Qualcomm Inc (QCOM)

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After Qualcomm, royalty issue haunts GSM players

Siddharth Zarabi / New Delhi July 14, 2006

http://www.business-standard.com/common/storypage.php?leftnm=lmnu9&subLeft=2&autono=98178&am....

In the backdrop of the controversy over Qualcomm’s royalty structure and Reliance Communications’ problems with it, the debate within the telecom industry circles is slowly turning to the royalty structure which prevails in the GSM segment dominated by the likes of Nokia, Ericsson and Motorola.

Summarising the various components of the royalty fee that notch up to almost 10 per cent of the sales price for any equipment, some industry watchers hold this as the real hindrance in the growth of domestic manufacturing entities in the GSM space.

Various sources indicate a royalty fee per company of 1-2 per cent of the sales, taking the total fee (cumulative royalty fee) to around 10 per cent.

Citing the development of homegrown Chinese telecom manufacturing entities like Huawei and ZTE, which became forces to reckon with in the recent past, sources added that with India becoming a huge market for telecom equipment, it needs to follow the Chinese practice of opening the market for only those patent holders that agree to share patents.

It may be recalled that last year the ministry of communications launched a campaign to encourage manufacturing of telecom equipment domestically.

Pegging it on the Bharat Sanchar Nigam mobile equipment purchase order worth around $4 billion, the ministry has succeeded in getting a number of mobile equipment manufacturing companies to make a start with assembly facilities in Chennai.

Given that, a section of the domestic telecom equipment lobby now wants Communications and IT Minister Dayanidhi Maran to work towards ensuring that only those companies, which reduce royalty fees and give the government access to patents, be allowed to bag orders from public sector companies.

On the face of it, asking patent holders to share them may not be legally tenable, but this could make services more affordable.

CDMA major Qualcomm said its royalties in India on handsets were about 5 per cent. The firm has been criticised by operators in many emerging markets for the alleged high royalty charges.

However, given that over 78 million of the nearly 105 million mobile customers in India are on the GSM platform, the impact of royalties in this space may be even higher.

It may be recalled that India imported GSM handsets worth around Rs 15,000 crore last year from China, which benefits from the laissez-faire on patents and fees.