 56K modems, while Rockwell International is marketing its K56 Flex modem chipsets. Since the two systems are incompatible with each other, the industry is seeking to define a standard that would make all the modems compatible.13

Modems