Growing Automotive Industry Revenue from Cellular Connectivity Outweighs SEP Licensing Costs (Analyst Angle)

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Image courtesy of 5GAA.

The automotive industry is being revolutionized by continuous cloud connectivity, self-driving technologies, electrification of drivetrain and shared mobility. These transformations are facilitated in part by the standardized cellular technologies now commonly implemented in “connected vehicles” or “CVs”. The proportion of vehicles shipped globally with built-in cellular connectivity is expected to increase from 46% in 2020 to 76% in 2026.1

The CV business ecosystem has matured considerably since I last reported on it here nearly two years ago. The benefits, additional revenues and costs now associated with the adoption of cellular technologies in vehicles translate into major commercial actions by industry players and in financial markets. The incremental revenue from vehicle point-of-sale products as well as continued monetization opportunities in value-added services and cost savings will parallel what has been achieved in smartphones, where substantial profits are being reaped at beyond initial product sales and recurring network operator service fees into the application ecosystem. . The value of automotive connectivity is created through enhanced safety features, improved navigation, driver assistance and automation, vehicle and driver monitoring (e.g. to adjust insurance premiums), reduced maintenance, in-car entertainment services and over-the-air software updates. for various systems.

Although the share of new car sales prices and after-sales service costs attributable to cellular connectivity was estimated at $54 billion in 2020, the total patent royalties paid by automotive OEMs to license the cellular standards-essential (SEP) patents on which these capabilities depend was and remains well below 1% of that figure. And that low royalty yield percentage will decline, despite total royalties increasing as more OEMs get licenses, as the CV market value is expected to grow faster to $166 billion or more. here 2025.2

SEP license fees are modest relative to product costs and with thousands of dollars in anticipated revenue and cost savings from connectivity services over the typical life of a 14-year car.3 Indeed, SEP license fees represent a small proportion of an estimated average cost of $700 per vehicle for OEMs on telematics and infotainment systems, which are marked up significantly when sold to consumers as features. bundled or additional options in the prices of finished product cars.4 Examples of ongoing additional revenue for OEMs include £141 ($176) per year after an initial free period, excluding mobile operator service charges, to subscribe to the Audi Connect Infotainment package in the UK . ‘Remote services’ cost an additional £37. In the Eurozone, Volkswagen charges €75 ($80) per year to extend its basic We Connect subscription and €145 for its “Plus” service. OEMs can receive $30 or more per year from insurance companies for policyholders who agree to provide their driving behavior data.

There has been much discussion about the value SEPs place on a CV, but consensus on how much the automotive industry should pay to enable 4G, 3G and 2G SEPs that underpin connectivity-based solutions recently emerged. A large majority of these SEPs are licensed by the Avanci patent platform for a one-time payment of $15 per 4G CV (or, as of September 1, 2022, $20 per 4G CV). With more than 40 automotive brands licensed, including BMW, Ford, General Motors, Mercedes-Benz and Volkswagen, Avanci licenses approximately 45% of CV shipments. This is not surprising given that the platform provides the “one stop shop” with transparent and predictable pricing that many implementers and government authorities have demanded.

Automotive is now the largest IoT SEP licensing segment, with licensing revenue in the low hundreds of millions of dollars, paid to SEP owners primarily multilaterally through Avanci, but also bilaterally to companies such as Nokia and Qualcomm.

The development of cellular technology is a huge, risky and expensive undertaking, involving a large number of R&D personnel and numerous companies. For example, Ericsson, Nokia and Qualcomm each invest around $5 billion a year in R&D, mainly in cellular. Other companies are collectively investing billions more. Smartphones generate nearly all of the return on this R&D investment, which totals approximately $15 billion in SEP licensing revenue per year.

While CVs usefully leverage various cellular technologies, including core 4G LTE capabilities such as eMBB for video streaming, cellular technologies developed specifically for vehicles are also a major focus for the 3GPP standards organization and the many companies that bring patented technologies to its standards. Cellular Vehicle-to-Everything (C-V2X) technologies include many features that can improve safety on the road and help enable or improve advanced driver assistance systems (ADAS) and automated driving systems (ADS). WiseHarbor’s analysis of 3GPP Radio Access Network Working Group contributions reveals that 5% of them relate to C-V2X among many innovations.

Consumers often pay over $1,000 for a new smartphone, plus more per month in network operator service fees, because of the value they get from the many free and other services these devices also allow them. to obtain, including search, navigation and social media. CV pricing also reflects downstream value, whether or not all of that value is captured by the OEM itself. Yet CVs generate less than one-fiftieth of the cellular MS license fees of mobile phones. This despite the fact that OEMs are already earning substantially more than half of their total annual revenue of $2.7 trillion in 2021 from CV sales. By comparison, the total turnover of mobile phone sales is around $500 million per year. Even if every CV produced over the next five years is licensed, including those expected to include 5G, the proportion of licensing revenue coming from cars is unlikely to exceed a tenth of that from smartphones.

With the growing adoption and value of connectivity in vehicles, there is consensus with the acceptance now that the modest, widely paid SEP fees are fair and reasonable. CV manufacturers and users derive enormous value from cellular technologies, including those developed specifically for the automobile.

1 WiseHarbor estimates based on various industry sources.

2 Markets and Markets estimated the global connected car services market to be worth $54 billion in 2020, with growth to reach $166 billion by 2025. Other industry analyst firms forecast a larger market (see for example endnote 3). “Less than 1%” is based on WiseHarbor’s estimate for cellular MS licensing revenue over CV sales. Statista forecasts total annual revenue from car sales to be between $2.7 trillion and $3.0 trillion.

3 Other CV market value estimates also include revenue from ongoing services and operating cost savings. Allied Market Research valued the global connected car market – “providing comfort, convenience, performance, safety and security as well as powerful network technology” – at $63.03 billion in 2019, and forecasted it to grow at a CAGR of 17.1% to reach $225.16 billion by 2027. McKinsey & Company estimates that connectivity could drive up to $310 in revenue and $180 in savings per car per year, on average, in 2030. There are approximately 1.4 billion cars on the road worldwide.

4 WiseHarbor estimates this figure using various sources focused on component and manufacturing costs, with car sales volumes increasing from 73 million in 2020 to 95 million in 2026 and the proportion of connected vehicles expected to increase from 46% to 76% in the future. during this period.

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