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.”  

Monday 14 November 2016

BRICS IP Forum - London 21/21 November - Discount For Readers

This blogger is involved in a unique IP Forum dedicated IP issues in BRICS countries to be held in London next Monday and Tuesday (21-22 November 2016) at the Grange City Hotel. It is a jointly hosted conference by five well known IP firms dedicated to each country and region plus industry speakers from AB InBev, BSA The Software Alliance, Brand Finance, Novartis and Richemont.

There are a few seats still left. The cost of this two-day conference is US$550 pp. This includes the two-day conference, mid-morning refreshments, lunch and afternoon refreshments. The organisers have offered a 10% discount for readers of this blog, please just mention this when booking. Click here to register and send an email here to obtain the special rate.

Monday 7 November 2016

China Ripe for Non-Practicing Entity Suits

A short time ago, I wrote about an article by Ma Si in the China Daily concerning the likelihood of an increase in patent suits filed in China.  On November 7, 2016, the Wall Street Journal has published an article by Juro Osawa, titled "China's Patent Lawsuit Profile Grows," about a Canadian non-practicing entity's (NPE) suit against Sony in Nanjing, China.  The article notes that China's IP enforcement system has changed substantially in the last few years and is less expensive than other systems making it an attractive place for NPE litigation for licensing leverage.  For one, according to the article, enforcement of the NPE's patents could result in stopping Sony from exporting infringing parts manufactured in China.  Notably, China's government has made clear its intention to move to an innovation and services based economy for continued economic growth and intellectual property protection will play an important part in that move.  The focus is usually on developing Chinese companies and protecting their technology, but there are obvious opportunities for other companies as well.  Indeed, I was in Beijing recently at a conference and there was talk concerning making patent enforcement in China even stronger than in the United States.  

China currently has three specialized IP courts: Shanghai, Beijing and Guangzhou.  It will be interesting to see if there is soon an expansion into other cities with intellectual property courts.  [hat tip to Professor Ed Lee of Chicago-Kent College of Law for the lead to the Wall Street Journal article] 

Friday 4 November 2016

IP & Sustainable Corporate Governance : Part 1 KingIV and IP

This is the first post of a series dealing with the role of IP in corporate governance in the wake of the launch of the KingIV report in South Africa by the Institute of Directors earlier this week. The conference had well over 1000 business leaders based in Gauteng and a stellar line-up of speakers.

This post explores the relationship between the KingIV Report on sustainable governance and IP, the next traverses a three step approach to IP management, followed by a case study illustrating the need for a deft touch on IP enforcement where brands cater for social good, and the power of measurement.


Professor Mervyn King, the name that is inextricably linked to the KingIV report on sustainable governance, started off his presentation at the launch this week with a slide that I often use to start off my own presentation on intellectual property and innovation. I am sure he would be pretty bashful about using my favourite slide. That’s not true of course, but the fact that he used that particular slide, my slide, is.

He used it to illustrate, in his wise demeanour, that the value over time in companies has shifted from physical assets to intangible ones. This illustrated too, the evolution of the King reports (I-IV) and the shift in emphasis of governance over time from profits and outputs, to outcomes i.e. intangibles.
His particular example was the business of Ben & Jerrys which he introduced as a pioneer in using business as a force for good.  I am familiar with their ice cream and subsequently looked that business and came across a book published in 1994 entitled “Ben & Jerry’s: The Inside Scoop” which focusses on “how two real guys built a business with a social conscious and a sense of humour.”
1994 was of course also a critical date for South Africa and the wise Prof reflected upon that, stating that the evolution of King was is indeed an unintended and positive by-product of our grappling with our unique circumstances as a nation at that time, and since then. A nation with so much diversity and disparity. He explained that this is the reason why KingIV is also a pioneer, worldwide and why he sits on so many international boards, on governance. I am sure that there are many more reasons.
The use of that particular slide by me is significantly less profound but hopefully no less remarkable. You see the link between intangibles and intellectual property is in fact tangible. Intellectual property in its legal forms as patents, trade marks, designs, copyright and knowhow are the only legal way in which intangibles are protected and nurtured. Proper governance under KingIV will therefore mean proper IP governance.
So, despite the phrase “intellectual property” not featuring once in the entire KingIV report, adhering to KingIV naturally means adherence to sound policies on IP management and governance. The better this governance, the better care of the intangibles and potentially, the higher value of the business.  
It is worth mentioning here, that the ISO standard on brand evaluation published in 2010 (ISO10668), advocates a three step approach to brand evaluation. Brands are of course, the touch and feel of a business, that distinguish it from others and through which repeat customers are retained.
The Apple brand speaks to innovation and tremendous customer experience, whereas the Oakbay and Enron and now Eskom conjure up completely different images. Those brands also have three different brand values. Apple dominates the world, whereas Oakbay, Enron and sadly now Eskom do not.
The first step of the three step approach to brand valuation entails a thorough examination of the legal position of the brand i.e. legal governance of intellectual property used to protect a brand. The second and third steps, by the way, entail measuring the behavioural and financial aspects of a brand. I am no accountant but these are very King-like attributes to me.
An example of where a simple trade mark opposition had a direct effect on a listing value in an IPO was that of Skype. Their litigation (including routine oppositions) with BSkyB in Europe had to be disclosed in the listing documents as a material risk, directly affecting its value.
But this stage I am hoping that you are with me, that IP governance and KingIV outcome based reporting, and brand valuation are in fact, three peas in the same pod. I will go as far as to say so is innovation. The normal use of that slide is to draw parallels between IP governance in the creation of opportunities to innovate, create jobs and grow. Intellectual property therefore potentially underpins it all.
Next up, a three step approach to effective IP management.
Posted by Darren Olivier (editor of Afro-IP)

Thursday 3 November 2016

Stanford Law School Patent Assertion Entity Symposium Call for Proposals

The Stanford Law School is holding a Patent Assertion Entity (PAEs) symposium based on the empirical research of Mark Lemley and Shawn Miller on lawsuits involving PAEs.  Proposals to participate should be based on the research and directed to PAE reform efforts.  This is a timely symposium based on the release of the recent FTC Report on PAEs.  The details are pasted below.

Call for Proposals
PAE Reform Symposium at Stanford Law School
May 11, 2017

We hope that you will be able to join us at the Stanford Patent Litigation Policy Practicum’s Symposium on patent assertion entities (“PAEs”) on May 11, 2017 at Stanford Law School. The Stanford Program in Law, Science & Technology is cosponsoring this event. The Practicum is directed by Professors Mark Lemley and Shawn Miller. Since 2013, over twenty Stanford students have been working to create the Stanford NPE Litigation Dataset (the “dataset”), which when complete will categorize the patentees in all patent lawsuits filed between 2000 and the present as practicing or as one of eleven categories of non-practicing entities (“NPEs”). Several of our NPE categories are different species of PAEs.
 Within the month, we will finalize a 20-percent random sample of all lawsuits filled between 2000 and 2015. The main purpose of this symposium is to bring together scholars, policymakers and practitioners to listen to and discuss presentations by selected researchers who have used this data in empirical studies aimed at informing the debate on the need (or lack of need) for additional patent reform targeting PAEs. 
 We welcome your proposals for research using the dataset. Below are links to our taxonomy for categorizing patent owners and to our completed random sample of cases for the year 2000:

  • Taxonomy and methodology (link)
  • Sample of cases filed in 2000 (link)

Researchers who are selected to present at the Symposium will receive the entire random sample of over 10,000 lawsuits in early December. We will provide these researchers assistance in obtaining other data, including the patents asserted in each case, as needed. We do not expect completed papers by the date of the Symposium but rather presentations describing the participants’ hypotheses, methodology, empirical results and policy implications.
 Call for Proposals on the following subjects:
  • The impact of PAEs on the courts, the patent system, innovation, producers and/or consumers (including in comparison with other types of patent owners).
  • Whether patent reform to address PAEs is warranted given the evidence and if so what shape should it take?
 We welcome proposals for projects that would use the entire dataset as well as those focused on particular industries or technologies.

Deadline for submissions:
  • December 2, 2016
 PROPOSAL SUBMISSION PROCEDURE: If you are interested in presenting empirical results at the Symposium please send a brief one to two page description of the study you would like to conduct using the Stanford NPE Litigation Dataset to the Practicum's research assistant Kevin Gibson at no later than December 2, 2016. Please include your name, current position and contact information in the e-mail accompanying the submission. 
 COST: There is no registration fee and meals will be provided during the conference. We will cover hotel accommodations and limited travel expenses for researchers whose proposals are selected for presentations.
 Please email Shawn Miller with any questions concerning the symposium, the dataset or the call for proposals:

OxFirst to hold free webinar on measurement of effectiveness of the patent system

OxFirst will be holding a free webinar on the subject of ‘Assessing the Impact of Patent Strategy’. The program will take place on November 16, 2016, at 15:00-16:00 BST. The speaker will be Dr Nick Papageorgiadis, Lecturer in International Business of the University of Liverpool and Associated Researcher at the department of Business Studies of Uppsala University (Sweden).

In his presentation, Dr Papageorgiadis will focus on a new approach to the measurement of the effectiveness of the patent systems of 49 countries. He will then discuss the implications of the extent of the effectiveness of international patent systems on the patent strategy of firms, by explaining the results of his latest econometric studies.

Further details on signing up for what seems to be a most interesting presentation can be found here.