Managing Patent Pools and Royalty Exposure

Introduction – The Hidden Cost of Connectivity

When boards review telecom capex plans, the line items are familiar: spectrum, network rollout, equipment, IT upgrades. But one of the largest recurring costs is rarely visible: royalties for Standard Essential Patents (SEPs).

Royalty “stacking” — the accumulation of multiple SEP license fees across chipsets, devices, and infrastructure — can quietly erode EBITDA. For device makers, royalties can represent 10–15% of the bill of materials. For operators, royalties are embedded in RAN equipment costs and ultimately affect cost-per-GB metrics.

Patent pools emerged as a solution to simplify licensing, reduce litigation risk, and create a single point of negotiation. But they are not without risk. For boards, the challenge is deciding when and how to engage with patent pools to control costs without losing flexibility or leverage.

1. What Are Patent Pools – and Why They Matter

A patent pool is a consortium of SEP holders that agree to license their patents as a package, often at a single published rate. Examples include:

• Avanci: Dominant pool for connected cars and IoT modules.

• Sisvel: Operates pools for Wi-Fi, cellular standards, and video codecs.

• MPEG LA: Manages pools for video compression standards (H.264, HEVC).

For licensees, the benefit is obvious: a single license, fewer negotiations, and less litigation risk.

For boards, pools create:

• Predictable Cost Base: Simplified budgeting and reduced exposure to surprise claims.

• Legal Risk Mitigation: Pools typically include a covenant not to sue for covered patents.

• Efficiency: Internal legal and procurement teams spend less time managing dozens of bilateral negotiations.

But pools also introduce:

• Price Inflexibility: Once rates are published, leverage for bilateral discounts is lost.

• Over-Inclusion Risk: Some pools may include marginal patents, raising costs without adding true value.

• Competition Law Concerns: Regulators monitor pools to avoid anti-competitive behaviour.

2. The FRAND Backdrop – Legal and Regulatory Shifts

Patent pools sit within the broader FRAND (Fair, Reasonable, and Non-Discriminatory) licensing framework. But FRAND is not a fixed concept — it is shaped by case law and regulation:

• Unwired Planet v. Huawei (UK, 2020): UK courts confirmed jurisdiction to set global FRAND rates.

• FTC v. Qualcomm (US, 2019): Limited Qualcomm’s ability to force “no license, no chips” model but left much of its licensing model intact.

• China (2020–2023): Chinese courts have become increasingly active in setting global FRAND rates, sometimes at levels below Western jurisdictions.

For boards, this means that the venue of litigation or arbitration can swing millions in royalty payments. There is also an EU proposal (2023) to create a centralised SEP register and essentiality check, which could bring more transparency but also more administrative burden.

3. Quantifying Royalty Exposure – Board-Level Metrics

Boards should insist on a regular royalty exposure dashboard that includes:

• Total Royalty Outflow: Annual licensing cost by standard (e.g., 4G, 5G) and by supplier.

• Royalty Stack Analysis: What percentage of BoM or per-GB cost is attributable to SEP royalties?

• Litigation-Adjusted Risk: What exposure exists if litigation occurs — including potential back payments?

• Scenario Modelling: Best, expected, and worst-case costs for upcoming transitions (e.g., 6G adoption).

4. Strategic Levers for Boards

Boards have multiple levers to manage royalty exposure beyond simply paying published pool rates:

a) Early Pool Participation

Early members often receive preferential terms or caps. Waiting until after launch can mean paying higher rates retroactively.

b) Bilateral Negotiations Before Pool Formation

Some SEP owners are willing to cut bespoke deals before joining a pool, locking in lower rates.

c) Cross-Licensing and Portfolio Development

Even modest internal IP portfolios can be used to negotiate offsets, reducing net royalty outflow.

d) Collective Bargaining

Industry alliances or purchasing consortia can negotiate rates collectively, improving bargaining power.

e) Royalty Caps and Volume Discounts

Where possible, negotiate caps tied to shipment volumes or revenue to avoid runaway costs as deployments scale.

5. Case Studies – Lessons from Industry

Case 1: Avanci and Connected Cars

Avanci’s 4G pool became the de facto licensing mechanism for automotive OEMs, but early joiners paid lower cumulative rates. Late joiners faced back payments plus higher forward rates, putting pressure on margins.

Lesson for Boards: Engage early, even if volumes are small, to lock in preferential terms and avoid retroactive liability.

Case 2: Sisvel Wi-Fi Pool

Some implementers refused to take a license, arguing patents were weak. Litigation ensued, with mixed outcomes.

Lesson: Conduct essentiality analysis before signing to ensure you are paying for truly essential IP.

6. The Financial Dimension – Royalty Cost vs EBITDA

Royalty costs are not just a legal issue; they can move the share price. For handset makers, a $1 increase in per-unit royalty can wipe out hundreds of millions of dollars in annual profit. For MNOs, higher vendor royalty costs may be passed through in network equipment pricing, indirectly inflating capex.

Boards should treat SEP royalty strategy as part of total cost of ownership (TCO) optimisation, alongside spectrum, energy, and network opex.

7. Future Outlook – The 6G Challenge

6G will likely involve even more SEP holders as AI-native, software-defined, and joint-communication-sensing features become standardised. Royalty stacking risk could increase unless open standards, patent pools, or government intervention cap aggregate rates.

Boards should:

• Engage with policymakers to shape FRAND frameworks.

• Support open-source implementations where possible to reduce dependency.

• Ensure 6G planning includes royalty exposure modelling, not just spectrum and capex assumptions.

Board “So-What” – From Passive Payer to Active Negotiator

Boards that merely “sign the cheque” risk becoming passive price takers in an increasingly expensive IP landscape. Instead, boards should:

• Demand regular royalty exposure reports and scenario plans.

• Empower procurement and legal teams to negotiate proactively with pools.

• Explore IP acquisition or cross-licensing strategies.

• Join industry coalitions to influence pool rates and FRAND terms.

Handled well, patent pools can be predictable cost-management tools that de-risk litigation. Handled poorly, they can become a significant drag on margins.

“Patent pools can either be your litigation shield — or your biggest line item after spectrum.”