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.
Click here for more information about Digital Infrastructure and Connectivity UCITS ETF.
Download the PDF
When you trade ETFs your capital is at risk.