Royalty

A royalty is an ongoing per-unit payment made by a chip company to an IP licensor based on production volume or revenue from chips using the licensed intellectual property. Royalty models: (1) Per-unit royalty—fixed amount per chip shipped (e.g., $0.50-$5.00 per chip for processor core); (2) Percentage of ASP—royalty as percentage of chip selling price (1-5% typical for major IP blocks); (3) Percentage of revenue—based on total product revenue using the IP; (4) Tiered royalty—rate decreases at higher volumes (incentivizes volume production). Royalty vs. license fee: license fee is one-time upfront payment for IP access; royalty is ongoing production-based payment. Many deals combine both (upfront + royalty). ARM royalty example: charges $0.01-$2.00+ per chip depending on core complexity—Cortex-M (low) to Cortex-X/Neoverse (high). Total ARM royalties: ~$2B+ annually from 30B+ chips shipped per year. Royalty economics for IP vendor: (1) Revenue visibility—predictable income stream tied to customer production; (2) Upside participation—benefit from customer's volume success; (3) Alignment—incentivized to help customer succeed. Royalty economics for licensee: (1) Lower upfront cost—spread IP cost across production; (2) Variable cost—scales with actual production vs. fixed license fee; (3) Margin impact—ongoing COGS component. Royalty reporting: quarterly self-reporting by licensee, periodic audits by licensor to verify accuracy. Royalty disputes: disagreements over applicable products, royalty base, stacking (multiple royalties on same product). FRAND: fair, reasonable, and non-discriminatory licensing for standards-essential patents. Royalty stacking concern: multiple IP royalties can accumulate to significant percentage of chip ASP, squeezing margins.