Wednesday, 8 January 2020

How innovative, competitive and well adopted was 4G LTE in mobile communications— implications for outlook in 5G?

LTE's introduction a decade ago and its development as the definitive 4G mobile communications standard which predominates in smartphones is an outstanding accomplishment. Competition has served technology innovators, manufacturers, mobile network operators (MNOs), over-the-top service providers and end-users extremely well.  Markets have functioned and advanced superbly with a vibrant supply ecosystem and providing 4.1 billion LTE connections out of 9.4 billion in total worldwide. In the U.S., 63 percent of the nation’s 479 million mobile connections use LTE.

4G Communications Power to the People

Despite overwhelming evidence of this extraordinary and widespread success, some allege that illegal and anticompetitive practices have caused significant harms including suppressed innovation, market exclusion and excessive pricing. While legal arguments and economic theories are extensively articulated by the parties and their amici in the U.S. Federal Trade Commission’s antitrust action against Qualcomm—with this case still on appeal following the Northern California District Court’s ruling against the latter—my analysis here focuses on market and economic facts and figures in innovation, competition and consumer welfare over the last decade with LTE. While there is no evidence of those negative effects, there is proof of commercial failure by the alleged principal injured party, Intel, due to its poor strategic judgment and inability to keep up with the exacting technical pace of a most fiercely competitive marketplace in smartphone chips.
Antitrust law is to ensure competitive processes are preserved, not that competitors are protected. High prices are not per se illegal because they provide incentive for increased competition, such as from new market entrants and lower-cost innovations. Suppliers that are inefficient in terms of costs, quality or speed-to-market versus competitors should not be protected from their failings.

Every new decade, a new G

A new generation of mobile technology is introduced approximately every 10 years. As the new decade turns, it is most opportune to assess how well LTE has exceeded all expectations, and what has made this possible, since its first introduction around the turn of the previous decade.  Were concerns about introduction of yet another new G—including the need to invest in a network overlay, more spectrum, replace devices and pay additional patent license fees—well founded or needless?
Many MNOs, particularly in Europe, were very disappointed with their transitions to 3G in the early 2000s, due to high spectrum costs and initially disappointing demand for new data services. Conversely, in the US, AT&T waited until availability of mobile broadband with HSDPA in 2005 and deployed this on its existing spectrum. With exclusivity over iPhones in the US, its network became overloaded and in dire need of capacity expansion by around the end of the decade.
The very first commercial launches of LTE were in Scandinavia by TeliaSonera in late 2009. Following several more launches in 2010, the new standard was most significantly established with its introduction by Verizon at the end of that year and by AT&T in 2011. Both of those MNOs largely deployed LTE initially in new spectrum at 700MHz. It provided great coverage, together with much improved data speeds and network capacity. That was just the beginning for LTE.

Consumer demand surges with smartphones and LTE

While press and consumer attention in the smartphone and mobile broadband revolution over the last decade or so is mostly with device original equipment manufacturers (OEMs) including Apple and Samsung, the increases in communications performance have largely been down to others in their technology development and through chip component and network equipment supply, together with network deployments by the MNOs.
While mobile broadband data initially grew from a low base at a fast rate using 3G technologies CDMA EV-DO and HSDPA from the mid 2000s—with most demand from PC data cards and dongles— that exponential trajectory has been maintained with data growth compounding at around 60 percent or more annually for the last decade.

Mobile broadband data consumption has grown enormously in recent years

This was significantly due to the rapid adoption of smartphones following the introduction of the iPhone 3G and the first Android operating system device in 2008. Smartphones embodied a variety of innovative new technologies including applications processing, displays and sensors. Improved communications with LTE, in conjunction with an increasing supply of licensed spectrum for mobile, were perfectly placed to accommodate demand growth. The first Android smartphone with LTE was launched in 2010 and Apple’s first LTE smartphone was the iPhone 5 in 2012. It took less than a decade for smartphones to overwhelmingly substitute for feature phones.

Smartphones predominate in U.S. handset purchases since 2011

Market dominance and concentration in supply

Other measures commonly used to assess economic efficiency in antitrust investigations also indicate that mobile technology markets are healthy and dynamic.
Some industries are inherently and necessarily highly concentrated. For example, Boeing and Airbus have a duopoly in supply of large commercial aircraft. The number of suppliers and the relative positions among them reflect industry economies of scale, barriers to entry, strategic focus and competitive strengths in execution with customers purchasing largely based on technical specifications, cost and delivery performance. Trends in market concentration over several years are very informative about how market competition is developing.
The supply of mobile handsets including smartphones has remained unconcentrated for many years because merchant supply of highly standardized components and open standards in cellular technologies have reduced barriers to market entry to low levels. In the 2000s, Nokia dominated with a vertically integrated supply chain, up to 40 percent market share in handsets and even higher in the high-end devices that were precursors to modern smartphones. Since smartphones became mainstream in the 2010s, there have been many new market entrant OEMs and the positions of some leading incumbents including Nokia and BlackBerry have collapsed due to competition.
Concentration is inevitably rather higher in digital baseband modem chips than in mobile phones, because supply is rather different than in handsets including much higher barriers to entry with R&D requirements and economies of scale in product design and production. While some modem chip vendors have exited the marketplace in the last decade, MediaTek’s share of LTE modem chip sales rose to 24 percent in 2016 before falling with significantly rising shares for vertically integrated suppliers Samsung and Huawei with its HiSilicon division. Large shifts in market share away from leaders and rapid reductions in concentration indicate intense competition.
The extent of concentration in supply can be quantified by reference to the Herfindahl-Hirschman Index, a widely accepted measure of market concentration in competition analysis. The HHI is calculated by summing the squared market shares of all firms in any given market. U.S. antitrust authorities generally classify markets into three types: Unconcentrated (HHI < 1,500), Moderately Concentrated (1,500 < HHI < 2,500), and Highly Concentrated (HHI > 2,500).
High concentration in LTE modem chip supply was very transient. Concentration in new market segments is likely to be high as the first few suppliers enter. Between 2013 to 2016, LTE modem chip supply concentration trended down to lower levels than in the 3G UMTS, 2G GSM/GPRS and 3G CDMA modem chip segments. LTE supply concentration has fallen to a Moderately Concentrated level and Qualcomm now accounts for less than 40 percent share. In contrast, UMTS (i.e. WCDMA/HSDPA) and GSM/GPRS/EDGE modem chip supply concentration has increased as MediaTek’s shares have grown to exceed 50 percent in each of these market segments while Qualcomm’s shares have diminished to only a few percent in UMTS and zero percent in GSM/GPRS/EDGE. While the FTC also alleges that Qualcomm has illegally dominated CDMA chip supply, since 2017 it is VIA Telecom (acquired by Intel in 2015) that has the highest share of this market segment and largely accounts for the high and increasing HHI in this market segment.

Market concentration in supply of baseband modem chips and handsets including smartphones

Qualcomm has excelled in bringing the latest advanced features to market most rapidly, as has MediaTek with mid-range, low-cost solutions and VIA Telecom has focused on CDMA.

A lot more bang for your buck

Meanwhile, consumer prices—measured in dollars or whatever currency prevails nationally per gigabyte of data—have fallen dramatically to a small fraction of levels around the turn of the last decade, as is evident in the US. This has been due to the low costs of LTE technology and fierce competition throughout the value chain.
Source: Qualcomm’s Opening Statement presentation, p29, at trial on April 16, 2019. In Re: Qualcomm litigation Case No. 3:17cv0108-GPC-MDD (S.D. Cal.)
“I skate to where the puck is going to be, not where it has been”—Wayne Gretzky
Surviving, let alone winning in industry sectors with rapid technological change and major investment requirements is not easy. Sound strategic and commercial judgment as well as a modicum of good luck are as important as technical competence. Intel’s various incoherent forays in cellular chips make a pertinent case study in strategic failure, not of abuse by a much smaller company.
Each generation of mobile technology is commonly portrayed and perceived—particularly in hindsight—as a single entity. However, with a new 3GPP standard release every year or two, LTE was first specified in Release 8 (2009) and then improved with increased functionality and performance six times before 5G was first standardized in Release 15. Whereas LTE and 4G are now universally regarded synonymous, it was only with Release 10 (2011) that LTE became compliant with International Telecommunication Union’s IMT Advanced specifications which are generally regarded as defining 4G. LTE Advanced Pro in Release 13 (2016) was another significant performance upgrade milestone.
Numerous technological improvements in LTE’s introduction and continuous development have increased spectral efficiency, spectrum reuse, data speeds, network capacity, reduced latency and also provided entirely new capabilities. Improvements include the OFDMA waveform, carrier aggregation, MIMO, advanced channel coding, higher order modulation, use of unlicensed spectrum and improved positioning technologies.
Standards setting organizations (SSOs) map out, for all to see, which new features will be introduced in each new standard release. That is very helpful for product developers, but so much resulting from the collaboration among SSO participants and appearing in the standards means chip and network equipment vendors are chasing multiple moving targets. The general direction of travel might seem obvious in hindsight, but fast pace and good judgment with selection and commitment to the most important improvements are essential. Some features turn out to be much more important than others. While device OEMs design and manufacture smartphones, it is largely the modem chip vendors and network equipment OEMs that have developed and supplied the technologies and products that implement or enable MNOs and users to benefit from latest standard-based improvements.
Leaders must not only be the fastest to invent and bring to market, they must also know where and when to place their big bets. Those that make the wrong call will suffer significant adverse consequences with exacting requirements from OEMs and their MNO customers.

Self-harm

While Intel its portrayed as the major injured party in the FTC’s case against Qualcomm, Intel failed in modems for several significant reasons at Apple and elsewhere, despite its deep pockets, position as a leading semiconductor chip designer and silicon fabricator. It even squandered the advantages of its incumbency as the sole modem chip supplier to Apple for iPhones and iPads from 2007 until 2011, while also being, in that period and continuing to be ever since, Apple’s sole supplier of CPUs for its Mac computers.
Intel failed to recognize the (mis)match between what it was pushing and what OEMs wanted.  It foreclosed itself from all but a relatively small proportion of the LTE modem chip market segment. Most smartphones include chips that integrate the baseband modem processor with an application processor that is based on the ARM instruction set and architecture. There was never a distinct “thin modem” market—in the sense of defining a relevant market for competition purposes. Modem suppliers need to address the entire market segment of modem supply—including thin and integrated modems—to be efficient in development and production of technologies and products. The proportion of thin versus integrated modems in smartphones has fallen from around 40 percent in 2011, when most smartphone OEMs were just getting started, to only teens of percent in the last few years.
Intel has offered no ARM-based application processor since it sold its XScale business to Marvell in 2006. It failed in its alternative strategy with attempts to get its “Intel Architecture-based [X.86] processors” adopted in smartphones and tablets. Its x.86-based Atom application processor was uncompetitive for many reasons including higher power consumption and its inferior supply ecosystem with higher costs for the associated components needed to support the chip. Intel fared poorly despite spending billions on subsidies in its attempts to build a mobile device beachhead in tablets. It never achieved any more than a small share of supply to tablet OEMs and no more than a trivial share of supply to smartphone OEMs.
Intel captured Apple, as Apple’s sole 3G modem supplier for iPhones, when Intel re-entered the market with its acquisition on Infineon’s cellular chip division in August 2010.  However, Infineon would have known by then— as Intel should have also known through its acquisition due diligence, if that had been carried out thoroughly and competently—that modem business was about to be lost with the upcoming February 2011 launch of an iPhone 4 model based on a Qualcomm chip. Intel’s other 3G thin modem customers included Samsung and Huawei that subsequently have significantly switched to vertically integrated supply. Apple aside, Intel’s share in LTE supply was never more than a percent or two. Bad luck or poor market intelligence, judgment and execution?

Intel was too late in finding its voice

Having been ejected from Apple in 3G, Intel was very anxious to get back in there with LTE. But it failed to keep up with the pace of standard-based developments in LTE. Intel was late with LTE-Advanced (i.e. actual 4G) improvements and was at least two years late in being able to offer voice over LTE (VoLTE). LTE had no voice capability before VoLTE was standardized. Leading mobile operators—including AT&T and Verizon in the US—demand certain features in devices to exacting schedules.  For example, with major operators including T-Mobile US and Verizon launching VoLTE services by 2014, they were insisting on VoLTE in new phone models beforehand. This was significantly driven by their desires to seed the market for use of the new service and so that they could shut down older-generation networks, such Verizon’s 3G CDMA network by the end of 2019. Despite the above efforts, this date has slipped to 2020 to avoid leaving customers with phones that cannot make phone calls.
Many devices are used on networks for more than five years following new model introduction. Popular models are commonly sold for more than three years before being withdrawn from sale. For example, Verizon is still selling the iPhone 6s (2015) and Galaxy S7 (2016). The last of those sold are likely to be used for another few years before being retired.
It was not until 2016, with chip supply for launch of the iPhone 7 in September that year, that Intel could meet voice specification requirements of Apple and its MNO customers in LTE. In contrast, Metro PCS launched VoLTE with the LGE Connect 4G in January 2012 and VoLTE was incorporated in the iPhone 6 (September 2014). Qualcomm LTE modems were included in both devices.

What was he smoking?

In addition to strategic conflicts, Intel also suffered from delusions at the highest level. For example, despite Intel not being able even to do voice in LTE, in 2016, former Intel CEO Brian Krzanich proclaimed that Intel was the leader in 5G, including in modem technology. This was way off the mark. In fact, the main reason Intel exited modem supply, announced by replacement CEO Bob Swan in April 2019, and why Apple settled all its litigation with Qualcomm the very same day, was that Intel could not keep up the required pace and schedule in its 5G technology developments. Apple was clearly fearful it would not be ready to introduce 5G iPhone devices in 2020 without switching back to Qualcomm’s supply.
While the period of Qualcomm’s alleged misconduct is only to 2016, the FTC regurgitates the Court’s contention that Qualcomm will remain dominant in the transition to 5G, but without explicitly alleging any abuse there. Qualcomm has clearly competed on the merits in establishing itself as the leader in 5G modem chips. With a new air interface and addition of mmWave bands (i.e. with high-band frequencies at 24 GHz and abo)  its astute competitive strategy has included unmatched technology development in modems and acquisition in RF front-end components.

Voodoo economics II

The FTC’s most significant but hotly contested theory of harm, and that the district court has accepted, is that Qualcomm’s royalty charges to OEMs impose a “surcharge” on chip competitors that limits their ability to invest in R&D and makes them unable to compete on the merits such as in technical performance. Why the royalty charge is any different to any other necessary input cost—such as that for the display or battery components—is a mystery. OEMs are charged royalties non-discriminately regardless of modem supplier. According to the FTC’s allegations, and despite evidence to the contrary, Qualcomm’s royalty charges are excessive and are only paid because it supplies “must have” chips and has a “no license, no chips policy.”
That theory suggests that elimination of the alleged surcharge should enable a chip vendor to become competitive. However, Intel still failed despite that supposed relief. It commenced LTE modem chip supply to Apple for the iPhone 7 in 2016 and was the sole modem supplier to Apple for all subsequently launched models, including the iPhone X (2018) and iPhone 11 (2019). By April 2017, royalties paid to Qualcomm on Apple products, including those with Intel’s chips, had ceased and were not resumed until April 2019.
Rather than capitalizing on this window of opportunity, Intel failed on the merits, as indicated by its chip market exit, despite this non-payment of any royalties including the alleged surcharge to Qualcomm. While Intel’s dollar expenditures on R&D had been increased, R&D decreased as a percentage of its rising sales (i.e. including new sales of modems to Apple): $12.7 billion (21.4 percent) in 2016, $13.0 billion (20.8 percent) in 2017 and $13.5 (19.1 percent) in 2018. Based on the FTC’s economic theory, Intel supplying Apple should have had lower costs than other chip suppliers whose customers were still paying Qualcomm royalties. LTE modem chip market segment shares for Huawei (HiSilicon) and Samsung, that also buy Qualcomm chips and pay it licensing fees, have continued to increase since 2016.

Be careful what you wish for and be grateful for what you have

There will always be prophets of doom and self-serving interests who predict harms such as market failures if changes are not made. The kinds of accusation made by the FTC about Qualcomm in LTE echo those made against Qualcomm in UMTS, just before mobile broadband with HSDPA took off and before those charges were dropped  by the European antitrust authorities.
Prior to the introduction of LTE and for several years subsequently it was alleged that royalty stacking would make the technology prohibitively costly, particularly since LTE royalties would stack on those that had to be paid in multimode equipment including 2G and 3G.
A royalty stack never appeared in 3G and in never appeared in 4G. The only harms are the contentions over patent royalties that are costing a lot in legal fees and are enabling implementers including Apple and others to “efficiently infringe” by holding out from payment while enjoying the benefits of rich standard-based technologies.
As I explained here last month and previously, with patent licensing fees paid less than five percent of handset prices, such costs are dwarfed in comparison with the value that has been created with annual revenues of around half a trillion dollars in handsets, more than a trillion in operator services plus huge revenues to the over-the-top players that have flourished over the last decade in the smartphone and mobile broadband revolution with LTE.
Uber, Instagram, FaceTime and Netflix all launched in 2010 and have, among many other OTT providers, significantly benefitted from LTE’s mobile broadband capabilities. For example, Netflix has enjoyed a 4,000 percent stock rally with its streaming services significantly used on mobile devices. Smartphone OEMs have benefitted from these services because users want devices that can best access these services. Mobile operators benefit because they generate mobile broadband service revenues even from “free” services that are delivered on top. These services are transforming the way we work and play with daily hours of smartphone usage even exceeding TV watching.
Significant ongoing development has been required since introduction of LTE and the first 4G technologies. Whereas coverage and capacity were easily established with the deployment of additional spectrum at 2 GHz and below, there is nowhere near enough spectrum available there to satisfy escalating mobile broadband capacity demands. New technologies including Massive MIMO antenna arrays and HPUE to increase device uplink radio transmission performance in the latter LTE releases and in 5G are expanding capacity by better exploiting frequencies above 2 GHz. 5G has been designed to access mmWave bands with orders of magnitude more bandwidth than is accessible with previous generations of technology. All this, yet alone what is yet to come with URLCC and mMTC in the Internet of Things, would not be possible without major ongoing R&D investments. These should not be taken for granted—particularly in the race to establish and maintain global leadership and national security in 5G.
This article was originally published in RCR Wireless in a very similar form on 7th January 2020.

Keith Mallinson is a leading industry analyst, commercial consultant and testifying expert witness. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007.

Thursday, 2 January 2020

U.S. Agencies Release Policy Statement Concerning Remedies and SEPs

The United States Patent and Trademark Office, the U.S. National Institute of Standards and Technology, and the U.S. Department of Justice, Antitrust Division, (collectively, the agencies) have issued a policy statement concerning remedies and standard essential patents.  Importantly, the agencies have rejected the prior 2013 policy statement in favor of a policy statement that expressly recognizes that all remedies, including injunctive relief and exclusion orders at the International Trade Commission, are available for infringement of a standard essential patent.  Notably, the agencies primarily rely on U.S. case law to support its decision and OMB Circular A-119.  The policy statement provides, in part: 


Of course, the particular F/RAND commitment made by a patent owner, the SDO’s intellectual property policies, and the individual circumstances of licensing negotiations between patent owners and implementers all may be relevant in determining remedies for infringing a standards-essential patent, depending on the circumstances of each case.  Further, individual parties may voluntarily contract for or agree to specific dispute resolution mechanisms. 

In the Agencies’ view, courts, the U.S. International Trade Commission, and other decision makers in their discretion should continue to consider all relevant facts, including the conduct of the parties, when evaluating the general principles of law applicable to their remedy determinations involving standards-essential patents, such as the factors enumerated in eBay or 19 U.S.C. § 1337, as appropriate. The courts are “more than capable of considering these factual issues” when deciding whether to award remedies for infringement.20 In the Agencies’ view, courts—and other relevant neutral decision makers—should continue to determine remedies for infringement of standards-essential patents subject to F/RAND licensing commitments pursuant

to the general laws. A balanced, fact-based analysis, taking into account all available remedies, will facilitate, and help to preserve competition and incentives for innovation and for continued participation in voluntary, consensus-based, standards-setting activity.

The policy statement is available, here

Wednesday, 18 December 2019

Biting the hands that feed you SEP technologies


Longstanding and economically efficient balance in Standard-Essential Patent licensing is being destabilized by misinformation and manipulation of commercial practices and of benchmarks in Fair, Reasonable and Non-Discriminatory licensing. This is epitomized in litigation between Apple and Qualcomm, commencing January 2017, until settlement in April 2019 and in the US Federal Trade Commission’s antitrust action against Qualcomm also commencing around the same time and now on appeal. Many in the cellular industry—who unsurprisingly like the idea of lower prices for something they assimilate and must pay for rather than that they create or sell—have lapped this up. But that does not justify the disingenuity or negate the resulting harmful effects that undermine incentives for ongoing and long-term technology development in the mobile communication sector including 5G and the emerging Internet of Things.

“Goal: Reduce Apple's net Royalty to Qualcomm” [1]

Since the 1990s, Apple among others have taken various and elaborate steps to "Devalue SEPs." As indicated in the next three endnotes, I have analysed the failings in the first three of Apple's proposed measures for "Reshaping FRAND — Licensing, Litigation & Competition Law" including:
  • “Base = derived from smallest priceable component (i.e. baseband)”[2]
  • “Rate = no higher than adjusted pro-rata share of SEPs”[3]
  • “Control for quality, over-declaration & royalty stacking”[4]
  • “Build favorable, arms-length ‘comp’ licensees”

And, regarding the fourth measure, for example, Apple’s actions over the years in the run-up to suing Qualcomm were in “Creating Evidence” for the lawsuit so “[it]can leverage [its]purchasing power” and “captur[e]IP value with purchase power.” To achieve this, Apple “selectively filter[ed][deal-flow] pipeline to identify the most desirable deals,” it “Us[ed]Liabilities as an Asset” and “Evaluated risk, cost and use[d]as evidence… as a comparable in disputes with others.” Apple sought to “create leverage by building pressure” that would “hurt Qualcomm financially,” put “Qualcomm’s licensing model at risk” and “drive Qualcomm to engage Apple” on a significantly weakened basis.


Apple’s multi-pronged attack included coercing its suppliers—contract manufacturers Foxconn, Pegatron, Wistron and Compal—into violating supply agreements, including those forged with Qualcomm two or more years before a couple of them even started making iPhones for the launch of the very first model in mid 2007. Apple’s stipulations demanded “[CM] does not settle any such claim or allegation, or make any admissions of liability or admissions relevant to the claim or allegation (related to the Goods), or take any other action that [CM] knows or should reasonably know will harm Apple’s position(s) with respect to the claim or allegation, without Apple’s prior written permission.” For example, according to one of them: “our customer has recently [as of April 2017]requested compal to stop the royalty payment to Qualcomm.” For CMs to continue paying would have left them incurring losses by not being able to recover licensing costs along with component and manufacturing costs, as was the norm. “Apple may notify Supplier that Apple will not pay Supplier any amount attributable to mobile technology license fees at any time, and after the date of any such notification, any mobile technology license fees that Supplier pays are the sole responsibility of Supplier.”
Timeline of Contract Manufacturers’ Subscriber Unit Licensing Agreements

Unlike Apple with gross profit margins of around 60 percent on its iPhones, corresponding figures for CMs are one tenth of that and CMs typically have operating margin percentages in the low single digits. Qualcomm had been receiving licensing royalties of $7.50 per iPhone until Apple forced its CMs to stop paying. That was, for example, one fifth the cost of the camera and versus total component, assembly and test costs of $325 [Endnote 5] for the iPhone 8 Plus. The unsubsidized retail price of this model was $799. Product costs and prices are from 2017/2018 for the cheapest model with 64GB of memory.
The restrictions Apple imposed on its CMs were in overt breach of its (2013-2016) Business Cooperation and Patent Agreement (BCPA) with Qualcomm for which “Apple [was]at risk for infringement, tortious interference and full royalties (plus and interest, penalties, etc).”  The BCPA required that “Apple shall not knowingly take (or continue taking) any action against or make any demand of any Qualcomm Licensee that prevents, restricts, or discourages such Qualcomm Licensee from which it purchases Apple Devices from complying fully with the terms of such Qualcomm Licensee’s QC License Agreement.”  Apple found it “Beneficial to wait to provoke a patent fight until after the end of 2016” when the flow of all the benefits it received from Qualcomm ceased with expiration of the BCPA.

IP value is unrelated to publication medium, hardware and manufacturing costs

We all understand and accept that most of the cost for books, recorded music, and movies is for the intellectual property added rather than in the publication medium. Similarly, with generic drugs typically being 80-85 percent lower in price than patented pharmaceuticals, we recognize that most of the value in the latter before patent expiration is in IP rather than in the cost of medicine manufacturing.
The parallels among book printing, audio or video disc manufacturing and chip manufacture are closer than one might imagine. In all these cases, production plant is quite generic, typically operated by independent manufacturers and can be rapidly reconfigured to serve the needs of different customers and products. Declining manufacturing process costs including in silicon foundries have little or no relationship with costs of content or technology development elsewhere. While Taylor Swift sounds and has very different IP ownership to Black Sabbath, CD production of their respective albums is as oblivious and independent of that as is TSMC’s chip foundry to the cellular or video codec SEP ownership and to the implementation of cellular modem designs by MediaTek versus Huawei’s HiSilicon. The production of CDs and chips is, therefore, rather like printing from a commercial perspective.
So why is there such resistance to paying total royalties of no more than around five percent of smartphone costs in patent licensing fees in patent-rich devices such as smartphones?
IP costs are typically buried and invisible in technology product bills of materials. Where a manufacturing company develops its own IP for the products it produces, the R&D cost is accounted for as a fixed and sunk indirect cost—not a variable cost in production, as with the addition of a camera or baseband chip. The same accounting treatment applies when that IP value is cross-licensed to other manufacturers for net-zero or much reduced net licensing charges. In some cases, concerted action among product suppliers insists that patented and other technologies are only licensed to those who contribute their IP gratis, as is the case with open source software and some royalty-free patent pooling arrangements, as is the case with the Bluetooth Special Interest Group and with the USB Implementers Forum. They do that because costs are recovered from their financial returns on selling products and services that incorporate those technologies. It is only when that IP is procured from elsewhere in licensing for cash payments and without the quid pro quo in cross-licensing the manufactures of others that true values are revealed anywhere, such in the management or financial accounts.

Qualcomm was targeted despite and because of its superior patent strength

Apple recognised internally that “Qualcomm is widely considered the owner of the strongest patent portfolio for essential and relevant patents for wireless standards.” However, with the measures identified above, in public statements, in its litigation complaints against Qualcomm and in its sponsorship of the FTC action against Qualcomm, Apple sought to undermine SEP valuations generally. Qualcomm leads among owners of wireless SEPs and SEPs reading on other standards applicable to Apple’s products implementations. Apple recognises Qualcomm superior position: “compared to others [Huawei, Nokia, Ericsson, InterDigital and Apple], Qualcomm holds a stronger position in each of the [ WiFi, audio/video and cellular SEP] categories, and particularly with respect to cellular and WiFi SEPs”.
Apple also recognizes that Qualcomm “has significant holdings in other areas, including many areas relevant to Apple… Compared to other licensors, Qualcomm has more significant holdings in key areas such as media processing, non-cellular communications and hardware. Likewise, using patent citation analysis as a measure of thorough prosecution within the US PTO, Qualcomm patents (SEPs and non-SEPs both) on average score higher compare to the other, largely non-US based licensors.”  And yet, Apple’s much-published arguments were also that Qualcomm’s non-SEPs are not worth much.
Qualcomm’s licensing-for-money business model was the most lucrative target for Apple in potential cost savings, because licensing by Ericsson and Nokia—that used to license defensively to protect handset business downstream and still have large downstream network equipment businesses—continue to be limited—particularly by their legacy comps including extensive cross-licensing—in the extent to which they can be fully and property rewarded in cash royalties for their patent value.

Good value for money

While some OEMs have managed to “hold out” from paying their fair share in patent licensing fees, the status quo in SEP licensing under FRAND terms has worked rather well overall. For example, billions of consumers use gigabytes of mobile data per month on smartphones that are their primary or only means of internet access. In the US, consumers spend more time on their mobile devices than they do watching television, in significant part because video streaming on these devices is substituting substantially for the former. At 3 hours 43 minutes per day in 2019, the average U.S. adult spends more time using all their mobile devices (including smartphones, tablets, etc.) than they do watching television.
Apple’ CEO Tim Cook even publicly recognized the value of improvements in cellular technology. For example, in an April 2016 call to investors he said “[T]he LTE rollout with India just really began this year, and so we’ll begin to see some really good networks coming on in India. That will unleash the power and capability of the iPhone in a way that an older network, a 2.5G or even some 3G networks, would not do.”
Licensors of the standard-essential technologies that have made much of the above possible are not simply free riding on previous accomplishments in their licensing demands.  Leading SEP developers, including Ericsson, Nokia and Qualcomm in particular, have no direct share of the large mobile phone product market, which is worth nearly $500 billion annually and provides stellar profits to Apple, or of the operator services market worth $1 trillion or of the revenues Internet platforms and applications including Android, Uber and Facebook generate from mobile devices.  Consequently, these licensors need and deserve adequate compensation, by other means, for their major R&D developments in SEP technologies.
New technology developments are enabling an accelerating pace of improvements including 5G which, for example, have unlocked access to the mmWave spectrum that is providing orders of magnitude more cellular network speed and capacity than was even thought conceivable less than ten years ago when 4G was first introduced. With significant further developments still required, 5G promises so much more in ultra-reliable and low-latency communications including connections to a multitude of things as well as people.
The pace of innovation is increasing, but it is largely the same relatively few companies that make most of the technical contributions to standard setting organizations, such as 3GPP for cellular, and that file SEP declarations to the ETSI IP rights database.  Some of those companies are increasingly dependent on licensing for fees rather than selling manufactured products to make a return on their large R&D investments.

Legal tussles and consequences of Decisions

There is much ongoing legal dispute with tensions among patent law, contract law and antitrust law: in Qualcomm’s appeal to Judge Koh’s Decision in the US FTC case and elsewhere among other litigants. Matters include those of patent exhaustion, where in the supply chain licensing may or should occur, tying and exclusive dealing, the meaning for FRAND, availability of injunctions, and jurisdictional issues among nations in contract interpretation and in global licensing.  Judgments on appeal in the US and EU and in the UK Supreme Court (i.e. Unwired Planet v Huawei; Conversant v Huawei and ZTE) could bring about major disruptive changes with significant unexpected as well as expected consequences. Litigants should be wary of possible and likely adverse long-term consequences in what they wish for, given the huge success of the mobile sector for manufacturers, operators and the enormous benefits it has provided to consumers.
I will finish with another idiom that comes to mind with the British Pantomime season upon us. While the idiom is from Mother Goose, it is more widely known from is origins in one of Aesop’s Fables. Don’t kill the goose that lays the golden egg! 
The goose that lays the golden egg

Endnotes

[1] This and all subsequent quotes, apart from a public announcement by Apple’s CEO, Tim Cook, are from internal documents at Apple, as found through discovery in the litigation between Apple and Qualcomm, and as revealed publicly for the first time in Qualcomm’s Opening Statement presentation at trial on April 16, 2019. In Re: Qualcomm litigation Case No. 3:17cv0108-GPC-MDD (S.D. Cal.) https://www.scribd.com/document/407463620/Qualcomm-opening-statement. The trial was terminated very shortly thereafter that day with dispute settlement between Apple and Qualcomm. See also: https://www.qualcomm.com/news/releases/2019/04/16/qualcomm-and-apple-agree-drop-all-litigation
[5] TechInsights estimates for component, assembly and test costs. 


Keith Mallinson is a leading industry analyst, commercial consultant and testifying expert witness. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007.

Thursday, 5 December 2019

How to use your company’s IP to shed light on your firm’s value


Last month, a small mobility company based in Texas popped up on my regular online monitoring of the IP world. This company had written a clever press release about the value of its patent portfolio. While I can’t vouch for the veracity of its claims, I do think more entrepreneurs can learn from its tactics.

As an IP specialist, I am frequently surprised by how little start-up founders and entrepreneurs think about harnessing the value of their IP. Several years ago, I did some work for a start-up working with high-temperature superconductors. Its founders were having trouble determining the value of their IP and decided to seek some professional help. Armed with this IP valuation, they began meeting potential investors. The offers quickly started rolling in. IP valuations can be helpful to companies in multiple ways. Savvy entrepreneurs leverage their patent portfolios for cash, license them out, or use valuation data to ensure they adequately protect their products. And, for a start-up that is pivoting, IP can even be sold to private equity investors, patent aggregators or other market players.

Undertaking an IP valuation on one’s own can be difficult, however. And tech companies get into IP battles all the time on who should pay whom, and how much is at stake. Nevertheless, there are a few simple principles that you can apply to put your company and its IP in a better position.

Determine your goals
Valuing your IP portfolio can help you decide how much to invest in R&D, build a pitch deck, or engage in licensing negotiations. It can also help when you are optimizing your tax structure, entering into a joint venture or collaboration, or seeking to insure your business. Your goals will depend on what stage your business is in. And depending on what exactly those goals are, simpler methods for rough estimates can be used to serve your purposes. Before you seek any professional help in IP valuation, it’s best to decide what you hope to accomplish with any number you receive.

Research several methods to decide which works best for you
The most common IP valuation methods assess either the incremental value of the IP, potential income generated from it, or the broader market for the IP. It is also possible to use a combination of these methods. The right method will depend on various circumstances. The UK Intellectual Property Office, for instance, believes it can be helpful to assess the revenues that IP rights may generate in the future. This method focuses on the potential size of the total market and competition, as well as actual cash flow. A discount rate can be applied to future cash flows in order to reflect risks, which need to be determined appropriately. Using a market method, meanwhile, may produce additional insights when compared to an income method. Often, it can be a good idea to use several methods so as to understand value in different ways.  

Find a simple way to convey what you uncover
This is perhaps the most neglected element of IP valuation among companies, particularly those in the high technology industry. Media conglomerates and sports franchises have no trouble demonstrating the value of cartoon characters or football players. But because so much of IP valuation comes from complex economic models, it can become difficult to demonstrate when IP value that is not as visible or easily understandable. This is why the Texan mobility company stood out so much for me. They had made their patent portfolio a central feature of their communication strategy. This tactic isn’t going to work for everyone. Nevertheless, you should try where possible to show how your IP is making a difference to the market. Keep that information prominent – on your website, in your investor presentation pack, even in the short description on your press release. Rather than telling people how many patents you have, for instance, emphasize your licensing potential or what economic advantages your patented technology offers.

Among founders and entrepreneurs, understanding of the importance of IP valuations is growing. Even so, the market is not yet mature. Companies that are early movers within their industry, in communicating the value of their portfolio, stand to gain a great deal in the minds of potential investors, customers, and even employees.

Roya Ghafele is the Executive Director of IP management consultancy OxFirst. She previously worked for the World Intellectual Property Organization, and now specializes in providing advice on IP valuation and strategy. You can follow her on LinkedIn.

Saturday, 23 November 2019

Anti-Troll LOT Network Expands to 500 members

The Anti-Troll (or Troll protection) LOT Network has expanded to 500 members.  I first wrote about the Google started LOT Network in 2015, and I believe it had about 47 members then.  Around four years later and we are at a significant increase.  For more on the LOT Network, please see these two prior posts, here and here.  Also, here is a blurb from a release by the LOT Network: 

"When you’re caught up in the day-to-day business of moving things forward, it’s easy to lose sight of accomplishments. It was in this way that a significant milestone — LOT Network’s membership reaching 500 members — caught us nearly by surprise. We are very proud of our community, which now counts Disney, Meituan Dianping, Centerpoint Energy, Synchrony, Yamaha,  VISA, Juniper Networks, 7-Eleven and Netgear as some of its newest members.

Our growth now spans industries — including automotive, finance, entertainment, cloud computing, retail, manufacturing, and emerging industries like blockchain — as well as continents. You can find LOT members in more than 35 different countries and counting; some of the biggest tech companies in Asia are among our strongest supporters.

Further, we’ve seen an uptick in startup membership, confirming that LOT is a solution for all companies regardless of their size or industry. Our momentum toward becoming a standard business practice grows stronger every day — more and more, we see members joining us based on information they’ve found online — often joining without contact from a LOT Network team member.  And that is because of you — the collective reputation of our membership makes joining LOT an easy decision."

Trump's New Drug Pricing Plan to be Released Soon -- Pay to Play?

How strange.  I was just thinking about why President Trump hasn't said much about drug pricing recently and then this . . . .  President Trump tweeted today that he and Secretary Azar will release a plan to lower drug prices by relying on the importation of drugs from other countries.  It will be interesting to see which states can import prescription drugs given the upcoming election--he seems to imply only some will be able to do so--expect a challenge to that.  His tweet stated: 

and I will soon release a plan to let Florida and other States import prescription drugs that are MUCH CHEAPER than what we have now! Hard-working Americans don’t deserve to pay such high prices for the drugs they need. We are fighting DAILY to make sure this HAPPENS...