Gabe Moretti, Senior Editor
The legal case between Apple and Qualcomm made me ask: “What is a fair royalty a supplier can charge a user?” The answer is not clear, since the product that uses the IP can benefit in many different way from the IP. I asked a few questions to exponents of the IP business and I received answers that, even if they do not provide one solution, clear the issue significantly.
In this article I will cover answers from Robert (Bob) Smith, executive director of the ESD Alliance, Warren Savage, general manager of IP at Silvaco, Farzad Zarrinfar, Managing Director of Novelics, Mentor Graphics, and Grant Pierce, CEO of Sonics and also Chairman of the Board of the ESD Alliance.
I am publishing Grant’s response as a separate article with the title: “Behold the Intrinsic Value of IP “.
It must be noted that the ESD Alliance has launched a project called “IP Fingerprinting Initiative” using technology from Silvaco.
Chip Design (CD): Should royalties be fixed at a certain amount regardless of the sale price of the unit that use the licensed IP? Or, should royalties be a percentage of the price charged to the customer of the end product?
Robert Smith (RS): Royalties should be based on value provided. Value comes in many forms, such as how much of the functionality of the end product is provided by the IP, the risk and time-to-market reduction, and design and verification cost savings. There is no simple formula for IP royalties. In fact, they can be quite complicated.
Warren Savage (WS): Business models used for licensing royalties are ALWAYS a negotiation between the buyer and seller with each party striving to optimize the best outcome for their business. In some cases, the customer may be willing to pay more for royalties in exchange for lowering the upfront licensing costs. A different customer may be willing to invest more upfront to drive down the cost of royalties. Calculation of the actual royalty amounts may be based on a percentage of the unit cost or a fixed price, and each may have sliding scales based on cumulative volumes. Both parties need to derive the value that fits their own business model. The IP user needs to arrive at a price for the IP that supports the ROI model for the end product. The IP supplier needs to ensure that it receives sufficient value to offset its investment in IP development, verification and support. It is able then to participate in the success of the buyer’s product based (at least in part) on the value of the IP provided.
Farzad Zarrinfar (FZ): No. It will not be practical. Royalty is a form of payment for IP licensing. Using royalty-based payment, IP providers can share the business risk and rewards with IP users. Royalty is typically “negotiable” and is dependent to a variety of parameters such estimated volume, estimated product life, IP value, the amount of R&D invested in IP development, the business model for IP suppliers, competitive landscape for IP, and others. In reality, good relationships between IP users and IP providers are important in developing a win-win business model. IP royalty is negotiable. However, some of the most utilized models are:
- Royalty fee, as a percentage of end product selling price (i.e. the selling price of packaged IC)
- Royalty fee, as a percentage of end-product cost (i.e. die cost)
- Royalty fee, as a percentage of wafer revenue that the foundry generates
- Royalty fee, as a portion of cost saving that IP providers offer to IP users.
CD: What is the intrinsic value of an IP?
WS: An IP has ZERO intrinsic value in of itself. The value is completely dependent on the application in which it is used, the ability of the IP to offset development costs and risks and the contributions it makes to the operation and success of the target product. For example, an IP that is developed and ends up sitting on the shelf has no value at all. In fact, its value is negative given the resources and costs spent on developing it. Size doesn’t matter. An IP that has hundreds of thousands of gates may command a higher price because the IP supplier needs to sell it for that price to recoup its investment in creating it. A small IP block may also command a high price because it may contain technology that is extremely valuable to the customer’s product and differentiates it significantly from the competition. The best way to think about intrinsic value is to think of it in the context of value delivered to the customer. If there is no apparent difference in this regard between an IP product from two or more suppliers, then the marketplace sets the price and the lowest cost supplier wins.
FZ: It depends from various situations such as;
The value could be related to the cost saving for IP user. In the slide below, several cost savings have been calculated.
The value could be related to the time-to-market saving or the saving for IP implementation. These will impact “build vs buy” decisions.
How many times can the owner of the IP charge for its use in the same system to the same customer?
WS: This again is a negotiation determined by the buyer and seller. As long as both parties receive what they perceive as fair value, there is no magic number.
FZ: If I understand your question correctly, the typical licensing model is “step-function” or “flat”. In step-function, IP providers offer a licensing fee for “First-Use”, “first-re use”, and “second re-use & beyond”. Therefore, the more designs customers do, proportionally, more IP builders generate revenue. In addition, royalty revenue for differentiated IPs offer scalable business for IP providers. Therefore, more successful and higher volume the chip supplier gets, will also benefit IP provider by royalty.
Royalty can be paid in several forms. Following are several popular royalty payments:
- Per parts
- Per wafer
- Buy out
- Buy down
- Royalty with Cap
- Royalty with step function
It is also important to structure a solid tracking system to track and verify the proper value of paid royalty. In this case, as President Ronald Reagan said “I trust you, but I need to be able to verify”.
CD: How can the owner of the IP protect it from illegal use by customers?[NVC1]
WS: This is the great problem we have in the IP industry today. Approximately 99% percent of IP is delivered to customers in source code form and IP companies rely on the good faith of their customers to use it within the scope of the license agreement. However, there is a fundamental problem. Engineers rarely know what the usage terms and restrictions of the agreement their company has with the IP supplier, so it is quite easy for a semiconductor company to be in violation—and not even know it. New technologies are coming into play, such as the IP fingerprinting scheme that the ESD Alliance is promoting. Fingerprinting is a “non-invasive” approach that protects both IP suppliers and their customers from “accidental reuse.”
RS: IP suppliers can utilize The Core Store (www.the-core-store.com) at no charge to showcase their products and register “fingerprints” of their technology. Semiconductor companies can use this registry to detect IP usage within their chips by means of “DNA analysis” software available through Silvaco.
Warren and Bob changed the question a bit.