Sometimes, Less Is Just Less

Today’s system of setting royalty rates on patents embedded in 5G and other communications standards works. So why does Europe want to tear it up and start again?

The latest front in the never-ending war over how much hardware makers must pay for patented innovationsbuilt into communications standards is quickly gathering strength in Europe this summer. That’s because the European Commission just proposed an ambitious new bureaucracy that would replace much of the existing negotiation process for setting royalty rates for those innovations throughout the region.

The Commission professes neutrality, though much of the language in the proposal parrots the position of multinational implementers like 苹果 , 谷歌 and 大陆集团 , which all hope to shrink royalties they pay on standard essential patents, or SEPs.

The proposal’s three-pronged approach would give the new office plenty of power to achieve the implementers’ goals. First, SEP holders would be required to register all their declared IP with the new office. The office also would appoint an expert to assess essentiality – that is, how vital individual patents are to their associated standards. And finally, the office would take a stab at each patents’ individual value, as well as the value of all the patents included in each standard.

Not surprisingly, intellectual property holders overwhelmingly reject the initiative, and are meeting on both sides of the Atlantic to craft a response. After gathering in May to discuss the issue, the IP Europe association of patent holders last week issued a scathing position paper condemning the plan. The IP Europe paper calls the proposal “flawed,” and predicts it will hurt innovation.

The initiative is also top of mind – and agenda – for attendees at the IPBC Global this week in San Diego.

Potential backlash

If the Commission’s proposed “competence centre” inside the EU’s patent office does slash SEP royalties as patent holders fear, that could lead to a drop in innovative new technology investment as well as lower participation in standards organizations. Taken together, the developments would put next-generation standards like 6G behind the eight ball, depriving them of technological advancements to meet our needs.

That’s no idle threat. Previous legislation, litigation and rule changes that depressed innovators’ ability to make a fair return have shaved available funds for R&D and muted contributions to standards-setting activities.

Since 2006, for example, many investors have abandoned traditional R&D in favor of platform providers like Apple and Google. That’s because the US Supreme Court that year dramatically restricted innovators’ ability to secure injunctions to stop implementers from infringing on their patents. Since that time, the number of platform providers on the list of 10 most valuable companies mushroomed from just one – Microsoft – to five today.

And since 2015, when the IEEE standard-setting organization introduced a SEP rule change for its 802 networking technology working group that both muted potential royalties and thwarted the ability to seek injunctions against violators, many innovators picked up their ball and went home, so to speak.

Indeed, those inventors opted to prohibit the 802.11 wireless networking committee – the section with the most SEP activity by far – from using their technology under the 2015 rules. As a measure of the patent holders’ reaction, the #wifi group had managed five consecutive years without a single so-called “negative LoA” – that is, a letter of assurance prohibiting use rather than guaranteeing it. For the five years After the new rule was put in place, nearly one in three LoAs were negative.

The backlash prompted the IEEE to introduce the concept of “custom” LoAs, which gave innovators the option to grant use under the pre-2015 policy. And this year, the IEEE walked back much of the 2015 revisions.

IEEE’s experience should serve as a cautionary tale for Europe. Innovators invest far more on R&D than implementers, so disincentivizing them is sure to result in technology lags. In the most recent quarter, for example, 高通 led the pack of major innovators, investing 23.8 percent of revenue on R&D. 爱立信 and 诺基亚 spent 19.2 percent and 18.9 percent, respectively.

All three devoted far more than Google and 思科 , which each invested about 13.5 percent of revenue. And their investment dwarfs the 7.9 percent and 4.9 percent of revenue that Apple and 宝马 spent on R&D, respectively.

Fair and reasonable

SEPs are a unique breed of intellectual property, because there’s no way for equipment makers to produce compatible hardware without them. That power comes with responsibilities that SEP holders must accept before their technology can be included in any standard. Those licensing responsibilities are often referred to as FRAND, which stands for fair, reasonable and non-discriminatory. That means patent holders must charge rates that help promote proliferation. And they must issue a license to all comers.

That’s exactly what’s happened in the smartphone arena. Implementers pay just a few percent of a device’s wholesale price – more or less the same as what those companies pay credit card firms for the simple task of managing smartphone purchases - for a cornucopia of innovation.

In the automobile industry, where #5g is an ancillary feature, the cellular royalties are a rounding error on the sticker. Avanci , a patent pool that manages the vast majority of cellular IP, only charges $20 per vehicle for rights to use #4g SEPs. Avanci is still negotiating 5G terms with SEP holders. But when all is said and done, I expect the price to come in around $30.

(As with 4G, the 5G license will cover all previous generations of digital cellular as well.)

So why bother?

Exactly. It would be difficult for the European Commission – or anyone, for that matter – to make the argument that royalties on cellular standards have caused harm. On the contrary. The royalty streams have funded Herculean efforts in next-generation technology. Like, for example, techniques for delivering tremendous amounts of data via ephemeral spectrum that wasn’t even considered usable just a few years ago.

By any measure, the smartphone market has thrived as a result. And smartphone makers have profited handsomely by building handheld devices that leverage the innovation to support high-bandwidth, no-wait communications at scale. It’s a vibrant market that continues to attract new players.

As well, it’s hard to imagine how consumers could be any better off than they are now. Even if royalties were eliminated entirely, end-equipment prices likely wouldn’t change at all.

But while royalties may be insignificant for consumers and implementers, they mean everything to innovators. Inventors depend on the revenue to invest in new ways to transform weak, high-speed wireless frequencies into fertile ground for cellular communication. Without prospects for making money on their innovations, inventors will find something else to do. And progress would suffer.

In other words, we all lose.

So, what is motivating the Commission to take on such a monumental task with such ominous implications? Good question. Without any hint of harm, the Commission is rationalizing this heavy lift in the name of “transparency.” Whatever that means.

And make no mistake, this is a heavy lift. How many experts would it take – and how long would it take them – to absorb tens of thousands of patents, then cross-check them against each other to come up with individual values for each? That one office might singlehandedly spark a global communications engineering shortage.

And what happens when the holders of these patents disagree with the results?

Here’s another idea: why not let innovators declare what patents they believe are essential to the standards organizations? Then they can present their case to implementers about which SEPs they have that they believe are really important. The two sides can negotiate, and eventually come up with fair and reasonable royalty agreements. Like they always have.

Now why didn’t the Commission think of that??