Bid-Ask Spreads and the Obviousness of Fair and Reasonable
Pricing is a basic human principle. If you have something I want, I make an offer or bid for it. If you want to trade it, you have an ask in return. A deal is struck when both sides remove the spread between the bid and the ask. In the context of a securities marketplace, the bid-ask-spread drives pricing up or down, but the market is always moving because liquidity exists to create a market.?
However, in the context of the patent licensing market, if an ask is made but a bid is not offered, there is no spread. The marketplace does not exist without a bidder; for the most part, there is little to little to no liquidity in patents absent litigation. It is a difficult situation for patent holders, but where it gets very tricky is related to Standards.?
Standards are a vital agreement within society to ensure interoperability. Standards exist everywhere, and the US Chamber of Commerce oversees the National Institute of Standards and Technologies. For some standards, adoption is easy. If you’re building a house to code, separate your wall studs by 16 inches, and you’ve adopted the Standard. Other types of Standards require the purchase or license of essential technology that has been patented, called Standard Essential Patents or SEPs. There are numerous SEP standards across many industries, but I’ll focus specifically on Telecommunications patents that enable cellular communications, colloquially known as 3G, 4G, 5G, or LTE. Telecommunication SEPs have been a nonstop point of conflict between inventors and implementers since before Apple made its first iPhone.?
SEPs are the backbone technology that makes your smartphone work across the network of telecommunications devices wherever you are in the world. Without SEPs, your phone would only work on the network of your specific service provider, meaning moving from an AT&T zone to a Verizon zone would shut your phone down. Phone makers must adopt the SEP technology or the devices would not work as intended. Therefore, an implementer (i.e., Apple, Samsung, Google) has to use this technology.?
So what does an implementer need to pay? Guidance from regulatory authorities requires fair, reasonable, and non-discriminatory (FRAND) pricing for the use of SEPs by implementers, but settling on the actual rate for SEPs in smart devices has been like searching for the holy grail, which is paradoxical because Standards are ubiquitous. It surrounds everyone all the time but yet we cannot put a price on it. Or can we??
Where's the Bid?
The bid-ask spread between SEP patent holders and technology implementers is a void of nothingness in the public domain. My friends and former colleagues at Stout provided a recent report on SEPs that indicated the “ask†from patent holders. It also showed the “paid†rate based on a calculation that imputes the royalty based on total patent families owned and offered for license.?
What is absent from this report? The Bid offer rate.?
Implementers of SEP technology never make a public bid offer rate for licensing SEPs. They certainly know what the amount is that they want to pay, and it is less than $10 per device, an unreasonably low figure. When the smartphone patent wars began in the late 2000s, the imputed “ask†royalty rate for all SEPs was over $50 per device. I know this because I have conducted more than a dozen SEP royalty rate studies throughout my career for many stakeholders.
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The absence of offer rates from implementers raises many questions:?
- How is it possible to be Fair and Reasonable if the implementer side never makes a public bid for a license??
- If the implementer side nearly always requires litigation before a settlement is reached, how is that fair or reasonable??
- If, on rare occasions, there is no litigation, why are the agreements kept under a confidential seal??
- Without transparent bidding, how does a licensor know if its offer is fair and reasonable?
- If implementers can’t make a Bid on a fair and reasonable standard, how are small patent and IP holders going to be treated going against trillion-dollar infringers? Terrible is the answer to that one.?
Stop Being Unreasonable and Make a Bid
Connecting bid-ask-spreads to FRAND SEP royalty rates is obvious. What is not obvious is why none of the courts, regulators, politicians, or accountants recognize this obvious fact and enforce implementers to make a public bid??
Based on the myriad of reports I have completed over the years, a reasonable range for a fully burdened SEP 3G to 5G rate is between $12 to $22 per phone for all declared SEPs.?I personally think Apple, Google, and Samsung are about a decade late for making an offer rate of implementation to the whole stack of SEP LTE patents. It is a dirty game they are playing not being fair.
I'm sure their argument is that an implementer needs to choose how to allocate the price paid for the entire stack based on the importance of the declared patents to their product. However, implementers should pay the fully burdened “Fair and Reasonable†royalty rate that would allow auditors and regulators to know that the payments are reasonable.?
Anything else is simply holding out.