Will Samsung earn a royalty bonanza from Apple iPhones?

Samsung Electronics is known to have demanded that Apple pay it patent royalties of more than 13 U.S. dollars on each iPhone sold, a sum that could exceed 1 trillion won (870 million dollars) per year if Apple accepts.

In a Sept. 26 court hearing in Hague, the Netherlands, Apple reportedly claimed that Samsung is holding it hostage by asking for 2.4 percent on each chip used in an iPhone. Industry sources say, however, that Samsung asked for 2.4 percent on each iPhone chipset.

The price for an iPhone 4 chipset is 10.25 dollars, and 2.4 percent of it is just 25 cents. The price of an iPhone 16GB model is 560 dollars, however, and 2.4 percent of that comes to 13.44 dollars, or double the profits (7 dollars) per iPhone device earned by Apple’s Chinese subcontractor Foxconn.

Thirty-nine million iPhones were sold in the first six months of this year, heightening expectations for sales to top 80 million this year and 50 billion dollars in revenue. Apple sold 4 million units of the iPhone 4S in just three days of release, which could further boost the number of iPhone sales for the year.

If Apple pays 2.4 percent in royalties to Samsung for each iPhone, the Korean company will receive 1 billion to 1.3 billion dollars in royalties from Apple a year. This will equal 25 percent of the annual operating profits of Samsung’s mobile business.

This is why Apple defied the code of secrecy to leak its secret negotiations with Samsung.

Samsung refused to confirm the allegations, saying, “We cannot disclose the content of royalty negotiations based on the contractual duty to maintain secrecy.”

Apple, however, mentioned the 2.4-percent figure in a hearing at a Dutch court while Samsung is neither confirming nor denying, suggesting that the latter did demand a high royalty amount from the American company.

The Dutch court rejected Samsung’s patent claims to Apple, saying the 3G patent is accepted as an industry standard and therefore cannot be used as a reason to ban the sale of mobile phones by Apple.

A Samsung source said, “The ruling meant Apple infringed on Samsung’s standard patent and that negotiations on the royalty amount should follow suit,” adding, “The more Apple sells iPhones, the more royalties Samsung will get.”

Patent experts say it is within reason for Samsung to demand royalty rates higher than chipset prices since the value of a patent is not restricted to only parts price but should be decided in proportion to the profits earned by the end product seller.

Canadian software company i4i Inc. sued Microsoft by claiming that Microsoft Office infringed on its XML tagging technology. After the four-year patent battle, the U.S. Supreme Court ordered Microsoft to pay i4i 300 million dollars for patent infringement in June this year.

The XML patent is used by a small fraction of Microsoft Office, but the payment ruling was made considering its vast worldwide sales.

In another case, Oracle filed a 6.1 billion-dollar suit against Google saying the Android operating system infringed on its Java patent. Google said it will pay 2 billion dollars.

What happens if Apple refuses to pay royalties to Samsung? The law stipulates that royalties be paid under fair and reasonable terms, but no clear criteria on the rate of royalties exist since the negotiations depend upon the two companies.

Yet a patent user can sue a patent holder if royalty demands are deemed excessive, while a patent holder can ask for a sales ban and claim damages if the patent user refuses to pay royalties.

Lee Chang-hoon, a lawyer on U.S. issues at Wooin Patent and Law Firm in Seoul, said, “A 2.4-percent royalty on iPhone devices is not unreasonable at all. It will be inevitable for Apple to pay a significant amount of royalties to Samsung, if not all."

jaeyuna@donga.com