Is Ericsson’s Demand To Micromax On Patent’s Royalty Fee Irrational? Will Micromax Give In To The Demands?

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The on-going patent royalty fee dispute between Indian mobile handset major Micromax and Swedish telecom equipment maker Ericsson has intensified. In latest developments, Competition Commission of India (CCI) is to investigate Ericsson in regards to the charges levied on Micromax for the use of Ericsson’s patents. To do an in-depth investigation CCI has now decided to refer the case to the Director General.

Micromax and Ericsson both are undergoing negotiations to settle down on terms that will allow Micromax to use the mobile technology, for which the latter holds patent. According to a fresh claim by Micromax, Ericsson is demanding too much in royalties to allow them to use its patents, which are crucial for 2G, 3G and 4G devices. Ericsson has alleged Micromax for an infringement of eight Standard Essential Patents (SEPs) in its 2G, 3G and 4G mobile handsets, Tablets and Dongles. Micromax, on the others side, has accused Ericsson for arbitrary demands in patent fees, claiming that royalties must be based upon the contribution of technology and not on the price of a device.

Ericsson has demanded that Micromax should cough up 1.25% of sales prices for GSM devices, 1.75% of sale prices for GPRS devices, 2% of sale prices for EDGE/WCDMA/HSPA capable devices, and USD 2.50 on sale of each dongle from Micromax.

Micromax Ericsson Patent Dispute

Micromax – the world’s 12th largest mobile devices maker and 2nd largest in India – argued that the patented technology contributes equally on different classes of mobile devices and there is no way Ericsson could justify different patent fees based upon the price of each device.

To strengthen its claim, Micromax went on explaining this in CCI document “For the use of GSM chip in a phone costing Rs. 100, royalty would be Rs. 1.25 but if this GSM chip is used in a phone of Rs. 1000, royalty would be Rs. 12.5. Thus increase in the royalty for patent holder is without any contribution to the product of the licensee.”

The Indian mobile major feels this will shoot the price of mobile devices further, resulting in a significant effect on the company’s market share and sales. As on 31, May 2013, Micromax had deposited Rs. 29.45 Crores towards the payment of royalties and seeks the final verdict in its favor.

Ericsson Dominates GSM And CDMA Markets In India

Ericsson is dominant in the relevant markets of GSM and CDMA in India as the company holds 33,000 patents under credit, 400 of these patents were granted in India.  The company is also the largest holder of SEPs for 2G, 3G and 4G patents used for Smartphones, tablets and dongles.

The company is reportedly not willing to expose the royalty charges being collected for same patents from other mobile handset makers.

Mobile Handset Makers Pay Up to 4% in Royalties

The payout of royalties based upon technology contribution could be debatable, but a majority of mobile handsets makers across the globe are paying anything between 2.5% to 4% on an average on the selling price of a Smartphone.

Microsoft is charging nearly 3%, on an average, from 70% of mobile handset makers powering their devices with Android OS. This has helped Microsoft to add an estimated $1.31 billion as revenues in its Q2, 2013 performance.

Having said that, the arrangement between Microsoft and other Mobile handset makers is on a fixed price in royalties, unlike the percentage of handset prices that Ericsson is demanding from Micromax. Reportedly, Microsoft charges $10 on each Android Smartphone and $12 on each Android tablet sold by Samsung. Hypothetically, the percentage is much higher than the royalty fees being demanded by Ericsson.

The Technology, Microsoft holds patent for, sits at the core of Android and is therefore essential for any Android Smartphone to run. On the other hand, the contribution of technology, Ericsson hold patent for, is a matter of consideration and discussion before anyone actually reaches to a final conclusion and stands by Ericsson’s or Micromax’s sides.

Micromax is reportedly gearing up for an IPO launch next year and is concerned about the lukewarm response the company is receiving from the market towards its premium Smartphones. The company has started cutting corners to make devices more affordable and boost sales. In such a scenario, topping 2% of total price of Smartphones could be a serious concern for the Micromax management.

Source: CCI Document


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