Monday, 5 December 2016

UK: Draft Finance Bill changes to patent box - including CSA interests

From today's draft Finance Bill overview:

"2.13. Patent Box: cost sharing for collaborative Research and Development (R&D)

As announced at Autumn Statement 2016, the government will legislate in Finance Bill 2017 to add specific provisions to the revised Patent Box rules introduced in Finance Act 2016, covering the case where R&D is undertaken collaboratively by 2 or more companies under a ‘cost sharing arrangement’ (CSA). The provisions will ensure that companies are neither penalised nor able to gain an advantage under these rules by organising their R&D in this way.
The new rules provide that:
  • where a company acquires an interest in or increases its interest in a CSA, an appropriate amount of the consideration paid counts as acquisition cost for the purpose of calculating the R&D fraction, to the extent any Intellectual Property (IP) assets are held within the CSA
  • where a company disposes of an interest or reduces its interest in a CSA, an appropriate amount of any consideration received is treated as IP income, to the extent any IP assets are held within the CSA
  • activity of participants in the CSA to develop IP or products is appropriately treated in the company’s R&D fraction
This has effect for accounting periods commencing on or after 1 April 2017. Draft legislation (provision 24) and a TIIN has been published on 5 December."
This should be filed under "not particularly surprising", it's been a gap in the legislation/guidance for some time.

Sunday, 4 December 2016

Hotel branding: how peculiar sometimes!

As the major hotel brand owners consolidate, more and more brands identifying hotels of differing types of luxury and status (and therefore of
price?) are finding themselves under a single ownership roof. This poses special branding challenges, as the conglomerates seek the best way to maintain brand equity in the house mark while at the same time attempting to distinguish each of the separate branded hotels. This can lead to some interesting results. Let us consider two examples.

The first relates to a situation where the company is apparently prepared to tolerate actual confusion between two hotels, each owned by the same company. In connection with the 2015 International Trademark Association Annual Meeting in San Diego, this blogger made his way to what he thought was the Hotel Palomar. Upon arriving at the hotel and making some inquires, he was told: “Sir, you are at the wrong hotel. You don’t want the Hotel Solamar, you want the Hotel Palomar” (which is about a 10-minute walk away). I then continued: “How often does it happen that a person confuses one hotel with the other”? The answer, “From time to time, but we don’t really care, since both the Hotel Solamar and the Hotel Palomar belong to the same group, the Kimpton Hotels.” So, there it was—as a consumer I had been confused, but from the point of view of the trade mark owner, confusion was less of concern, it would seem, than the time and expense of rebranding one of the two hotels.

The second refers to a recent piece that appeared on entitled “Marriot and Starwood Reveal the Future of Their Luxury Brands”. As readers may recall, Marriott’s acquisition of Starwood will result in expanding Marriott’s brand holdings (at 19 brands, already the biggest in the world) to 30 brands. What does Marriott intend to do with these multiple brands? In an interview with Bloomberg, Tina Edmundson, the global brand officer of Marriott, set out her company’s branding strategy. The following points made in the interview are particularly noteworthy.

1. For the moment, all 30 brands will remain, even if the author of the piece, Nikki Ekstein, commented--“We remain skeptical about that in the long run.” Interestingly, Edmundson had previously worked for Starwood for 18 years prior to joining Marriott, so her connection with all 30 brands is long-standing and intimate.

2. When one hears the words “Marriott” and “luxury”, he or she will likely think in terms of Ritz-Carton, Ritz-Carlton Reserve, Bvgari, St. Regis, Edition, the Luxury Collection and JW Marriott, all of which are designated “luxury” by the company. But not all Marriott luxury hotels are equally “luxurious”, it would seem. Ritz-Carton, St. Regis, and JW Marriott will all be identified as “classic luxury”, with the other hotels will all be designated as “distinctive luxury”. The first category focuses on traditional and business travelers, while the second addresses patrons seeking a modern, boutique-y hotel experience.

3. Of particular interest will be how the Ritz-Carlton and St. Regis brands, which Ekstein likened in the piece to two boxers “occup[ying] opposite corners of the same boxing ring”, and which are “very similar in style and taste”, will move from competing over the same type of customer to sharing them. The company apparently will do so by segmenting luxury customers into two distinct categories—the Ritz-Carlton consumer is about “discovery”, while that of the St. Regis patron is about “status and connoisseurship”; the Ritz-Carlton “is about connecting people to places”, while the St. Regis “itself is the place where people want to see and be seen.” Will this work, or will the two hotel brands simply cannibalize each other’s customers? Obviously, Edmundson thinks that it will succeed.

Whatever one’s lodging preferences, from the IP and branding point of view, what Marriott has embarked on in seeking to maintain 30 different brands, including eight different “luxury” brands, seems to be uncharted branding waters. Indeed, the success of the company in doing so may shed light on the the extent to which consolidation in the hotel industry involving companies of this size can work side by side with successfully supporting multiple brands.

Monday, 28 November 2016

Fair returns on R&D from SEP licensing with smartphone success and upcoming 5G

Patent licensing remains a flashpoint for mobile telecom as it moves towards a future of 5G and the Internet of Things (IoT)
Cellular technology pioneers are being marginalized with diminished financial returns on their research and development investments while leaders in devices and “over-the-top” services are flourishing. Calls to weaken the basis of licensing standard-essential technologies are misplaced. There are no indications of profiteering or harm caused by licensors. All evidence is to the contrary.
Innovations in standards including technologies based on standard-essential patents can be exploited in product and service implementations by anyone. Undermining the value of SEPs will choke off vital R&D investments along the path to “5G” and cause other harmful disruptions to the mobile ecosystem, including reduced contributions to or withdrawals from standard setting.
The innovation game

As I noted here a couple of months ago in a cellular industry trade publication I also write for, innovation in cellular and other supporting technologies as well as in applications will be able to sustain the rate of smartphone improvements. New technologies can also advance the “internet of things,” automotive and other capabilities. And the financial rewards could be substantial. A European Commission study has identified a potential annual benefit to its member states of 113 billion euro ($124 billion) annually as early as 2025, from deploying 5G, with trickle-down benefits from 5G investment totaling as much as 141 billion euro.

However, technology developments and infrastructure demand large investments globally. According to a study report on the “mobile revolution,” by the Boston Consulting Group in 2015, “to reap the economic benefit of [5G] networks and beyond, mobile players will need to invest approximately $4 trillion in R&D and capital expenditures by 2020.” BCG estimates mobile players invested an aggregate of $1.8 trillion in capex and R&D from 2009 through 2013, and are expected to invest approximately $4 trillion between 2014 and 2020. While the bulk of this is capex by mobile operators, BCG also estimates R&D technologies continue to accelerate, reaching almost $100 billion annually, and growing at a rate of 9% year-over-year since 2009.

R&D investments by their very nature can be very risky: consequently, these rely on the possibility that adequate revenues might be earned to compensate for these risks and the long time it takes to generate these revenues. With short device lifecycles, returns on product R&D are relatively quick and can be reasonably certain for market leaders with new models annually in popular lines such as iPhone and Galaxy, notwithstanding the occasional disaster like the incendiary Galaxy Note 7. Returns are significantly slower and less certain in network equipment product developments, for example, with big bets on once-per-decade generational changes including GSM, WCDMA/HSPA, LTE and upcoming 5G.

In the case of the fundamental technologies that contribute to these standards, lead times before any revenues can be generated are even longer and risks are much greater. For example, less than 17% of contributions to Third Generation Partnership Project standards have been approved for inclusion in the standards. Many contributions are based on and preceded by many years of R&D by individual companies before a technology is presented to any standard-setting organization working group. Nevertheless, for those technologies that are adopted the entire ecosystem including chip, device and network equipment manufacturers, as well as network operators and OTT service providers benefit from improved capabilities. In cellular, these have included thousand-fold increases in data rates over little more than a decade, much reduced latencies, higher network availability, high-definition voice, plunging costs per gigabyte for operators and users, and so on.
Ecosystem disruptions

However, there is significant and increasing divergence between those who have largely borne the costs of developing the standard-essential technologies and those who benefit most financially from exploiting them. Whereas most of the developers of the standard-essential technology employed by all implementers used to be vertically integrated with mobile phone manufacturing, those companies including Qualcomm (2000), Alcatel (2005), Siemens (2005), Motorola (2012), Ericsson (2011) and Nokia (2014) have sold off their handset businesses. The sellers, including those that have merged, have continued with sales of network equipment or chips and patent licensing. Handset brand names Motorola and Alcatel have lived on under licensing arrangements with Lenovo and TCL, respectively.

Handset OEM market shares have therefore changed dramatically.And many new entrants have appeared.Meanwhile, the mobile devices market has expanded enormously along with demand growth for data services. These are the largest money makers in the mobile ecosystem, while use of OTT services including Facebook, YouTube and Netflix has surged on mobile devices, and as mobile advertising revenues have grown to nearly half of total internet advertising revenues.
Collecting the rents

Revenues and profits in smartphones are much larger than those generated by the leading five cellular SEP licensors that derive most of their revenues from sales of network equipment or chips. The difference is widening with a lackluster market in network equipment as LTE orders taper off. For example, Ericsson recently issued a profit warning and its interim CEO Jan Frykhammar forecast the total mobile infrastructure (RAN) market is set to fall by between 10% and 15% this year, and by between 2% and 6% in 2017.
Economic rents, which are profits exceeding the cost of capital, are increasingly accruing to leading device OEMs and OTT service providers in the mobile ecosystem. Largely from exceptional commercial success with dominance in mobile, Apple with iPhone and Alphabet with Google’s Android have become the world’s two most valuable companies. Sales of iPhones accounted for 60% of Apple’s revenues last quarter. Its service revenues in mobile are in addition. A news release reporting Apple’s fiscal fourth quarter earnings quoted its CEO, Tim Cook, as saying “we’re thrilled with … the incredible momentum of our Services business, where revenue grew 24% to set another all-time record.” Apple’s services revenues (including Apple Pay, Apple Music, iTunes and its App Store) generated $24 billion revenues in the year to September 2016. This substantially exceeds all cellular SEP licensing fees paid, as indicated in the next section, even though Apple’s user base from which it derives these revenues is only around 1 billion devices, in comparison to 7 billion cellular devices connected worldwide. With Android in 80% of smartphones, Google also profits most significantly from mobile, also including apps, search and advertising. On a conference call with investors this summer, Google CEO Sundar Pichai said “mobile is the engine that drives us.”

Paying their dues
Companies that develop SEP technologies are highly dependent on licensing revenues as well as their sales of network equipment or chips. SEP licensing brings compensation from those who implement the standard-essential technologies in their products to those who develop those technologies. The widening disparity in revenues and profits between the smartphone device market and those who significantly rely on cellular SEP licensing revenues limits the ability of the latter to invest in technology development for standardization and implementation ahead of the anticipated 5G launches from around 2020.

Cellular SEP licensing revenues at no more than around $20 billion are modest in comparison to and are being significantly outpaced by growth in other ecosystem revenues and costs. There are around $1 trillion dollars in operator service revenues. Total handset revenues have increased from $378 billion in 2013, to $439 billion in 2015, according to IDC.The five leading mobile SEP licensors that contributed around half the patents declared essential to 3GPP standards collectively generated approximately $11 billion per annum in licensing fees between 2013 and 2015. This accounts for more than half the $20 total billion (at most) paid to all licensors. Licensing fees have declined slightly as a percentage of handset revenues.
Unholy intervention

Despite the stellar financial performance of the leading device OEMs and OTT players, there is mounting pressure to change consensus-based and established SEP-licensing practices, including by government intervention, which would further undermine the ability of cellular technology vendors to make an adequate return on their standard-essential technology investments through licensing. Measures such as making injunctions more difficult to obtain, enforcing licensing or calculating royalties at the chip level, as advocated by the so-called Fair Standards Alliance and as already implemented in the Institute of Electrical and Electronics Engineers new patent policy are all undermining SEP technology developers. Some antitrust authorities, including the U.S. Department of Justice, support such changes.

R&D investments and contributions to SSOs will be significantly reduced by measures to weaken SEP licensing. For example, proprietary and 3GPP-based technologies are vying with those based on IEEE standards for short-range communications in emerging next-generation IoT and automotive vehicle-to-x applications. Technology developers will shy away from participating in standard setting or investing at all where they cannot make sufficient returns on their investments.

The system of Fair Reasonable and Non-Discriminatory licensing in standard setting has worked extremely well with phenomenal innovation, extensive new market entry and significantly improving quality adjusted prices. There is no evidence of harm to competition or consumers. In the absence of that there is no basis to undermine the position of licensors in FRAND licensing, and particularly no justification for government agency interventions to force such change.

I originally published this article, here, in cellular industry trade publication RCR Wireless on November 16, 2016.

Wednesday, 23 November 2016

UK - Autumn Statement and IP tax

The devil will no doubt follow in the Finance Bill detail, but the heads up on IP tax points from the Chancellor's statement is:

- the new (post-1 July 2016) patent box rules are to be updated by adding provisions to deal with cost sharing arrangements so that companies using these are not advantaged/disadvantaged when it comes to calculating the R&D fraction

- 'new spending' of £4.7 billion between 2017 and 2021 to enhance the UK’s position as a world leader in science and innovation (whatever that means …), apparently to be rolled out as £425m in 2017-18, £820m in 2018-19, £1.5bn in 2019-2020, and £2bn in 2020-2021. This is apparently direct funding (grants) into an Industry Strategy Challenge Fund, to be modelled on the USA's Defense Advanced Research Projects Agency programme, as well as allocating funding more generally.

- £0.7 billion to support the market to roll out full-fibre connections and future 5G communications

- review tax environment for R&D to build on the R&D Expenditure Credit for large companies 'to make the UK an even more competitive place to do R&D'
- more Science & Innovation Audits

Tuesday, 22 November 2016

Webinar on "The Economic Contribution of IP Rights"

OxFirst has announced a free webinar, entitled “The Economic Contribution of IP Rights”, to take place on December 8, 2016, at 14:00 GMT (being 15:00 CET and 9:00 am Eastern Standard Time). The speaker will be Dr. Nathan Wajsman, Chief Economist of EUIPO.

The webinar will build on prior work carried out by Dr. Wajsman. The first phase of the IP Contribution study was published in September 2013 and shows which industries are IPR-intensive and measures their contribution to GDP, employment, international trade and wages in 2008-2010 at EU, as well as country, level. (A similar study was published for the US by the USPTO in 2012.) In October 2016, an update of the EU study was published, considering the period between 2011-2013. The IP rights considered in the most recent study include patents, trademarks, registered designs, copyright, geographical indications and plant variety rights.

In addition to the industry-level study, the EUIPO has also conducted research to estimate the contribution of IP rights at the individual firm level. This study was published in June 2015 and the IP rights included in this study are trademarks, patents and designs, both European and national (in 12 EU Member States covering about 80% of EU’s economy). In the study, the economic performance of firms that are owners of IPRs is compared with those that do not own any of the three IPRs. The study is based on a statistical analysis of more than 2 million firms and an econometric model based on data for 130,000 firms.

In the webinar, Dr. Wajsman will present the results of the two studies and discuss possible future research on the relationship between IP and economic performance.

For registration and more information, please consult the attached link.

Monday, 21 November 2016

Watch this space …

From the UK Prime Minister's speech to the Conferation of British Industry today:

"So in the Autumn Statement on Wednesday, we will commit to substantial real terms increases in government investment in R&D – investing an extra £2 billion a year by the end of this Parliament to help put post-Brexit Britain at the cutting edge of science and tech.
A new Industrial Strategy Challenge Fund will direct some of that investment to scientific research and the development of a number of priority technologies in particular, helping to address Britain’s historic weakness on commercialisation and turning our world-leading research into long-term success.
And we will also review the support we give innovative firms through the tax system.
Since 2010 we have made the Research and Development Credit more generous and easier to use – and support has risen from £1 billion to almost £2.5 billion a year.
Now we want to go further, and look at how we can make our support even more effective – because my aim is not simply for the UK to have the lowest corporate tax rate in the G20, but also a tax system that is profoundly pro-innovation."
We were promised a review of IP tax incentives a couple of years ago, which hasn't really materialised - fingers crossed, this time. 
On the extra £2bn … hopefully the Autumn Statement on Wednesday will have more detail!

Thursday, 17 November 2016

Can the Donald Keep Up with the EU: EU Tax Reform and Venture Capital Fund

After the hangover of the U.S. presidential election subsides, some serious issues will be addressed, including our current tax and innovation system.  Will the U.S. adopt a patent box?  Will the U.S. lower the corporate tax rate?  What will the Donald do?  I am hopeful that he will push more resources to research and development (which has been in decline in real dollars), and education. Perhaps a gaze across the pond will not only give him some inspiration, but may also solve some of our problems.  

On October 26, the EU Commission announced a new way to tax corporations operating in the EU.  The EU Commission website states:
EU Commission have announced the Common Consolidated Corporate Tax Base (CCCTB), a new EU-wide tax system to improve the Single Market, combat tax avoidance and support growth and investment in the EU. The CCCTB will also support Research and Development (R&D) through tax incentives for companies that invest in real research activities. 
In particular, the proposal includes super-deductions for R&D costs: big companies may deduct 100% of their costs, in addition to 50% deduction for R&D expenses up to €20 million and further 25% deduction for R&D costs that will exceed this amount.
The draft also grants super-deductions for small starting companies without associated enterprises (i.e. start-ups) which may deduct up to 200% of their R&D expenses.

For more information, including videos, please see the CCTB website here.  The EU Commission also recently announced the “European Investments Fund (EIF) . . . , a Venture Capital fund of funds programme of €400 million to boost start-ups' growth and increase investments opportunities of institutional private investors.”