By Mike Clendenin and Peter Clarke
(05/30/01, 12:30 p.m. EST)
TAIPEI, Taiwan — After several months of negotiations, Taiwan's top recordable compact disk (CD-R) maker is nearing a deal with Royal Philips Electronics on royalty payments, signaling an impending conclusion to a drawn-out battle between the Dutch electronics giant and the island's numerous disk manufacturers.
Ritek Corp. (Hsinchu, Taiwan) is wrapping up the details of a multi-year licensing agreement with Philips (Amsterdam, Netherlands) that would amount to between 10 percent and 15 percent of the wholesale average selling price per CD-R. Last month, Ritek rival CMC Magnetics Corp. settled a similar deal with Philips and agreed to pay 3.5 cents per unit. Together, the two Taiwanese companies account for nearly 50 percent of the global CD-R supply; Taiwan accounts for about 80 percent of the world supply.
"We are very close to finding a solution," said a spokeswoman for Philips Research. "Within a month or two we believe it will be settled."
Striking a deal among the companies has been anything but easy. There have been accusations of price gouging, counterclaims of royalty evasion and complaints filed with the Taiwan government, sources familiar with the companies said. In January, Taiwan's Fair Trade Commission (FTC) levied $430,000 in fines against Philips, Sony Corp. and Taiyo Yuden Co. Ltd. for collusion in charging high royalty fees and abusing their CD-R market positions, according to an FTC official.
At stake, said analysts, are the traditionally high margins of CD-R makers. "If you look at the financial reports for CD-R makers last year, they had gross margins of 50 percent, so they cannot get used to seeing this reduced," said Charles Yang, a disk industry analyst for Entrust Securities.
A few months ago, those margins were under assault as average selling prices declined uncomfortably close to manufacturing costs — less than 18 cents per unit. Tack on a royalty, and the companies claimed they would lose money. "At the end of last year the average selling price was only around 20 cents. So our company suffered a lot and most of the manufacturers cannot pay the royalties to Philips because it amounts to more than half the cost," said a spokeswoman for CMC. "Normally for the royalty issue, most of the industries pay around 3 percent for the final goods. However for CD-R we had to pay more."
Philips said that assuming a deal could be reached with Ritek, terms would be same as for all other licensees. "The royalty price will not change. It has to be the same deal for everyone," the Philips spokeswoman said.
Philips Research, on behalf of Philips, Sony and Taiyo Yuden, announced in April that four additional Sony patents are likely to be brought into a collective agreement involving a "future revision of the CD-R patent portfolio," which could change the cost of royalty licensing. However, that will not effect Philips' royalties in Taiwan.
"In Taiwan, because of the FTC ruling, Philips, Sony and Taiyo Yuden license separately," the Philips spokeswoman said. "Everywhere else Philips collects on behalf of the patent holders and then an internal calculation is made."
Originally the Taiwanese manufacturers cried foul over CD-R royalties that hadn't changed in more than five years, when retail prices for disks were far higher than today. "The price has plunged so quickly, but the royalty has stayed the same. That's not fair," said Sean Lee, an executive at Ritek.
Sources familiar with the standoff said some CD-R makers wouldn't open their books to Philips so the company could determine whether royalty payments accurately reflected unit shipments. There were also allegations that CD-R makers just didn't make payments. And at least one company investigated invalidating the patents held by Japanese manufacturers, whom the Taiwanese also have to negotiate with for related CD-R technology.
But with Ritek close to a deal, analysts predict the fracas will soon conclude because the island's smaller manufacturers will fall in line. Additionally, "the problem will be resolved by rising CD-R prices," analyst Yang said. "If the [average selling] price hits 30 cents [from the current 27 cents], then the makers will still enjoy about a 30 percent gross margin, which is still much higher than traditional technology companies in Taiwan." And even in this bad second quarter, analysts predict that gross margins will remain above 20 percent.