Friday, 2 September 2011

Artificial Distinction between Software and Telecoms for Essential IP Disclosure

In this, the sixth in his series of posts for IP Finance, Keith Mallinson (WiseHarbor) defends the non-interventionist approach which the European Union takes towards horizontal cooperation agreements against the criticisms levelled by the European Committee for Interoperable Systems (ECIS), which supports the mandatory disclosure of the most restrictive licensing terms for patented IP in the purportedly different “software” sector.
Artificial Distinction between Software and Telecoms for Essential IP Disclosure 
In December 2010 the European Commission approved guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union (TFEU) for horizontal co-operation agreements. These guidelines lay out a comprehensive approach for conformity of standardisation agreements with Article 101 TFEU, creating a “safe harbour” while affording standard-setting organisations significant autonomy in setting policies for disclosure of IP and its licensing terms. They also provide guidance on policies for ex-ante disclosure of IP and most restrictive licensing terms.

Not everybody is happy with this non-interventionist approach. While to some extent accepting it for telecoms, some continue to campaign for mandatory disclosure of the most restrictive licensing terms for patented IP in the purportedly different “software” sector. The European Committee for Interoperable Systems (ECIS) circulated a dissenting opinion paper about this at a workshop recently hosted by the European Commission in Brussels. The event was convened to discuss practical experiences with standards setting organisation IPR policies that voluntarily permit or require the ex ante disclosure of licensing terms.

Whereas I refer to “software” versus telecoms to facilitate my analysis in this blog post, I refute ECIS’s distinction.

Illogical software exception 
By attempting to bifurcate the debate on various issues with IP in standards, ECIS seeks to create a more IP-hostile regime with onerous disclosure requirements for “software” standards as opposed to telecoms standards. Political bargaining for its various demands might more easily prevail over logic, facts or the law in the “software” sector; but that does not make its position defensible. 
On the contrary, the ECIS paper makes many sweeping and false generalisations without either evidence in support of its assertions or any credible explanations why these are relevant to whether or not the Commission should promote the ex ante disclosure of IP and its licensing terms in connection with “software standards”. 
“…in the software industry, in contrast to the telecoms sector, there are generally fewer players holding IPRs relevant to the standard; product lifecycles are short (two years or less); innovation often proceeds through incremental development of standards-compliant products; many if not all hard IPRs – i.e., patents – can be developed around since alternative equally functional solutions generally exist; and IPR holders are amply rewarded if their technology is adopted for the standard through their lead time to market with a compliant implementation and the strong network effects that are often prevalent in the software sector.”  
Telecoms network equipment and devices are now as software intensive as any computers. General purpose computers are pervasively interacting with and have become part of modern networks.  Whereas batch-processing mainframes in the 1970s and PCs in the 1980s were largely offline devices, computers have increasingly become connected locally and beyond. Computers have accessed the Internet with corporate networks at work and with dial-up at home on a widespread basis since the 1990s.  With the convergence between computing—including software—and telecoms networks, John Gage, Chief Researcher of Sun Microsystems for many years, famously coined the phrase “the network is the computer” and this became his company’s motto.

Consumer broadband connections for browsing, email, downloads, uploads and streaming have been the norm since the millennium. Broadband will also soon predominate on mobile phones. Today’s smartphones, including multi-core processors in many cases, have the computing power and software capabilities of PCs and games consoles such as the Xbox 360, launched only six years ago.
With increasingly telecoms-centric “software”, ECIS’s distinctions between “software” and telecoms are absurd. Telecoms is an increasing part of “software” standards and the programs that implement them.  For example, most new features and functionality in the HTML5 standard for web browsing are to enable richer, higher performance and more efficient usage over communications links. Mobile communications is particularly demanding in these respects. 
HTML5 is particularly telecom-intensive with WebSockets (delivering real-time data and two-way communications), File Reading, File Writing and Systems Operations (facilitating interaction between the web and files/systems stored on a device) and Video Playing (including online streamed video) among other features. HTML5 implementations are being tightly coupled across all the hardware and software layers in smartphones and tablets. A major competitive objective for System on a Chip suppliers (SoC) such as Qualcomm, NVIDA and ST Ericsson is to ensure that video running in the browser with HTML5 (on various high-level operating systems) will be as fast and efficient (i.e., with respect to bandwidth used, network signalling and power consumption) as a “native applications” performing the same function.
Elsewhere, even ECIS recognises most digital products include telecoms. 
According to a message “About ECIS” from its chairman on his organisation’s web site:
“Today, we all need to exchange information and remain in touch with others on a permanent basis. This demand for permanently networked communications capability among most digital products and services has made full interoperability an essential market condition for open, dynamic competition.” 
Telecoms devices include powerful general purpose processors and more specialised processors for communications functions, as well as processors for video and graphics. Each of these requires extensive software. Technological advances including Software Defined Radios (SDRs) enable communications functions to be performed on more general purpose processors. Different radio communication protocols including as GSM, HSPA, CDMA2000 and LTE can be implemented in software while also using common radio frequency transceivers, amplifiers and antennas in some cases. With development of standards such as Advanced Telecommunications Computing Architecture, telecoms network equipment hardware is becoming increasingly standardised and general purpose with software increasingly the basis upon which innovative functionality is implemented. 
Plentiful IP holders in software 
Audio and video encoding and decoding are software intensive but are not telecoms functions per se; and yet there are many innovators who own patented technology used in standards that implement these functions. Audio and video “codecs” are still primarily used offline, in consumer electronic products such as DVDs, MP3 players and camcorders. PC and smartphone usage can be offline or online. Patent pool administrator MPEG LA lists 29 companies as licensors for patents included in the MPEG-4 Visual Patent Portfolio License. Although the pool’s coverage of essential IP for this video standard is generally regarded to be quite extensive, research indicates 71 companies have essential claims on MPEG-4. In contrast, according to a 2009 study by Fairfield Resources International, only 57 companies had declared ownership of IP essential to 3GPP cellular telecoms standards and computing hardware is no more patent intensive. 
Hardware cycles quickly 
Telecoms product lifecycles are as short as for “software” in many cases. Samsung, HTC, Motorola and others introduce many new mobile phones, as illustrated in my previous IP Finance posting. Old models are typically superseded or retired within a year or so even when successful. The HTC “4G” EVO is scheduled for “End of Life” just 15 months after its launch on the Sprint network. Motorola’s Droid smartphone models have not even lasted a year. Once operator distribution is withdrawn in the US, a product is effectively finished. New product improvements include more than just a few cosmetic tweaks. New phones have faster radio modems implementing more recent standards, more powerful applications processors and better graphics as well as later software releases at every level in the design architecture from SoC microcode upwards. 
Similarly, the communications and computing hardware platforms upon which devices are based are also evolving rapidly with significant updates every year or two. Moore’s law still prevails with the processing power implemented by SoC suppliers in their processors doubling every two years. For example, Qualcomm’s Snapdragon and NVIDIA’s Tegra design wins for chips in new devices show that hardware platforms are advancing rapidly with major architectural changes such as introduction of multi-core processors. 
In contrast, software platforms can be difficult to “evolve” quickly, efficiently and significantly enough to keep up with competition. For example, Nokia is abandoning Symbian, which was the market leading smartphone operating system (OS) until 2Q 2011, in favour of Microsoft’s Windows Phone OS. Research in Motion acquired QNX to replace the aging and cumbersome OS it uses on its BlackBerries. 
Innovation’s long leaps and rapid steps 
Telecoms standards have proceeded concurrently with a few big leaps and numerous small steps. In mobile communications, for example, there have been three of four major generations of standards. For example, in Europe, a multiplicity of “1G” analogue radio access standards were replaced by an entirely new digital “2G” standard based on a time division multiple access protocol with GSM in 1992. 
One decade later, a code division multiple access protocol called WCDMA was launched for “3G” services. The latest new standard to be deployed commercially in the last year or two that is based on an orthogonal frequency division multiple access protocol is called LTE.  Along the way, however there have been many and frequent incremental improvements. These embody hundreds of specifications, with a new standards release from 3GPP almost every year.  Putting it simply, GSM was enhanced to include GPRS technology and then EDGE, and WCDMA was enhanced to include HSDPA, HSUPA and then HSPA+.  Along the way, improvements have included all manner of features and functionality to increase radio spectrum efficiency and lower battery consumption, encrypt data flows, present caller-ID, deliver text, multimedia messages and connect to the Internet. 
The latest major technological shift in mobile communications with introduction of LTE has moved quickly. In 2004, NTT DoCoMo of Japan proposed LTE as an international standard to succeed 3G technologies WCDMA and HSPA.  In December 2008, the Rel-8 specification for LTE was frozen for new features, meaning only essential clarifications and corrections were permitted. Within one year, in December 2009, the world's first publicly available LTE services were launched by TeliaSonera in Stockholm and Oslo. There are now 24 commercial LTE networks in service and 166 firm commercial LTE network deployments in progress or planned in 62 countries, according to a July 2011 report from The Global mobile Suppliers Association (GSA).

According to the Worldwide Web Consortium (W3C), with work starting in 2003 the HTML5 standard will not be completed until 2022. Even though many parts of HTML5 will likely be widely used long before HTML5 is officially complete, this example illustrates that complex technology standards in “software” can take as long as or longer to complete than in telecoms. HTML4, DOM2 HTML, and XHTML1— the three specifications that HTML5 is intended to update and replace—were also a long time coming. Work on HTML4 started in early 1997. The specification itself took about two and a half years, and was published in late 1999. Work on XHTML started while this was happening, in 1998, and it was officially completed in 2000. 
Work arounds 
Standards-essential IP cannot be designed around within the context of a given standard because it is, by definition, necessary to implement that standard. This is the case for standards in telecoms or any other sector. Alternative approaches are, however, employed among competing standards such as in “3G”, as illustrated by HSPA, CDMA2000 1x EV-DO, LTE, TD-SCDMA, WiMAX (802.16) and defunct Flash OFDM (802.20). 
In many cases, there is less scope to avoid particular technologies with the high level of participation in “software” standards such as HTML and MPEG-4. As I will illustrate in an upcoming IP Finance posting, alternatives, such as VP8 for video, are quite likely infringing many of the same patents as do competing standards. I will explore the conflict between the “royalty free” open source software business models and the patented IP which is infringed by such programs. The promise of free software is often not fulfilled with open source, as is illustrated with the current wave of litigation against Android implementers.

Ex-ante IP disclosure requirements cannot ensure standards bodies are exhaustively “identifying the need to design-arounds and avoiding patent ambushes” because those requirements cannot bind those who are outside the relevant standards body.

Business models 
IP owners choose to monetise their rewards for investing in IP in a variety of ways including licensing for fees and by implementing the IP in products for sale. Whereas vertically-integrated manufacturers deserve to take advantage downstream when their IP is adopted, there is no reason that innovators who prefer to focus on upstream licensing should have their business model foreclosed. Public policies in the US and Europe do not favour one business mode over others and “software” should be no exception. 
As the term implies, “network effects” are as prevalent with telecoms network technologies as they are in the “software” sector. 
It is only some IP holders who show willingness to license software copyrights and patents on a royalty free basis. Patented IP in standards is mostly cross-licensed for little or no net payments, or licensed for a fee on a (Fair) Reasonable And Non-Discriminatory basis. Examples of extensively implemented non-telecoms standards IP licensing are in consumer electronics such as those with audio and video codecs including AVC, DVB-T, DVD-1, DVD-2, MPEG-2 and MPEG-4.  These standards probably represent the most prevalent examples of (F)RAND licensing. 
Audio buffs and the masses since the 1970s have benefited from innovative noise reduction for audio cassettes and in cinemas. More recent inventions include surround sound.  Dolby Labs has specialised in developing these technologies. The company does not manufacture products. It licenses its IP to numerous consumer electronics manufacturers.

Other matters 
I also take issue with several other statements made in ECIS’s paper. Royalty free licensing is not always preferred by licensees: in some cases would-be licensees would rather pay royalties than agree to other proposed contract terms.  As explained in my previous IP Finance posting, the ex-ante IP value is not just the incremental value for the licensee over the next best alternative. I also disagree that “[a]llowing injunctions to be given before the FRAND royalty rate or the validity of the patent is determined [by a court] would entirely alter the negotiating positions”. On the contrary, if the potential threat of injunctions is removed, infringers would be incentivised to take unreasonable positions and wait for the courts to make these determinations rather than to negotiate a FRAND licence. 
ECIS also proposes another untested theory on IP disclosure called “ex-ante plus”. This article is already quite long enough, so I will leave my analysis on the fallacies and downfall of this approach for a future blog posting on IP Finance. 
Final word on ex-ante disclosure 
 Ex-ante disclosure requirements do not necessarily increase transparency or reduce uncertainties on actual rates. On the contrary, as shown in my IP Finance postings on aggregate royalty rates and on fixing IP prices with royalty caps, disclosed “rack rates” are very misleading because they do not reflect cross-licensing and other realities in negotiating down from prices asked. As illustrated in an example presented by patent pool administrator SISVEL, adding up everybody’s disclosed prices can result in the nonsense of a theoretical aggregate royalty rate twice the average price of a licensed mobile phone, whereas actual aggregate rates are 9% or less in 3G. With asking prices differing so much from actual outcomes, disclosure can do more harm than good. ECIS seems to recognise these shortcomings in the context of telecoms while sidestepping the issue with “software”.

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