5G: Another step in the evolution of infrastructure | DIGI

26 October 2020

Part 1: Digital Infrastructure and Connectivity Overview

Part 2: Mobile Technology and the Promise of 5G

Part 3: 5G: Another step in the evolution of infrastructure


A word on the connected car, better known as a data centre on wheels

5G is thought to bring an opportunity with even greater need for RF semiconductors – the Connected Car. While we are still at least a few years away from autonomous cars being unleashed on local roads and autonomous semi-trucks on highways, infotainment, telematics, and real-time monitoring applications are expected to result in $50 worth of RF semiconductors per car by 2024. Similar to the smartphone market, there are semiconductor dollar content per unit and volume drivers at work. According to the 5G Automotive Association, today connected cars account for roughly 12% of all vehicles on the road and by 2021 they are projected to make up more than one-third. By 2024, it’s estimated that more than 70% of cars will ship with cellular connectivity. This will result in an explosion in demand for data and the associated digital infrastructure given expectations for data flow to explode to 1 TB of data per vehicle per month by 2025.[1] 


For illustrative purposes only. 


Wireless technology and IP licensing

  • 5G handsets are expected to generate almost $20 billion annually in global royalties for intellectual property (IP) holders in 2025, according to Strategy Analytics.[2]
  • The buildout of 5G and beyond will dramatically expand the addressable market for mobile technology beyond the smartphone, opening up new markets for wireless IP licensing business models.
  • With South Korean government targeting 6G trials by 2026 and commercial deployments in 2028-2030, standards and IP development for this next-next generation wireless technology are already underway.[3] 


The expanding digital ecosystem that will foster digital infrastructure and connective demand has been made possible by companies that have made enormous investments in developing and manufacturing core wireless communications technologies.  When we dig deeper, we find that at the heart of this mobile and digital backbone disruption is a series of technological innovations in wireless technology standards. It’s these protocols that allow for networks and devices to function as firms must develop standards-compliant products if they are to be of use to customers. To date, those products have included mobile devices, such as cellular phones, tablets, notebook computers, and wireless personal digital assistants; wireless infrastructure equipment, such as base stations; components, dongles and modules for wireless devices; and Internet of Things (IoT) devices and software platforms.

Because of the way these wireless standards are developed, a wide variety of companies both collaborate and compete with one another as they seek to develop the winning standards. Arguably the holy grail in developing new wireless technology standards, such as 4G LTE or now 5G and eventually 6G, is for a firm to develop “essential patents” that are core to the technology. As mobile operators and device companies build out networks and devices, the value tied to those essential patents increases dramatically.

Some companies develop these technologies for in-house use, while some look to license their intellectual property to others so as to monetize their investment, and some do both. Examples of such companies run the gamut from Qualcomm (QCOM), InterDigital (IDCC), and Nokia (NOK), while others either through internal development or the acquisition of IP include Samsung (OO5930:KS), LG Electronics (066570:KS), Apple, Alphabet (GOOGL), Ericsson (ERIC), Alcatel Lucent (ALU), Huawei, ZTE Corp. (000063:CH), and Intel (INTC). Some, such as Qualcomm and InterDigital, look to monetize their patent portfolio strive to enter license agreements, primarily with device manufacturers on a variable royalty basis, while others are structured on a fixed-fee basis or a combination between the two.

As the 2019 InterDigital 10-K with the Securities Exchange Commission spells out a fixed fee agreement “can include paid-up licenses for a period of time, for a class of products, for a number of products sold, under certain patents or patent claims, for sales in certain countries or a combination thereof. Licenses become paid-up based on the payment of fixed amounts or after the payment of royalties for a term.” A variable agreement depends on the sales of products incorporating or using a company’s licensed intellectual property with such royalties generally based upon a percentage of the wholesale selling price. Some, such as Qualcomm, provide per-unit royalty caps that apply to certain categories of complete wireless devices, namely smartphones, tablets, laptops, and smartwatches, and provide for a maximum royalty amount payable per device.

This IP licensing business model is not very capital intensive but is highly lucrative given the substantial margins associated with it. For example, the operating margins associated with Qualcomm’s licensing business ranged from 64% to 80% over the 2017-2019 period, comprising more than half of the company’s overall operating profit during that period. In the first half of this year, Nokia’s Nokia Technologies operating margin was 83%, flat with the same period in 2019, and the business generated 64% of Nokia’s operating profit for the first six months of 2020. As a result, we’ve seen IP licensors look to expand their IP war chest through acquisitions, while in some cases licensees are looking to shore up their IP position and minimize their licensing costs. Perhaps the greatest example of the latter was had in 2011 when a consortium Apple, BlackBerry (BB), Microsoft (MSFT), Ericsson, Sony (SNE), and EMC, which is now owned by Dell Technologies (DELL), agreed to buy more than 6,000 patents covering key telecommunications technologies, from Internet services to wireless data networking from bankrupt Nortel Corp. for $4.5 billion.[4] 

The buildout of 5G and beyond will dramatically expand the addressable market for mobile technology beyond the smartphone, its primary volume market. Some examples include connected vehicles (telematics, in-vehicle entertainment, semi-and autonomous driving), smart grid management, public video surveillance and security, VR and cloud gaming, and other industrial applications. This in turn opens up new markets for wireless IP licensing business models and augments existing revenue streams for wireless IP licensors. This new class of connected devices will generate additional forms of data traffic that will likely drive network capacity utilization levels even higher, resulting in the need for further digital infrastructure expansion.

5G handsets alone are expected to generate almost $20 billion annually in global royalties for intellectual property (IP) holders in 2025, according to Strategy Analytics[5]. By 2026, the South Korean government expects to conduct 6G trials with the goal of 1Tbps in data transmission speeds, which amounts to roughly five times faster than 5G and latency reduction to one-tenth of current 5G services[6]. Odds are this will drive demand for forthcoming applications, and open up the potential for brand new ones, fuelling the digital infrastructure virtuous circle and IP development along the way. 

As one might expect, one of the hurdles, particularly as these new markets go online, is the negotiation process between the IP licensor and prospective licensees that may be utilizing the licensors technologies and patents. In some cases, negotiations may be straightforward, while in others they can become quite contentious and lead to litigation. For example, in 2018 Broadcom (AVGO) settled out of court with Volkswagen AG (VLKAY), ending a billion-dollar patent lawsuit that centred on 18 of Broadcom’s patents that Volkswagen allegedly used in the navigation and entertainment systems for several of its car models[7]. In 2020 Nokia won a court ruling for a patent dispute with Daimler AG (DDAIF) because the court found that Daimler wasn’t willing to abide by existing rules for so-called essential patents. We agree that the court’s ruling goes to the heart of how technology must be licensed for the mobile-telecommunication systems that are standard features in most modern cars. We also suspect Daimler will appeal, and that ultimately some deal between the two companies will be struck[8]. 

Given the implications for not only incremental revenue streams for the IP licensor, but also at least a nudge higher in costs for the licensee, wireless IP licensing developments are ones to watch as they will point to new and incremental markets that will drive data creation and consumption and therefore data infrastructure and connectivity demand.


5G another step in the evolution of infrastructure

As much as the rollout of 5G represents a significant increase in the connective capabilities of networks and devices, it is “just” another step in the evolution of global data network infrastructure. As newer and faster connections allow more people to create and consume data globally, this drives the development of incremental capacity and fuels the adoption of newer technologies that will ripple through the digital infrastructure ecosystem, creating further demand for capacity in a virtuous expansive circle.  It is this ongoing virtuous cycle that represents the long-term opportunity we see in this space with companies that enable the ever-growing consumption of streaming content, the creation, storage and transmission of data, ecommerce and connectivity across a growing number of devices around the world.

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