The State of IP Licensing (Beyond Covid-19)

Past performance is not an indication of what the future holds. Quite so.

Given the crazy times we have been living through, I decided to write down some observations about the state of IP (really, patent) monetization presently and where it seems to be headed in the future.

While I belittle the importance of the past above, it does in fact provide really the only available canvas, against which the future should be forecast and projected. Thus, the best, and really only workable way, to describe any likely future, is to reflect against what happened in the past.

So, we must start with the past when dealing with each topic below. To know the past is to understand the future - exactly because the future will be different from the past.

The Golden Age of Globalization

The recent decades have seen unprecedented globalization. While we may take it for granted, the sheer scale of it may not be replicated during our lifetimes. Put differently, most of us, me included, underestimate the impact this unprecedented era of globalization has had on our careers and even on our lives more broadly. Me personally? I lived in the US on no less than three occasions over the recent decades, yet moved back to Europe always. For earlier generations, migration was a once a life time event, if at all. Not to even mention the millions of flight miles working and living through this unique era of ever increasing globalization. Clearly, also I then am a child and product of globalization, just like millions of others. Just wanted to make clear that I am by no means opposed to globalization.

So, to make it really concrete, the share of global GDP subject to international trade astonishingly grew from less than only 30% in the early 1970s to about 60% already in about 2008. Put differently, it doubled. Yet, it has actually plateaued since. Peak globalization, they call it. Undoubtedly, globalization was the singular dominant story in the global economies for about 40 years, until it reached its current plateau already about a decade ago. And plateaus are inherently unstable in economics. Besides, the about 61% peak reached already in 2008 may be quite close to how globalized the world economy even can be - surely a major part of the global economies must always remain global. Put differently, it seems unbelievable that only about 39% of the world economy was local, rather than globalized, back in 2008.

Not only is it mathematically impossible for world trade to grow like that from here, but we are already seeing a major reversal. If you look at, for example, the level of trade between the two giant economies on our planet, the US and China, it is already down some 25% from its peak. And it seems destined to shrink far more. Unprecedented.

On this note, a news item just crossed my screen saying that the UK will, as urged by the US, move to "clean" its telecommunication infrastructure from all gear from Chinese Huawei. Obviously for reasons of national security. It just happened. Another thing that was announced recently was that exports from the EU to the rest of the world crashed by about 30% a few months ago. Massive, but it just happened. I have more detailed statistics for Finland, probably the one economy in the world most dependent on globalization, showing that the biggest decline was actually already in late 2019. Way before Covid-19 going global. So, exports and globalization was crashing already before the virus.

When massive trends defining the world we live in, like globalization, start reversing, it is really hard to stop those trends. Irrespective of what we may think of them. Perhaps globalization simply went too far, too fast and must revert some. What is absolutely certain is that, given how strong the trend of globalization was over the past decades, it cannot mathematically continue like that in the future. Rather, it seems to be slated for a reversal at least to some degree. Brexit, by the way, is one very concrete manifestation of this de-globalization trend. Whatever we may think of Brexit, it is real and frankly unprecedented as well. It actually happened.

Very recently, this new über trend of de-globalization seems to have gone into overdrive. First, the Covid-19 caused massive border closures, even within the EU, in a way that has never happened. A very concrete example being that all the Nordic neighbors of Sweden, being Denmark, Finland and Norway, closed their borders to Sweden. Simply unfathomable just last year. While that happened obviously for health reasons, it still happened.

Global trade volumes were crashing already before the virus and crashed even more due to the virus. And global flight travel virtually disappeared for many months. Then again, the stock markets have been boosted by the central banks. So, there's always that, at least for now. But, any way you look at it, the world has not been less globalized and more closed for 50 years than it has been in 2020 so far. While the world probably opens up quite a bit soon, it would seem bold to assume that a change of this magnitude would not leave a permanent footprint and impact. And even bolder to expect for the past globalization trend to continue just like it did since the early 1970s. It actually cannot.

Political Harmony Among the Nation States

Patents are monopolies awarded by nation states or regional groups of them. Patent litigation happens in courts operated by nation states. Their judgments are enforced by the bailiffs and like officials of the nation states. This then means that the global patent system is not only entirely dependent on nation states, but also on the relative harmony between the same.

While there always has been, and always will be, more geographical friction in the patent system than it may appear from the outside and while things like home field advantage in courts will always exist, the past push for ever more globalization did cause a relative harmony within the global patent system. Patent system was simply one beneficiary of the good times.

Very concrete illustrations of this include, for example: i) the very important TRIPS agreement on the trade related aspects of global IP rights from 1995 and all the various global efforts to locally implement the same; ii) the European Patent Convention and the corresponding European patent system stemming from 1973 and having grown massively since then; and iii) the global Patent Prosecution Highway initiative having been around for little more than 10 years already. More subtle illustrations include national courts being rather mindful about not encroaching on each other's monopoly to adjudicate patent matters impacting their own jurisdictions, aka "comity", as well as the relatively careful approach observed by various anti-trust offices around the world to avoid interfering in patent matters, certainly not in a manner impacting other geographies.

All of that has changed. The European Unitary Patent seems destined to fail (am quite happy about that personally, but that is a different story). There's been quite a mess around what the Brexit of UK means in relation to various IP rights. It appears impossible to achieve more IP harmonization globally through the WTO either, quite the opposite in fact. Litigation outcomes with at least purportedly extra-territorial impact have raised their head within the patent space as well. Just think the of the Unwired Planet vs. Huawei case from the UK for example. Though may not stick upon appeal, perhaps.

And then outright anti-trust interference, often for blatantly protectionist and political reasons, has raised its ugly head also in IP matters. While the trend has been most dominant in openly mercantilist and protectionist Asian countries, such as China, Korea and to a lesser degree Japan, the EU, and more recently even the US, have not been immune to this emerging trend either. Not going to name cases, as I assume it is fairly self evident what I mean.

The inherent problem with anti-trust law of course being that it is not really law, but largely politics instead. And, hence, massively subject to political influence, far more than the court systems of most nation states. Asian countries broadly see anti-trust law as a tool for their industrial policy based on mercantilism and protectionism. While it used to be quite different at least in the EU, though less so in the US, not sure that the same really applies any more over here in the EU either. To be honest, am quite confused about many recent developments, also in the EU.

Here too China has taken things to the next level, as they are prone to. China opened up to the global markets belatedly after many decades of being confined to its own, then quite backwards, domestic markets. China, thus, found itself many decades behind others in technological progress and, consequently, being a huge net payor in the patent system. They must have been so irritated by this and disliked the tables being turned against them so much, that they appear to have chosen to drive the global patent system to the wall. Really to illustrate its weaknesses. To make a point and to send a message.

The main weakness China exploited was that of government subsidies, the domain of anti-trust law through the doctrine of state aid, but generally not regulated by IP law and its global conventions. They openly came up with 5 year plans deciding to come up with millions of patents over a very short time. Like other communist 5 year plans, this too materialized, as was decided, when the Chinese government poured vasts amounts of money in tax subsidies for patenting.

Things got so crazy that, on the average, China domiciled companies make a profit for filing a patent in China. A profit, not a cost. What obviously happened was that millions of patents emerged in a few short years in China. As filing for patents was profitable activity in and of itself. Of course, large and hard working as China may be, they did not invent as much stuff in a few years as, say, the US had invented in 50 years before that. Obviously not, quite the opposite. But the vast sea of government paid and awarded junk patents is now slushing out there, some of it even starting to find its way to developed markets.

In China, much of the R&D is done by huge companies, which like Huawei, can be 99% government owned and controlled. Then they get tax subsidies from the government to file patents for what they invent as extended parts of the government. And, through the court system, it is again the government, who ultimately enforces such patents financed by government money to begin with. So it's government, government, government: inventing patentable inventions, filing patents, awarding patents, using patents, litigating patents, licensing patents, being the licensor, being the licensee, enforcing patents and paying for it all. Nothing that the government does not do. In keeping with the latest 5 year plan from the Communist Party.

I believe this to be the biggest existential threat to the global patent system and its justification. What's worst about it is that everything that the nation state controls is subject to politicized central control. And if they do control "everything" with patents, as they do in China, then "everything" in patents is also subject to politicized central control and, therefore, political interference. Which can only lead to great waste and failure.

So, the long standing relative harmony in many areas related to the global patent system seems to have disappeared. This holds true really across a very broad range of different issues relevant to the global patent system. Probably because the political and economical, and more recently even health related, friction has increased globally. The ever growing pie that all the nation states were happily sharing is not growing anymore - at least not like it used to. And, hence, the era of relative harmony seems already to be in the distant past.

The Great Age of the Cellular Phone

The cellular phone emerged in the early 1990s as a product category. Given the way cellular networks work, interoperability, first regionally and then later globally, was always in the focus. The industry was producing ever larger amounts of ever more complex cellular phones, which could and were sold globally with relatively minor modifications.

Then over the recent three decades, cellular phones morphed into this dominant consumer gadget category, which does everything. Communication, watching videos, still and video imaging, sound recording, listening to music, navigation, web browsing, gaming, e-mail, social media, mobile payments, all the endless use cases enabled by the endless parade of apps and so on. From the technological perspective, this meant that hundreds of standardized technologies and even more non-standardized ones were crammed into this one little remarkable device category. Really super converged technology never witnessed before in the history of the world.

So successful was the product category that the sales kept on rising, both in volume and revenue terms, for about three decades. The sheer size of this market still remains in the trillions of USD annually still today, when you factor in also what people pay for their phone subscriptions and the like - and not just the devices themselves. Never before had a single technological product category so taken over the entire world, from Africa to Europe and from US to China, for such a long time. The demand was massive, until recently, when first the global smartphone sales plateaued, and then even more recently - though before the Covid-19 crisis - they had started to decline both in volume and revenue terms. While other industries transformed as well over the recent decades, none of them were as important for IP monetization as phones. Really the perfect converged licensing target.

What about 5G then, you may ask. Well, first, it currently offers cell sizes comparable in size to WLAN. Really like a centrally controlled WLAN competitor for the time being. Struggle to see a real use case for 5G in smartphones for the longer haul as well. With a screen size like that, there's nothing requiring 5G data speeds. Maybe virtual and augmented reality products some day in the far more distant future. The fact of the matter is that 2G really generated the market and late 1990s brought data for the first time to 2G. With 3G, data went main stream and with the later iterations of 3G and then also 4G, data transfer needs were really met or exceeded for virtually all smartphone use cases.

But for now, the move to 5G seems to be the least beneficial technology leap for the average phone user thus far. Classic case of diminishing returns, until all connectivity finally disappears into some future all encompassing mesh network of networks. So, to answer the question, no 5G will not change any bigger trends. This based on having lived through the 2G to 3G transition in licensing, which was still a biggie, and then later the 3G to 4G transition, which was already much less of an event. This pattern will continue to 5G and beyond. Note that I am not speaking about the value of 5G SEPs here, not at all. Just saying that 5G will not change the bigger industry technology trends already playing out.

The Emerging Great Super Converged Technology: the Cloud

I will not go into things here in any detail, but cloud computing and related technologies, such as AI and machine learning, have already been the dominant technology story in the world for many years. This will hold true for many more decades to come and is really, really bad news for the global patent system. The present patent system is simply way too regional, way too dependent on the nation state, way too slow and far too optimized for tangible products of the industrial age to matter much in the cloud. To save space here, I refer to this earlier article, if the topic is of interest to you:

https://www.dhirubhai.net/pulse/cloudy-chance-patents-niklas-%C3%B6stman/

The Impact of Covid-19

It remains quite unclear presently, just how "sticky" and long lasting the impact of Covid-19 epidemic, both directly and indirectly, will be. But as of now, there is a massive impact on patent licensing and litigation.

Patent licensing is, given its complexity, exceptionally dependent on in-person meetings across different companies, geographies and cultures. Very few other businesses are as travel intensive, would be a different way to put it. But all that travel has been on almost total hold for soon six months. Phone calls and video calls, while useful in their own right, cannot ever make up for actual meetings when things get contentious, things get super complex, the stakes get large and the amounts discussed grow.

Similarly, there have been massive delays and outright stoppages in the global court systems and the service of summons. Understandably so, as there are many things far more important than patent licensing and litigation in this time of crisis. Yet, a patent being ultimately nothing but a right to try to enforce the same against an alleged infringer before a court of law, this has had a massive impact on the "product" being offered. It really is hard to overstate these impacts of the current epidemic on patent licensing for the time being. Just massive - though unclear how long standing.

Then, lastly and most importantly, there is the real life impact of economic downturn. As an example, if companies are forced, for economical reasons, to choose whether they pay their taxes, salaries to their people, for things like electricity, for the components they use for their products or for items like patent royalties under their patent licenses, the situation is quite clear for many. If you do not pay taxes, you may face prison time or even something worse in some countries. If you do not pay salaries to your people, your company shuts down. Same with not paying for electricity or components for your products.

Now, patent licenses are very different, particularly in cultures with little to no respect for contracts and law. Even in situations where valid and enforceable patent licenses exist, it is quite common to see either intentional, but unjustified, under reporting and under payment of royalties, or even outright non-payment without any justification, when the economic situation gets existentially risky for companies. What the companies are doing is electing to defer the payment of the least important cost items, again without any justification. You can think of it as "force majeure" of sorts, though rarely, if ever, actually contractually authorized. Amoral and questionable, yes, but regrettably common particularly in Asia.

As much as I am a patent licensing person, and have predominantly spent my time on the offensive side of the table, I can sort of see why this happens. It does not mean that I would endorse or even approve of it. But sometimes it could perhaps be in the interest of licensors also. Better to have their licensee survive for the long haul, while getting paid, hopefully more, later than not being paid at all. Note that I am talking about existing patent licenses here. Not about some so called "stalling" tactics in patent licensing negotiations, which frankly seem to exist irrespective of the economic trend.

Conclusion - The State and the Future of IP Licensing?

Currently, IP licensing is very difficult and relatively quiet. Even existing patent licenses are intentionally not being complied with - at scale, but without justification. This is unlikely to change over the very short term. Over the more long term, it gets progressively harder to forecast, as always. Even then, if you internalize all the really massive changes beyond "mere" Covid-19, such as:

i) the seemingly accelerating trend with de-globalization;

ii) resulting move from relative harmony to outright conflict between nation states, also in areas relevant to the patent systems;

iii) the golden age of the smartphone as the dominant super converged technology being increasingly past us, likely for good; and

iv) the emerging and already present age of cloud technologies being really bad news for patent monetization,

then the picture suddenly becomes much clearer. This is not just about Covid-19, not at all. There are far bigger and more permanent trends playing out here than just "mere" Covid-19, which itself seems to be quite intertwined with the (de)globalization trend. Hard to say whether it is more a cause for or result of (de)globalization. We shall see, Covid-19 is too complex a topic with too little information available presently.

Want concrete evidence, in this data hungry age, for what I say above? The largest player, Qualcomm, having been singularly the patent licensing bastion of strength over several decades, has suffered material and continued erosion of its patent licensing income. The second largest player, Microsoft, and hence my old team, has entirely stopped its efforts to monetize Microsoft's patents, at least at anything like the scale and magnitude they used to. Mind you, for all the right reasons and in a manner which makes great business sense for them. The next companies, not dropping names here, are either stagnating or shrinking with their patent licensing income. Put differently, the data seems to align with the trend being forecast.

Finally, never say never. The pendulum will swing one day, or so I hope. Just that the past decades were such a perfect storm with globalization being seemingly an inevitable force of nature, the resulting relative harmony between nation states sharing an ever larger pie grown together and the emergence of the perfect licensing target product and market, namely the converged, interoperable and globally marketable smartphone super hardware product, is just something that we may not see for a really, really long time. Though you should never say never, it does not seem likely that the stars would be so aligned again during our lifetimes. The next Golden Era of IP licensing may be in the really, really distant future.

Want a simplified conclusion and forecast? The future of the IP licensing depends above all on the future of the relationship between the two dominant global economies, namely the US and China. This will dictate pretty much everything economically, even the future of IP licensing. If that relationship improves, everything is possible - and then the inverse also.

But one thing is certain. Namely that the future of IP licensing, just like most things in life, will be primarily informed and impacted by things outside of it, such as global geopolitics.